Timely change in the BVI - amendments to the BVI Business Companies Act 2004
British Virgin Islands (BVI) companies are among the most popular offshore holding structures in the world, and are popular throughout Asia-Pacific in particular. One common structure is to set up a Cayman Islands company as part of a typical red chip structure as a proposed listing vehicle and to set up multi-layered BVI companies as special purpose investment vehicles above and below the equity structure of the Cayman Islands vehicle in connection with an initial public offering (IPO) in Hong Kong.
BVI companies are also commonly used by venture capital and private equity investors in private equity transactions for joint ventures, downstream acquisitions and pre-IPO equity financing, as the BVI is a popular jurisdiction due to the jurisdiction being more cost efficient, and in some respects more flexible, than most other offshore jurisdictions, whilst also having all the usual. Given the prevalent use of BVI companies in typical transaction structures, Hong Kong lawyers may benefit from keeping pace of the latest legal and regulatory developments in the BVI when advising their clients.
In early 2023, various changes to the BVI Business Companies Act came into effect. Collectively, these changes are the most far-reaching and significant updates in some time, perhaps since the BVI Business Companies Act itself came into effect. The amending legislation consists of the BVI Business Companies (Amendment) Act, 2022 and the BVI Business Companies (Amendment) Regulations, 2022, both of which became effective on 1 January 2023.
The key changes can be summarised as:
- Disclosure and transparency: the names of current directors of BVI companies can now be obtained via a company search or physically attending the offices of the relevant regulator in the BVI. The legislation also includes a framework for the potential future introduction of a register of significant controllers.
- Financial returns: For the first time, BVI companies will be required to provide some financial information to their registered agent on an annual basis. This is expected to consist of a simple balance sheet and profit and loss statement. Such financial return will not be publicly available nor publicly filed. Limited exceptions, as discussed below, apply.
- Striking off, dissolution, and restoration: Companies which are struck off the Register of Companies (the Register) for any reason are now dissolved immediately (subject to certain transitional provisions expiring in June). There are significant changes in the process of restoring a struck-off and dissolved companies.
- Liquidations: There have been changes to the rules around who can act as a liquidator of a BVI company, and what documents and records a liquidator is required to obtain and retain.
- Continuations: The process by which a BVI company may migrate to another jurisdiction has been amended to provide additional protections for creditors and shareholders.
The names of the current directors of a BVI company can now be obtained through an online system, or in person at the offices of the Registry of Corporate Affairs (the Registry). The Registry charges a fee for providing such list, and such information is not automatically provided as part of a “standard” company search. Searches must be run against a specific company, rather than the name of a director.
Since 2016, companies have been required to file a full register of directors on a non-public basis. This full register remains unavailable in a public search (unless the company has voluntarily elected for it to be disclosed, which is rare). This means that directors’ personal information such as date of birth and residential or correspondence address, as well as the names of former directors, are protected. The Financial Services Commission (FSC) extracts publicly available names from these previously filed registers. Entities that do not update their registers in a timely manner following a change or do not comply with their existing obligations) should take care to rectify the position as soon as possible.
Due to the potential delay between the occurrence of a change and the update of the online record, there is a clear risk of relying solely on the list of directors obtained from the Registry. The company’s private register (which, by statute, is prima facie evidence of the information contained) remains the more definitive document.
Registers of persons with significant control
The amendments also include a primary legislative framework by which the BVI may introduce a public register of persons with significant control in the future.
As and when introduced, the Government may prescribe by regulation the requirements for the maintenance and format of such registers. It also provides that such regulations may contain exemptions for publicly listed companies or companies with equivalent disclosure and transparency obligations. It further provides that the regulations may restrict access to the registers in relation to any person where it is in the public interest, where compliance with data protection laws is required, where a person is protected from specific risks, or where a person is a child or otherwise lacks legal capacity.
The BVI government, in a common position with the other British Overseas Territories and Crown Dependencies, had previously committed to introducing such a register by the end of 2023, subject to certain reservations. In a judgment dated 22 November 2022, the European Court of Justice has decided that open public access to the beneficial owner registers of European Union member state companies is not valid under European law, as it is in contravention of articles 7 and 8 of the Charter of Fundamental Rights of the European Union. Although the decision has no legal bearing on the BVI, it remains to be seen what impact this recent ruling will have on the timetable and politics around this issue.
Financial records and accounts
For some time, all BVI companies have been required to maintain records and underlying documents which (a) are sufficient to show and explain the company’s transactions, and (b) are reasonably accurate at all times in determining the company’s financial position. These requirements remain in effect. These records may be kept at the registered office of the company in the BVI, or at such other place as may be notified to the registered agent.
It is important to note that the information filed with the registered agent will not be filed with any regulator or BVI government authority, nor will it be made publicly available. The registered agent will need to provide the information to a regulatory body if it receives a request which is within the scope of that body’s investigative powers and existing information exchange agreements.
However, subject to limited exceptions, BVI companies are now required to provide certain financial information to their registered agent on an annual basis in the form of an annual return (although, in practice, the first filings will not be due until 2024). Further details, including the form of return, are due to be set out in supplementary regulations, which are expected to be published shortly.
Based on public statements from the regulator and the draft regulations published during the consultation process, we expect the final annual return to consist of a relatively simple balance sheet and profit and loss statement. There is no requirement that the return be audited or based on audited financials, either locally or otherwise, and companies should be free to use whatever accounting policies they currently use.
The annual return will need to be filed within nine months of the end of an entity’s financial year (which we expect will not necessarily need to be a calendar year). The registered agent will have an obligation to inform the regulator if it has not received the annual return within 30 days of the due date. Companies that fail to file in a timely manner will be subject to fines up to a maximum aggregate amount of US$5,000. Where a company has accrued the maximum fine and still fails to file its return, it may be struck off.
There is an exception to the requirement to file an annual return for companies listed on recognised exchanges (on the basis that these companies are already subject to comprehensive financial disclosure regimes). There are also exceptions for companies that already provide information to BVI authorities. This will benefit entities which have a regulated status in the BVI and which provide financial statements to the FSC in such capacity. Those companies which file annual returns with the BVI’s Internal Revenue Department (such as entities operating locally) also benefit from an exception.
Strike-off and dissolution
Under both the new and old regimes, BVI companies may be struck off the Register in a number of different circumstances. In practice, failure to pay the annual government licencing fees is the most common ground.
Under the old regime, once struck off a company existed in a sort of limbo. The company’s existence would not formally end for seven years, but the company (and its directors, members, and any liquidator or receiver) were broadly prohibited from taking any action with respect to the company, other than taking steps to restore it to the Register. A struck company could generally be restored at any time by paying any accrued fees and penalties, provided it also rectified any other defect in its compliance with law (such as appointing a new registered agent in the event of the resignation of the old one). If not restored prior to the end of the seven-year period, the company was dissolved.
Under the new regime, any struck-off company is dissolved immediately. Brief transitional arrangements apply to companies that were already in a struck-off or dissolved state on 1 January 2023.
It would be advisable to any person who owns a company that has been struck off and/or dissolved which still holds assets or business operations to take action to bring the company back into good standing as soon as possible.
Restoration of Dissolved Companies
The process of restoration has changed significantly for companies in dissolution.
As discussed further below, there will remain a route by which a company may seek restoration via the courts in the BVI, but for the first time, there is a method of obtaining an out-of-court restoration of a dissolved company. To go down this route, companies must apply to the Registry within five years of the date of dissolution. The transitional arrangements will apply to companies which are currently in a struck-off state so that they will be able to apply to the Registry until 1 July 2023, unless the seven-year period since their strike-off date expires earlier.
There are several mandatory conditions for utilising the out-of-court process, including that:
- the company must have been carrying on business or in operation on the date of its striking off and dissolution;
- a licensed person must have agreed to act as registered agent of the company, and must make a declaration that it has updated and maintain all of the company’s information that a registered agent is required to maintain;
- the company has paid the restoration fee and any outstanding penalties in relation to the company; and
- the Registrar is satisfied that it would be fair and reasonable for the company to be restored to the Register.
The Court may order restoration in a wider set of circumstances. The Court may exercise its power if:
- the company was struck off the Register and dissolved following the completion of its solvent or insolvent liquidation;
- the company was not carrying on business or in operation on the date of dissolution;
- the purpose of restoration is to (i) initiate, continue or discontinue legal proceedings in the name of or against the company; or (ii) to apply for property that has vested in the Crown bona vacantia to be returned to the company (subject to a similar requirement for consent as discussed above); or
- in any other circumstance where the Court considers that, having regard to any particular circumstances, it is just and fair to restore the company to the Register.
The Court may (but is not obliged to) order that the restoration be subject to a licenced person making a declaration in the same format as that required for restoration by the Registrar.
Regardless of which route of restoration is taken, a restored company is deemed never to have been struck off the Register or dissolved.
A person wishing to act as a liquidator of a BVI company must now satisfy a residency requirement. To qualify, an individual must have physically lived in the BVI for at least 180 days, either continuously or cumulatively, prior to their appointment. It is not entirely clear from the legislation whether this 180 days is assessed by reference to a specific period of time.
Given the potential foreign language or time zone benefits of having a liquidator in location of the company’s principal operations or business, a joint liquidators may also be appointed where only one person meets the residency test.
Liquidators are now also be required to take additional steps to obtain accounting records prior to the commencement of liquidation and to provide copies of all documentation they receive to the registered agent of the company being wound up.
Companies wishing to continue their corporate existence outside the BVI must now give advance notice of their intention to depart, by placing an advertisement in the BVI Gazette. They must also give advance notice to the shareholders and creditors. In practice, many BVI companies have no creditors and many continuations are approved by the sole shareholder. While this will result in some minor delays continuations, the additional protection for creditors and members is widely welcomed.
The BVI has always taken its international obligations seriously and remains fully committed to its role at the forefront of combatting financial crime in all forms. The latest round of legislative amendments demonstrates its determination to align with international best practices and to ensure the effective and efficient exchange of information. After these changes, we envisage that the BVI continues to be one of the most attractive offshore jurisdictions in the world for investment vehicles, as the key advantages and benefits of using BVI structures remain, including but not limited to tax neutrality, corporate flexibility, stability and reliability, confidentiality and low set up cost.
This article first appeared in the February 2023 issue of the Hong Kong Lawyer, the official journal of The Law Society of Hong Kong.