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| Colin Riegels
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One of the great attractions of the British Virgin Islands as a
jurisdiction for structuring finance transactions is the simple yet
thorough security registration regime applicable to BVI companies. For
the most part, where a lender advances money against security provided
by a BVI company, registering the security and thereby protecting its
priority and giving public notice of the secured party's rights is a
straightforward and effective system. The legal position becomes less
clear when the company is acting in its capacity as trustee of a trust.
The question of how to deal with trust property is not new. The
statutory system for registration of company charges was first
introduced in the BVI in 1991. Since then, practitioners in the
jurisdiction have had to consider how best to address the problem of a
company creating a charge over assets which it does not beneficially
own.
There has, however, been a surge in the popularity of so-called
private-trust companies (a construct which arose from the Financial
Services (Exemptions) Regulations, 2007), which are essentially
companies which operate as trustees within certain restrictions and are
thereby exempt from the normal requirements of a BVI company to obtain a
trust licence. Lending against trust assets was a comparatively
uncommon event but it now occurs with increasing frequency.
The old International Business Companies Act, 1984 included statutory
provisions allowing a company to register a security interest which was
created "over its assets." That provision was normally interpreted as
referring to the assets which the company owned exclusively of others,
precluding assets which were held on trust. Accordingly, until the BVI
Business Companies Act, 2004 came into force, the answer was simple:
security over trust assets did not have to be registered.
Things became more complex because there are now two different
registration systems which need to be considered (the privately-held
register of charges which the company kept at its registered office, and
the public register of registered charges maintained by the Registrar
of Companies at the BVI Companies Registry). The relevant statutory
sections under the BVI Business Companies Act appear at first blush to
be much wider. Section 162 (dealing with the private register) refers to
"a charge created by the company" and section 163 (dealing with the
public register) refers to "[w]here the company creates a relevant
charge." Both registrations seem to suggest that the new registration
regime ought to extend to property held upon trust.
It is arguably too artificial to construe those two sections alone
without considering Part VIII of the BVI Business Companies Act which
commences with section 161 referring to the power of a company to
"create a charge over its property." Furthermore, section 166 (which
expands upon the public registration regime) refers to a "relevant
charge on property of a company." Accordingly, although sections 162 and
163 when read alone suggest that charges over trust property may be
registrable, when read in conjunction with sections 161 and 166, Part
VIII as a whole seems to suggest that the company charges registration
regime should still be construed as only applicable to charged property
which the company owns beneficially, and not property held on trust.
When faced with difficult questions of statutory interpretation,
lawyers often resort to seeking to ascertain the purpose of the relevant
provision. The registration system under Part VIII appears to serve two
different purposes. The private registration under section 162 appears
to be simply a matter of corporate record keeping – it is not available
for public inspection, and does not affect third-party rights.
Accordingly, that would suggest that charges over property held on trust
should not need to be recorded because they affect neither the
company's balance sheet nor the rights and interests of the company's
shareholders.
On the other hand, public registration serves two purposes: firstly,
to give public notice of charges over the relevant assets, and secondly
to fix priority of claimants in the event that more than one security
interest is created over the same property. If one accepts that charges
over trust property are not registrable, then that would mean there
would be no public record of them under the company charges registration
system. Similarly, the mechanism for determining the higher ranking
priority between competing secured creditors would be absent with
respect to charges over trust property.
While those arguments do seem to suggest there would be sensible
reasons for interpreting section 163 in favour of registering such
charges, realistically both of those arguments are somewhat limited.
It does not appear that a clear-cut answer exists, but it is
respectfully suggested that the better view is that charges created over
trust property should not be regarded as registrable either under
section 162 (private registrations) or section 163 (public
registrations).
In common with just about everything else in this article, the above
comes with a qualification. Just because a security interest over trust
property may not require registration under Part VIII of the BVI
Business Companies Act, that does not mean that such charges cannot be
so registered or that they will not be so registered.
Colin Riegels