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.
About the authors
Peter Tarn
Harney Westwood
& Riegels
Partner
Peter Tarn worked at the London office of Allen & Overy
from 1990 to 1997, where he specialized in emerging market
debt. He joined Harneys in 1997 and is head of the Banking
& Finance and Corporate & Commercial Departments.
His client base comprises major financial institutions and
corporates throughout the world.
Ray
Wearmouth
Harney Westwood
& Riegels
Ray Wearmouth qualified as an English solicitor in 1994. He
worked for two leading English law firms, specializing in
mergers and acquisitions, until 1999. In 1999 he joined one of
Jersey's leading law firms where he specialized in corporate,
banking, securitization and structured finance matters for two
years. He joined Harneys in 2001 and his current area of
practice includes all corporate and commercial disciplines and
capital markets matters.