The British Virgin Islands (BVI) Government, in consultation with the industry and the Financial Services Commission (FSC), the local regulatory body, has recently introduced a new BVI Business Companies Act (BVIBC).

In order to give flexibility, the BVI Government introduced a two-year transition period for the introduction of the BVIBC Act – which came into force on 1 January, 2005 – and the eventual phase-out of the IBC Act and the much less frequently used Companies Act for incorporating local companies.

From 1 January, 2006, only Business Companies (BCs) under the BVIBC Act can be incorporated. However, International Business Companies (IBCs) under the IBC Act and local companies (CAPs) under the Companies Act (Cap 285) can co-exist until 31 December, 2006. At any time during 2006, IBCs or CAPs can optionally reregister as a BC. On 1 January, 2007, all non-converted IBCs and CAPs will be automatically re-registered to BCs.

The BVIBC Act has been introduced for three main reasons:

. to avoid the risk of being seen to practise 'ring fencing' in the BVI – treating different types of companies, such as local and international companies differently, most notably with respect to tax treatment;

. the IBC Act, which has been successful for the past 20 years, was felt to be dated in various aspects; and

. the introduction of a brand new piece of legislation, rather than to try to amend the previous act, allowed for a thorough and comprehensive review.

The BVIBC Act provides greater flexibility than its predecessor, the IBC Act. Under the IBC Act, only one type of company could be incorporated, the company limited by shares. The BVIBC Act provides for the incorporation of seven different types of transactional vehicles. These are:

. companies limited by shares;

. companies limited by guarantee who are authorised to issue shares;

. companies limited by guarantee not authorised to issue shares;

. unlimited companies authorised to issue shares;

. unlimited companies not authorised to issue shares;

. restricted purposes companies; and

. segregated portfolio companies. Of particular interest is the availability of segregated portfolio companies, (previously only available to insurance companies) to mutual funds.

Section 135 of the BVIBC Act provides that a company limited by shares may apply to the Financial Services Commission (FSC) to be registered as a segregated portfolio company (SPC). The FSC would only give its written approval if the company limited by shares is, or on its incorporation will be, licenced as an insurer under the Insurance Act, 1994, is or on its incorporation will be recognised as a professional or private fund or registered as a public fund under the Mutual Funds Act 1996 or is of such class or description as may be prescribed by the Regulations made under the Act. Both existing and new insurance companies and mutual funds may apply for registration.

The name of the segregated portfolio company shall include the designation 'SPC' placed immediately before one of the endings permitted by the Act, namely Limited, Corporation, Incorporated, Society Anonyme or Sociedad Anonima or their abbreviations thereof.

An SPC is an entity which allows each portfolio or cell to have legal separation of assets. Thus, the assets and liabilities within a segregated portfolio will be segregated from the assets and liabilities of other segregated portfolios and those assets and liabilities of the company that are not held in any segregated portfolio. The SPC provides greater flexibility and protection for mutual funds investment by allowing an investor to invest in various trading strategies through one investment vehicle without the risk of cross-fund liability.

An SPC should, at all times, have one or more administrators, managers and custodians and may appoint one or more investment advisers (each a 'functionary').

A mutual fund SPC shall have an auditor who should be responsible for auditing its financial statements. The financial statements must be filed with the FSC within six months of the end of the mutual fund financial year.

The BVIBC Act has some innovative provisions concerning company names, which will be attractive to overseas parties. Limited companies can be incorporated ending with:

. Limited, Corporation or Incorporated;

. Ltd, Corp, Inc, SA;

. Societe Anonyme or Sociedad Anonima. Unlimited companies must end with 'Unlimited' or 'Unltd', restricted purposes companies must be designated as '(SPV) Limited' or '(SPV) Ltd' and segregated portfolio companies must include the designation 'Segregated Portfolio Company' or 'SPC'.

Perhaps most interesting is the ability to add foreign characters such as Chinese or Cyrillic script, as an additional name. Finally, the company registration number can comprise the name of the company, e.g. BVI Company Number 123456 Limited.

A company can issue shares with or without a par value but it need not have an authorised level of share capital as such. The intention behind the drafting has been to move away from the concept of authorised capital, the company need only state the maximum number of shares it can issue. This is useful because, in effect, there are no provisions for a company to maintain any particular level of capital. Distributions can be made to members at any time and in any amount provided the familiar tests of solvency are satisfied:

. the value of assets exceeds liabilities; and

. the ability to pay debts as they fall due. The solvency tests also, in reality, offer the best protection to creditors, especially in view of the wide-ranging provisions of the Insolvency Act.

The flexibility of being able to make distributions in this way is useful when planning complex reorganisations of a group including more than one BVI company, leading to the solvent liquidation of a parent company in the group, with a distribution to members. The ability to move assets and effect share for share exchanges, subject only to the solvency tests makes such reorganisations as painless as possible, especially where there may be different groups of shareholders in the BVI or wider structure.

The liquidation of a BC may be on a solvent, voluntary basis or through insolvency, in the latter case, the terms of the British Virgin Islands Insolvency Act 2003 apply. The process of appointing a voluntary liquidator to effect a solvent liquidation is straightforward; the directors must be able to produce a declaration of solvency and to approve an uncomplicated 'plan of dissolution'.

The BVIBC Act provides a new regime in the BVI for the registration and priority of charges over a company's assets. The new regime differs materially from the regime under the IBC Act, creating for the first time a system of registration of charges with the Registrar of Corporate Affairs. A 'relevant charge', being a charge created on or after 1 January, 2005, or in the case of an IBC, the date that such IBC is re-registered as a BC (the 'commencement' date), may be registered with the Registrar. Registration with the Registrar is not mandatory, and failure to register does not affect the validity or enforceability of the charge.

A BC is also obliged under the BVIBC Act to maintain a register of charges showing prescribed particulars of charges over its asset. The company's own register of charges must be kept by the company in the BVI, either at its registered office or with its registered agent.

Where a company creates a relevant charge, an application to register the charge with the Registrar may be made by the company or the chargee by filing an application in the approved form. The Registrar will then issue a certificate of registration of the charge containing the date and time on which a charge was registered and send a copy to the company and to the chargee. The certificate is conclusive proof that the requirements as to registration have been complied with and that the charge referred to in the certificate was registered on the date and time stated in the certificate.

Where there is a variation in the terms of a relevant charge, the variation may be made by the company or the chargee by filing an application in the approved form. The Registrar will register the variation and issue a certificate of variation which is sent to the company and to the chargee.

Where a relevant charge ceases to affect the property of a company, the company must file a notice specifying the property that has ceased to be affected by the charge in the approved form which must be signed by or on behalf of the company and the chargee. In such a case the Registrar shall state in the Register of Registered Charges and on the certificate issued to the company and to the chargee the date and time on which the notice was registered and the charge shall be deemed not to be registered in respect of the property specified in the notice.

The BVIBC Act provides that a relevant charge registered with the Registrar under the BVIBC Act has priority over a subsequently registered relevant charge on the property and over a relevant charge on the property that is not registered.

Charges created on or after the commencement date which are not registered rank among themselves in the order in which they would have ranked had the new provisions not come into force. Charges created (by an IBC) prior to the commencement date shall continue to rank in the order in which they would have ranked had the new provisions not come into force and, where they would have taken priority over a charge created on or after the commencement date, they shall continue to take such priority after the commencement date. This is important for chargees who have taken security from IBCs before the commencement date. Where such security has priority under BVI law, that priority is preserved under the BVIBC Act.

Guy Eldridge is a partner at Conyers Dill & Pearman. William Tacon is an insolvency and corporate restructuring partner at Ernst & Young in the BVI.