Country report: BCA benefits

By William Tacon, partner, Kroll BVI Ltd

The new Business Companies Act (‘BCA’) replaced the International Business Companies Act (‘IBCA’), which has served the BVI so well for many years. All new registrations from 1 January 2006 have been under the BCA, whose terms now automatically apply to all companies registered in the BVI. In 2005, registrations under the IBCA were 58,100: BCA registrations up to 30 September 2006 were 51,000, or 68,000 on an annualised basis.

Although the BCA includes a number of headline-grabbing matters, such as the ability to form a company including characters from languages other than English, they are relatively trivial when compared to more fundamental matters. The intellectual basis of the BCA is to create a structure within which companies, their directors and members may operate, which is flexible and permissive but that also has safeguards for creditors and minority interests. There are also detailed and useful provisions, such as an improved regime for the registration of charges. The BCA successfully enhances creditors’ and members’ rights but without removing the traditional attractions of a BVI company. The important features listed below illustrate this.

Capital maintenance and solvency

The distinction between ‘capital’ and ‘revenue’ reserves (i.e. those that are distributable and those that are not) has been removed entirely. The outdated concept of capital maintenance has been replaced with the requirement for solvency to be maintained. The solvency tests are the usual ones of the company being able to pay its debts as they fall due and having net assets. Provided solvency is maintained, all and any assets of a company can be returned to members. To increase flexibility even further, the distinction between capital and revenue can be preserved, if that suits the purposes of the shareholders. This is achieved through the memorandum and articles of association of the company – for example, through the creation of differing class rights (if shares are created) and specifying the nature of distributions that may be made.

Solvent liquidation

The process for solvent liquidations remains both simple and inexpensive, but a new requirement is that the directors must prepare a declaration of solvency before the onset of the liquidation process. This approach is consistent with the requirement for the solvency test to be passed.

Shareholder protection

The Insolvency Act has been used extensively as the settlement procedure of last resort for disputes between shareholders. Although this remedy remains in place, members can now exercise rights in additional ways. The BCA has introduced the concept of ‘derivative actions’ where the Court can intervene to support a shareholder in an action, provided it is in the interests of the company and the matter cannot be left with the directors or members as a whole. The Court has the ability to make orders to assist an oppressed shareholder, including:

Requiring a company or its members to acquire shares;
Ordering compensation;
Amending the memorandum and articles of the company;
Setting aside actions.

These enhancements will materially improve the likelihood of shareholder disputes being resolved without necessarily threatening liquidation, with its potential for value destruction. There is further shareholder protection through provisions that prevent directors amending the memorandum and articles and reducing the rights of shareholders without their consent.

Directors’ duties

The duties of directors are now codified and are in line with generally recognised obligations in most jurisdictions, such as:

Acting in good faith;
Acting in the best interests of the shareholders;
Disclosure of interests.

There are no unusual or onerous obligations, so honest directors should not have any concerns.

Protection of secured creditors

In addition to a company maintaining a register of charges, both the company and chargeholder can now file charges created with the Registrar of Corporate Affairs. The key advantage of the external registration is the creation of priority over unregistered charges. Predetermined priorities can be maintained and further enhanced by the recognition of negative pledge terms in security. The ability of the chargee to register removes reliance upon the directors to do so.

New types of company

Segregated portfolio companies, frequently used in the insurance industry, are now incorporated into the BCA rather than the Insurance Act. Additional types of company, all of which serve to increase flexibility, include:

Restricted purposes companies – formed for specific reasons;
Companies limited by guarantee with or without the issue or shares;
Unlimited companies with or without shares.

Overview

This short review amply demonstrates how the BCA can provide immense flexibility, further enhanced by the sanctity of tailor made memorandum and articles, while at the same time can offer shareholder and creditor protection within the normal acceptable parameters of directors’ duties. The BCA is going to develop the BVI’s reputation as a robust, reliable and effective location for incorporation.