British Virgin Islands: Lending And Taking Security In The British Virgin Islands: Overview

OVERVIEW OF THE LENDING MARKET

1. What have been the main trends and important developments in the lending market in your jurisdiction in the last 12 months?

The British Virgin Islands (BVI) is one of the world's leading international financial centres. The BVI continues to be a jurisdiction of choice for companies entering into secured and unsecured finance transactions. In the last 12 months, revised, modernised and consolidated editions of the jurisdiction's financial services legislation have been enacted. Other significant recent developments include amendments to the key corporate legislation, the BVI Business Companies Act 2004 (2013 Revision) (Companies Act), which have enhanced the public filing system for the registration of security interests. The creation of security over shares in BVI companies remains popular. Following the amendments to the Companies Act, a chargee can now enforce a BVI law governed share charge immediately on default (the amendments removed mandatory grace/notice periods). For an English law governed charge over shares in a BVI company that provides for appropriation of the shares, the Privy Council has provided further guidance on the rights of the parties, including the application of equitable relief in Cukurova Finance International Limited and Cukurova Holdings A.S (Appellants) v Alfa Telecom Turkey Ltd (Respondent) [2013] UKPC 20. FORMS OF SECURITY OVER ASSETS

FORMS OF SECURITY OVER ASSETS

Real estate

2. What is considered real estate in your jurisdiction? What are the most common forms of security granted over it? How are they created and perfected (that is, made valid and enforceable)?

Real estate

The BVI is a leading jurisdiction for the incorporation of investment holding companies and BVI companies hold real estate located across the world. A BVI company can create and perfect security over interests in real estate in the manner permitted/required in the jurisdiction where the real estate is located. The holding of an interest in real estate in the BVI itself requires, with certain exceptions, a Non Belongers Land Holding Licence. Application for this licence must be submitted together with the requisite supporting documentation to the BVI Ministry for Natural Resources and Labour, and the prescribed process followed.

Common forms of security

A legal mortgage over land is the most common security over real estate. However, security can be created in any form appropriate to the relevant jurisdiction.

Formalities

Formalities depend on the laws of the jurisdiction where the real estate investment is located.

Companies can enter into contracts that (Section 103(1), Companies Act):

• By or on behalf of the company are in writing under the common seal of the company, if that contract could be entered into by an individual and would be required by law to be in writing and under seal. These contracts can be varied or discharged in the same manner.
• By or on behalf of the company are in writing and signed by a person acting under the express or implied authority of the company, if that contract could be entered into by an individual and would be required by law to be in writing and signed. These contracts can be varied or discharged in the same manner.

An instrument is validly executed as a deed or an instrument under seal if it is either (Section 103(4), Companies Act):

• Sealed with the common seal of the company and the application of the seal is witnessed by a director or such other person who is authorised by the company's memorandum and articles of association to witness the application of the company's seal.
• Expressed to be, or is expressed to be executed as, or otherwise makes it clear on its face that it is intended to be, a deed and it is signed by a company director or a person acting under the express or implied authority of the company.

There are no perfection requirements necessary under BVI law to recognise the validity or enforceability of security created by BVI companies. However, the following steps can be taken to protect a lender's security and ensure the lender is conferred with priority against unsecured creditors and subsequent secured creditors:

• Particulars of a "relevant charge" created by a BVI company under section 163 of the Companies Act, including a mortgage, can be filed with the Registry of Corporate Affairs of the British Virgin Islands (Registry) for a fee of US$100.
• The particulars of the charge are then placed on the BVI company's corporate records at the Registry to put third parties on constructive notice of the existence of the security interest.
• The filing also acts as a priority determinant vis-à-vis subsequent filed security for the secured asset and the claims of unsecured creditors.
• A company must keep a register of all relevant charges created by the company, either at the company's registered office, or at the company's registered agent's office (Companies Act).

Tangible movable property

3. What is considered tangible movable property in your jurisdiction? What are the most common forms of security granted over it? How are they created and perfected?

Tangible movable property

A BVI company can create and perfect security over interests in tangible moveable property in the manner permitted/required in the jurisdiction where the property is situated.

Common forms of security

There are a large number of BVI companies that own, finance, and sell and lease back aircraft. These are predominately corporate and business jet aircraft. However, they also include aircraft operated by commercial airlines, as well as helicopters. In addition, the BVI has long been a jurisdiction of choice for the holding of yachts and pleasure craft. It is therefore common for a BVI company to secure interests in aircraft and vessels. A typical aircraft financing transaction includes:

• A company's loan obligations under a facility agreement that is supported by an aircraft mortgage (governed by the laws of the state of aircraft registration).
• Assignments for:
• • aircraft and engine maintenance support agreements; and
  • insurances and warranties.
• A tripartite agreement governing the management and operation of the aircraft, if an aircraft manager or operator has been appointed.
• Various supporting ancillary notices of assignment, and de-registration powers of attorney.

A typical yacht financing would include a ship mortgage and assignment of insurance.

Formalities

Formalities depend on the laws of the jurisdiction in which the asset is situated and/or registered. The BVI government recently enacted the Mortgaging of Aircraft and Aircraft Engines Act 2011 to facilitate the establishment of a comprehensive aircraft and security registration system in the BVI with a view to creating and implementing an effective regulatory oversight regime.

For vessels registered at the BVI Shipping Registry, the registration of mortgages is governed by sections 80 to 86 of the Merchant Shipping Act 2001 (Merchant Shipping Act). The BVI Shipping Registry facilitates the entry, transfer and discharge of marine mortgages over registered vessels. Brief details of the mortgage are entered in the register, namely the type of mortgage, the date of creation and the date and time of registration, the name and address of the mortgagee, and the number of shares mortgaged.

The order of priority of mortgages is determined by their dates of registration. If two mortgages are registered on the same day, then the first one entered in the register will have priority over the other. A mortgage can be registered for a previously registered ship and a registered ship under construction. A priority notice can be given of a proposed mortgage, which will maintain priority of the interest. The mortgage must be in statutory form (Merchant Shipping Act). The prescribed forms are the account current, principal sum and interest forms. It is usual to use the account current form as the principal and interest form only secures the principal sum and interest concerned. In addition to the principal sum and interest, the mortgagee usually wishes to secure sums that it may incur for protection of its security (for example, insurance premiums, and costs to maintain and repair the security). The account current form secures all monies currently owed by the mortgagor to the mortgagee. A mortgage can be registered in the BVI in advance of title to the ship that is being transferred to the borrower. Mortgages can also be registered for provisionally registered ships and ships under construction. A fee of US$250 is payable for registration of a ship mortgage.

Financial instruments

4. What are the most common types of financial instrument over which security is granted in your jurisdiction? What are the most common forms of security granted over those instruments? How are they created and perfected?

Financial instruments

Security can be taken over shares in BVI companies and this is a popular and frequently used form of security. This security can be granted under the governing law appropriate to the transaction. New York, Hong Kong or English law governed share charges are common. For an English law governed document, the application of the Financial Collateral Arrangements (No.2) Regulations 2003 to shares in a BVI company was confirmed by the Privy Council in Cukurova Finance International Limited and Cukurova Holdings A.S (Appellants) v Alfa Telecom Turkey Ltd (Respondent) [2013] UKPC 2. The application of equitable relief was further confirmed by the Privy Council in Cukurova Finance International Limited and Cukurova Holdings A.S (Appellants) v Alfa Telecom Turkey Ltd (Respondent) [2013] UKPC 20.

Common forms of security

Shares are in registered form and share security is typically taken by way of an equitable mortgage. A mortgage or charge of shares of a BVI company need not be in any specific form. However, it must clearly indicate:

• The intention to create a mortgage or charge.
• The amount secured by the mortgage or charge or how that amount is to be calculated.

Where the governing law of a mortgage or charge of shares in a BVI company is not the law of the BVI, the mortgage or charge must comply with the requirements of its governing law in order for the mortgage or charge to be valid and binding on the company providing the security.

The Companies Act provides a mechanism for particulars of a charge over shares to be noted on the register of members (of the BVI company whose shares are being charged), a copy of which the company can file publicly at the Registry (see Formalities).

Formalities

Where a lender has taken security over the shares of a BVI company it is advisable to place a notation on the BVI company's register of members evidencing the existence of the security. This acts as a method of giving notice to third parties of the existence of the security if they review the register of members. This is particularly important in the context of equitable security, such as the commonly used equitable mortgage over shares. It is also possible, where the commercial parties agree, for the annotated register of members to be publicly filed with the Registry and thereby recorded on the company's public corporate records.

Claims and receivables

5. What are the most common types of claims and receivables over which security is granted in your jurisdiction? What are the most common forms of security granted over claims and receivables? How are they created and perfected?

Claims and receivables

Assignments of receivables are common.

Common forms of security

Common forms of security include assignments of rental income or the benefit of insurances.

Formalities

BVI statute does not provide for the legal assignment of intangibles such as a chose in action. There is also no statutory concept of a security assignment. Accordingly, an assignment of a receivable, including an assignment by way of security, will take effect as an equitable assignment as a matter of BVI law, unless agreed and consented to by the debtor. There are no other specific requirements (see Claims and receivables and Common forms of security).

Cash deposits

6. What are the most common forms of security over cash deposits? How are they created and perfected?

Common forms of security

A BVI company can give security over cash deposits held in its bank accounts in any jurisdiction. This is a common form of security, typically governed by the laws of the jurisdiction in which the bank account, and therefore the deposit, is held.

Formalities

BVI law does not make statutory provision for collateral security over cash deposited in bank accounts located in the BVI and the cooperation of the account holding branch would be required. There are no other specific requirements (see Common forms of security).

Intellectual property

7. What are the most common types of intellectual property over which security is granted in your jurisdiction? What are the most common forms of security granted over intellectual property? How are they created and perfected?

Intellectual property

The BVI has a local patents and trade marks registry. It is also possible to apply for local recording of patents and trade marks registered with the UK Intellectual Property Office. Community trade marks and registrations under the Madrid Protocol designating in the UK, however, do not have effect in the BVI.

Common forms of security

Security over intellectual property in the BVI is most frequently created under a debenture. Assignments of trade marks by way of security are not common.

Formalities

Patents. The Patents Act 1906 (2013 Revision), together with the Patent Regulations 1906 (2013 Revision), set out the procedure and requirements for the registration of patents, and the rights and powers of those who register them.

Trade marks. The Trade Marks Act 1887 (2013 Revision), together with the Trade Marks Rules 1937 (2013 Revision), governs original applications for the registration of trade marks in the BVI, and the rights and powers granted following registration.

Registration of UK trade marks in the BVI. The Registration of United Kingdom Trade Marks Act 1946 (2013 Revision) and the Registration of the United Kingdom Trade Marks Rules 1947 (2013 Revision) govern the procedure for the registration of UK trade marks, and the applicant's rights and powers following registration.

(See Question 29 for reform proposals.)

Problem assets

8. Are there types of assets over which security cannot be granted or can only be granted with difficulty? Which assets are difficult or problematic when security is granted over them?

Future assets

Security can be granted by a BVI company over its future acquired assets.

Fungible assets

Shares of the same class and series of a BVI company are fungible and it is common for security to be taken over these shares.

Other assets

The entry into a mortgage or charge over shares in a BVI company that is licensed by the Financial Services Commission to carry out certain defined financial services business requires the prior consent of the Commission.

A mortgage or charge of a bearer share is not valid and enforceable unless the certificate for the bearer share is deposited with a custodian.

The consent of the BVI courts is required for the transfer of shares in a BVI company in liquidation.

(See also Questions 2, 3 and 5.)

RELEASE OF SECURITY OVER ASSETS

9. How are common forms of security released? Are any formalities required?

Security granted by a BVI company is released in accordance with the applicable governing law. Where registration of the security has been made at the Registry, a notice of release can be filed under section 165 of the Companies Act by either:

• The company or a legal practitioner in the BVI authorised to act on its behalf, but only if the notice is signed by the chargee or an authorised person on their behalf, or is accompanied by a statutory declaration by a director of the company..
• For security filed under the Companies Act since 1 January 2005, a person qualified to act as the registered agent of a company in the BVI or a legal practitioner in the BVI acting on behalf of the chargee.

SPECIAL PURPOSE VEHICLES (SPVS) IN SECURED LENDING

10. Is it common in your jurisdiction to take security over the shares of an SPV set up to hold certain of the borrower's assets, rather than to take direct security over those assets?

It is very common for the shares of a BVI company established as a SPV to be secured (see Question 4, Common forms of security).

QUASI-SECURITY

11. What types of quasi-security structures are common in your jurisdiction? Is there a risk of such structures being recharacterised as a security interest?

Sale and leaseback

These arrangements are determined by BVI law as contract matters enforceable in accordance with their terms.

Factoring

See Question 5.

Hire purchase

There is no specific BVI statute governing hire purchase arrangements. These arrangements are determined by BVI law as contract matters enforceable in accordance with their terms.

Retention of title

These arrangements are determined by BVI law as contract matters enforceable in accordance with their terms.

Other structures

If the effect of a set-off provision under the applicable governing law is that one party is under a single obligation to pay an amount calculated on a net basis to the other party following the termination of outstanding obligations (set-off provision), then these provisions are effective under BVI law.

Insolvency set-off is recognised by statute (section 150, Insolvency Act 2003 (2013 Revision (Insolvency Act)). However, the effectiveness of the set-off provision can be restricted in certain limited circumstances based on the provisions of the Insolvency Act as follows:

• The rights of a creditor preferred under BVI law are restricted as a result of the operation of the set-off provision. There is an argument that the rights of the preferred creditor should prevail over the set-off provision. However, in the absence of specific case law authority in the BVI on this point, it is difficult to be certain.
• The right of set-off under the set-off provision will be restricted to the extent that giving effect to that right deprives a secured creditor of one of the parties of a debt over which that creditor has taken security in circumstances where the security taken over the debt is not subject to the right of set-off under the set-off provision.
• If the claim against one of the parties to the set-off provision is subordinated or deferred to other creditors, the right to set-off under the set-off provision will be restricted to the extent of that subordination or deferral.

GUARANTEES

12. Are guarantees commonly used in your jurisdiction? How are they created?

It is common for a BVI company to give a guarantee, particularly for intra-group/parent/subsidiary obligations. Guarantees given by BVI companies are governed by the Companies Act and the company's memorandum and articles of association. Subject to its memorandum and articles of association, a company's powers include, among other things, the power to guarantee a liability or obligation of any person and secure any obligations by mortgage, pledge or other charge of any of its assets for that purpose.

RISK AREAS FOR LENDERS

13. Do any laws affect the validity of a loan, security or guarantee (or the terms on which they are made or agreed)?

Financial assistance

Subject to its memorandum or articles of association a company's powers include the power to give financial assistance to any person in connection with the acquisition of its own shares.

Corporate benefit

A company, under the Companies Act and subject to its memorandum and articles of association, irrespective of corporate benefit:

• Has full capacity to carry on or undertake any business or activity.
• Can do any act or enter any transaction and, for those purposes, has full rights, powers and privileges.

If there is no benefit to the company, a transaction may be open to challenge in the event of the insolvency of the company, for example as a transaction at an undervalue (see Question 23).

Loans to directors

There are no express restrictions. A company's directors have fiduciary and statutory duties to act honestly and in good faith, and in the best interests of the company. A director who is in breach of his duties may be liable to the company for the resulting loss to the company.

Usury

There is no applicable statutory usury or interest limitation law in the BVI. However, extortionate credit transactions (see below) are potentially vulnerable to hardening periods (that is, the periods in which the security is vulnerable to challenge) under the Insolvency Act.

If a company enters into, within the hardening period, a transaction for, or involving the provision of, credit when it is insolvent, or if that transaction causes it to become insolvent, the transaction may be regarded as an extortionate credit transaction and voidable(Section 248, Insolvency Act). It is regarded as such if either, having regard to the risk accepted by the person providing the credit:

• The terms of the transaction are or were such that required grossly exorbitant payments to be made for the provision of the credit.
• The transaction otherwise grossly contravenes ordinary principles of fair trading.

For the above to apply, the transaction must have taken place within the period beginning five years prior to the onset of insolvency and ending on the appointment of a liquidator of the company regardless of whether the person(s) that the transaction is entered into with is a connected person. The onset of insolvency for these purposes is the date on which an application for the appointment of a liquidator was filed (if the liquidator was appointed by the Court) or the date of the appointment of the liquidator (where the liquidator was appointed by the members).

Others

Member's remedies were codified in the Companies Act. For example, if a company or a company director engages in, proposes to engage in or has engaged in conduct that contravenes the Companies Act or the company's memorandum or articles of association, the BVI court may, on application of a company member or director, make an order:

• Directing the company or director to comply with the Companies Act or the company's memorandum or article of association.
• Restraining the company or director from engaging in conduct that contravenes the Companies Act or the company's memorandum or article of association.

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