| Background
All companies incorporated under the International Business Companies Act (1984) (the “IBC Act”) that did not during the transitional period voluntarily elect to be re-registered with a memorandum and articles of association compliant with the BVI Busines Companies Act (2004) (the “BC Act”), were automatically re-registered under the BC Act on 1 January 2007. To avoid inconsistency between the BC Act and terms incorporated into the memorandum and articles of association of each IBC company, certain grandfathering provisions were introduced by the BC Act which continue to apply to such companies (the “Transitional Provisions” set out in Part IV of Schedule 2 of the BC Act). For example, there are specific provisions that apply to distributions, including share redemptions (which can only be paid out of surplus), in place of the provisions in the main body of the BC Act applicable to companies incorporated under the BC Act and companies that elected to re-register under the BC Act prior to 1 January 2007. The concepts of share capital and surplus have been retained for such companies, which means that they must keep separate accounts reflecting capital and surplus, and a different solvency test is applicable with respect to distributions. |
Given the increased flexibility introduced by the “BC Act”, it is perhaps surprising that many BVI companies that were incorporated under the “IBC Act” have still not elected to take advantage of the more flexible regime by adopting new BC Act-style memoranda and articles of association and disapplying the Transitional Provisions.
Flexibility introduced by the BC Act
The BC Act simplified BVI company law in many ways. In particular:
• the concept of share capital was removed so that, instead of a company being issued with a share capital of, say, US$50,000 divided into a certain number of shares, it would be authorised to issue up to a certain maximum number of shares (typically 50,000);
• the capital maintenance rules and the concept of surplus disappeared so that, subject (in most cases) to the satisfaction of a solvency test, dividends can be paid out of any funds held by a company, including monies received for shares, instead of having to be paid out of surplus;
• redeeming shares is easier: subject (in most cases) to the satisfaction of a solvency test, shares may be redeemed out of any monies held by a company, rather than having to be redeemed out of surplus;
• a new solvency test was introduced (applicable to distributions), i.e. “the value of the company’s assets exceeds its liabilities and the company is able to pay its debts as they fall due” instead of “the company will be able to satisfy its liabilities as they become due in the ordinary course of business and the realisable value of its assets will not be less than the sum of its total liabilities, other than deferred taxes, as shown in the books of account, and its capital”.
For those companies incorporated under the IBC Act that have not sought to modernise their memoranda and articles of association as mentioned above (“IBCs”), transactions can sometimes be unnecessarily complicated by the additional restrictions on the way that share redemptions, dividends and capital reductions are structured. Examples of issues arising with reductions of capital and bearer shares are considered below.
Acquisitions and redemptions of shares
Pursuant to the Transitional Provisions (applicable to IBCs that have not adopted new BC Act memorandum and articles of association), shares may only be redeemed out of surplus or in exchange for newly issued shares of equal value. But in such circumstances, what happens if there is insufficient surplus to redeem the shares of an IBC but there is a large sum of money in the capital account that the shareholders wish to access? Can the capital be reduced and transferred to surplus, and then used to redeem the shares?
Surplus is defined as “the excess, if any, at the time of the determination, of the total assets of the company over the sum of its total liabilities, as shown in the books of account, plus its capital”.
Although it is possible to transfer money from capital to surplus, it is not possible for the capital to be reduced to an amount that is less than the sum of (a) the aggregate par value of (i) all outstanding shares with par value; and (ii) all shares with par value held by the company as treasury shares; and (b) the aggregate of the amounts designated as capital of (i) all outstanding shares without par value, and (ii) all shares without par value held by the company as treasury shares that are entitled to a preference, if any, in the assets of the company upon liquidation of the company.
Because it is not possible to redeem shares for a sum that exceeds the total amount of a company’s surplus, an option might be to (1) redeem the shares for a nominal sum or for nil consideration; (2) transfer the amount of the capital attributed to the shares being redeemed (i.e. the aggregate par value of those shares) from the capital account to the surplus account; and then (3) declare a dividend of the amount of the capital that was transferred to the surplus account. The difficulty with this approach, however, is that if there are other shareholders of the same class, any dividend would need to be offered pro rata to all those shareholders and not just those whose shares are being redeemed.
If a new BC Act memorandum and articles of association had been adopted, the company could redeem the shares from any monies held by it, including any monies received in exchange for the issue of shares, and therefore the procedure would be much simpler.
Bearer shares
The position with respect to bearer shares and IBCs can be misleading. Even though an IBC’s memorandum and articles of association may expressly state that it is permitted to issue bearer shares, it will not actually be authorised to issue bearer shares unless it elected to disapply section 34(a)(1) of the Transitional Provisions on or before 31 December 2009 by making a filing with the BVI Registry of Corporate Affairs. If such a filing was not made, its memorandum and articles of association are deemed to have been amended with effect from midnight on 31 December 2009 to the effect that the company is not authorised to issue bearer shares and with effect from that time, the company would have ceased to be a bearer share company and would no longer be permitted to issue bearer shares.
Disapplying the Transitional Provisions
It is a very simple process for an IBC to disapply the Transitional Provisions. A BC Act compliant constitution needs to be adopted, and an application made to the BVI Registry of Corporate Affairs to disapply the Transitional Provisions.
By Karen Gilbert, senior associate.
+44 207 0143 225
