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Contractual re-financings

The economic downturn has brought many companies into at least the early stages of financial difficulties, necessitating discussions with creditors and shareholders. Many have opted to restructure the terms of their existing financing arrangements. Although a number of companies have used schemes of arrangement, contractual refinancings have remained the standard solution.

As BVI companies are used throughout the world, they are often involved with such negotiations and subsequently agreed arrangements, whether as primary obligor/borrower or security provider.

More often than not, finance documents are governed by English law or New York law. BVI companies can validly choose a foreign law to govern such documentation and can also submit to the jurisdiction of those courts.

A very helpful feature of BVI law is that the BVI Business Companies Act, 2004 (Act) expressly enables security to be taken over shares in BVI companies either under BVI law or any other law. This gives great flexibility to security packages and avoids gritty conflict of laws and comity questions.

Registrations of new security or the filing of variations to existing security are straightforward in the BVI. A mandatory requirement under the Act is that a BVI company must make an entry in it's register of relevant charges maintained by its registered agent of any security granted by that company. An optional filing can be made at the BVI Registry of Corporate Affairs by the company or the secured party (or its agent). That filing creates a priority ranking for that security interest over any subsequently registered or unregistered security interests. It is highly recommended that a creditor file the particulars of its security at the Registry of Corporate Affairs in all circumstances to protect against a company granting security in the same assets and a subsequent creditor filing first. Subordination arrangements are effective to alter the statutory ranking that would otherwise apply.

Also, subordination arrangements that may be agreed as part of a refinancing arrangement, in the event of an insolvency of the BVI company concerned, are given express legal effect under the BVI Insolvency Act, 2003. The subordination however will not be effective to the extent that a creditor of the BVI company that was not a party to the agreement is prejudiced.

Set-off provisions in netting agreements also survive the liquidation of a BVI company and where set-off provisions are not contained within a netting agreement, mandatory insolvency set-off rules will apply. A creditor is not entitled to claim the benefit of a set-off if it had actual notice that the debtor was insolvent at the time it gave credit to the debtor or received credit from the debtor or at the time it acquired any claim against the debtor, or any part of or interest in such a claim.

In terms of vulnerable transactions, if a BVI company enters into any transaction within a period following the onset of insolvency, a liquidator might look to prove that the transaction was a "voidable transaction" for purposes of the BVI Insolvency Act, 2003. To be a voidable transaction, the transaction contemplated would need to constitute either (i) an unfair preference; (ii) an undervalue transaction; (iii) a voidable general assignment of book debts; or (iv) an extortionate credit transaction. Assuming that the company and the other parties to the financing are not "connected persons", this period is six months prior to the onset of insolvency, save in respect of an extortionate credit transaction where the period is five years. The period of six months is extended to two years where creditors are "connected persons".

Rachael McDonald and Ray Wearmouth

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