Introducing the BVI Business Companies Act 1 Introduction On 1 January 2005 the BVI Business Companies Act 2004 (the BC Act ) came into force 1, overhauling the territory s existing corporate legislation. In the last 20 years, the International Business Companies Act (Cap. 291) (the IBC Act ) has become the BVI s hallmark legislation, regulating the incorporation and registration of over 600,000 companies. Whilst the features of the IBC Act made the BVI the premier offshore corporate domicile, it became increasingly evident in the last few years that improvements to the legislation were necessary in order to keep pace with the demands of international business. The BC Act will eventually replace both the IBC Act and the existing local Companies Act (Cap. 285) (the "Companies Act"), and allows for the incorporation of both local and international offshore companies. Its aims are to provide a wider range of corporate vehicles, and to increase the flexibility of the regime, so as to retain the attractions of the previous corporate structure whilst providing a suitably robust legal framework. To ensure the seamless introduction of the BC Act, there is a two-year transition period during which both the IBC Act and the BC Act will be in force. The administrative details of the transition period are set out at the end of this guide. This guide summarises the key features of the BC Act, highlighting several of its differences with the IBC Act. 2 Types of Company The BC Act provides a wider choice of company available in the Territory. Under the IBC Act the only type of corporate vehicle was (and, until the end of the transition period, is) the company limited by shares. Under the BC Act, however, seven options are now available: companies limited by shares 2, companies limited by guarantee and not authorised to issue shares 3, companies limited by guarantee and authorised to issue shares 4, unlimited companies not authorised to issue shares 5 and unlimited companies authorised to issue shares 6, 1 Section 1(2) 2 Section 5(a) 3 Section 5(b) 4 Section 5(c) 5 Section 5(d) 6 Section 5(e)
and two new concepts: the restricted purpose company 7 portfolio company 8. and the segregated It is worth focussing briefly on the two new corporate vehicles introduced by the BC Act; the restricted purpose company and the segregated portfolio company. 2.1 Restricted Purpose Companies The BC Act provides for the incorporation of restricted purpose companies ( RPCs ) basically, companies limited by shares which have restricted purposes or objects. Their memorandum of association must state those purposes for which the RPC has been incorporated 9. RPCs are unique to the BVI, and have been designed primarily as special purposes vehicles for use in particular in the context of large joint venture structures, or structured finance and securitisation transactions. 2.2 Segregated Portfolio Companies Segregated portfolio companies ( SPCs ), previously only available under the Insurance Act 1994, are permissible on the proviso that the BVI Financial Services Commission (the FSC ) has consented in writing 10. Like RPCs, they are companies limited by shares. The BC Act permits registration as a SPC by licensed insurers and public mutual funds. 3 Incorporation under the BC Act 3.1 Incorporation procedures To register under the BC Act the applicant (who must be the proposed registered agent) must file with the Registrar of Corporate Affairs (the Registrar ): the company s memorandum and articles of association (both signed by the proposed registered agent as incorporator) 11 ; a document signed by the proposed registered agent certifying his consent to act as registered agent 12 ; and such other documents as may be prescribed. (Note that if the company is to be a SPC the written approval of the FSC referred to in paragraph 2.2 above will also need to be filed.) 7 Section 8(1) 8 Sections 134-159 9 Section 10(2) (note that the BC Act does not require any other form of company to set out its objects or purposes in its memorandum or articles of association.) 10 Section 135(2) 11 Section 6(1)(a) and (b) 12 Section 6(1)(c)
Once satisfied that all required documents and filings have been provided or made, the Registrar will register the documents, allot a company number, and issue the certificate of incorporation 13. 3.2 Memorandum and Articles of Association A company s memorandum and articles of association are its corporate constitution, and regulate the relationship between the members and the company. They are binding as between the company and each member, and between each member of the company 14. Whilst the BC Act does give companies absolute freedom as to what can be set out in the memorandum and articles, certain administrative information must always be stated, including the company s name and type, the identity and address of the registered agent, the maximum number of shares it may issue (if the company is limited by shares or otherwise authorised to issue shares) and the amount which a member must contribute on liquidation (if the company is limited by guarantee) 15. SPCs must state in their memorandum that they are segregated portfolio companies 16, and, as mentioned in paragraph 2.1 above, RPCs must state that their purposes are restricted 17. As mentioned in footnote 9 above, the BC Act does not otherwise require in any way that a company s constitutional documents detail its objects or purposes (although there is nothing to prevent a company doing so should it desire). One other departure from the IBC Act in this regard is that the BC Act has abolished the concept of authorised share capital. Whereas companies under the old system were required to state that they had an authorised share capital of $x divided into x shares of $x par value each, companies limited by, or otherwise authorised to issue shares are now simply required to state the maximum number of shares they are authorised to issue. Companies may amend their memorandum and articles of association by resolution of the members 18, or by the directors if expressly authorised by the memorandum 19 (and subject to certain limitations, for example the directors shall not have the power to restrict the rights of the members to change the memorandum or articles 20 ). 13 Section 7(1) 14 Section 11(1) 15 Section 9(1) generally 16 Section 9(1)(g) 17 Section 10(2) 18 Section 12(1) 19 Section 12(4) 20 Section 12(5)
If a company amends its memorandum or articles of association, it must file with the Registrar a notice of amendment in the prescribed form, or the restated memorandum or articles 21. The amended document has effect from the date such documents are registered, or from such other date as the court may determine (on application from a member, director, or any interested person) 22. 3.3 Permissible company names The BC Act has widened the scope of permissible names for companies incorporated under it. For example, the company number can now be used as part of its name, in the form BVI Company Number 9999999 23. If such a name is selected, the BC Act also allows an additional foreign character name (approved by the registrar) 24. Furthermore, the names of the different types of company must end with the following: limited companies with Limited, Corporation, Incorporated, Société Anonyme or Sociedad Anonima, or any of their respective abbreviations (i.e. Ltd, Corp, Inc or S.A. ) 25 ; unlimited companies with Unlimited or Unltd 26 ; RPCs with (SPV) Limited or (SPV) Ltd 27 ; and SPCs with Segregated Portfolio Company Limited, Segregated Portfolio Company Ltd, SPC Limited or SPC Ltd 28. Unlike the IBC Act, the BC Act also permits the use of names of companies which have subsequently changed their name, been struck off the register, or been dissolved 29. 3.4 Capacity and powers The corporate capacity of companies is one of the areas in which the BC Act differs significantly from the IBC Act. 21 Section 13(1), and c.f. the IBC Act, under which the resolution approving the amendment had to be filed. 22 Section 13(3) 23 Section 19 24 Section 20(1) 25 Section 17(1) 26 Section 17(2) 27 Section 17(3) 28 Section 17(4) 29 Section 24
One important distinction is that the BC Act provides that a company has, irrespective of corporate benefit, full capacity and power to carry on any business or activity, do any act or enter into any transaction 30 (subject to the other provisions of the BC Act, any other enactment and the company s memorandum and articles of association). The powers of companies under the BC Act are thus considerably wider than under the IBC Act. Furthermore, no act of a company, or transfer of assets by or to a company is invalid by reason of the relevant company s lack of capacity, right or power 31. In order to render the specific act or transaction invalid, it will generally be a requirement that not only was the act or transaction beyond the scope of the company s capacity and powers, but that the third party had knowledge of that fact. It is here that the BC Act deviates from the IBC Act, by abolishing the concept of constructive notice. It provides that a third party will not be deemed to have knowledge of any document relating to a company (including its memorandum and articles of association) simply because such document is a matter of public record 32. Thus a third party will not be deemed to have the constructive notice necessary to invalidate a company s actions for incapacity simply by reason of the fact that the company s powers are available for public inspection from the Registrar or at the company s registered office. 3.5 Restrictions on carrying on business IBCs incorporated under the IBC Act were not permitted to carry on business with persons in the BVI (a restriction which had to be reflected in the company's memorandum of association). However, the BC Act imposes no such statutory restriction. The only limitations on a company s business under the BC Act will be contained in a statement in the approved form contained in its memorandum 33. 4 Directors 4.1 General The BC Act vests the power to manage, direct and supervise the business and affairs of a company in its directors 34 (subject to any modification or limitation in the memorandum and articles of association). Every company must have at least one director 35, and no person may be a director of a company unless he has 30 Section 28(1) 31 Section 29 32 Section 32(1) 33 Section 9(4) 34 Section 109(1) and (2) 35 Section 109(4)
consented in writing to be a director 36. The names and addresses of all directors are to be entered in a company s register of directors 37. The directors are entitled to establish committees of directors, to which they may delegate their powers 38. The BC Act does, however, specify certain powers which may not be delegated, including the powers to amend the memorandum or articles of association, to appoint directors or agents, and to make a declaration of solvency or approve a liquidation plan 39. The directors retain responsibility for the exercise of any power delegated to a committee, unless they believed on reasonable grounds that the committee would in fact exercise the power in accordance with the duties imposed on directors by the BC Act 40. 4.2 Appointment, resignation and removal The first director(s) of a company are to be appointed by the registered agent within 30 days of incorporation 41, and subsequent directors may be appointed by members resolution or where permitted by the memorandum or articles - by the directors themselves 42. Directors may resign their position by written notice 43, or be removed by a resolution of the members passed at a meeting with the purpose of removing such director, or a written resolution passed by at least 75% of the members of the company entitled to vote 44. The BC Act also provides that a director may be removed by his fellow directors where permitted by the memorandum or articles of association themselves 45. 4.3 Directors duties The fiduciary duties of directors have been enshrined in the BC Act 46, giving statutory standing to the duties to act honestly and in good faith, in what the relevant director believes to be the best interests of a company. A feature of the BC Act is that it permits a director of a subsidiary company to exercise this duty by acting in the best interests of a holding company, even though it may not be in the best interests of the company of which he is a director (if so authorised by the memorandum or articles of association and where the company is not a whollyowned subsidiary with the prior agreement of the shareholders) 47. 36 Section 112 Note that this is a new requirement which does not exist under the IBC Act. 37 Section 118(1) 38 Section 110(1) 39 Section 110(2) 40 Section 110(4) 41 Section 113(1) 42 Section 113(2) 43 Section 115(1) 44 Section 114 45 Section 114(4) 46 Section 120(1) 47 Section 120(2) and (3)
Furthermore, the BC Act reflects the common law duties of due care, diligence and skill 48 and imposes on directors the duty to act for a proper purpose and not in a manner which contravenes either the BC Act or the company s memorandum or articles of association 49. A director is also obliged to disclose any interests he may have in a transaction to be entered into by the company 50 (although he remains entitled to vote on the transaction, attend meetings in relation to it and be counted for the purposes of the quorum 51 ). Should he fail to do so, the transaction will be voidable by the company 52, unless the material facts of the interest are disclosed to the members and the members nevertheless ratify or approve the transaction, or the company receives fair value for it 53. 5 The Members 5.1 Who is a member? A member is defined as (a) a shareholder, (b) a guarantee member, or (c) a member of an unlimited company who is not a shareholder 54. In any case, a member will be anyone whose name is entered in the company's register of members 55. Companies incorporated under the BC Act must have at least one member 56 (and, if the company is unlimited, at least one member must be an unlimited member, and if the company is limited by guarantee, at least one member must be a guarantee member). 5.2 Rights and Powers The rights of members are specified in the company s memorandum and articles of association. However, certain shareholder rights are actually set out in the BC Act, such as the right to one vote, the right to an equal share in any dividend and the right to an equal share in the distribution of the company s assets 57. (It should be noted, however, that the BC Act also provides the option for a company to negate, modify or add to those rights 58 where so authorised by its memorandum of association.) 48 Section 122 49 Section 121 50 Section 124(1) 51 Section 125(4) 52 Section 125(1) 53 Section 125(2) 54 Section 2 55 Section 78 56 Section 79(1) 57 Section 34(1) 58 Section 34(2)
The BC Act provides that members may exercise their powers by passing resolutions either at meetings, or by written resolution 59. Member s meetings may be called and convened by the directors or any other person so authorised by the memorandum 60. Under the BC Act, both resolutions at members meetings and written resolutions may be passed with a simple majority (or such higher majority as the memorandum or articles may specify) of the votes of those members entitled to vote and voting 61. This is a further departure from the IBC Act, which requires an absolute majority to pass written resolutions. 5.3 Liabilities The respective liabilities of a company s members are set out in the BC Act. A member of a limited company will have no liability whatsoever for the liabilities of that company 62. A shareholder s liability to the company is limited to the amount unpaid on that shareholder s share(s), any liability provided for in the memorandum or articles of association and any liability to repay a distribution 63. A guarantee member will only be liable for the amount that member would have to contribute to the company s assets on a liquidation, and any other liability expressly provided for in the memorandum or articles of association 64. The liability of members of unlimited companies is, of course, unlimited 65. 6 Shares 6.1 General As previously mentioned in paragraph 3.2 above, one of the major new features of the BC Act is that the concept of authorised share capital has been abolished. Instead, a company limited by, or otherwise authorised to issue shares, must now simply state in its memorandum the maximum number and classes of shares they are authorised to issue 66. The directors of a company can, at their discretion, issue shares in registered or bearer form (although in order to issue bearer shares there must be an express authorisation in the memorandum of association 67 ) for such consideration and on 59 Section 81(1) 60 Section 82(1) 61 Section 81(2) 62 Section 80(1) 63 Section 80(2) 64 Section 80(3) 65 Section 80(4) 66 Section 9(1)(e) 67 Section 38(1)(a)
such terms as they may determine 68. Shares can be issued for consideration in any form 69, provided such consideration is not be less than par value where the share is a par value share 70. If so authorised by its memorandum, a company can issue more than one class of shares 71 and, if so, the memorandum must also specify the rights, privileges, restrictions and conditions which attach to each class 72. The BC Act provides that companies may issue redeemable shares, shares with no rights, limited rights or preferential rights to share in distributions of capital or income, or shares with no or special or limited or conditional voting rights 73. They may also, subject to their memorandum and articles, issue bonus shares, partly or nil paid shares 74, and fractional shares 75. It should be noted that under the BC Act, bearer shares must be deposited with a custodian authorised or recognized by the FSC. Such shares, and the rights attaching to them, will be disabled during any period where this is not the case 76. The custodian of the shares will be entered on the register of members of the company (and therefore becomes a member) 77, however the intended bearer will still be shown as beneficial owner 78. 6.2 Companies may acquire their own shares The BC Act provides that a company may purchase, redeem or otherwise acquire its own shares, either in accordance with the procedure set out in the BC Act, or any other procedure as provided for in the company s memorandum and articles of association 79. Under the statutory provisions, the directors may make an offer to acquire the shares in the company provided that the offer is either (a) to all shareholders and would, if successful, leave the relative voting and distribution rights unaffected 80, or (b) to one or more shareholders and consented to in writing by all shareholders, or otherwise permitted by the memorandum or articles of association 81. Where the offer is to one or more shareholders, the directors must have passed a resolution to the effect that in their opinion the acquisition would benefit the 68 Section 45 69 Section 47(1) 70 Section 47(2) 71 Section 34(2)(a) 72 Section 9(1)(e)(ii) 73 Section 36(1) 74 Section 36(2) 75 Section 39(1) 76 Section 70(1) 77 Section 41(1)(d)(iv) 78 Section 71(1) 79 Section 59 (1) 80 Section 60(1)(a) 81 Section 60(1)(b)
remaining shareholders, and that the proposed offer is fair and reasonable to the company and the remaining shareholders 82. Because the acquisition by a company of its own shares would be treated as a distribution 83, the conditions imposed on distributions (detailed in paragraph 6.3 below) must be met. 6.3 Distributions The directors of a company may only declare a distribution (which is widely defined 84 ) by the company if they are satisfied, on reasonable grounds, that the company will, immediately after the distribution, satisfy the solvency test 85. A company will satisfy the solvency test if the value of its assets exceeds its liabilities, and it is able to pay its debts as they fall due 86. 7 Registration of charges 7.1 General The BC Act has established a new régime for the taking of security from BVI companies, introducing for the first time a system of registration with the Registrar. As with the IBC Act, all companies must keep a register of charges at their registered office or the office of their registered agent 87, however, the BC Act provides that a relevant charge (defined as a charge created on or after 2 January 2005 88 ) may also be registered with the Registrar 89. (It should be noted that such registration is not mandatory, and failure to make an application for registration will not therefore affect the charge s validity or enforceability.) Where a company creates a relevant charge, an application for registration may be made to the registrar either by the company or the chargee 90. Once all formalities have been complied with, the Registrar will enter the charge on the register of registered charges for that company, and issue a certificate of registration of the charge 91 which will be sent to both the company and the chargee. This certificate will show the date and time of registration, and is conclusive proof that the registration requirements have been complied with 92. 82 Section 61(1) 83 Section 56(b) 84 Section 56(b) 85 Section 57(1) 86 Section 56 87 Section 162 88 Section 160(1) 89 Section 163(1) 90 Section 163(1) 91 Section 163(4) 92 Section 163(6)
7.2 Priority A relevant charge registered with the Registrar under the BC Act will have priority over subsequently registered relevant charges and relevant charges which are not registered 93. Relevant charges which are not registered will rank among themselves as if the new provisions had not come into force 94. Charges created before 1 January 2005 will continue to rank as if the new provisions had not come into force and, where they would have taken priority over a charge created on or after that date they will continue to take such priority 95. The effect of this provision is that chargees who have taken security from IBCs prior to 1 January 2005 will be able to rely on the priority of their charge. The order of priorities as between chargees can be modified by express consent of a chargee, or by agreement between chargees 96. Furthermore, a registered floating charge will always be postponed to a subsequently registered fixed charge (unless the floating charge contains a negative pledge provision) 97. One point worthy of note to potential chargees is that the provisions of the BC Act and the transitional arrangements for its introduction have led to an inconsistency. Due to the overlap of the BC Act and the IBC Act during the transition period, chargees who propose to take security from existing IBCs risk a potential exposure, as the BC Act only applies to companies registered under it. Therefore, where an existing IBC creates a charge, that charge will not be registerable under the BC Act, despite qualifying as a relevant charge. The exposure will arise on the re-registration of the IBC under the BC Act, if another creditor then registers a relevant charge over the same property. A chargee proposing to take security from an existing IBC might therefore wish to consider requesting that the IBC voluntarily re-register under the BC Act prior to granting the security, and then register the security in accordance with the provisions discussed above. 8 Transition period As mentioned above, the Legislative Council has set out a two-year transition period for the introduction of the BC Act, which will operate as follows: from January 2005 to 31 December 2005 new incorporations will be permitted under the BC Act, the IBC Act and the Companies Act; from 1 January 2006 to 31 December 2006 new incorporations will only be permitted under the BC Act, but companies already incorporated under 93 Section 166(1) 94 Section 166(2) 95 Section 167 96 Section 168(a) 97 Section 168(b)
the IBC Act or Companies Act may continue under those acts or reregister under the BC Act, at their option; and from 1 January 2007 all remaining companies incorporated under the IBC Act or Companies Act will be automatically re-registered under the BC Act.