Introduction

Many individuals, companies and investors in Singapore utilise offshore financial centres (“OFC”) for the purposes of tax planning and asset protection. Most OFCs (a) impose low or no income taxes and capital gains taxes; (b) do not have withholding taxes; (c) offer flexible incorporation regimes; and (d) allow flexible use of trusts and other special purpose corporate vehicles.

High net worth individuals and investment holding companies can make use of companies, trusts or foundations based in an OFC to avoid paying tax on income, withholding taxes, stamp duty and/or estate duty. Assets may also be parked in an OFC to protect against domestic currency fluctuations and exposure to political risks. Individuals may, by placing their assets in offshore trusts, try to mitigate against unlimited liability or forced inheritance provisions in their home jurisdictions.

An often used OFC is the British Virgin Islands (“BVI”). The BVI is a group of islands in the Caribbean. The principal islands are Tortola and Virgin Gorda. Its capital city and financial centre is Road Town on Tortola. As a British Overseas Territory with a long history of political stability, the BVI offers the security associated with the British flag. BVI law is largely based on the British legal system and English common law. The court system is made up of a Magistrates Court, a High Court, a Circuit Court of Appeal of the Eastern Caribbean Supreme Court with final appeal to the Privy Council in England.

The BVI has approximately 300,000 International Business Centres (“IBC”) registered. It meets the common criteria of a suitable OFC which include:-

1. political and economic stability;
2. innovative, flexible and uncomplicated legislation;
3. no wealth, capital gains or estate taxes;
4. asset security and the freedom to transfer and merge assets;
5. protection of wealth benefits, inheritance wishes and trust interests;
6. sound infrastructure and good communications; and
7. professional services of high quality.

In light of its continued popularity as an OFC, it is inevitable that banks and financial institutions in Singapore would have clients based in the BVI. This article is a brief introduction to security registration requirements in the BVI. It goes without saying that this article cannot be a substitution to proper legal advice concerning a specific set of facts.

The Statutory Registration Regime

The BVI registration regime for security created by an IBC over its assets is voluntary and is governed by the BVI IBC Ordinance of 1984 (the “Act”). Section 70(A)(1) of the Act provides that a company incorporated under the Act may create a mortgage, charge or other encumbrance over any of its assets situate in any part of the world in accordance with the laws of any jurisdiction of the company’s choice and the mortgage, charge or other encumbrance shall be binding on the company to the extent, and in accordance with, the requirements, of the chosen law.

Such a company may maintain at its registered office a register of mortgages, charges and other encumbrances (the “Register of Charges”) in which there shall be entered particulars regarding each mortgage, charge and other encumbrances as follows:-

1. the sum and assets secured;
2. the date and description of the security documents;
3. the name and address of the mortgagee, chargee or other encumbrancer;
4. the date of creation of the mortgage, charge or other encumbrance;
5. the date on which the particulars specified in paragraphs (a) to (d) in respect of the mortgage, charge or other encumbrance are entered in the register; and
6. where appropriate, the date of discharge of the security interest.

Section 70(A)(3) of the Act states that in the event an application is made to a BVI court to enforce any mortgage, charge or other encumbrance created by a company incorporated under the Act and there are assets of the company which are subject to two or more mortgages, charges or other encumbrances, then, notwithstanding the provision of any other law, priorities shall be determined in accordance with the dates of entry in the Register of Charges. Any unregistered mortgages, charges and other encumbrances created after 1 January 1991 shall rank after registered mortgages, charges and other encumbrances, but unregistered mortgages, charges and other encumbrances created prior to 1 January 1991 shall have priority over mortgages, charges and other encumbrances registered pursuant to section 70(A) of the Act and shall rank in order of their creation.

The Register of Charges is technically a private document maintained with the corporate records of the company at its registered office. Although under BVI legislation, the filing of the Register of Charges with the BVI Registrar of Companies (the “Registrar”) is voluntary, secured lenders usually require filing as a condition to the banking facility because:-

1. it provides verifiable evidence that the charge has been registered, which would be difficult if the Register of Charges remained private; and
2. it allows any third party creditor inspecting the statutory records of the company at the BVI Companies Registry (the “Registry”) to have notice of the security.

Usually, the bank’s BVI lawyers will draft an entry for the Register of Charges of the IBC. After the document has been executed by the company, the lawyers will then send the draft entry to the registered agent of the company in the BVI. The registered agent will verify with the IBC that it should proceed with the registration. Once the approval has been received, the registered agent will sign at the appropriate place on the draft register entry to indicate that it has been formally adopted. The registered agent then forwards the entry to the Registry for filing in the company’s statutory records A filing fee is payable. The Registry then stamps the register entry and returns any surplus stamped copies to the registered agent who then forwards them to the secured lender.

If the IBC has already a Register of Charges, the new entry is simply added on. If the company does not have a Register of Charges, the draft entry de facto becomes the first entry in the register and the IBC has officially opted into the statutory registration regime.

Priority of Charges

Once the IBC opts into the security registration regime, security interests created prior to 1 January 1991 (the commencement date of the statutory registration regime) take priority over all security interests subsequent to that date, and as between themselves rank in order of their creation. In respect of security interests created after 1 January 1991, security interests entered in the Register of Charges take priority over all unregistered security and as between themselves rank in order of their entry in the Registry of Charges.

Priority between unregistered security interests created by a company, which has opted into the statutory registration regime, is determined by common law rules. If the IBC has not yet opted into the statutory regime, priority between all competing security interests is determined by the common law rules.

Should there exist any discrepancy between the Register of Charges filed with the Registrar and that maintained privately by the IBC, the contents of the latter will prevail.

Conclusion

Lender who have or who intend to provide secured financing to a BVI IBC that does not maintain a Register of Charges, i.e. have yet to opted into the statutory registration regime, it would be in such lender’s interest to request that the company create such a register and record the charges created in their favour. The company also be required to file a record of the newly created register with the Registry.

Once an IBC opts into the statutory registration regime, in the event the courts in the BVI are asked to enforce any security created by the company, priority would be determined by their date of entry into the Register of Charges and not by the date of their creation.