Secured Lending

Subject to applicable conflict of laws rules, secured finance in the British Virgin Islands (BVI) is governed by commercial and contract law and the common law. The BVI does not have an Unfair Contract Terms Act, Consumer Credit Act, Contract (Rights of Third Parties) Act or Misrepresentation Act; but the Conveyancing and Law of Property Act 1962, the Bills of Sale Act 1882 and the Electronic Transactions Act 2020, among others, may affect secured lending transactions in the BVI.

No.

No – in fact, for the most part, governmental institutions do not play a large role in secured finance in the BVI. Regulatory institutions such as the BVI Financial Services Commission (FSC) and the Financial Investigation Agency function to supervise and regulate the industry (eg, law firms, trust companies), but will not overreach into clients’ affairs.

The BVI government welcomes business to the BVI, which is widely touted as a lender-friendly jurisdiction and is notable for its flexible, progressive and modern corporate laws. Provided that debt securities are not being issued and/or offered to the public within the BVI, governmental or regulatory approvals are not required to enter into debt transactions in the BVI and debt financing transactions are not subject to any mandatory filings. This means that BVI companies are not required to give notice to any public authority when seeking – whether as lender, borrower, guarantor or security provider – to enter into lending transactions.

The position is different in relation to regulated entities. Because of restrictions relating to the dispositions of ownership in relation to regulated businesses, it is not possible to grant a security interest to support borrowing over shares in a regulated entity beyond a certain threshold without approval. The threshold is different depending on the type of regulated entry and can range from 5% to 10%. If a shareholder wishes to grant security over a greater percentage of shares in a regulated entity, it required the approval of the FSC.

The BVI’s contemporary, flexible, creditor/lender-friendly legislation has made it an ideal jurisdiction for corporate vehicles to enter into secured finance transactions. While the legislation is flexible, the BVI also remains compliant with international regulations and policies, keeping apace with all calls from international bodies to maintain the highest standards of transparency, which has assisted with the development of the secured finance market. The BVI is and continues to be a jurisdiction of preference in relation to bilateral and syndicated secured financing.

The BVI does not have an equivalent to the Loan Market Association, the Asia Pacific Loan Market Association or the US Loan Syndication and Trading Association in the BVI; although the standard documentation of all those bodies is used in secured finance transactions in the BVI, where the governing law of the main debt documentation tends to be foreign (typically, New York, English, Hong Kong or Singapore) law. Local law is reserved to govern:

• security over shares;
• limited partnership interests;
• intra-group receivables; and
• the taking of lightweight floating charges.

In purely domestic secured lending transactions, of course, BVI law will be used to govern the relevant debt instruments.

It is less the case that significant secured finance transactions take place in the BVI, and more due to the fact that the BVI plays such a key role in international cross-border corporate finance, that the largest transactions in the world typically involve some kind of BVI element – be it a BVI incorporated bond issuer, a BVI borrower, a BVI subsidiary or guarantor providing security.

The only type of secured finance providers in the BVI are local banks. However, BVI entities usually enter into financing transactions outside of the BVI and across numerous jurisdictions with the gamut of global financial institutions, bank lenders, shadow banks, mezzanine creditor providers and private lenders.

BVI entities are usually involved in cross-border transactions with international secured finance providers; and as such, BVI law is rarely chosen as the governing law of the loan documents. This means that any requirements and restrictions that apply to secured finance providers will be determined in accordance with the laws and market of the jurisdiction of the main loan documentation.

There are three main types of debt documentation in the BVI:

• promissory notes;
• bonds and other forms of debt instruments; and
• documentation under a loan agreement.

The most common of these are promissory notes and loan agreements. BVI borrowers have been used in export credit agency-backed financing, asset financing structures, secured margin loans, trade finance structures, leveraged finance, securitisations, structured financings and guarantee facilities, to name just a few. Secured finance structures can also involve listed debt securities. BVI entities generally have unlimited objects and powers, and can enter into any secured finance structure that is legally valid and binding under its governing law.

Because of the way that BVI vehicles are used in cross-border international secured lending scenarios, there is no real advantage or disadvantage to any one form of secured lending over another. If the structure works under its governing law, the BVI courts will generally recognise it and give effect to the parties’ commercial intentions. The BVI courts have demonstrated a willingness to recognise and even apply foreign law security remedies that are not available under BVI law (eg, English law appropriation); and accordingly, weighing up the advantage or disadvantages of any one structure over another is not usually a question for BVI counsel.

When using a BVI vehicle in a secured finance structure, the key issue to contemplate at the term sheet stage is the conflict of laws position. Where does the BVI entity do business? Where are its assets located? What laws govern its trade contracts? These are the kinds of questions that will determine the appropriate structure for the financing.

The BVI Business Companies Act, 2004, subject to a BVI company’s memorandum and articles of association, gives the entity the power to create security over its assets to secure an obligation owed by it or another person. The most common of these are as follows:

• Equitable mortgage: For registered shares, this will involve executing share transfer documents but leaving them undated. In the event of a default, the secured lender will date the transfer documents and request the registered agent to update the register of members accordingly, allowing the secured lender to deal with the assets of the company as they see fit. Legal mortgages (where legal title to the shares is transferred) are not unheard of, but are very rare.
• Equitable charge (fixed or floating): This confers a power of sale on the secured party on the intangible assets of the BVI entity. Equitable charges are also known as security documents, debentures, or pledges (although they are not technically pledges at all).

Pledges and liens are also used, though less frequently, as these require physical delivery of the secured property to the lender.

In the vast majority of cases, upon execution of the security documents, the security constituted thereby will be considered perfected. No steps are required as a matter of BVI law to ‘perfect’ security interests in the way that perfection is understood in other jurisdictions: for example, failure to register a security interest does not, as a matter of BVI law, invalidate a charge. The only real departure from this general principle is that a security assignment is invalid if notice is not given. However, the Business Companies Act requires a company to keep a register of charges it has created. Details of the security interests granted by a BVI company should thus be entered in the company’s register of charges, which should be maintained at its registered office (usually the office of its registered agent). This does not go to perfection, but is rather a point of internal housekeeping. That said, any sensibly advised lender will ensure that a BVI entity publicly registers the security interests at the BVI Registry of Corporate Affairs in order to obtain statutory priority (as a matter of BVI law). But again, public security registration does not ‘perfect’ a security interest, and it will remain valid even if unregistered. Once publicly registered, all persons are deemed to have notice of a security interest and the security interests created by the relevant security documents will have statutory first priority over any future claims by third parties. Validly granted security – whether governed by BVI or foreign law – can be enforced against a BVI company without recourse to the court or any liquidator, regardless of the solvency of the company in question.

The main types of collateral used as security by BVI entities are as follows:

• Shares in BVI entities: Share security is typically taken by way of an equitable mortgage. While there are no particular specifications that a mortgage or charge over shares of a BVI entity must take, it must unequivocally indicate the intention to create a mortgage or charge and the amount secured by the mortgage or charge or how that amount is to be calculated. If a mortgage or charge of shares in a BVI entity is not governed by BVI law, the mortgage or charge must comply with all requirements of its governing law in order to be binding and valid on the BVI entity. The Business Companies Act provides for the particulars of a charge of shares to be noted on the register of members of a BVI entity whose shares are being charged. This gives actual (and arguably constructive) notice to any person inspecting the register of the existence of the security, although notably it does not confer statutory priority.
• Real estate: A BVI entity can create and perfect a security interest over real estate situate either in the BVI or anywhere else in the world (as is permitted by the jurisdiction where the property is located).
• Tangible movable property (eg, art, aircraft, yachts): A BVI entity can create and perfect security over interests in tangible movable property as is permitted by the laws of the place where the property is located and/or subject to the governing law clause of the security document.
• Rental income and benefits of insurance: Legal assignments of intangibles are not provided for by BVI statute, which means that these will take effect as equitable assignments; but they are frequently used.
• Cash deposits: As BVI law does not make statutory provision for collateral security over cash deposits in bank accounts located in the BVI or elsewhere, the law of the jurisdiction in which the bank account is located will apply. Cash in the bank in the BVI will be secured by an equitable charge.

A BVI entity is permitted to enter into security documents including a mortgage, charge or any other encumbrance over any of its assets, wherever situated. This security document can and is usually governed in accordance with the law of a jurisdiction outside the BVI and is binding to the extent and in accordance with the requirements of the chosen law. A BVI entity can also secure the obligations of third parties with a charge over its assets and is not restricted to providing security for its own borrowing (first-party versus third-party security).

Yes, as stated in question 5.4, security can be taken over any assets of a BVI entity; although this will be subject to the laws of the jurisdiction chosen to govern said security document.

Yes, a BVI entity can give security over the shares of any company it owns, whether another BVI company or a foreign entity. Care should be taken when a BVI entity owns shares held in dematerialised form: arguably, the security will amount to security over a contractual right rather than over the dematerialised share itself. Local law guidance should be sought from lawyers where the relevant stock exchange is situate.

Yes, as stated in question 5.4, security can be taken over any assets of a BVI company; although this will be subject to the laws of the jurisdiction chosen to govern said security document.

No steps are required as a matter of BVI law to ‘perfect’ a security interest; however, if choosing to make a public security registration, the fee levied by the BVI Registrar of Corporate Affairs is $200 per charge. This is notably cheaper than in many other offshore jurisdictions.

The respective obligations and liabilities of the parties under the security documents will be contained in the security documents and will be governed by and in accordance with the law selected to govern the security documents.

N/A.

Corporate guarantees bring into focus the issue of ‘corporate benefit’, as third-party guarantees often present no direct or easily ascertainable corporate benefit to the company. However, the Business Companies Act contains very broad powers allowing a BVI entity to guarantee an obligation or liability of any person. Indeed, BVI companies are not, by law, required to demonstrate corporate benefit in order to enter into transactions. This means that – within reasonable parameters – a BVI entity can guarantee the obligations of anyone else in the world; and while this power will be subject to the BVI entity’s memorandum and articles of association, for the most part, the powers of a company contained therein expressly include (among other things) the power to guarantee a liability or obligation of any person, and to secure any obligations by mortgage, pledge or other charge of any of its assets for that purpose.

Why is this an important point? The confusion that arises is that the abolition of the corporate benefit requirement (the old ‘cakes and ale’ rule) does not obviate the directors’ fiduciary duties to act in what they believe to be the best interests of the company. In the case of a guarantee given to support a shareholder’s (or subsidiary’s) obligation, the corporate benefit to the BVI guarantor is fairly obvious. Extending a guarantee to a ‘sister’ company may be harder to ascertain, but not impossible (and can always be documented in the board resolution approving the transaction). But guaranteeing the obligations of a third party throws up a challenge: there is absolutely no power or capacity issue at BVI level; but an arguable case might be made by the shareholders of the BVI guarantor that a directors are not, in granting such credit, acting in the best interests of the company. In this case, obtaining a members’ resolution is recommended.

Upon the execution of the guarantee, it will be considered perfected as it is not necessary to ensure the validity, admissibility, legality or enforceability in evidence of a guarantee to be recorded or filed with any governmental authority in the BVI. Unless a guarantee contains a propriety security interest (as in a US-style ‘pledge and guaranty’ agreement), it is not normally registerable in the BVI.

N/A.

The respective obligations and liabilities of the parties under the guarantee will depend on the contractual agreement made between the surety and the beneficiary in the guarantee.

In an insolvent liquidation, a liquidator may view an inter-corporate guarantee as a preference or a transaction at an undervalue where the company did not directly receive any benefit of the financing. In that case, the liquidator may either prevent a payment from being made on the guarantee or attempt to set aside any payments already made on the guarantee. There is no sure-fire way to avoid this, as solvency is a matter of fact and guarantees granting in the twilight period prior to the onset of insolvency may, if no statutory safe harbour is available, be determined to be an avoidance transaction. However, a sensible precaution to take is to include in the resolution approving the guarantee a consideration and determination of solvency at BVI level; if nothing else, this will focus the board on whether granting the guarantee is the right thing to do. If the company is financially healthy (and likely to remain so for the relevant ‘hardening period’), then granting the guarantee (or security, as the same rules apply) carries no such avoidance risk.

One quirk of BVI law is that it has no equivalent of the Statute of Frauds 1677, requiring a guarantee to be granted under written instrument – although in practice, of course, we would strongly advise against oral contracts.

Financial assistance in one important area in which the BVI has distinguished itself as a practical, modern jurisdiction where business may be done with ease. BVI companies are expressly permitted, by statute, to give financial assistance for the acquisition of their own shares. There is no expensive or time-consuming ‘whitewash’ procedure to comply with in the BVI. This makes BVI targets very attractive in the acquisition financing context and, together with the fact that no stamp duty is levied on the transfer of BVI shares, is the reason why a BVI company is often interposed in target capital structures to simplify the acquisition process and reduce cost.

Yes, the courts will acknowledge the role of an agent or trustee and permit that agent or trustee to enforce the loan documentation and collateral security in accordance with their terms and distribute the proceeds to all lenders according.

There are no requirements or restrictions on the BVI side in relation to syndicated lending. Any requirements or restrictions that may arise will be governed by the provisions of the loan documentation.

There are no pitfalls to watch out for in the BVI. Syndicated lending transactions progress smoothly in the jurisdiction.

There are no taxes or similar charges levied in the secured finance context in the BVI. BVI entities are not required to make any deduction or withholding from any payment they may make under any loan document for, or on account of, any BVI tax. There are neither exchange controls nor restrictions on removal of currency in force in the BVI. If a BVI entity is party to the loan documentation, the transaction will be exempt from BVI stamp duty; however, if a BVI entity is not party to the loan documentation, the transaction will attract stamp duty at a nominal value.

N/A.

The only fees that will be incurred and payable to the Financial Services Commission are the fees required to register the particulars of the security documents in favour of the lender. The fee is $200 per security filing and $100 for de-registration. This is one of the most competitive rates for security registration in the developed world.

Structure through the BVI!

The principal assets which are located in the BVI are shares in a BVI entity; as such, most legal issues which arise in relation to enforcement are in relation to security over shares. There are four main remedies available to a holder of a legal mortgage over shares in the event of default on secured obligations:

• selling the assets;
• taking possession;
• appointing a receiver; or
• foreclosing on the assets.

Another option which exists is to sue on the covenant to pay. All enforcement remedies under BVI law are out-of-court remedies; although naturally, if enforcement is disputed or the obligors are obstructive, a court order may be required.

Section 66(4) of the BVI Business Companies Act 2004 makes clear that mortgages over shares in a BVI company may be expressed to be governed by the laws of foreign jurisdictions; thus, if a foreign law is chosen to govern, the remedies available to the mortgagee will be determined by that foreign law. If a recognition order is required in the BVI to enforce the foreign judgment, the BVI courts have shown themselves willing to apply foreign remedies that are not available in the BVI.

The variable usually comes down to whether the enforcement is disputed, meaning that recourse to the court is required. Where the security interest created is a charge over shares and this is governed by BVI law, a domestic judgment is recognised the moment it is made and becomes enforceable immediately. Part 43 of the Eastern Caribbean Civil Procedure Rules, 2000 provides that once a domestic judgment becomes enforceable, the judgment creditor can apply to request an enforcement order from the court. A judgment must be properly served on the judgment debtor before it can be enforced. Where a judgment creditor has an unpaid money judgment against a BVI entity, it can apply to the court to appoint a liquidator over the judgment debtor under the Insolvency Act 2003.

The enforcement proceedings in relation to foreign judgments are as stated in question 12.2.

One should take care to engage early with the registered agent of the relevant BVI entity, especially in connection with the enforcement of security over shares.

Extremely – the BVI courts will usually give effect to contractual agreements varying the priority of security interests and netting and set-off agreements.

From execution of the finance documents (as stated above), lenders can safeguard their position in connection with security by ensuring that the BVI entity publicly registers the security interests in order to obtain statutory priority. A person is deemed to have notice of a document registered with the registrar in the BVI. The security interests created by the financing documents will have priority over any future claims by third parties (other than those preferred by law), including any liquidator or creditor of the BVI entity.

Bankruptcy/liquidation proceedings do not impact the right of a secured creditor to enforce any security interests created over the assets of a BVI entity. A secured creditor can, subject to its security interest, enforce its security and take control of the assets without recourse to the liquidator or reach an agreement with the liquidator regarding how the assets will be handled as part of the liquidation.

The circumstances in which an antecedent transaction may be set aside will always be fact specific; however, in the BVI, a liquidator may apply to set aside:

• on the basis that the transaction constituted a preference;
• in the case of certain floating charges, if the transaction was undervalued or zero consideration; and
• in the case of extortionate credit transactions.

The BVI court may also make an order for the BVI entity to be restored to the position it would have been in prior to entering into the unfair preference or undervalue transaction.

A few sovereign entities and treaty-based organisations are excluded from the bankruptcy regime. The State Immunity (Overseas Territories) Order 1979 extended the State Immunity Act 1978 to the BVI and the International Finance Corporation Order 1955 extends to the BVI.

The majority of loan documents are governed by New York law, Hong Kong law or English law. The lex situs of commercial transactions or assets also plays an important role. Any specific requirements will depend on the governing law of the finance documents and what is required in the relevant jurisdiction.

Final and conclusive judgments for a sum of money given against the company in a superior court of England and Wales, the High Court of Northern Ireland, the Court of Session in Scotland, the Federal Supreme Court of Nigeria and the High Courts of the Western, Northern and Eastern Regions and Lagos (Nigeria) and the superior courts of the Bahamas, Barbados, Belize, Bermuda, Grenada, Guyana, Jamaica, New South Wales, St Lucia, St Vincent and Trinidad & Tobago may be registered and enforced as judgments of the BVI Court under the Reciprocal Enforcement Act if:

• an application is made to register the judgment with the High Court of the BVI within 12 months (or such longer period as the High Court may allow) of the date of the judgment;
• the High Court considers it just and convenient to enforce the judgment;
• the BVI entity:
• • has not appealed the judgment; and
  • does not have the right and has not expressed the intention to appeal the judgment;
• the foreign court had jurisdiction in the matter;
• the company either:
• • submitted to the jurisdiction of the foreign court; or
  • was resident and carrying on business in the jurisdiction and was duly served with process;
• the judgment was not in respect of taxes or similar fiscal or revenue obligations or a fine or penalty imposed on the BVI entity;
• the judgment was not obtained by fraud;
• enforcement of the judgment would not be contrary to BVI public policy; and
• the proceedings under which the judgment was obtained were not contrary to the principles of natural justice.

A judgment of a court of any other jurisdiction not listed above (‘foreign court’) is not capable of being registered and enforced as a judgment of the High Court under the Reciprocal Enforcement Act. However, a final and conclusive judgment for a debt or definite sum obtained against a BVI entity in the foreign court will be enforced by the High Court without re-examination of the issues if:

• the foreign court had jurisdiction in the matter;
• the BVI entity either:
• • submitted to the jurisdiction of the foreign court; or
  • was resident and carrying on business in the jurisdiction and was duly served with process;
• the judgment was not obtained by fraud;
• the judgment was not in respect of taxes or similar fiscal or revenue obligations or a fine or penalty imposed on the BVI entity;
• recognition or enforcement of the judgment would not be contrary to BVI public policy; and
• the proceedings under which the judgment was obtained were not contrary to the principles of natural justice.

The law on sovereign immunity is governed by the UK State Immunity Act 1978, which was extended to the BVI by the State Immunity (Overseas Territories Order) 1979; thus, a relevant entity may waive immunity pursuant to the Immunity Act.

The Arbitration Act 2013 allows for the United Kingdom and BVI arbitral awards to be treated in the BVI as New York Convention awards. The BVI is party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958. As such, the court in the BVI is mandated by law to enforce a convention award without the re-examination of the merits of the case or of the matters arbitrated upon. The Arbitration Act provides that the enforcement of a convention award may be refused if the party against which it is invoked can prove that:

• a party to the arbitration agreement was under some incapacity under the law applicable to that party;
• the arbitration agreement was not valid:
• • under the law to which the parties subjected it; or
  • if there was no indication of the law to which the arbitration agreement was subjected, under the law of the country where the award was made;
• the person:
• • was not given proper notice of the appointment of the arbitrator; or
  • was otherwise unable to present its case;
• the award:
• • deals with a difference not contemplated by or not falling within the terms of the submission to arbitration; or
  • contains decisions on matters beyond the scope of the submission to arbitration;
• the composition of the arbitral authority or the arbitral procedure was not in accordance with:
• • the agreement of the parties; or
  • failing such agreement, the law of the country where the arbitration took place; or
• the award:
• • has not yet become binding on the parties; or
  • has been set aside or suspended by a competent authority of the country in which, or under the law of which, it was made.

Enforcement of a convention award may also be refused if:

• the award is in respect of a matter which is not capable of settlement by arbitration under the laws of the BVI; or
• it would be contrary to public policy to enforce the award.

BVI legislative development has lately centred on the tech boom, with a focus on:

• the amendment of the Electronic Transactions Act;
• data privacy, which will be of more relevance to bond issuers than to borrowers; and
• economic substance.

The BVI has demonstrated itself to be resilient in the face of the COVID-19 pandemic, with neither deal flow nor the efficiency of on-islands operations particularly slowing down. We look to the world with which we do business to see what trends emerge as we move towards 2022; whatever they are, the BVI will keep pace.

Our top tips are as follows:

• Focus the mind on conflicts of law issues.
• Watch out for the end of year and mid-year annual fees deadlines which, if missed, can cause a BVI company to cease to be in good standing.
• Ensure always, when dealing with BVI shares, to engage the registered agent at an early stage.