Top Tips - Taking Security Over Shares in a BVI Company
There were 468,339 British Virgin Islands ("BVI") companies in existence as at 31 March 2012 and virtually every day Maples and Calder is involved in advising, either lenders or borrowers, on taking security over shares in BVI companies. In secured financing transactions, it will always be important for BVI counsel to review the security document, regardless of its governing law, to ensure that it provides the parties with the best protections and, in the case of the lenders, the easiest route to taking control of the BVI company on an enforcement event.
Should the security document be governed by BVI law?
When dealing with security over shares in a BVI company the instinctive reaction of onshore counsel is often that, as the asset being secured is a BVI asset, the security over the shares should be governed by the laws of the BVI. BVI law expressly allows for share security to be governed by foreign law and there may be advantages in using the same law as the main financing documents, as the lender can be comfortable that it has the remedies that it anticipated when negotiating the commercial terms of the transaction. This is as a result of section 66(4) of the BVI Business Companies Act 2004 (as amended) (the "BC Act"), which states that:
"Where the governing law of a mortgage or charge of shares in a company is not the law of the Virgin Islands:
(a) the mortgage or charge shall be in compliance with the requirements of its governing law in order for the mortgage or charge to be valid and binding on the company; and
(b) the remedies available to a mortgagee or chargee shall be governed by the governing law and the instrument creating the mortgage or charge save that the rights between the mortgagor or mortgagee as a member of the company and the company shall continue to be governed by the memorandum and the articles of the company and this Act."
A very good example of the section being applied in practice can be found in the Privy Council decision in Alfa Telecom Turkey Limited v Cukurova Finance International Limited  UKPC 19 (the "Cukurova Case").
The Cukorova Case arose in relation to a loan made by Alfa Telecom Turkey Limited to Cukurova Finance International Limited ("CFI") which was secured by, amongst other things, an English law governed share charge over shares in CFI (a BVI Company).
Included in the share charge was the English law self help remedy of appropriation: the Privy Council held that such a remedy could be applied in respect of shares in a BVI company. No such remedy would have been available if a BVI law governed share security had been used.
It should however be noted that there may be complex conflict of laws issues if the share security is governed by foreign law although these are less likely to be of concern if the foreign law is a common law jurisdiction with similar laws to those of the BVI.
If the share security is to be governed by BVI law then the provisions of section 66(7) of the BC Act need to be taken into account. These provide that if a share security is governed by the laws of the BVI then the remedies under the share security are only enforceable if:
(a) a default has occurred and has continued for a period of not less than 30 days, or such shorter period as may be specified in the share security; and
(b) the default has not been rectified within 14 days or such shorter period as may be specified in the share security from service of the notice specifying the default and requiring rectification thereof.
Historically, an issue raised by section 66(7) of the BC Act related to how short a period could be specified in the instrument creating the share security. By way of example, some agreements specify 24 hours and others as little as an hour. This has not been tested in the BVI courts, so there has been some doubt as to what length of time period would be acceptable. The BVI Business Companies (Amendment) Act, 2012 deals with this uncertainty by making the remedies available immediately upon default, pursuant to a new section 66(7A) of the BC Act. This particular amendment is being introduced following representations from the industry and comes into force on 15 October 2012. It will be a welcome improvement to the BC Act to ensure that the jurisdiction continues to be a competitive 'creditor-friendly' jurisdiction.
Do you need to go to the BVI courts to enforce the share security?
If the share security is governed by BVI law, the instrument creating the share security would typically appoint a receiver who would be able to vote the shares, receive dividends in respect of the shares and ultimately use its power of sale to sell the shares. It is not necessary to apply to the BVI courts either to appoint the receiver or for the receiver to be able to exercise its power of sale. The more draconian remedy of foreclosure would, however, require a court application.
If the share security is governed by a foreign law, then the manner in which enforcement is carried out will usually be governed by that foreign law without any need for recourse to the BVI courts.
What ancillary documents should be obtained as part of the share security package?
Regardless of the governing law of the share security, there are number of documents that lenders would usually require as part of the security package to facilitate enforcement. These include an undated share transfer form, the original share certificates (if any), a proxy to allow them to vote the shares following an enforcement event, signed and undated letters of resignation from the directors of the BVI company and a letter from each director authorising the lenders to date the letters of resignation upon an enforcement event.
It is also common for lenders to require amendments to the memorandum and articles of association of the BVI company to restrict, amongst other things, transfers of shares without the lenders’ consent.
One recurring theme when a lender enforces its share security is that the person holding the register of members of the BVI company (usually the BVI Registered Agent) may refuse to update the register to reflect any transfer of shares (for example, because their client tells them that the default is disputed). There are a number of different steps that can be taken to limit the ability of the Registered Agent to take such action (or inaction) and this is something on which we regularly advise.
Are there any registration requirements in respect of the share security?
There are no requirements to register share security in the BVI, however, the security holder will be able to avail itself of the provisions of section 66(8) of the BC Act which specifically allow for the register of members to note both that shares have been mortgaged and the name of the security holder. The register of members can also be publicly filed. This registration is a useful mechanism in relation to equitable security to help defeat "equity's darling" (a bona fide purchaser for value who takes without notice of the equitable interest). A purchaser (or potential security holder) of shares in a BVI company should always insist on looking at the register of members and will therefore be notified of any security interest entered on the register of members. It should also be noted that if the chargor is a BVI company, registrations will need to be made under the BC Act to ensure priority.
One other point to watch out for is that, where a BVI company has publicly filed its register of members, it is bound by that register until it files a new one or a notice that it is no longer publicly filing the register. It is therefore important to ensure that an appropriate filing is made when the register of members is updated (such as in the event of a share transfer upon enforcement or otherwise).
A holder of shares in a BVI company can grant effective security over such shares but it is important that the parties seek BVI legal advice, regardless of the governing law, to ensure that the share security includes: (i) the correct provisions to comply with BVI law; (ii) suitable ancillary documents to facilitate enforcement; and (iii) obligations on the chargor and the BVI company to ensure that details of the share security are adequately registered.