Ashley Davies offers a practical guide to secured financing in Asia using a BVI or Cayman Islands company.
In recent years lenders in Asia have been increasingly involved in financial transactions which involve Cayman Islands and/or British Virgin Islands ‘offshore’ companies. The entities most frequently used are the ‘BVI Business Company’, incorporated under the BVI Business Companies Act 2004, as amended (the BVI Act), and the Cayman ‘exempted company‘, incorporated under the Cayman Companies Law (2009 Revision), as amended (the Cayman Act).
In Asia, these companies are often used as listing and holding companies in secured financings. For example, a common structure would be a Cayman company listed in Hong Kong and owning a number of BVI companies, which in turn own Hong Kong and/or PRC incorporated companies. The PRC companies would then own the relevant PRC assets. Lenders would provide a loan facility to one or more of the BVI companies and take security at both the PRC onshore level and the Cayman/BVI/Hong Kong offshore levels.
In a secured financing context, a BVI or Cayman company is often asked to grant security to a security agent or trustee for the benefit of the lenders as part of the security package. The security package may include one or more of the following: a security agreement over all the assets and undertaking of the offshore company, an account charge, a share mortgage or charge over the shares the offshore company holds in its subsidiaries, and assignments by way of security over its book debts or contractual rights. Where there are concerns over the practical or legal feasibility of enforcement of security over assets located in a particular Asian jurisdiction, for example China, security over the assets of the BVI or Cayman company is seen as a key additional protection for lenders.
A BVI or Cayman company may also often find itself the subject of security where its parent has granted security over the shares it owns in such a company.
The taking of security involving these companies and/or over their shares raises a number of issues for lenders and their counsel. This article seeks to explore some of the key points that transaction parties should be aware of when taking security that involves BVI or Cayman companies.
Preparing and Executing the Documentation
As a first step, the lenders will decide upon an appropriate security package in consultation with their legal advisors. The security documents will usually be drafted by an international law firm acting as transaction counsel to the lenders. The provisions of the security documents will nonetheless need to be supplemented by comments from a law firm practising BVI and Cayman law to make sure that all the appropriate protections are included (eg, undertakings as to registration of the security) and that the documents would be considered by a court as valid and binding on the company as a matter of the laws of BVI or Cayman, as applicable. However, in certain cases some of the security documents would be drafted by the offshore law firm. For example, in the case of a share charge or share mortgage over a Cayman company, the governing law will often – although not always – be Cayman, and thus a Cayman law firm would typically be asked to prepare the document.
Once the security documents have been prepared, care should be taken to ensure that they do not infringe the relevant company's constitutional documents or other third party agreements. On signing, the relevant execution formalities must be in compliance with the relevant company's memorandum and articles of association. Prior to any funding, lenders should also request their offshore counsel to carry out a court search to check whether any actions, suits or proceedings are pending against the relevant offshore companies.
Note that the memorandum and articles of association of a BVI company must be registered with the BVI Registrar of Corporate Affairs before it becomes effective. The memorandum and articles of association are publicly searchable and it is possible to obtain a copy from the Registrar of Corporate Affairs. Lenders should instruct their BVI counsel to do this to ensure that they are reviewing the duly registered memorandum and articles of association. In contrast, unlike in many jurisdictions, the memorandum and articles of association of a Cayman company are not publicly searchable, although they are filed with the Cayman Registrar of Companies. Accordingly, it is important to obtain a certified copy of the originals from the registered office of the company well before closing for review.
Following execution of the security documents, lenders will want to ensure that their security package is registered appropriately. Both the BVI and Cayman security registration regimes feature significant differences from those of other common law jurisdictions which lenders will need to bear in mind. For example, unlike many jurisdictions there are no statutory time limits in either BVI or Cayman within which registration of security has to take place on either a public or private register to avoid being void against a liquidator or creditor (although it is clearly prudent for lenders to ensure their security is registered as soon as possible so that other potential creditors who search the register are put on notice). Another difference in comparison to many jurisdictions is that there is no requirement in either BVI or Cayman to file an original of the security document itself with the registered office or any public register.
Some other features specific to the two jurisdictions are as follows:
(a) create and maintain an internal register of charges in accordance with Section 162 of the BVI Act;
(b) enter particulars as required by the BVI Act of the security interests created pursuant to the relevant security document in the register of charges and provide the lenders with a certified true copy of the updated register of charges;
(c) effect public registration of the security document with the Registrar of Corporate Affairs pursuant to Section 163 of the BVI Act by making the required filing in the approved form with the Registrar of Corporate Affairs (particulars will subsequently appear on the register of registered charges which is maintained by the Registrar of Corporate Affairs and constitute constructive notice of the existence of the security to third parties); and
(d) deliver to the lenders the certificate of registration of charge issued by the Registrar of Corporate Affairs (this evidences that the requirements of the BVI Act as to registration have been complied with) and the filed stamped copy of the application containing the relevant particulars of charge.
If a security document is registered as described in (b) and (c) above, then generally (and subject to certain exceptions, some of which are discussed below) as a matter of BVI law it will have priority over security interests which are subsequently registered on the register of registered charges in respect of the same secured property. However, the priority of security as a matter of BVI law is subject to a number of factors, in particular:
The Cayman register of charges is not a publicly filed register, although under the Cayman Act it is open to inspection by creditors and members at all reasonable times. Unlike BVI, no statutory priority is afforded to the security holder by ensuring its security is registered, however it does put third parties on actual notice of the existence of the security if they search the register (and many potential lenders would routinely do so as part of their due diligence).
lt;span style="font-size: 14px;">The table below summarises some of the main points of difference between the general BVI and Cayman registration regimes. Note that other specialist registers and considerations may also apply (for example in the context of aircraft or shipping financings) which are beyond the scope of this article.
Compulsory private and optional public registration of charges by security provider possible
Compulsory private registration only
Statutory priority regime afforded in respect of publicly registered security
No statutory priority regime
Optional private and public annotation of register of members possible where security taken over shares
Optional private annotation of register of members only
Registrar of Corporate Affairs will issue a "certificate of registration of charge" in respect of publicly registered security
Statutory procedures for public registrations of discharge and variation of security
Only internal register of charges is amended
Annotation of Register of Members
Where there is a share charge or mortgage taken over shares in the BVI or Cayman company itself, it is also common practice to enter a notation on the register of members of the company to the effect that the shares are secured in favour of the lenders. Note, however, that unlike in the British Virgin Islands, a copy of such annotated register of members cannot be publicly filed in Cayman.
Amendments to the Memorandum and Articles of Association
Yet another way of enhancing the protection afforded to the lenders is to require the BVI or Cayman company whose shares are the subject of a share charge or mortgage to amend its constitutional documents. Counsel for the lender would often require, for example, that the company amend its memorandum and articles of association to require registration by the board of directors of the company of any transfer of the charged shares pursuant to the share charge, as otherwise the board of directors might refuse to do so. Other provisions that could be inserted in the memorandum and articles include that no transfer of the charged shares be registered without the lender's consent and the removal or disapplication of lien, call and forfeiture provisions in respect of the charged shares. In the BVI, this amended and restated memorandum and articles would need to be publicly filed with the Registrar of Corporate Affairs and would be publicly searchable by third parties. In Cayman, however, although the amended and restated memorandum and articles of association would be filed with the Cayman Registrar of Companies, there is no option to place the memorandum and articles on a publicly searchable register.
Both Cayman and BVI companies can grant effective security in favour of lenders and such security is increasingly common in the Asian market, particularly where there are concerns about the effectiveness of enforcing security granted by other companies in the security structure. However, it is important that the correct documents are used and that the necessary registrations are made to protect the lenders' position. There are many similarities but also many differences between the laws of Cayman or BVI and other common law jurisdictions. Lenders and their counsel would be unwise to ignore these differences when embarking on financing transactions involving such offshore companies.
Ashley Davies is an associate in Walkers' Hong Kong office. He advises on Cayman Islands and BVI law in relation to real estate finance, construction finance, structured finance, acquisition finance, syndicated loans, private equity and general corporate transactions.
Bermuda, British Virgin Islands, Cayman Islands, Dubai, Guernsey, Hong Kong, Ireland, Jersey, London and Singapore.