BVI and Cayman companies: security considerations for lenders

British Virgin Islands and Cayman Islands entities are commonly used for international investment and corporate structuring as a result of the robust legal frameworks, sophisticated and well-regulated financial service industries and tax neutral regimes of both jurisdictions. As a consequence, lenders are frequently requested to put in place financing arrangements involving Cayman Islands and British Virgin Islands entities.

This briefing highlights (and, where applicable, contrasts) some of the issues that may be relevant when providing debt finance to Cayman Islands exempted companies and British Virgin Islands (BVI) business companies. 

Cayman exempted companies

The Cayman Companies Act (Revised) (Companies Act) is the primary law relating to Cayman Islands companies and exempted companies are the most common Cayman corporate vehicle.

An exempted company, as opposed to an ordinary company, is required to carry out its objects mainly outside the Cayman Islands. Exempted companies are only permitted to trade in the Cayman Islands to advance its business outside Cayman. However, it may conclude contracts in the Cayman Islands and exercise all its powers in the Cayman Islands necessary for carrying on its business outside the Cayman Islands.

Exempted companies are required to maintain these registers under the Companies Act:

• register of members

• register of directors and officers

• register of mortgages and charges

• register of beneficial ownership

BVI business companies

The BVI Business Companies Act (BCA) is the primary law relating to BVI business companies and these are the most common BVI corporate vehicle. As well as carrying out its objects outside of the BVI, a BVI business company can also carry out business within the BVI itself but, depending upon those activities, may need certain licences from either the BVI regulator, the Financial Services Commission or Government in order to do so, depending on the nature of those activities.

BVI business companies are required to maintain the following registers under the BCA:

• register of members

• register of directors

• register of charges

• register of beneficial owners

Registration of security

A security document granted by a BVI business company or a Cayman Islands exempted company does not need to be filed or recorded with any governmental or regulatory authority, agency or court in the BVI or the Cayman Islands (as applicable) in order to ensure the legality, validity or enforceability of such security document creating the security interest. However, there is a statutory obligation to record particulars of that security in the company's register of charges.

Aside from particular assets, such as Cayman real estate, Cayman personal chattels, Cayman registered ships and aircraft, there is no central registration system or public register of liens or security interests in the Cayman Islands. However, Cayman Islands exempted companies are required (under section 54 the Companies Act) to maintain an internal register of mortgages and charges at its registered office. This register is not public but it is open to inspection by members and creditors of the company. A potential new lender will not have this right, but will usually request a copy of the register as a pre-condition to closing of the financing. Failure to have a security interest noted on the register mortgages and charges does not render it void or invalid against the exempted company or a liquidator of the exempted company nor does it have any impact on the priority of the security. The exempted company and its directors would however be liable to a fine under the Companies Act. It may be in the interests of a secured party however that the Cayman exempted company comply with the statutory requirements relating to the register of mortgages and charges as the register is open to inspection by creditors. Therefore, creditors who inspect the register could be fixed with actual notice of its contents and such notice may, under the laws of other jurisdictions, be a relevant consideration.

By contrast in the BVI, the BCA does provide a framework for the public registration of particulars of security interests that are granted by BVI business companies (irrespective of the governing law of the underlying security interest), the effect of such registration being to confer priority ranking to the secured party over subsequently registered and unregistered security. As such, to ensure lenders to a BVI business company benefit from priority ranking of their security interest, its particulars should be registered with the Registry of Corporate Affairs in the BVI. This registration is implemented by submitting an application in the approved form to the Registrar of Corporate Affairs in the BVI in accordance with Section 163 of the BCA. This can be done by either the lender or the BVI business company or their respective legal counsel. The BVI business company granting the security interest is also required to enter the particulars of the security interest on an internal register of relevant charges in accordance with Section 162 of the BCA and to maintain a copy of that register at its registered office or the office of its registered agent.

Where security is created over shares in a BVI business company or a Cayman Islands exempted company, it is typical for the company whose shares are being charged to include a notation of the security interest in favour of a lender in its register of members. Although the annotation has no statutory effect in both jurisdictions, it could, potentially, give notice to any third party reviewing the register of members of the security interest. In the BVI, it is also possible for the BVI business company whose shares are being charged to voluntarily file a copy of its annotated register of members with the Registrar of Corporate Affairs in the BVI and to opt to have its annotated register of members publicly accessible (pursuant to section 43A(6) of the BCA). Although a filed annotated register of members in itself has no statutory effect for priority purposes, it could potentially give notice of the security interest to any party carrying out a search against such BVI business company and offer additional comfort to a lender (this additional step is not available in the Cayman Islands).

Stamp duty

Although the Cayman Islands and the BVI are tax neutral jurisdictions, meaning that companies incorporated in these jurisdictions are typically not subject to any domestic tax, both jurisdictions do have a stamp duty regime. Stamp duty is payable on any documents that are executed in the Cayman Islands or that are brought into the Cayman Islands after execution (for enforcement purposes or otherwise). Generally, on international financing transactions, the stamp duty payable on any such documents will be nominal only (although the stamp duty can potentially be onerous if security includes any Cayman located real estate or if security is granted by locally resident entities). As it relates to BVI business companies, the statutory exemption that they otherwise benefit from under the BCA to the provisions of the Stamp Acts of the BVI will not apply to (i) an instrument for the transfer to or by a company of an interest in land situated the BVI; or (ii) transactions in respect to the shares, debt obligations or other securities of a "land owning company" (a company with an interest, direct or indirect, to BVI situs real estate). 

Corporate benefit

Directors of Cayman and BVI companies have duties to act in the best interests of the company. As a result, if a Cayman company proposes to enter into a guarantee or third party security, the corporate benefit to the company ought to be considered. Guarantees or third party security may be construed as not being in the best interests of a company (and not for the company's corporate benefit) if the company receives no commercial benefit from the underlying financing arrangements.

In comparison, for BVI business companies, Section 28(1) of the BCA specifically permits BVI business companies to undertake actions irrespective of corporate benefit, and so, from a statutory perspective, directors of BVI business companies are not obliged to consider the issue of corporate benefit.

Where a Cayman Islands exempted company is guaranteeing or providing security in support of obligations of a subsidiary (downstream guarantee / security) there is a presumption that the guarantee or security will benefit the company, since any benefits accruing to the subsidiary will indirectly benefit the parent. Where the corporate benefit is less clear, such as in circumstances where the guarantee or security is being provided to secure obligations of a parent of the Cayman exempted company (upstream guarantee / security) or a group affiliate (cross-stream guarantee / security), it is recommended that the Cayman exempted company obtains shareholder approval to prevent shareholders subsequently challenging the transaction on the basis of a lack of corporate benefit. However, this may not eliminate the risk of challenge by creditors whose rights are prejudiced, or in the event that the Cayman company is wound up.

In the BVI, the position on guarantees and / or third party security is clearer with an express statutory power for BVI business companies to make guarantees and charge their assets. Section 28(2) of the BCA provides that, subject to its memorandum and articles of association, a BVI business company may "guarantee a liability or obligation of any person and secure any obligations by mortgage, pledge or other charge, or any of its assets for that purpose." There are no guarantee limitations or financial assistance restrictions applicable to BVI business companies, with statutory power and capacity to grant guarantees regardless of corporate benefit.

In slight contrast to the Cayman position on upstream guarantees / security, the BVI offers a statutory solution, with section 120(2) of the BCA providing that a director of a BVI business company that is a wholly-owned subsidiary may, when exercising powers or performing duties as a director (if expressly permitted to do so by the memorandum or articles of the BVI business company) act in a manner which he or she believes is in the best interests of that BVI business company’s parent even though it may not be in the best interests of the BVI business company. This means that when the BVI business company is a wholly owned subsidiary, the directors may act in the best interests of the parent even where that action may not be in the best interests of the BVI business company itself.

In addition, although shareholder approval isn't required for a BVI business company to grant an upstream guarantee / security interest, the giving of a guarantee and / or the granting of a security interest in support of the obligations of the parent or even a sibling affiliate (which has common ownership) may be considered a "distribution" under the BCA or at common law given on the basis that the guarantee and / or security interest may represent in whole or in part a potential gratuitous disposition for the benefit of a member or parent entity of the BVI business company. However, Section 57(1) of the BCA provides that, subject to a BVI business company's memorandum and articles of association, the directors of a BVI business company may, by resolution, authorise a distribution, which might include the giving of a guarantee and/or the granting of a security interest in the circumstances and for the purposes described above, if the BVI business company, immediately after the distribution satisfies a "solvency test". For these purposes, in accordance with Section 56(a) of the BCA, a BVI business company satisfies the solvency test if (a) the value of the BVI business company's assets exceeds its liabilities; and (b) the BVI business company is able to pay its debts as they fall due.

Enforcement

Any default of an obligation owed to a lender by a Cayman or BVI borrower or guarantor, and the remedies available to the lender arising as a result of such default would be a contractual matter pursuant the contract under which the obligation arises. Rights under such a contract may be enforced by action in the Cayman or the BVI courts by enforcement in the Cayman courts or BVI courts of a judgment of a foreign court or a foreign arbitral award, in each case if the obligor is incorporated or registered in the Cayman Islands or incorporated in the BVI courts or has otherwise submitted to the jurisdiction of the Cayman Islands or the BVI courts.

It is common for loan documentation entered into by Cayman and BVI borrowers or guarantors to be governed by foreign law (typically New York law or English law). Provided that the choice of the foreign governing law was made in good faith (i.e. not to avoid the mandatory application of the law of another jurisdiction and is not illegal under any other applicable law) the Cayman and BVI courts will honour the choice of law, and apply the chosen law in any proceedings before it. Note that the relevant provisions of the foreign law would have to be proved as matters of fact (usually by expert evidence). For this reason, it is normally preferable to bring proceedings in the relevant foreign court, and then seek to enforce the foreign judgment in the Cayman Islands or BVI.

The courts of the Cayman Islands will recognize and enforce a foreign judgment of a court of competent jurisdiction, based upon the principle that the foreign judgment imposes upon the judgment debtor an obligation to pay the sum for which judgment has been given. However, the judgment must be final, for a liquidated sum and not obtained in a manner or of a kind the enforcement of which is contrary to Cayman Islands public policy. Whether the foreign court had jurisdiction to give the judgment is determined in accordance with Cayman Islands principles of jurisdiction. However, this will not be an issue where the transaction documents contain an express submission to the jurisdiction of the court that gave the judgment, or if the judgment debtor voluntarily appeared (otherwise than to contest jurisdiction) in the proceedings in which that judgment was given. The typical procedure for enforcement of a foreign judgment is by commencing an action in the courts of the Cayman Islands, with the foreign judgment being the basis for the cause of action, usually founding the basis for a debt claim, and then applying for summary judgment in that action. The Cayman Islands court will not itself inquire into the issues underlying the foreign judgment as the foreign judgment creates a debt enforceable in the Cayman Islands in the circumstances referred to above.

The enforcement approach in the BVI is broadly similar, though with an important distinction depending on the jurisdiction in which the foreign judgment is made. The BVI courts will recognise and enforce a final conclusive monetary foreign judgement against a BVI business company in the relevant courts of certain reciprocating jurisdictions (i.e. those specific jurisdictions covered by the Reciprocal Enforcement of Judgments Act of the BVI, including England and Wales for example) for a definite sum. This may be registered and enforced as a judgment of the BVI court provided that the application is made for registration of the judgment within twelve months of its date or such longer period as the BVI courts may allow, provided that the BVI business company is not appealing and has no right or intention to appeal and the BVI courts consider it just and convenient that the judgment be enforced and provided the judgment:

is not in respect of penalties, fines, taxes or similar fiscal or revenue obligations of the BVI business company;

• is final and for a liquidated sum;

• was not obtained in a fraudulent manner;

• is not of a kind the enforcement of which is contrary to the public policy in the BVI;

• is not contrary to the principles of natural justice; and

• provided that the relevant courts of the reciprocating jurisdiction had jurisdiction in the matter and the BVI business company either submitted to such jurisdiction or was resident or carrying on business within such jurisdiction and was duly served with process.

Although there is no statutory enforcement in the BVI for foreign judgments from those jurisdictions not covered by the Reciprocal Enforcement of Judgments Act (such as the United States for example), the BVI courts will recognise such a foreign judgment and treat it as a cause of action in itself which may be sued upon as a debt at common law so that no retrial of the issues would be necessary if fresh proceedings are brought in the BVI to enforce that judgment, provided that such judgment:

is not in respect of penalties, fines, taxes or similar fiscal or revenue obligations of the BVI business company;

• is final and for a liquidated sum;

• was not obtained in a fraudulent manner;

• is not of a kind the enforcement of which is contrary to the public policy in the BVI;

• is not contrary to the principles of natural justice; and

• provided that the courts of the foreign jurisdiction in the matter and the BVI business company either submitted to such jurisdiction or was resident or carrying on business within such jurisdiction and was duly served with process.

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Disclaimer

This client briefing has been prepared for clients and professional associates of Ogier. The information and expressions of opinion which it contains are not intended to be a comprehensive study or to provide legal advice and should not be treated as a substitute for specific advice concerning individual situations.

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