Original Publisher: Loeb Smith Attorneys
Author: Peter Vas, Partner - Loeb Smith Attorneys, Hong Kong
Date: 29 January 2021
Coronavirus (“Covid-19”) is continuing its spread across the world, with more than 85 million confirmed cases in 220 countries and more than 1.8 million deaths. In response, governments worldwide have implemented far ranging containment measures, such as travel restrictions, mandatory quarantine and social distancing. Many of our clients have additionally activated their business continuity and contingency plans and put in place alternate workplace arrangements and/or heightened measures to ensure the health and safety of their employees. These policies have disrupted “business as usual” and our clients with British Virgin Islands (“BVI”) companies have faced a number of challenges accordingly.
In this brief guide, we address certain of the most frequently asked BVI law questions that our clients have posed in connection with the difficulties that Covid-19 presents in the context of corporate and finance transactions. We also offer some practical guidance and considerations with respect these issues.
Having considered the impact of Covid-19 on meetings, economic substance and the execution of documents in parts I to II of this guide, we now examine its impact on the BVI Registry of Corporate Affairs, as well as the issue of liquidity and financial distress with respect to BVI companies.
BVI Registry of Corporate Affairs:
The BVI Registry of Corporate Affairs remains open with some relatively minor changes to cater for Covid-19. Registered agents in the BVI are, on the whole, also operating relatively normally in our experience.
Liquidity and Financial Distress:
Covid-19 has had a significant impact on the earnings and revenue streams of some companies. Some companies have lost their investment grade credit ratings and investors have sold down positions in newly created sub-investment grade debt. Lenders have also generally focused on preserving capital and supporting existing clients with bridge financing and liquidity, leaving less appetite for new corporate loan transactions. In addition, certain borrower-friendly terms that regularly featured in loan documentation prior to Covid-19, such as unrestricted subsidiary structures which facilitate additional borrowing, have become more heavily negotiated.
Loan defaults have also increased due to an inability to service debt. For example, US institutional loan defaults climbed to 3.9% on a trailing 12month basis in June. To put this into perspective though, default rates remain considerably lower than the 10%+ levels observed in 2009 following the global financial crisis. This is due to the fact that many companies have managed to draw down on revolving credit facilities and obtain payment holidays/covenant suspensions and waivers from financial institutions. The increasing prevalence of loan transactions done on covlite terms prior to Covid-19 has also mitigated the risk of breaching covenants and triggering a default.
The following practical points may assist the board of directors of a BVI company which is experiencing a liquidity crisis and/or seeking to mitigate any potential insolvency risks:
i. Treat creditors fairly (and where they are of the same class, equally). BVI law includes a vast range of statutory provisions which seek to protect creditors from the unfair distribution of a company’s assets prior to a formal insolvency process. For example, directors may be personally liable for disposing of assets at an undervalue or preferring particular creditors over others. Such transactions may also be unwound by the courts. Directors of a BVI company that are continuing to trade in a situation where the relevant company is of dubious solvency should take appropriate legal advice to ensure that they continue to meet all of their statutory and common law obligations.
ii. Ensure compliance with fiduciary and common law directors’ duties owing to the company. Broadly speaking, these include the duties:
a) to act with reasonable care, diligence and skill;
b) to act in good faith in the best interests of the relevant company;
c) to exercise a director’s powers for proper purposes;
d) to avoid conflicts of interest;
e) not to fetter a director’s discretion; and
f) not to misuse or misappropriate the relevant company’s property.
Any breach of these duties may result in personal liability on the part of a director and the relevant transaction may be set aside by the courts.
It is important to note that the board of directors of a BVI company has a duty to consider the interests of its creditors as paramount if that company is insolvent or of dubious solvency. This is because the creditors are the ultimate beneficiaries of an insolvent company’s assets. As noted above, appropriate legal advice should be sought if the relevant company’s solvency is in question.
iii. Review contracts to consider whether a default or insolvency event has been (or could be) triggered. Most commercial contracts governed by BVI law contain a force majeure clause which may allow a party to terminate the contract and/or be excused from complying with certain of its terms. Whether Covid-19 constitutes a force majeure event will depend on the specific drafting in each case. If it does not, it may nevertheless be possible to rely on the common law doctrine of frustration to excuse performance.
iv. Hold regular board meetings with detailed minutes. The directors of a BVI company should keep each other updated in times of financial distress as a company’s financial outlook can rapidly change. This should include forming a plan as to how to return the company to health or achieve the best result possible for creditors. Keeping detailed meeting minutes additionally ensures that there is a written record of such proceedings in the event that any of the directors’ decisions are challenged at a later date.
v. Frequently review financial information. The board of directors should ensure that a BVI company’s balance sheet and cash ow position is frequently reviewed with appropriate advisors to detect any solvency concerns. This is particularly important because a director’s compliance with his/her fiduciary and common law duties may include an assessment of his/her actual knowledge and what a reasonable person with the director’s skills and competence ought to have known in that director’s position.
vi. Seek ratification. In certain instances, it may be appropriate to obtain shareholder approval in order to ratify transactions that a company is proposing to enter into. For example, it is relatively commonplace to obtain such approval in circumstances where a BVI company enters into a transaction where there is no or little corporate benefit to it. This includes companies that are providing third party collateral support to group entities that are in financial distress.
This publication is not intended to be a substitute for specific legal advice or a legal opinion. For specific advice, please contact:
Peter Vas Partner Loeb Smith Attorneys Hong Kong T: +852 5225 4920 E: firstname.lastname@example.org www.loebsmith.com
About Loeb Smith Attorneys
Loeb Smith Attorneys is an offshore law firm which delivers high quality Partner-led professional legal services at competitive rates. We are Cayman Islands law and BVI law specialists on international corporate, investment and finance transactions. We have an excellent track record of advising investment fund managers, in-house counsels, financial institutions, onshore counsels, banks, companies, and private clients to and successful outcomes and solutions to their day-to-day issues and complex, strategic matters.
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