The British Virgin Islands 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. Further, an RPC's annual licence fee of $5,000 is far higher than a standard BVI annual licence fee of $350.(1)
So who would want to use an RPC – and what were the drafters of the BVI Business Companies Act trying to achieve in this apparent deviation from their much-admired (and emulated) approach to corporate legislation?
The answer lies in structured finance, which is popular in the British Virgin Islands. 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 $613 million notes issue, CEMEX's $1.5 billion financing and Dong Feng's $359 million securitisations. This update outlines the main features and uses of RPCs.
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 parties in the same way as it would for a transaction outside the purposes of an RPC.(2) 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.
The key requirements for RPCs are as follows:
- 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 must state that it is a restricted purposes company.
- An RPC's name must end in '(SPV) Limited' or '(SPV) Ltd', 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 of the British Virgin Islands, so consideration should be given to whether the restricted purposes of an RPC would be recognised by the applicable foreign jurisdictions. Under the conflict of law rules in the British Virgin Islands, a transaction entered into which is in breach of an RPC's purpose would be void and unenforceable and, broadly speaking, a foreign judgment where such a transaction was valid would not be enforceable in the British Virgin Islands.
RPCs offer certain advantages and are a valuable facet of the BVI's offerings to international finance. While they are intentionally niche and specialised, they prove that there remains a place in the contemporary legal world for more traditional principles of common law, such as restricted purposes and constructive notice.
For further information on this topic please contact Hamish Masson at Harney Westwood & Riegels by telephone (+1 284 494 2233) or email (firstname.lastname@example.org). The Harney Westwood & Riegels website can be accessed at www.harneys.com.
(1) Section 29(1) of the BVI Business Companies Act 2004 (as amended) provides that no act of a company or transfer of an asset by or to a company is invalid by reason of the company lacking the capacity, right or power to perform the act or asset transfer; Section 29(2) disapplies this for RPCs.
(2) RPCs are subjected to significantly higher licence fees to restrict their use to appropriate cases.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.