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The ABCs of security

BVI companies are regularly used as asset holding companies. Security packages cover almost all asset classes with real property, ships, aircraft, securities and shares probably being the most common.

BVI companies have the statutory power to charge their property and assets, subject to the provisions of their memorandum and articles of association. A very helpful statutory provision confirms that "the governing law of a charge created by a company may be the law of such jurisdiction that may be agreed between the company and the chargee and the charge shall be binding on the company to the extent, and in accordance with, the requirements of the governing law." Having statutory certainty and clarity on the choice of governing law and remedies of security avoids many concerns that might otherwise arise from a situs, conflict of laws or comity perspective.

BVI law recognises the concepts of both fixed and floating charges.

Breach

What if there is a breach of any of the obligations owed to a lender leading to an event of default? The BVI Insolvency Act, 2003 was designed to create a secured creditor friendly environment.

Where a BVI obligor is insolvent, the insolvency regimes available under the Insolvency Act are familiar to most: provisional liquidation, administrative receivership, liquidation or creditors' arrangements. Even if a BVI company does enter into these regimes, that by itself will not negate a foreign liquidation of the company. The Insolvency Act also expressly provides that liquidation does not affect the rights of secured creditors to enforce their security.

Only unpaid governmental charges are preferred over the claims of secured creditors. The voidable transaction rules under the Insolvency Act apply only to a six-month vulnerability period, where the company has entered into a transaction with an unconnected person (or a two-year period, with a connected person), prior to the onset of insolvency. The Insolvency Act also expressly recognises that BVI companies enter into transactions with foreign parties that often involve foreign assets and gives the BVI court wide powers to assist, or to step away from, foreign insolvency proceedings.

The enforcement of foreign judgements is usually a straightforward process in the BVI. The BVI also benefits from a dedicated specialist Commercial Court with ultimate appeal to the Privy Council in London.

The BVI Registry of Corporate Affairs maintains a central public register of charges for the registration of security interests granted by BVI companies. Public registration usually regulates priorities as between secured creditors although there are exceptions to this. Clear statutory recognition of intercreditor arrangements is provided for. Either the company or the secured party has the option of filing particulars of the security interest in the public register. A failure to file will not render the security void but could of course affect priorities.

A BVI company that creates security must also enter particulars of that security in a private register of charges. Failure to do this could render the company liable to a fine.

Charges over BVI shares

BVI law expressly provides that a charge over shares in a BVI company may be governed by BVI law or a foreign law. Again, this statutory confirmation provides certainty and real flexibility in the choice of law.

Where the governing law of a share charge is BVI law, the chargee is statutorily entitled to the following remedies: (i) subject to anything to the contrary contained in the security document, to the right to sell the shares; and (ii) the right to appoint a receiver that, also subject to anything to the contrary specified in the security document, may:

(i) vote the shares,
(ii) receive distributions in respect of the shares, and
(iii) exercise other rights and powers of the chargor in respect of the shares, until such time as the security is discharged.

If a foreign governing law is used and the share charge complies with the foreign law requirements, the remedies available to the secured party on enforcement are also governed by that foreign law.

The decision of the Privy Council in May 2009 in Alfa Telecom Turkey v Cukurova Finance relating to the English remedy of appropriation under the European Directive 2002/47/EC on financial collateral arrangements is noteworthy. It was held that appropriation of shares in a BVI company was available as a remedy if the charge specified it as so being available (as required under the Directive), in this case being an English law governed share charge.

Rachael McDonald and Ray Wearmouth

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