The British Virgin Islands (BVI) is well known as a jurisdiction of choice for company law due to its corporate flexibility, transactional certainty and protection for third parties dealing with BVI business companies.
But for one BVI corporate vehicle, the Restricted Purposes Company (RPC), these principles are reversed: transactions can be set aside for lack of authority, capacity or power and owners and managers can be restricted in the transactions they carry out. Also, an RPC's annual licence fee of US$5,000 is far higher than a standard BVI company's annual licence fee of US$3501.
So who would want to use an RPC and what were the draftsmen of the BVI Business Companies Act trying to achieve in this seeming deviation from their much admired (and emulated) approach to corporate legislation?
The answer lies in structured finance, which the BVI is a popular jurisdiction for. Structured finance has a need for insolvency or bankruptcy remote companies that can only enter into a specific transaction. The RPC was created to cater to this sophisticated market, and has been the vehicle of choice for high profile transactions including Danone SA's US$613 million notes issue (which Harneys advised on), CEMEX's US$1.5 billion financing, and Dong Feng's US$359 million securitisations.
This article outlines the main features and uses of RPCs.
What are the advantages of using an RPC?
While conventional BVI companies can be and often are used as structured finance vehicles, RPCs are more attractive as they are considered to be truly insolvency or bankruptcy remote, which is required of issuers by rating agencies. To be truly insolvency or bankruptcy remote, a company must not be able to enter into any activities other than those in connection with the specific transaction.
A conventional BVI company could contractually limit its powers to enter into other transactions, but a breach of these restrictions would not invalidate the transaction against third parties1 in the same way as it would for a transaction outside the purposes of an RPC. Rather, it would result in a default and claim for damages against the company, which is not as effective protection for creditors of the company (including noteholders).
RPCs are also used in financings which need quasi-security, for example where security cannot be granted over an asset such as shares in a joint venture company or a limited partnership interest in a fund. If such an asset is held by an RPC whose purpose is limited to holding that asset and incurring liabilities to a specific creditor, then that creditor has the added assurance that any competing claims to that asset incurred by the RPC would be invalid.
What are the key requirements of an RPC?
- An RPC can only lawfully undertake activities within or in connection with its stated purposes.
- The RPC's memorandum must state the purposes of the company, may state that it is a restricted purposes company, and the company's certificate of incorporation shall state that it is a restricted purposes company.
- An RPC's name must end "(SPV) Limited" or "(SPV) Ltd", so identifying it as a restricted purposes company.
- Third parties are deemed to have notice of an RPC's restricted purpose, and capacity and any transaction which is not within or in connection with the purposes of an RPC is void.
Foreign law considerations
BVI companies are usually involved in transactions with foreign governing law documents (most commonly English or New York law) and hold assets located outside the BVI, so consideration should be given to whether the restricted purposes of an RPC would be recognised by the applicable foreign jurisdiction(s). Under the conflict of law rules in the BVI, a transaction entered into in breach of an RPC's purpose would be void and unenforceable and broadly speaking a foreign judgement where such a transaction was valid would not be enforceable in the BVI.
RPCs offer certain advantages and are a valuable facet to the BVI's offerings to international finance. While they are intentionally a relatively niche and specialised product, they have proven that there does remain a place in the modern legal world for the more traditional principles of common law, such as restricted purposes and constructive notice.