Five years on from the start of the global financial crisis, there has been an increase in parties seeking legal advice on how security interests can be enforced against debtors or third party security providers in order to safeguard creditors’ financial interests.
Given the predominance of BVI companies within Asian financing structures, it is quite common to find that an equitable share mortgage has been granted over the shares of a BVI Business Company. Where such security has been granted pursuant to a BVI law governed security document, an obvious enforcement option for any secured creditor is likely to be the appointment of a receiver.
Such financing structures are used in a variety of cross-border applications in Asia, for example, where an equitable share mortgage is granted by the owners of a BVI company as security for an equipment loan and a working capital loan advanced by a creditor to the BVI company's trading subsidiary in the PRC. Alternatively, an equitable share mortgage granted by the owners of a group of BVI companies as security for a loan to a BVI company's subsidiary in Hong Kong, for the purposes of developing a large commercial property in Hong Kong.
Whilst other types of security may be available, depending on the nature of the assets of the debtor company it is often the case that the company will have no assets other than the shares it holds in its subsidiaries. For that reason, the most common form of security given by BVI business companies is the equitable share mortgage. In an enforcement scenario, this type of security provides a quick and efficient route for the creditor to gain control of the shares that are the subject of the security.
Equitable mortgages are generally more commonly used than legal mortgages (where the mortgagee becomes the registered holder of the shares for the period of the security.) This is because borrowers are reluctant to give up registered title (with its rights to vote, dividends etc in respect of the shares) prior to any default in respect of the loan. Becoming the registered holder of the mortgaged shares can also cause complications for mortgagee banks, which may be obliged to consolidate the company on their balance sheets under applicable accounting principles.
In typical Asian investment structures where the underlying assets are held in jurisdictions such as Indonesia or China, it can be difficult to enforce local law security over those assets directly and can result in local court involvement leading to significant time delays and costs for the security holder. For that reason it makes better sense to take security over the shares held by a BVI company because this helps to assist the secured creditor to take control of the shares that are subject to the security interest.
Occasionally, we see situations where the BVI company, over whose shares security has been granted, being struck off the register of companies and/or dissolved. Whilst this does not, of itself, create a bar to enforcement, steps may need to be taken by the creditor to restore the company to the register before the security can be enforced.
Where a secured creditor holds an equitable share charge it must first perfect title to the shares that are the subject of the security. This typically involves using the suite of documents that are annexed to the share charge to appoint a sole director over the mortgagor who then liaises with the mortgagor's registered agent in the BVI to update the original register of directors.
The secured creditor then dates an instrument of transfer in respect of the shares that are subject to the mortgage and the new director passes a written resolution to (i) approve the transfer of the shares to its nominated shareholder; and (ii) update the mortgagor's register of members.
The registered agent should then update the register of directors and the register of members and deliver copies to the mortgagee or its nominee. If the registered agent's client of record is uncooperative and refuses to instruct the registered agent to update the register of members (which happens infrequently), it may become necessary to make a short application to the BVI Commercial Court for an order rectifying the register of members. That application would typically be listed between two to four weeks after the Notice of Application and supporting evidence were filed with the Court Registry.
It is usual to see the power to appoint a receiver expressly set out in the share mortgage, and, in such circumstances, the powers of the receiver are derived from the terms of that security document as well by statute. Where the ability to appoint a receiver is not provided for in the share mortgage, it is possible to apply for a court order appointing a receiver. However, the BVI court will generally only appoint a receiver where the power to appoint a receiver under the share mortgage is insufficient or where the BVI court is satisfied that the mortgaged shares are in jeopardy. Further, the powers that the BVI court is prepared to grant to a receiver (acting as an officer of the court) are ordinarily restricted to securing and protecting the mortgaged shares.
It should be noted that there is statutory requirement for receivers to file a notice of their appointment with the Registrar of Corporate Affairs in the British Virgin Islands.
The primary duty of a receiver is to exercise his powers in good faith, for a proper purpose, and in a manner he reasonably believes to be in the best interest of the person in whose interest he was appointed. Further, and to the extent consistent with this primary duty, the receiver must exercise his powers with reasonable regard to the interests of certain third parties (including, but not limited to, any other creditors). The company and every officer of the company owes a statutory duty: (i) to make the books and records and other information relating to the assets of the company available to the receiver; (ii) if required by the receiver, to verify that such information is complete and correct; and (iii) to give the receiver such assistance as he may reasonably require.
Unless the share mortgage expressly provides otherwise, the receiver is deemed to be the agent of the security provider. The receiver is not obliged by statute to exercise any power of sale and realise the mortgaged shares within any defined time period following his appointment. However, if and when the receiver does decide to exercise a power of sale over the mortgaged shares, he must take steps to obtain the best price reasonably obtainable for those shares at the time that he decides to sell.
The terms of a receiver’s remuneration, including any indemnity given by the appointing secured creditor, will usually be governed by the share mortgage and the instrument of appointment. Typically such remuneration is paid from the realisation of the secured property, in priority to any distributions to the secured creditor.
Any defect in the form of the appointment or relating to the validity of the security document itself, may render the appointment invalid. Where the appointment is invalid, the BVI Court may, if satisfied that the receiver acted honestly and reasonably, order the secured creditor who appointed the receiver to indemnify the receiver against any liability arising from the invalidity of his appointment.
Robert Foote Senior Counsel
Faye Griffiths Associate
Walkers Bermuda, British Virgin Islands, Cayman Islands, Dubai, Guernsey, Hong Kong, Ireland, Jersey, London and Singapore.