Secured Lending - taking security over shares of a BVI company

The Business Companies Act (as revised) (the BCA) of the British Virgin Islands (the BVI) provides a comprehensive regime to facilitate cross-border secured lending transactions, particularly with respect to the creation and registration of security interests by a BVI business company (a BVI Company) or the creation of a security interest over the shares of a BVI Company. One of the most common forms of security utilised to support secured lending is a mortgage or a charge over the shares of a BVI Company.

In this article, we review the creation of share security over the shares of a BVI Company.

BCA Principles of Share Security

The BCA provides that a security interest may be created over the issued shares (the Secured Securities) of a BVI Company (the Issuing BVI Company) by way of a mortgage or charge (the Share Security Interest) in favour of a person or entity (the Secured Party). This Share Security Interest must be:

created pursuant to a written security instrument (the Share Security Instrument); and
signed by, or with the authority of, the registered shareholder (the Security Provider) of the Secured Securities to which the Share Security Interest relates.

The BCA makes clear that there is no specified form the Share Security Instrument must take; however, it must clearly indicate the intention to create the Share Security Interest over the Secured Securities and also the amount that is to be secured by the Share Security Interest (i.e. the secured liabilities to which the Share Security Interest relates).

Notwithstanding the position under the BCA as to the form of the security, the most common form of the Share Security Instrument in the BVI is an equitable mortgage or charge, instead of a legal mortgage or charge. Legal shareholdings in a BVI Company are prima facie evidenced by registration on its register of members, and accordingly a Secured Party will typically be reluctant to take security pursuant to a legal mortgage or charge so as to avoid being entered on the register of members as a legal owner of the Secured Securities during the security period.

BCA – Governing Law

The Share Security Instrument may be governed by BVI law or by the laws of a foreign jurisdiction as permitted by the BCA.

BVI Law

The BCA sets out the remedies that a Secured Party will be entitled to in the event the Share Security Instrument is governed by BVI law. These remedies can be pursued without a court order, however they remain subject to any limitations or provisions to the contrary that are contained in the terms of the Share Security Instrument, and include:

the right to sell the Secured Securities;
the right to appoint a receiver who may:
- vote the Secured Securities;
- receive distributions in respect of the Secured Securities; and
- exercise other rights and powers of the Secured Party in respect of the Secured Securities.

The right of foreclosure will also be available to a Secured Party in circumstances where the Share Security Instrument takes the form of an equitable share mortgage, however a court order is required in order to exercise this remedy.

Enforcement

The BCA sets out the timeframes under which these remedies can be taken as a default status but importantly, for Secured Parties, it also provides that the Share Security Instrument can specify that these remedies can be exercised by the Secured Party or its receiver immediately upon an event of default.

Foreign Law

To the extent the Share Security Instrument is not governed by BVI law, secured lending transactions in Asia will often utilise Hong Kong, Singapore or English law to govern the Share Security Instrument. In practice, this will typically follow the governing law of the primary loan documentation.

Where the Share Security Instrument is governed by a foreign law, the BCA provides that:

the Share Security Instrument must be compliant with the requirements of its governing law in order for it to be valid and binding on the Issuing BVI Company;
the remedies available to a Secured Party will be determined by the governing law of the Share Security Instrument creating the Share Security Interest; and
the rights of the Secured Party as a shareholder of the Issuing BVI Company shall continue to be governed by the memorandum and articles of association (the M&A) of the Issuing BVI Company.

Where BVI law is not utilised, parties should be careful to make sure no conflicts of law issues are likely to arise when selecting a foreign law jurisdiction to govern the Share Security Instrument. The secured lending market is comfortable utilising Hong Kong, Singapore or English law for this type of security, noting these are common law jurisdictions similar to the BVI.

Application of Proceeds

The BCA provides that the Share Security Instrument can expressly set out the application of proceeds of the enforcement of the Share Security Instrument. Where this is not specified in the Share Security Instrument (either expressly or by reference to another provision in the primary loan documentation), the application of any such enforcement proceeds will follow the default provisions of the BCA as follows:

firstly, in meeting the costs incurred in enforcing the Share Security Instrument.
secondly, in discharging the sums secured by the Share Security Instrument; and
thirdly, in paying the balance due to the Secured Party.

In practice, the application of proceeds is typically included in the Share Security Instrument either expressly or by reference to the primary loan documentation.

Register of Members of Issuing BVI Company

The BCA provides that the register of members of the Issuing BVI Company can be annotated to reflect the Share Security Interest that has been created over the Secured Securities. This annotation shall include:

a statement that the Secured Securities are subject to a security interest;
the name of the Secured Party; and
the date on which the annotation and the name of the Secured Party have been entered in the register of members of the Issuing BVI Company.

Separately, the BCA [1] also permits a BVI Company’s register of members to be filed with the BVI Registrar of Corporate Affairs (the BVI Registrar). In circumstances where a BVI Company has filed its register of members, it will be bound by the form of the register and must continue to file an up-to-date register each time an update or an amendment to that register of members occurs. The continuing obligation to file an updated register of members remains in place until a BVI Company files a notice electing to cease filing such updates.

Both the annotation and the filing of the register of members are optional steps, however in a secured lending scenario involving a BVI Share Security Interest, the Secured Party will typically require the Issuing BVI Company to attend to such filing following the annotation of the register of members as it will practically put third parties on notice of the Share Security Interest. This obligation will typically be included in a contractually agreed provision of the Share Security Instrument or the conditions subsequent set out in the primary loan documentation.

Consideration for Secured Party – Due Diligence

A potential Secured Party looking to take a BVI Share Security Interest should conduct proper due diligence on that entity in addition to the Security Provider. This will include:

reviewing the M&A of the Issuing BVI Company to ensure there are no restrictions on shareholder(s) granting security over the Secured Securities or other provisions which might hinder effectively granting or enforcing the Share Security Interest. To the extent such restrictions exist (for instance, a right of the director(s) of the Issuing BVI Company to refuse to register a transfer of shares) then the Secured Party may require the Issuing BVI Company to pass a shareholder resolution to amend its M&A to remove such restrictions;
reviewing the register of members of the Issuing BVI Company to determine whether the Security Provider is the legal shareholder and whether such register reflects any prior security interest which has been recorded over the Secured Securities;
conducting company searches on the Security Provider (assuming it is also a BVI Company) to further examine whether the Security Provider has granted any prior security interest over the Secured Securities;
considering whether the Issuing BVI Company should be a party to the Share Security Instrument to obtain certain undertakings with respect to any share transfer upon an enforcement of the Share Security Instrument and the annotation to its register of members (or to ascertain whether this can be achieved through a letter of undertaking); and
considering what events of default will trigger an enforcement under the Share Security Instrument (these can be included in the Share Security Instrument but are typically linked to events of default set out in the primary loan documentation under a secured lending transaction).

Consideration for Secured Party – Stop Notices and Stop Orders

If, during the term of the security period under the Share Security Instrument, the Secured Party is concerned that the Secured Securities may be transferred away from the Security Provider to another third party in breach of the terms of the Share Security Instrument, the Secured Party can apply to the High Court of the British Virgin Islands (the High Court) for a stop notice or a stop order. A stop notice will be issued by the Registrar of the High Court requiring the Issuing BVI Company (or the Security Provider) to refrain from registering any transfer of the Secured Securities (or otherwise dealing with the Secured Securities) for a period of 14 days from notifying the Secured Party of the intention to transfer such shares. A stop order is an order of the High Court which will prohibit the transfer of the Secured Securities or other prejudicial actions relating to the Secured Securities.

Deliverables under Share Security Instrument

Typically, a Share Security Instrument will require the following deliverables from the Security Provider and the Issuer BVI Company.

signed but undated share transfer form in respect of the Secured Securities;
a signed but undated irrevocable proxy and power of attorney in respect of the Secured Securities;
a signed but undated resignation letter from each director of the Issuing BVI Company;
a signed and dated authorisation letter from each director, authorising the Secured Party to date each letter of resignation once an event of default has occurred;
a letter of instruction to the Issuing BVI Company’s registered agent directing the registered agent to, among other things, register the transfer of the Secured Securities following an event of default;
an acknowledgement from the registered agent of the Issuing BVI Company to the Secured Party;
shareholder resolutions of the Security Provider as shareholder of the Issuing BVI Company authorising amendments to the Issuing BVI Company’s memorandum and articles of association;
board resolutions of the Issuing BVI Company authorising its entry into the Share Security Document (to the extent it is a party), the annotation to its register of members and also the transfer of the Secured Securities upon the occurrence of an event of default;
original share certificate(s) in respect of the Secured Securities;
an up-to-date register of members of the Issuing BVI Company annotated to reflect the security created pursuant to the Share Security Instrument; and
an up-to-date annotated register of members of the Issuing BVI Company which has been filed with, and stamped by, the BVI Registrar (if agreed between the parties).

To the extent the Security Provider is a BVI Company, it will need to update its register of charges with the particulars of the security created pursuant to the Share Security Instrument and, to the extent agreed contractually, attend to the filing of the particulars of that security with the BVI Registrar. Further details on the creation of security by a BVI company and the advantages of filing such security with the BVI Registrar can be found in our article: Secured Lending – creating security in the BVI