Monday, January 01, 2007The Platinum Standard

Ayana Hull-BrathwaiteA look at the BVI Company � The Platinum Standard of International Business.

The International Business Companies Act (the “IBC Act”) was enacted approximately 22 years ago by the BVI Government at the instigation of a group of lawyers and other professionals who were fuelled by the failure of the US to resign the Double Taxation Treaty, a convention which the BVI and the United States of America were previously parties to and which aimed to eliminate the double taxation of income or gains arising in one territory and paid to residents of another territory.

The IBC Act launched at a steady pace and was hastened by two major external events which are worth mentioning, even if only in passing. The passage of the Act came only four years or thereabout before the US invasion of Panama and the overthrowing of General Manuel Noriega. Following the Noriega debacle, Panama, which was a leading offshore centre at the time due to its high volume of incorporations, lost political stability and as a result, international business companies then incorporated in Panama left in droves. BVI incorporations were also helped in the early stages by the reversion of Hong Kong from under British rule to China at the stroke of midnight on June 30 1997. As the twin-pillared concern of most investors is political stability and jurisdictional certainty, the BVI, being a British territory, became a place of refuge for these companies in their quest for a new domicile and as a result the BVI became the benefactor of the vast majority of companies fleeing from these uncertain climates.

In retrospect, neither the BVI Government nor those professional pioneers could have even dared to imagine the level of success which the IBC Act would have enjoyed over the years. The object of the Act was to provide the legislative framework for companies wishing to transact international activities from a tax exempt and secure environment. Over its 21 years of operation, the Act has shown astronomical growth bringing the number of companies registered under the Act to in excess of 625,000. In addition, the Act has enjoyed the highest level of admiration from the rest of the corporate world. The Act has become an international model and many jurisdictions have adopted the Act whole sale, often with just a change in the jurisdiction in which the Act is to apply. The paradigmatic example of this admiration, is the fact that in the Far East, these international business companies are simply referred to as ”BVIs”. The Act is therefore a major contributor to the respectful reputation which the BVI has gained as the world’s premier international corporate domicile, and from a macro perspective, is definitely a key to the future success of the country and its residents.

A logical question therefore follows: Why was the Act replaced? Despite the success of the jurisdiction in this regard, the Act has met with certain challenges which demanded the need for reform. Its biggest challenge was the international pressure which was descended on all financial services centres to abolish ring fencing generally, but especially with respect to taxation. As a British territory, the BVI has to comply with the EU Code of Conduct on Business taxation. This Code frowns upon ring fencing and requires that local and offshore companies be treated equally for tax purposes. Another challenge the Act faced was the changing international business climate which in some respects rendered it too antiquated to handle the needs of more sophisticated clients. The Act also required certain amendments, albeit prospective in nature, in order to properly manage the growth of the jurisdiction in the not too distant future and in order to avoid the danger of becoming too static and complacent a jurisdiction. As a result, the BVI Government, true to its reputation for treading where others have feared to tread, undertook to review the IBC Act thoroughly with a view to producing a comprehensive piece of legislation which will “kill all these vices with one blow”.

On 1 January 2005, the much anticipated BVI Business Companies Act, 2004 (the “BC Act”) arrived. The new Act abolished ring fencing entirely and to this end, all companies, offshore and onshore, have been placed within a zero tax regime. The BC Act has now, following a two-year transition period (ending on 31 December 2006), repealed the IBC Act on 1 January 2007 and now exclusively regulates all companies incorporated in the BVI. During the transition period, IBCs had the option of re-registering as business companies under the BC Act. Any IBC which did not re-register was deemed automatically re-registered as a business company on 1 January 2007.

The BC Act retains the same overall regime and successful core features of the IBC Act. Hence, many of the best and fundamental aspects of the IBC Act have been retained: including exemption from all BVI taxes and stamp duty, a high degree of confidentiality, limited statutory filings, privacy of directors’ and share registers, no director or member residency requirements, ease of administration and protection, a same day incorporation procedure, no requirement to file accounts and retention of the visible and tangible evidence of incorporation (memorandum and articles of association). Finally, but equally as important is the name of the Act. The BVI Business Companies Act was deliberately chosen to preserve the “IBC” branding as it is anticipated that this will greatly assist industry practitioners both within the BVI and overseas to transition clients into the new legislative regime.

It is instructive to note, however, that whilst the fundamentals of BVI companies remain the same under the BC Act, the need for practitioners to familiarise themselves with the BC Act cannot be over-emphasized as the Act contains a number of detailed amendments to existing provisions and introduces significant new aspects which are intended to give the BVI a number of competitive advantages in the global offshore market, but which will also impact certain transactions and the way in which business is done. Some of the very tangible improvements contained in the Act which the market has exhausted little time in utilizing are as follows:

As may be known, the IBC Act only provided for the incorporation of one type of company, which was a company limited by shares. With a significant improvement over the IBC Act, the BC Act offers seven different types of companies, two of which are subsets of companies limited by shares. These seven types of companies are: Companies Limited by Shares - These types of Companies are the most widely used vehicle in the BVI and perhaps will continue to be so because of their simplicity; Companies Limited by guarantee authorised to issue shares - These types of companies are hybrids and are usually used for structuring transactions by combining equity and guarantee membership; Companies Limited by guarantee not authorised to issue shares - Unlike its counterpart above, these types of companies are pure guarantee companies and are often useful for non-profit making organisations; Unlimited companies that are authorised to issue shares - These types of Companies do not enjoy the protection consequent upon separate legal personality; Unlimited Companies that are not authorised to issue shares - These types of companies could be used for a variety of purposes; Restricted purposes companies - These types of companies are limited by shares and have restricted objects. The BC Act gives statutory recognition to restricted objects clauses. They are used primarily in structured finance and securitization transactions.

Segregated Portfolio companies

Shares limit these types of companies. These companies are single corporate entities with the benefit of statutory segregation of assets and liabilities between segregated portfolios established within the same company. Prior to the enactment of the BC Act, these companies could only be incorporated under the Insurance Act. At present, their use is limited to insurance companies and mutual funds. Additional classes may be permitted by the regulations.

Perhaps one of the most fundamental changes to the corporate regime is the abolition of the concepts of authorised share capital and general capital maintenance. The memorandum and articles of the company only need state the maximum number of shares the company is authorised to issue or state that the company has no limits in terms of issuance of shares.

IBCs which did not voluntarily re-register but which were automatically re-registered on 1 January 2007 will keep their existing capital structures under the BC Act. Hence, for these companies, the old provisions in the IBC Act that relates to dividends, capital and share redemptions have been ‘grandfathered’ into the BC Act. On the flip side, IBCs which automatically re-registered on or before 31 December 2006 had to amend its capital structure to comply with the BC Act.
Another new feature which the BC Act introduces is numbered names. Hence, it is possible under the BC Act to incorporate companies called ‘BVI Company #’ followed by the number in figures. Where the company opts for this type of nomenclature, it will also be permitted to have a foreign character name, and need not have an English translation of that name.

The BC Act recognises the commercial realities of holding company structures and joint ventures and introduces a radical approach to the potential conflicts faced by directors who are obliged to act in the best interests of the company of which they are directors. As regards wholly owned subsidiaries, a director may act in the interest of the parent company even though it is not in the interest of the subsidiary, provided that the articles permit. In the case of a non-wholly owned subsidiary, a director may act in the interest of the parent company even though it is not in the interest of the subsidiary, if the articles permit and the other non-parent shareholders agree. With respect to joint venture companies, the director can act in the interests of the member who appointed him and not in the interest of the company, provided he has approval from the articles.

The BC Act also provides clearer procedures for the disclosure of director’s interest. Where there is a disclosable interest, it must be disclosed to the entire board and failure to do so will constitute an offence. Moreover, where an offence has been committed, the transaction will be voidable by the company unless the members were aware of the shareholder’s interest in the transaction or if the transaction was executed for fair value.

Asia’s use of BVI companies has also been a major contribution to the success of the financial services sector in the BVI and to the reputation enjoyed by the BVI as a world-class heavy weight in the offshore world. It is expected that the use of BVI companies by Asian countries will increase in the future in view of the fact that the growth in this market is expected to continue to increase rapidly. As a result, the concept of reserve director (which is very common in Hong Kong) has been included in the BC Act to allow an individual who is a sole director and sole member of a company to nominate an individual to act in his/her place in the event of his/her death and, should prove to be a useful succession tool.

The BC Act introduces a statutory solvency test to determine whether payment of distributions can be made. It has removed any references to a surplus requirement as a prerequisite to the distribution of profits and has also introduced a wider definition of distribution such that the provisions are not confined to dividends but relate to any distribution.

The BC Act has significantly changed the requirements as regards registration of charges. Under the IBC Act registration of charges in the company’s register was optional and priorities were governed by registration in the register of charges of the company which is usually kept at the registered office of the company. Under the BC Act, the priority system is now governed by registration in the public register. Additionally, unlike under its predecessor, a chargee can now make filings directly without the need to rely on the chargor company or its registered agent. Finally, the BC Act also clarifies the position of floating charges by stating that a floating charge is postponed to a subsequently registered fixed charge unless the floating charge contains a negative pledge.

The BC Act provides minority shareholders with statutory rights to take derivative actions in exceptional circumstances. However, in order to do so, leave of the court is needed.

Under the IBC Act, there was no provision for the restoration of dissolved companies. Under that Act, companies could be dissolved voluntarily or were deemed to be dissolved if they were struck off the register for a continuous period of ten years. This problem became acute in circumstances where after a company has been struck off, it has come to the liquidator’s attention that there were assets existing that were not properly disposed of by the liquidator. The courts, in the public interest, albeit with much criticism, assumed inherent jurisdiction to effect these restorations, but without any statutory basis. The BC Act contains provisions which permits an application to be made within 20 years of the dissolution and which permit the court to restore the company to the register on such terms as it thinks just.

It is expected that the popularity enjoyed by the IBC Act will be transferred to the BC Act and will catapult incorporations into the millions within a reasonable period of time. Already in the years 2005 – 2006, over 17,892 companies (excluding re-registrations) have been registered under the BC Act. Moreover, the ability to incorporate special purpose vehicles is expected to add to the jurisdiction’s attraction as a major financial centre particularly in the area of structured finance. Additionally, the concept of statutory segregation of accounts is now a well-developed and recognised concept in many offshore jurisdictions such as Bermuda, Cayman Islands and Guernsey. As segregated portfolio companies are useful vehicles particularly for funds, the ability to incorporate these vehicles is also expected to contribute in a major way to incorporations but also add to the jurisdiction’s attraction and to promote the jurisdiction as a one-stop financial centre.

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