British Virgin Islands

The primary historical reasons for the use of the BVI as a centre for incorporation of SPVs are not complex:

a tax neutral regime with no corporate, income or capital gains taxation, and an absence of withholding;
no exchange controls or currency risk external to the transaction (the BVI currency is the US Dollar);
speed and low cost of set up;
regulation at local service provider level and not on debt issuance itself with the result that no specific regulatory approval will be required or costs imposed; and
an attractive legal framework in both corporate and trust spheres.

Few of these reasons are different from those in other relevant jurisdictions. But a triumvirate of legislative initiatives is set to mark the BVI apart from its competitors. These legislative initiatives are at different stages: amendments to the trust legislation came into force on March 1 2004, a new insolvency act was enacted in 2003 and is expected to come into force in the next few months and the new companies act is scheduled for enactment before the end of 2004.

This article deals first with details of the incorporation process and the basic legal and tax situation before turning to these developments.

Incorporation

An International Business Company (by far the most common BVI special purpose vehicle) is incorporated by filing the memorandum of association and articles of association with the Registry of Corporate Affairs. There is no requirement that any directors or other officers be BVI resident but the company is required to have a registered office and a registered agent in the BVI. There are a large number of corporate service providers (ranging from divisions of the large accountancy firms to service companies of local law firms) able to provide this service.

Formation of the SPV is possible on a same day basis. This should not be taken to suggest that last minute incorporation is achievable since the need exists for directors to understand and take informed decisions on the proposed transactions, for constitutional documents to be drafted to fit the deal, and for service providers to undertake due diligence. What it does mean is that the practical limitations are determined by the quality and resources of that service provider rather than government or administrative bodies.

The cost of setting up an SPV remains low. Government fees range from $300 to $1,000 depending on authorized capital and the fees for local corporate service providers are extremely competitive.

Tax and basic legal regime

No special tax exemptions or regulatory consents are required (all international business companies being exempt from income tax, capital gains tax and stamp duty). There is no withholding. The BVI does not have any double tax treaties.

The BVI is a British Overseas Territory with a stable political system and no discernible threats to that stability. It is an English common law jurisdiction with the final appeal court being to the Privy Council in London. It does not have a local stock exchange.

Trust law

The basic legal architecture is that of English law but significant advances have recently been made. Charitable trusts remain by far the most common option for holding the equity of SPVs although the amendments made to the purpose trust legislation provide a clearer and more robust regime for purpose trusts created after March 1 2004 and may well increase their application.

The new trust legislation also includes the introduction of Vista (an acronym for Virgin Islands Special Trusts Act). The only element which this trust development shares with trust legislation from other jurisdictions is the use of an acronym. Vista is designed to allow property to be held on trust for retention rather than for sale and to permit the trustees to leave the management of the SPV to the directors. In effect the legislation authorizes the removal of the trustee's monitoring and intervention obligations (except to the extent that the trust deed requires otherwise) and allows the settlor to confer on the professional trustee a role more suited to its abilities, namely a duty to intervene to resolve specific problems; it also allows the trust deed to lay down rules for the appointment and removal of directors. Vista trusts can be purpose trusts or charitable trusts.

Although originally conceived of as a succession-planning tool, the attributes of a Vista trust clearly have a significant role to play in the structured finance arena.

The new trust legislation also introduces clear conflict of laws rules and provisions that, by dealing coherently with the relationships between trustees and third parties, significantly increase the attractiveness of BVI trusts in a commercial context.

Insolvency

All reasonably sophisticated offshore jurisdictions claim creditor friendly insolvency regimes. In making this claim the English law based jurisdictions have relied almost exclusively on the primacy given to the secured creditor, the absence of stays on enforcement and the protection that they will give effect to netting provisions. While these factors are important they have tended to exist on the basis of a rather muddled combination of old personal bankruptcy statutes and justifiable but aggressive application of concepts taken from such statutes in the modern corporate environment.

Although not solely aimed at the structured finance industry the need for insolvency legislation to be a positive reason for the providers of debt finance to do business in the jurisdiction was at the forefront of the legislative process in the BVI.

The BVI legislation owes much to the English 1986 Act but perhaps the most conceptually important divergence comes in the fact that it is not based on the assumption that BVI domestic law is the central issue. The BVI legislation clearly recognizes that to be effective it has to operate in a more complex cross-border environment. This recognition means that the legislation represents a genuine step forward in the efforts to achieve the structured finance imperative of legally isolating assets from a transferor's insolvency and enabling a purchaser of securities backed by the assets to rely solely on the creditworthiness of those assets.

The law of the jurisdiction of incorporation of the SPV cannot alone isolate assets from unrelated insolvency risks but it has a key role in the objective of reducing to the greatest extent possible the ability of a third party creditor to bring about, and potentially control, insolvency proceedings. It is not intended in this article to focus on the commonly used techniques for achieving this objective. Recognition by the relevant jurisdiction of non-petition covenants, limited recourse debt, the use of independent directors to reduce the risk of issuer petition and the way in which the jurisdiction treats attempts to restrict the scope of business of the SPV are all important. All are available if the issuer is a BVI SPV but these are established techniques and equally available elsewhere.

Both administration and administrative receivership are brought across from the English 1986 legislation but for those not familiar with English law and also to distinguish them from the somewhat different applications of these concepts under the English Enterprise Act a brief explanation is required.

Administration is a court driven breathing space during which rescue of the business or an opportunity to dispose of assets more advantageously than would have been the case in a liquidation can be attempted. An administrator is appointed by order of the court, which must be satisfied that the statutory grounds (including insolvency) exist. The administrator takes control of the company and must formulate proposals for consideration by the company's creditors. If these are approved the administrator manages the company's business, assets and affairs in accordance with the proposals until the purpose is achieved or the administrator concludes that it cannot be.

The simplistic view of administration is that a rehabilitation type statute with a moratorium provision must be a negative. Reality, and specifically cross-border reality, is more complex. The decision of the English courts that English law administration could be imposed on any company with its centre of main interest in England and the all pervasive nature of Chapter 11 make an analysis based solely on the existence or otherwise of some form of rehabilitation procedure in the jurisdiction of incorporation of the SPV simplistic. The fact is that, when considered in conjunction with the powerful creditor tool of administrative receivership, the introduction of administration in the BVI has the potential to protect noteholders to a greater degree than would otherwise be the case.

As noted above, administration has not been introduced on its own but in conjunction with administrative receivership (the Insolvency Act also represents a statutory codification and amendment to the law of receivers more generally). The administrative receiver is receiver of the whole or substantially the whole of the business undertaking and assets of a company appointed by a floating charge holder. Subject only to acting in good faith and for a proper purpose, the administrative receiver's primary duty is to act in what he believes to be the best interests of the person who appointed him.

The importance of the introduction of administrative receivership cannot be overestimated. It represents an efficient out of court enforcement procedure which has the capacity significantly to enhance the speed with which assets can be realized on behalf of the noteholders. Of equal importance is the fact that it decreases the reliance that has to be placed on non-petition covenants, independent directors and the like in ensuring that an insolvency regime cannot be imposed upon the structure without the consent of the noteholders via the trustee. Administration and its attendant moratorium cannot occur if the holder of a floating charge opts to appoint an administrative receiver. So long as a floating charge has been granted by the SPV to the trustee for the noteholders any attempt by a third party to place the SPV into insolvency would lead to appointment of an administrative receiver. The effect is to pass control over the securitized pool of assets to the noteholders.

The fact that administration can be blocked by a secured creditor who has the ability to appoint an administrative receiver will, of course, make the use of floating charges in structured finance almost inevitable and the legislation makes specific provision for lightweight floaters.

It is not only at finance company level that the introduction of administrative receivership and its interplay with administration is important. The move away from administrative receivership in the UK and its lack of availability elsewhere also present a rationale for the insistence on the use of BVI vehicles by originators who contemplate securitization of that book in the future.

Other security granted by the SPV will usually be over non-BVI assets and specific provisions allowing security to be granted under foreign law have always existed, allowing the unfettered choice of the law most appropriate for the asset in question. To allow a single choice of law to operate throughout the majority of transaction documents this is even extended to security taken over shares in BVI companies; BVI law simply mandates the operation of the rights and remedies given under the governing law.

Detailed analysis of the multitude of cross border issues and of the impact of different insolvency laws is beyond the scope of this paper but under the legislation any person authorized by judicial or administrative insolvency proceedings in a relevant foreign country may apply to the BVI court for assistance. The court has an extremely wide discretion on hearing such an application and may apply relevant foreign law. All this is similar to English law but from a structured finance perspective the most important element (and a distinction from English law) is that there are limits to that discretion and BVI laws protecting secured creditors and the primacy of BVI set-off and netting law cannot be subverted.

Specified financial contracts have their own regime based on International Swaps and Derivatives Association model netting laws and in effect netting agreements are validated in their entirety through insolvency.

Other set-off situations are dealt with by a provision substantially similar to rule 4.90 of the English Insolvency rules and conceptually do not represent a significant change from existing BVI law. In practice, the way in which the exception to the availability of set-off (where the counterparty has notice of the BVI company's insolvency) is drafted should markedly increase the availability of insolvency set-off and certainty that this will be the case.

Perhaps the most important effect of the legislation is that for the first time in the Caribbean there is a regime that is internally coherent. For example, practitioners no longer have to apply English insolvency rules from the 1980s to substantive legislation from the 19th Century. This, more than any single element, means that the Act is a piece of legislation that is better suited to the needs of the structured finance industry than any other.

Companies Act amendments

Looking forward, the BVI's process of amending corporate legislation itself is less advanced than either insolvency or trust reform and it is therefore difficult to give specifcs at this stage. However, it seems likely that specific legislation relating to SPVs will form part of the legislation and the needs of the structured finance industry are being considered at every step in its development.

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