The provisions relating to incorporation, corporate constitution, corporate capacity and internal management under the BVI Business Companies Act, 2004 (as amended,1 the Companies Act) follow the traditional model for British Virgin Islands companies, but with certain important differences. The most striking of these is that the memorandum is not required to contain an objects clause (save in the case of restricted purposes companies2). Subject to any restrictions in the Companies Act or its memorandum of association (memorandum) or articles of association (articles), a company has full capacity to carry on any business, do any act or enter into any transaction.3
- Procedure for incorporation
To incorporate a company the memorandum and articles are signed by the company’s first registered agent as incorporator and are filed with the Registrar of Corporate Affairs (the Registrar),4 together with the registered agent’s consent to act (in the approved form5) and any other documents that may be prescribed.6 In the case of segregated portfolio companies, the written approval of the Financial Services Commission must also be filed.7
The application for incorporation can only be filed by the proposed registered agent and the Registrar will not accept an application from any other person.8
If the Registrar is satisfied that the provisions of the Companies Act have been complied with, he will register the documents,9 allot a unique number to the company10 and issue a certificate of incorporation.11 The company is incorporated from the date specified in the certificate.12 If the company is a restricted purposes company, the certificate of incorporation will state this.13
Upon incorporation a company has no members or directors; the registered agent does not become either a director or a member of the company, but has only the power to appoint the first directors. This power must be exercised within six months of incorporation.14
A company must at all times have one or more members (except for the period from incorporation to the appointment of the first directors).15 Generally, there are no adverse consequences for a company without members. However, if a company has no members any person doing business in the name of or on behalf of the company is personally liable for payment of all debts of the company contracted during that time.16
- Effect of incorporation
From incorporation a company exists as an entity with separate legal personality.17 A company is a distinct legal person in its own right separate from its members and continues in existence until it is dissolved.18 Therefore, subject to the Companies Act and the Insolvency Act, 2003, the debts and liabilities of the company are its own and not those of its members.
- Memorandum and Articles
The corporate constitution of the company comprises its memorandum and articles and, together with the Companies Act, they regulate the relationship between the company, its members and its directors. The Companies Act prescribes certain compulsory matters that must be stated in the memorandum and allows the company to deal with other matters in the memorandum or articles as it so wishes.
4.1 Compulsory matters that must be stated in the memorandum
The memorandum must include:
- the name of the company;19
- its type, for example, company limited by shares, company limited by guarantee, etc.;20
- the address of its first registered office;21 and
- the name of its first registered agent.22 Other matters which must be stated relate to the type of company and are discussed in more detail in the Guide on Types of Companies under the BVI Business Companies Act, 2004.
4.2 No objects clause
There is no need for an objects or purposes clause in the memorandum.23 Subject to its memorandum and articles, a company has full capacity to carry on any business or activity, do any act or enter into any transaction.24 A company may limit its purposes, capacity or powers if it so wishes in its memorandum or its articles.25
4.3 No authorised share capital
There is no concept of authorised capital (or indeed of share capital in general) under the Companies Act. Therefore there is no need to state the authorised capital or the currency in which shares are to be issued. The maximum number of shares that the company is authorised to issue or that the company is authorised to issue an unlimited number of shares must, however, be reference in the memorandum.26 In addition, if the company is authorised to issue shares of more than one class, the classes of shares together with the rights, privileges, restrictions and conditions attaching to each class must also be stated.27
The following points should be noted with respect to companies which may issue shares. First, if the company is prohibited by the Companies Act or any other enactment from issuing bearer shares or exchanging or converting registered shares to bearer shares (such as a segregated portfolio company),28 the memorandum must state this.29 Second, in any other case, the memorandum must state whether the company is or is not authorised to issue bearer shares and exchange or convert registered shares to bearer shares.30
- Effect of the memorandum and articles
The Companies Act sets out the generally accepted view in most common law countries that the memorandum and articles constitute a statutory contract between the company and its members in respect of the members’ rights and liabilities as such,31 and that they are binding as between the members inter se.32 The memorandum and articles are binding as between the company and each member and as between the members themselves.33 However, by deviating from the traditional wording commonly found in Commonwealth companies’ legislation, the Companies Act does raise certain issues.
- Common law cases have not gone so far as to say that the memorandum and articles are a contract between members inter se. However, if the wording in the Companies Act is interpreted as going that far, would that mean that a member has a direct cause of action against another member or the company for breach of the memorandum or articles which he can prosecute in his own name, even if the wrong could have been cured by a vote of the members? If so, it would go further than the present common law which provides that normally only the company can proceed against a member for such breaches.34 It would extend the scope of the exception to the rule in Foss v Harbottle35 which exception provides that a member can sue in respect of his own personal rights.
- Is the statutory contract under the Companies Act only in respect of matters affecting members qua members, or is it wider, so that a member can enforce against the company or another member rights other than those relating to his membership rights, for example, rights granted to a member in his capacity as a director?36
- The Companies Act does not make any provision for the company and each member to have been deemed to execute the memorandum and articles under seal. Accordingly, any action brought for breach would have a limited period under the Limitation Act, 1961 of 6 years rather than the 12 years which would normally apply to documents executed under seal.37
- Amendment of memorandum or articles
Members have a general right to amend the memorandum or articles by a members’ resolution.38 The ability to amend can be restricted, for example:
- by providing in the memorandum that specified provisions of the memorandum or the articles may not be amended;39
- requiring a greater majority than simply in excess of 50% to amend the memorandum or articles or specified provisions in either;40 or
- providing that certain provisions may only be amended if specified conditions are met.41
However, there are two exceptions to these: First, in the case of a company other than a restricted purposes company, the ability to impose restrictions on amendments does not apply to any provision that restricts the purposes of the company,42 the intention being that members should be able to remove such restrictions by majority vote. Second, as regards restricted purposes companies, the statement that the company is a restricted purposes company cannot be modified or deleted by an amendment43 (although the purposes may be so amended, subject to the memorandum44).
The directors may also amend the memorandum or articles if authorised by the memorandum to do so.45 However, notwithstanding anything in the memorandum or articles, directors do not have the power to amend the memorandum or articles:
- to restrict the rights of members to amend;
- to change the percentage of members required to pass a resolution to amend; or
- in circumstances where the members themselves cannot amend the memorandum or articles.46
A resolution by the directors passed in contravention of this provision is void and of no effect.
To give effect to an amendment the company must file with the Registrar either a notice of amendment in the approved form47 or a restated memorandum or articles which incorporates the amendments.48 The amendment has effect from the date that the notice or restated memorandum or articles is registered.49 However, the company, a member, a director or any other interested person can apply to the court for an order that the amendment takes effect from another date that is not earlier than the date of the resolution to amend.50
- Corporate capacity and ultra vires
7.1 Common law principles
At common law a company only had capacity to do those acts which fell within its objects clause as set out in its memorandum, acts which were reasonably incidental or ancillary to such objects51 or (possibly) within the terms of an express power that was stated to be independent.52 Any act of the company, which was not within its stated objects or reasonably incidental or ancillary, or within the terms of an express independent power, was ultra vires the company and therefore void and could not be ratified by the members.53 If, however, the act fell within the objects of the company as a matter of construction, but was in excess of the authority of those who carried it out, not for a proper purpose or not bona fide for the benefit of the company, then the act was not ultra vires the company. Such an act might be a breach of the director’s duty, but it was intra vires the company.
If the act was an ultra vires act and therefore void, it could not be enforced by the third party54 or (possibly) the company,55 but the issue of enforceability was, at least in some cases, said to depend upon whether the third party had knowledge or notice of the act being ultra vires.56 This was certainly the case where the act was intra vires but in excess of authority, for an improper purpose or not bona fide; the company or the third party could not enforce the act if the third party had notice or knowledge of the excess of authority or improper purpose or lack of bona fides.57 On the issue of knowledge and notice, it was held that constructive knowledge or notice would suffice. Constructive knowledge or notice could arise from the public registration of documents: anyone dealing with a registered company was deemed to have notice of the contents of its public documents which included the memorandum and articles.58
However, the constructive knowledge/notice rule was ameliorated by case law which held that even if a third party had actual or constructive knowledge or notice of these documents, if an act could lawfully be done by a body of the company, a third party was entitled to assume that the internal formalities to authorise that body had been obtained.59 If the third party did, however, have actual knowledge of the lack of authority of the body or if put on enquiry by suspicions as to whether the body was duly authorised,60 then the act was not binding on the company unless it was approved by the body which did have actual or ostensible authority to approve it on behalf of the company, or if it was approved by the shareholders by ordinary resolution.61
7.2 The provisions of the Companies Act
The purpose of the provisions in the Companies Act dealing with these issues is clear and in line with modern company law generally. The ultra vires doctrine, and the doctrine of excess of authority by the directors, are curtailed so that the company and the third party will in general be bound. However, if an act is beyond the memorandum or articles or not in compliance with the Companies Act or other legislation, the company may be able to avoid it only if the other party to the act knew or ought to have known of that fact by virtue of his relationship with the company. Constructive knowledge arising from registration of the memorandum and articles has been abolished. The directors may be liable for breaching the memorandum or articles or their own authority. The provisions are as follows.
First, the basis of the ultra vires doctrine is removed by:
- not requiring companies to specify their objects or purposes in their memorandum, except in the case of restrictive purposes companies,62 and
- specifically providing that a company has, irrespective of corporate benefit,63 “full capacity to carry on or undertake any business or activity, or any act or enter into any transaction…”,64 and for those purposes the company has full rights, powers and privileges.65
A non-exclusive list of powers is contained in the Companies Act66, and there is also a specific statutory power permitting a company to give financial assistance in connection with the acquisition of its own shares to help remove concerns that financial assistance might be regarded as unlawful at common law.67
However, the company does not have limitless capacity: the Companies Act provides that its capacity and powers are subject to the provisions of the Companies Act, its memorandum and articles, and any other legislation.68 Therefore, the company would not have capacity or power to do anything that was contrary to the Companies Act, for example, in the case of a segregated portfolio company issuing bearer shares,69 or in breach of any other enactment,70 such as carrying on business in breach of statutes prohibiting those businesses without obtaining regulatory approval. Also, the company does not have capacity to do something that is outside its memorandum and articles. Thus, if the memorandum states that the company is not authorised to carry on particular business,71 it will not have the capacity to do so. Anything done that is beyond the memorandum and articles, the Companies Act or another enactment will potentially be ultra vires.72 Second, if an act is potentially ultra vires or in excess of powers, two questions arise: is it cured by the legislation and when (if ever) can the company assert the invalidity of the act against the other party? Sections 29, 31 and 32 are relevant to these questions. Section 29 provides that, save in the case of a restricted purposes company, no act of the company and no transfer of an asset by or to the company is invalid by reason only of the fact that the company did not have the capacity, right or power to perform the act or to transfer or receive the asset. This provision, which applies equally to the company as well as to third parties dealing with it and so can be relied upon by either, means that the mere lack of capacity (i.e. the mere fact that it is contrary to the Companies Act or another enactment or beyond the memorandum and articles) does not invalidate the act, and something more is needed to render the transaction invalid. Note that the Companies Act does not render the act valid in every case; it merely restricts the situations when invalidity can arise.
The further element that allows invalidity to be raised by the company is usually knowledge on the part of the third parties that the matter is ultra vires or in excess of the powers of the directors even if intra vires the company. It is on this issue that the third key point in the Companies Act should be noted. Section 31(1)(a) of the Companies Act provides that a company may not assert against a person dealing with it that the Companies Act or the memorandum or articles have not been complied with unless the person has, or ought to have, by virtue of his relationship to the company, knowledge of that matter.
Knowledge therefore includes both actual knowledge and also constructive knowledge, but the fourth point to note about the Companies Act is that it is constructive knowledge of what the person ought to have known by virtue of his relationship to the company.73 Constructive knowledge of the memorandum and articles merely by their registration has been abolished by the Companies Act, save in the case of a restricted purposes company,74 which provides that a person is not deemed to have notice or knowledge of any company document (including the memorandum and articles) by reason only of the fact that they are available to the public from the Registrar or available for inspection at the company’s registered office75 (although there is an exception in relation to charges registered on the public register of registered charges76 and any document relating to a restricted purposes company77).
The Companies Act does not provide for lack of capacity to be pleaded by members in proceedings against the company to prohibit the ultra vires act or by the company in proceedings against directors for loss or damage due to the ultra vires acts. Therefore, with respect to members the common law position, that a member may restrain a company from doing something ultra vires, may still apply subject to the point that under section 31, the validity of the act cannot be called into question merely by the lack of capacity (i.e. something more would need to be shown by the member).
Directors are under a statutory duty not to act or agree to the company acting in a manner that is contrary to the Companies Act or the company’s memorandum or articles.78 The company may therefore have an action against the directors for breach of their statutory duty in causing the company to enter into the unauthorised transaction. Furthermore, if a company or a director engages in, or proposes to engage in conduct that contravenes the Companies Act or the memorandum or articles, on the application of a member or director of the company the court may make an order directing the company or director to comply with, or restraining the company or director from engaging in, conduct that contravenes the Companies Act or the memorandum or articles.79 Members’ remedies are described in more detail in the Guide on Members under the BVI Business Companies Act, 2004.
- Internal management rules and the scope of section 31
The internal management rules developed at common law by Royal British Bank v Turquand and cases following it, will continue to apply to companies under the Companies Act but with changes effected by section 31. As noted above, section 31 applies to ultra vires acts, but it also relates to matters that can properly be described as failures of internal management procedures. The effect of the section is that the failures cannot be asserted by the company against a person dealing with it, unless that person had actual knowledge of such failure or ought to have known by virtue of his relationship to the company.80 The matters that cannot be asserted are:
- that a person is not a director or has not been duly appointed or authorised as a director;81
- that a director, employee, or agent has not been duly appointed or does not have the authority that such a person customarily has;82
- that a director, employee or agent held out as having authority which he would not customarily have, did not in fact have such authority;83 or
- that a document issued on behalf of the company by a director, employee or agent was issued without actual or usual authority to issue it, is not valid or not genuine.84
This is so even if the director, employee or agent who is purporting to act on behalf of the company is acting fraudulently or forges a document, unless the third party dealing with the company has actual knowledge of the fraud or forgery.85
The scope of the section is wider than just the company and the person dealing with it in that it also prevents a guarantor of the company’s obligation from asserting these failures against a person dealing with the company. The company and the guarantor cannot assert the failures against a person who dealt with the company or with a person who acquired assets, rights or interests from the company.86