British Virgin Islands: Offshore Companies Holding Residential Property In The UK — A BVI Perspective

A summary of possible BVI legal issues for various planning options.

In the 2012 Budget, the UK government announced its intention to tax corporate bodies holding residential property in the UK in an attempt to encourage the removal or "de-enveloping" of such property from corporate structures.

Action to be taken by offshore companies

It is expected that, following the publication of the draft legislation on 11 December 2012, owners of property holding companies will seek to take action before the changes come into effect in April 2013.

Of the various options available to BVI companies, most steps will involve one or more of the following transactions, which will be governed by BVI law:

• a liquidation of the company with the property being distributed in specie to the shareholders;
• a transfer of properties held by the company either into personal ownership, to third party purchasers or to other corporate entities;
• a distribution in specie of the property to the company's shareholders; and
• a share redemption in consideration of a transfer of the property to the company's shareholders.

Below we provide a brief summary of the most important factors to consider when a BVI company takes each of the above mentioned steps.

Voluntary liquidation of BVI companies

Broadly speaking, provided a BVI company is solvent, i.e. it is able to pay its debts as they fall due and the value of its assets equals or exceeds the value of its liabilities, it can liquidate pursuant to the flexible voluntary liquidation regime in the BVI.

A voluntary liquidator will need to be identified early on. He or she will need to be an individual rather than a corporate entity, and he must not have acted as a director or have been employed in the management of the company during the previous two years nor be a close relative of any such director or employee.

Usually, the solvent liquidation of a BVI company will need to be approved by the shareholders. In certain cases, however, the directors can appoint a liquidator. The directors are required to make a declaration of solvency and to approve a liquidation plan which typically also requires the approval of the company's shareholders.

The liquidation commences when the liquidator files notice of his appointment at the BVI Registry of Corporate Affairs. The notice must be filed within 14 days of the resolution appointing him (otherwise the resolution is void). The liquidator must advertise his appointment both locally and in the company's principal place of business (if not in the BVI), or in the place where the liquidator believes such advertising is most likely to come to the attention of the company's creditors (if the company has no principal place of business). Ascertaining where to advertise and making arrangements for such advertising may take some time, and this should be factored in to any decision to liquidate.

If the liquidator is required to distribute the property to the company's shareholders as part of the liquidation, he will need sufficient time to carry out thorough due diligence on the company, which will include considering all the company's corporate records. Any company considering liquidation as a possible course of action would therefore be wise to review its corporate records well in advance of the intended appointment.

Before the company can be liquidated and the property distributed to the company's shareholders, any security over the property will need to be released and, if necessary, new finance arrangements put in place. For companies holding UK property considering liquidation, steps should be taken now to investigate and arrange any new financing that may be necessary.

Transfer of property

Generally, under BVI law, any transfer of property by a BVI company will require the approval of the board by board resolution. In addition, if the property represents more than 50% of the total value of the company's assets, the transfer will also usually require shareholder approval.

Prior to effecting any such transfer, it is essential to check whether the property is subject to any security and, if it is, to take whatever steps are necessary to release such security and enter into new finance arrangements.

Distribution of the property to the company's shareholders

Subject to its memorandum and articles of association, it is usually within the power of the directors of a BVI company to declare a dividend to the company's shareholders. Any such decision needs to be made by board resolution and the directors need to be satisfied that the company will meet the applicable solvency test immediately after the distribution has been made.¹ A company incorporated after 1 January 2005 will satisfy the solvency test if the value of its assets exceeds its liabilities and it is able to pay its debts as they fall due.

A different solvency test applies to those BVI companies incorporated prior to 1 January 2005 that were automatically re-registered when the BVI Business Companies Act, 2004 came into force, and have not since elected to disapply the transitional provisions ("Former IBC Companies"). The directors of Former IBC Companies will need to determine that, immediately after the distribution, the company will (a) be able to satisfy its liabilities as they become due in the ordinary course of its business; and (b) the realisable value of its assets will not be less than the sum of its total liabilities, other than deferred taxes, as shown in its books of account and its capital. In addition, these companies can only make distributions out of surplus (the excess, if any, at the time of the determination, of the total assets of the company over the sum of its total liabilities, as shown in its books of account, plus its capital).

If these provisions are likely to pose a problem, Former IBC Companies may apply to the BVI Registry of Corporate Affairs to disapply them.

In certain circumstances, shareholder approval may also be required in order for a company to make a distribution, particularly in the case where there is a shareholders agreement in place.

As with any transfer of property held by the company, any security over the property being distributed will need to be removed and/or re-granted.

Share redemption in exchange for transfer of property to shareholders

It may be advisable for a company to redeem some of the shares held by the shareholders in exchange for a distribution in specie of the property to them. The exact process that will need to be followed to effect a share redemption will be determined by the company's memorandum and articles of association. In general, however, shares can usually be redeemed with the consent of the shareholders, provided that the company will satisfy the applicable solvency test immediately after the redemption. In addition, Former IBC Companies can only redeem shares out of surplus.

Immediate action

We would recommend that all BVI companies holding UK residential property valued at more than £2 million take the following steps to ensure that they are prepared for whatever action they (together with their tax and legal advisors) decide is necessary prior to April 2013:

• carry out a review of their memorandum and articles of association to ascertain whether there are special provisions governing any of the above transactions, and in particular consider whether any amendments need to be made to simplify any of the procedures that may need to be followed;
• carry out a review of their corporate records, such as registers of members, directors and charges; and
• carry out company searches at the BVI Registry to ensure that they are in good standing and whether any charges over the property have been registered on their files.

How we can help?

We can assist with the following:

• carrying out the BVI specific legal reviews referred to above;
• liaising with you to help determine the most suitable option for your clients; and
• drafting any documents required under BVI law to effect any transactions which may need to take place prior to April 2013.

Footnotes

^{1 Which solvency test applies will depend on when the company was incorporated and whether or not it elected to disapply the transitional provisions applying to companies incorporated under the old International Business Companies Act that were automatically re-registered under the BVI Business Companies Act, 2004 (as amended).} 

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.