1. What forms of security can be granted over immovable and movable property? What formalities are required and what is the impact if such formalities are not complied with?
In the British Virgin Islands ("BVI") the following forms of security can be granted over immovable property:
a. Mortgage (legal or equitable)
Both legal and equitable mortgages are recognised in the BVI. A legal mortgage requires the transfer of title from the mortgagor to the mortgagee. The most common asset held by BVI incorporated companies is shares. A legal mortgage over shares will necessitate a transfer of ownership of the share from the shareholder (mortgagor) to the mortgagee, which will in turn require a change to the Register of Members of the company. This will enable the mortgagee, for instance, to receive a dividend. Due to the impracticality of this, legal mortgages are not often utilised forms of security over shares. An equitable mortgage, on the other hand, enables the mortgagor to stay as named shareholder as there is no requirement for a transfer of ownership. An equitable mortgage can arise where a legal mortgage has failed or where an agreement has been made to create a legal mortgage.
b. Equitable charge (fixed)
A charge is defined in the BVI Business Companies Act, 2004 (the "BCA") as any form of security interest over property, wherever situated, other than an interest arising by operation of law. As with an equitable mortgage, it does not involve a transfer of ownership of shares, for instance, and can be easily and quickly created. A charge can be 'fixed', secured on a specific asset of the company, or 'floating', secured over all assets of the company.
The following forms of security can be created over movable property:
Whilst a pledge is available in the BVI as a form of security, it is rarely, if ever, utilised as a form of security over shares. This is due to the fact that physical possession of an asset is needed for the formation of a pledge under BVI law. Physical possession of the share certificate does not automatically lead to an update of the Register of Members and, as such, the mere holding of the share certificate would not entitle the holder to any of the entitlements usually carried by the share (i.e. right to vote or a dividend).
b. Floating charge
A floating charge is available over moveable assets due to its ability to remain unfixed over the assets of a company. The advantage of this is that it enables the company to dispose of assets as the floating charge is not fixed on any particular asset. The crystallisation of floating charges will usually occur upon the appointment of a receiver or a liquidator.
c. Mortgage (equitable)
As stated above, an equitable mortgage does not require the transfer of legal ownership to the creditor (mortgagee). Upon creation of an equitable mortgage, the creditor will have an enforceable equitable interest.
The type of security available will depend on the asset over which the security is granted. For instance, as stated above a pledge over the shares of a BVI incorporated company is largely unworkable.
In the BVI security may be created quickly and easily over shares. The requirements for creating security are (1) it must be in writing (2) it must indicates the intention of the parties to create the security over the asset (3) it must states the amount secured by the charge and be signed by the security issuer. Another advantage to taking security over shares in BVI incorporated companies is that the parties will have a choice of governing law in respect of the share security. This gives flexibility to companies and creditors when entering into negotiations for establishing security over shares. An additional advantage is that security interests over shares do not attract stamp duty upon creation or enforcement, except in very limited circumstances and, as mentioned above, they are easily created with little formal requirements.
If the statutory formalities are not complied with the security is not created. Additionally, a legal mortgage will fail in circumstances where legal title is not transferred from the mortgagor to the mortgagee. In these circumstances the legal mortgage will, in certain circumstances, become an equitable mortgage.
2. What practical issues do secured creditors face in enforcing their security (e.g. timing issues, requirement for court involvement)?
Much depends on the terms of the security given. Many written security agreements entitle the holder of a security interest to appoint a receiver in the event of a default. There is no need to apply to the Court for an order to appoint a receiver in the event that the security deed permits this. However, there are strict notice procedures that must be followed when appointing a receiver over a BVI company that holds shares in another BVI company. Failure to provide the requisite notice can result in the appointment being invalidated. Also, it is important to appoint a receiver that is familiar with BVI corporate structures and with securing assets held by BVI companies in foreign jurisdictions.
The appointment of a liquidator of a chargor that is a BVI company will not affect a secured creditor's right to enforce their security. The secured asset does not form part of the pool of assets available to unsecured creditors and the secured creditor may exercise any rights granted to it under the terms of the security deed. Therefore the appointment of a liquidator present no discernable issues to a secured creditor.
3. What is the test for insolvency? Is there any obligation on directors or officers of the debtor to open insolvency procedures upon the debtor becoming distressed or insolvent? Are there any consequences for failure to do so?
The test for insolvency is contained within the Insolvency Act, 2003 ("IA"). Pursuant to section 8(1) IA, a company will be considered insolvent if:
- it fails to comply with the requirements of a statutory demand that has not been set aside;
- execution or other process issued on a judgment, decree or order of a BVI court in favour of a creditor of the company is returned wholly or partly unsatisfied; or
- the value of the companies liabilities exceeds its assets; or
- the company is unable to pay its debts as they fall due.
In certain circumstances there will be an obligation upon directors of a company to initiate insolvency proceedings. For instance, in circumstances whereby a director (or former director) knew or ought to have known that there was no reasonable prospect that the company would avoid going into insolvent liquidation, a liquidator, upon being appointed over the company, may apply to the Court for an order against that director. The Court may order that that the director or former director concerned makes such contribution, if any, to the company's assets as the Court considers proper. However, the Court shall not make an order against a director if it is satisfied that after he first knew, or ought to have concluded, that there was no reasonable prospect that the company would avoid going into insolvent liquidation, he took every step reasonably open to him to minimise the loss to the company's creditors.
4. What insolvency procedures are available in the jurisdiction? Does management continue to operate the business and/or is the debtor subject to supervision? What roles do the court and other stakeholders play? How long does the process usually take to complete?
The following insolvency procedures are available in the BVI:
a. Involuntary/Insolvent Liquidation
Pursuant to the IA a liquidator may be appointed over a company through a qualifying resolution of its members or by the BVI High Court upon the application by the company, a creditor, a member, the supervisor of a creditors' arrangement in respect of the company, the Financial Services Commission, the International Tax Authority or the Attorney General. Where an application for the appointment of a liquidator of a company has been filed but not yet determined or withdrawn the Court may appoint a provisional liquidator. An application for the appointment of a provisional liquidator will usually be made where there is a real concern of the dissipation of assets, prior to the appointment of a liquidator.
The Court will appoint a liquidator over a company if one of the following is proven by the applicant:
- the company is insolvent;
- the Court is of the opinion that it is just and equitable that a liquidator should be appointed; or
- the Court is of the opinion that it is in the public interest for a liquidator to be appointed.
The applicant will usually propose a liquidator for the Court to appoint. The applicant's choice of liquidator will not usually be challenged without good cause, for example if it is believed that the liquidator has a conflict of interest.
Once a liquidator is appointed by the Court, the directors of the company are not able to conduct any business on behalf of the company (however see below for an exception to this). The Court will have a remaining supervisory role. Liquidators will have powers as specified in the appointing order, which usually include those outlined in Schedule 2 of the IA, subject to modifications by the Court. The liquidator will have to apply to the Court to exercise any powers that are outside the scope of the powers specified in the appointing order.
A change in board structure does not always arise as a matter of course upon the appointment of a liquidator. For instance, recently the Commercial Division of the BVI High Court allowed the appointment of 'soft touch' provisional liquidators which enabled the applicants to restructure with the oversight of joint provisional liquidators but without a change in board structure (BVIHCOM2018/0206, 0207, 0208, 0210, 0212 In the matters of Constellation Overseas Ltd.; Lone Star Offshore Ltd.; Gold Star Equities Ltd.; Olinda Star Ltd.; Snover International Inc.; Alpha Star Equities Ltd.).
With regard to the timeline, an application to appoint a liquidator must be determined within six months of the date of the application notice being filed with the court. This period can be extended by court application. Uncontested applications are usually resolved within 2-4 months but contested applications can take 6-12 months to be determined. Once a liquidator has been appointed the length of the liquidation process will depend upon the factual circumstances of each individual case, including the location and nature of the assets, the degree of cooperation from the company and its officers and the number of claims submitted to the liquidator.
b. Administration (currently not in force in the BVI)
The IA contains provisions as to the appointment of administrators. However, these provisions are currently not in force.
A receiver is usually appointed by the Court or under a debenture or other instrument.
Appointment under a debenture or other instrument
Appointment of a receiver out of Court shall be made in writing and will take effect from the time upon which the receiver receives the written notice of appointment. The appointment will not be effective unless the receiver accepts it before the end of the next business day following the day on which he receives the written appointment. There is provision for joint receivers to be appointed outside of Court. Where a receiver is appointed out of court he shall confirm his acceptance in writing to the person who appointed him within 7 days. This provision of the Act will not apply whereby an appointment is accepted in writing. Written acceptance or confirmation will state the time and date of receipt of the notice of appointment and the time and date of the acceptance.
Upon being appointed a receiver shall send notice of his appointment to the company; and file a notice of his appointment (i) with the Registrar of Companies; and (ii) if the company is or has been a regulated person, with the Financial Services Commission.
A receiver appointed out of court, other than an administrative receiver, is deemed to be the agent of the company unless the charge or instrument under which he was appointed expressly provides otherwise. An administrative receiver is deemed to be the agent of the company in receivership unless a liquidator is subsequently appointed, in respect of a company in receivership, which will terminate the agency of any receiver, including an administrative receiver. A receiver appointed by the Court will be deemed to be an agent of the Court, not the company.
The specific powers of a receiver should be as set out in the charge document and/or the Court order appointing him/her. Unless the charge or other instrument under which, or court order by which, he was appointed expressly provides otherwise, a receiver may:
- demand and recover, by action or otherwise, income of the assets in respect of which he was appointed;
- issue receipts for income recovered;
- manage, insure, repair and maintain the assets in respect of which he was appointed; and
- exercise, on behalf of the company, a right to inspect books or documents that relate to the assets in respect of which he was appointed in the possession or under the control of a person other than the company.
Appointment of an Administrative Receiver
Pursuant to the IA, an administrative receiver may be appointed by the Court or by a debenture or by the holder of another instrument of the company secured by a floating charge. Unless the debenture or other instrument states otherwise an administrative receiver may execute all documents necessary or incidental to the exercise of his powers in the name of and on behalf of the company in receivership; and use the company's seal.
Additionally, unless the debenture or other appointing instrument states otherwise, the powers conferred on an administrative receiver shall include those as stated in Schedule 1 of the IA.
Originally published by The Legal 500 Country Comparative Guides: Restructuring & Insolvency.
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.