British Virgin Islands: Creating And Registering Security Interests Over Assets In A BVI BC

Entering into security financing transactions with BVI Business Companies (BCs) is a familiar part of the global financial services landscape given the use and presences of BCs. The ease of use of BCs in these types of transactions is facilitated to a large extent by the flexibility of the BVI Business Companies Act, 2004 (the BCA). As it is common for BCs to maintain their assets outside of the British Virgin Islands (BVI), the focus of this note will be on what should be done under the BCA in relation to the creation and registration by a BC of security over its foreign assets which is governed by a foreign law. Given constraints of this note, security interest is created over specific types of assets such as security over shares in a BC, registered ships and aircraft, or land within the BVI, all of which have separate asset based security registration regimes, would require their own discussion at a later time or may be found elsewhere on our website.

Creation of security

Subject to its memorandum and articles of the association, section 161(1) of the BCA allows a BC to create a charge over its property by an instrument in writing. A charge, being any form of security interest over property, where ever situated and an instrument in writing is the security document dealing with the asset. The BCA does not prescribe the form of the security document or what provisions must be included, so longs as it conforms to the requirements of the foreign law. This is particularly useful given the global use of BCs, as it allows the governing law of a charge to be a jurisdiction agreed between the BC and the secured party and following on from this the security document will be binding on the BC based on the requirements of agreed governing law. The statutory frame work of the BCA in relation to the choice of law allows for a degree of certainty in these types of arrangements that common law could not provide.

Registration of security

The BCA prescribes that a BC must keep a register of charges which records details of the security interest entered by it and also record details of any variations to that interest as well as when that interest is eventually released. However, the filing or registration requirements in the BVI do not affect the validity of a security document. It should also be noted that there is no requirement for the actual security document to be filed as the register of charges only reflects certain information contained in that document. Details of the approved form are set out in Section 162 of the BCA and provide that a BC shall keep a register of all relevant charges created by the BC showing:

• the date of its creation or, if the charge is a charge existing on property acquired by the BC, the date on which the property was acquired;
• a short description of the liability secured by the charge;
• a short description of the property charged;
• the name and address of the trustee for the security or, if there is no such trustee, the name and address of the chargee;
• unless the charge is a security to bearer, the name and address of the holder of the charge; and
• details of any prohibition or restriction, if any, contained in the instrument creating the charge on the power of the BC to create any future charge ranking in priority to or equally with the charge

Where a Company creates a security interest over its own assets, there are two different registrations which need to be considered under the BCA:

Under BVI law, only the private registration is mandatory. If a Company fails to enter a security interest in the register of charges which it must keep at its registered office, it can be subject to a fine.

In relation to public registration, particulars of the security interest created by a BC should be filed, in the approved form, with the BVI Registrar of Corporate Affairs (the Registrar). Public registration can be made by the BC, its Registered Agent or a BVI lawyer acting on behalf of the BC or the secured party. The usual process is for an application to be made by submitting a "Form R401" containing the details of the security document to the Registry of Corporate Affairs together with the applicable filing fee using the BVI Financial Services Commission's online filing system.

There is no express time limit within which a security interest must be registered with either the Registrar or in the BC's own register of charges, however, security interests should be registered promptly after they are created in order to establish a priority ranking.

Priority

Even though it is not mandatory, public registration should be undertaken as its fundamental purpose is that it gives the security interest priority under the BCA from the time and date of filing with the Registrar. This effectively minimises the risk of a subsequent competing charge holder taking priority over the same asset. To be clear public registration only affects priority of the security interests as failure to register will not otherwise affect the validity of a security interest. Nor is registration necessary to ensure that the security interest is enforceable against third parties or any liquidator in the event of the BC's insolvency.

Registering a security interest in the public register will give it priority over (i) all security which is registered against the Company in the public register subsequently; and (ii) all security which is created by the Company after the "commencement date" which is not registered. (The commencement date is defined as either (a) the date upon which a BC was formerly registered under older companies' legislation in the BVI or was formally reregistered as a BC under the BCA). There are specific rules which apply to security interest created prior to the commencement date and given their complexity you should speak to your usual Harneys contact for further advice on this area.

While public registration does go some way to address priority it should be borne in mind that (i) priority of security interests can be varied with the consent of the holders and (ii) the priority of a registered floating charge is postponed to a subsequently registered fixed charge (but not an unregistered fixed charge) unless the floating charge contains a restriction (a "negative pledge") on the power of the BC to create any future charge ranking in priority to or equally with the floating charge.

Once registration is complete the Registrar will stamp the R401 and issue a certificate of registration. This certificate confirms the date and time the security was registered and once complete, the Registrar will send out the stamped R401 and the certificate of registration to both the BC and the secured party as conclusive proof that the registration has been done.

Variation of security

In some instances where a security interest has been registered and the parties later agree to vary the terms of the security requirements, such a variation, whether it is a partial release or an amendment to the security undertaking can and should be registered. Here again the BC, its Registered Agent or a BVI lawyer acting on behalf of the BC or the secured party can attend to the filing of a variation. As with the initial registration the variation is done by completing and filing the necessary forms with the Registrar, who will issue a certificate of variation that again confirms the date and time on which the variation was registered.

Release of security

A notice of satisfaction or release (either in whole or in part) should also be filed with the Registrar where a security interest over the assets of a BC has been released in accordance with the terms of the security documents and the governing law. The registered agent of the BC or BVI lawyer acting for the BC should not amend the BC's records to show the discharge of a security interest without proof of the secured party's release. This means that where a notice of release is to be filed on behalf of the BC by its registered agent or a duly instructed BVI lawyer, the document releasing the security interest must be signed by the secured party or the notice must be supported by a statutory declaration verifying the matters stated in the notice. The registered agent of the BC should also attend to the updating of the BC's own private register of charges together with the filing with the Registrar.

Once the release has been filed the Registrar will similarly, as with the filing and variation processes, issue a certificate confirming the date and time of the release and send a copy to the BC and to the secured party.

Commentary

Harneys can assist on all aspects of security registration from assisting with drafting the particulars to be entered into the register of charges, assisting with variations and ultimately with the release of that security interest. While this may be a fairly simple process, failure to attend to necessary filings could have serious repercussions for both the BC and the secured party and should be done as a matter course to ensure good corporate governance protection of all stakeholders.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.