British Virgin Islands ("BVI") companies frequently feature as obligors in guaranteed and secured financings. Lenders take particular comfort in the validity of the acts of BVI companies irrespective of corporate benefit, the ability of directors in certain circumstances to act in the best interests of a parent company, (for example when giving subsidiary guarantees for the obligations of the borrower parent), the statutory priority regime for publicly registered security in BVI, and the modern creditor friendly insolvency laws.
The underlying obligations that have been guaranteed and/or secured by the BVI company will often be the subject of amendments, particularly as debt restructuring and refinancings continue to play a significant role in modern commercial life. This article examines some issues to consider when dealing with amendments to the underlying debt in the BVI context.
Amendments to guaranteed debt
A standalone guarantee will invariably be drafted as a guarantee and indemnity, thus creating a primary obligation independent of the underlying guaranteed obligations. However, any number of commercial documents contain a form of guarantee which creates only a secondary obligation, dependent on and subsidiary to a principal obligation of the underlying obligor. Any amendment to the primary underlying contract, after the giving of a guarantee and without the guarantor’s consent, will discharge liability under the guarantee. The construction of a document as a guarantee or an indemnity will depend on the actual words in which the promise was expressed. A pure guarantee is an obligation to "see to it" that the primary obligor will perform its obligations. Most guarantees will contain protective provisions to guard against an unwitting discharge resulting from an amendment to the underlying obligations, but care in the drafting must be taken, particularly where the form of guarantee wording is embedded in a commercial contract.
An all monies guarantee will be enforceable against the guarantor where the underlying contract is amended or extended without the consent of the guarantor. The Court of Appeal in England, whose judgments are persuasive in the BVI courts, confirmed inNational Merchant Buying Society Limited v Bellamy and Mallet (2013) that, provided the course of dealing between the principal debtor and the beneficiary of the guarantee remains within the scope of that contemplated by the guarantee, the details of the manner of dealing as between the principal debtor and the beneficiary are of no concern to the guarantor.
Of course, guarantees create personal contractual rights. What of amendments to obligations benefiting from in rem security rights?
Amendments to secured debt
The lender and its advisers must consider the impact on security when the secured debt is amended, and decide whether new security should be taken. Does the amendment leave the lender unsecured as regards the amended indebtedness? This will depend on whether, on a proper construction of the original security, the parties intended the original security to cover the amended indebtedness. This is a question of their intent at the time the original security was entered into, based on the ordinary principles of contractual construction. If the amended debts falls outside the scope of what was originally intended to be secured, new security will need to be taken. This will sometimes be by way of amendment to the original security document(s), but the effect of such an amendment will be that new security rights are created and the new hardening periods referred to below will apply nonetheless.
Security documentation will invariably contain interpretation clauses stating that the security covers the facility "as amended". When construing the scope of the original security in the context of such boilerplate clauses, the Courts will consider whether the amended facility was expressly contemplated and within the general purview of the original agreement. The Court of Appeal in Triodos Bank NV v Ashley Charles Dobbs(2005) decided that, if the amended facility was substantially more onerous than the original loan agreement, the increase would not be covered by the original guarantee. In practice the extent of an increase in the facility amount, the addition of a tranche, or the extension of the repayment profile must be considered against the deal as originally contemplated by the parties.
Where new security is created by a BVI company over the facility as amended, then a notice of variation of a registered charge must be filed at the BVI Registry of Corporate Affairs (assuming that the original security was registered. If it was not, a registration should now be made). For the reasons set out below, the existing security will be left in place, continuing to secure the original indebtedness.
As with all monies guarantees, security which is intended to cover "all monies" owed to the lender will continue to secure all amended indebtedness.
Implications of creating new security: voidable/vulnerable transactions
In the event of the insolvency of a BVI company, the rights of a secured lender may be affected by certain hardening or "vulnerability" periods under the BVI Insolvency Act, 2003.
Unfair Preferences: Under section 245 of the Insolvency Act a transaction entered into by a BVI company, at a time when the company is insolvent, or which causes the company to become insolvent ("an insolvency transaction"), and which has the effect of putting the creditor in a better position than it would have been in the insolvent liquidation of the company, will be deemed an unfair preference and void if within six months (or two years in the case of a transaction with a connected person) a petition is presented to the courts for the winding-up of the company. A transaction is not an unfair preference if it took place in the ordinary course of business. This provision applies regardless of whether the payment or transfer is made for value or at an undervalue, and there is no need to demonstrate an intent to prefer the creditor.
Undervalue Transactions: Under section 246 of the Insolvency Act the making of a gift or the entering into of a transaction for no consideration or where the value of the consideration for the transaction, in money or money's worth, is significantly less than the value in money or money's worth, of the consideration provided by the company will (if it is an insolvency transaction) be deemed an undervalue transaction and void if within six months (or two years in the case of a connected person) a petition is presented to the courts for the winding-up of the company. A company does not enter into a transaction at undervalue if it is entered into in good faith and for the purposes of business and, if at the time it was entered into, there were reasonable grounds for believing it would benefit the company.
Voidable Floating Charges: Under section 247 of the Insolvency Act the creation by a BVI company of a floating charge is voidable if it is an insolvency transaction and takes place within six months (or two years in the case of a connected person) of a petition being presented to the courts for the winding-up of the company. A floating charge is not voidable to the extent that it secures, amongst other things: money advanced or paid to the company, or at its direction, at the same time as, or after, the creation of the charge; or the value of assets sold or supplied, or services supplied, to the company at the same time as, or after, the creation of the charge.
The implications of failing to take new security, and the potential hardening periods for new security must be well understood.