The Bahamas offers the arranger, promoter or sponsor of a securitization a cost effective, secure jurisdiction for the domiciliation of the special purpose vehicle (SPV) that issues securities in connection with the transaction. This briefing note will examine some of the key reasons The Bahamas is a suitable jurisdiction.
The Bahamas is an independent member of the British Commonwealth with a long history of political stability. In response to FATF and OECD initiatives The Bahamas has overhauled its financial legislative regime, which now accords with all international standards. The Bahamian judicial system is well respected. There are 12 resident judges of the Supreme Court, a resident Court of Appeal and the Privy Council of the House of Lords in England is the ultimate court of appeal.
There are no corporate or personal income or capital gains taxes in The Bahamas. Further, there are no interest or dividend withholding taxes and issues of securities by International Business Companies are exempt from stamp duty.
Exemption for exchange controls
International Business Companies, Exempted Limited Partnerships and Trusts are exempt from the Exchange Control Regulations Act, 1956, of The Bahamas. Thus exchange controls are not applicable to SPV structures in The Bahamas.
The International Business Companies Act abolished the doctrine of ultra vires however the Act says a company may restrict its objects in its memorandum of association. Thus an SPV may limit its activities to the furtherance of a securitization transaction only. The memorandum of association is filed at the Corporate Registry and open to public inspection thereby giving constructive notice to third parties of any limitations in the objects of the company.
Likewise the borrowing powers of the company may be restricted in the memorandum of association, further reducing the bankruptcy risk of the SPV.
Limitations may also be imposed in the memorandum and articles of association restricting the ability of the company and board of directors to amend its constitutive documents.
The articles of association of the company may contain restrictions on the ability of the board of directors and/or the shareholders to place the company into voluntary dissolution.
There is no requirement under Bahamian law that directors of a company be shareholders or resident in The Bahamas.
Although transaction documentation will probably be governed by foreign law, which will be upheld by a Bahamian court, should a Bahamian SPV company become insolvent it would be subject to Bahamian law in any insolvency proceedings.
Under Bahamian conflict-of-laws rules the agreement to create a security interest over movable property is governed by the proper law of the contract. However, questions regarding the validity of the transfer of the movable property depend, generally on the law of the country in which the movable property is located (the lex situs). Thus the law of the location of the collateral will govern the matters of (a) perfection; (b) recognition; and (c) enforcement.
Bahamian law does not require the filing or registration of a charge, financing statement or any other document against the debtor (SPV issuer) in The Bahamas for the security interest to be validly created. If the collateral is located in a foreign jurisdiction, Bahamian law will require that the formalities of the foreign jurisdiction be complied with for the valid creation of the security interest.
Bahamian law does not require a Bahamian company to maintain a register of mortgages and charges.
There are no provisions under Bahamian law that would delay or prevent a secured party from promptly liquidating securities collateral or setting off against cash collateral if the counter party SPV were to become subject to winding up or insolvency proceedings governed by Bahamian law. However the security agreement did not grant the secured party a power of sale, the secured party would have to apply to the Bahamian court for an order to sell the collateral.
Bahamian law provides for mandatory enforcement of netting and set-off clauses. Under Bahamian law the liquidator of an SPV would not be able to disclaim any onerous contracts provided they are outside the 90-day preference period preceding the date of the insolvency proceedings.
Bahamian law provides for limited priority payments in the winding up of a company all of which would usually not apply to an SPV in a securitization.
There is no general doctrine of recharacterization under Bahamian law and legal form should be upheld except perhaps in the instance of mistake of law.
Overall Bahamian insolvency laws can be characterized as creditor friendly.
Depending on the transaction, the issue of securities by a Bahamian SPV may be subject to the prospectus registration requirements of the Securities Industry Act. However, there are several safe harbours and exemptions from these registration requirements. The regulatory requirements are not onerous by comparison with onshore requirements. Bahamian law does not restrict the type of assets that may securitized.
Notwithstanding current issues in the securitization market, it appears the industry will continue to go from strength to strength. The Bahamas is a cost competitive jurisdiction and is well positioned to service the international SPV market. As such, The Bahamas should be on the shortlist of jurisdictions when analyzing and selecting the domicile for an offshore SPV.
Michael L Paton
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