On 17 October 2023 the British Virgin Islands (the “BVI”) was removed from the European Union (the “EU”) list of non-cooperative jurisdictions for tax purposes, also known as the “EU Blacklist”. Commentators have celebrated this as demonstrating, “the commitment of the BVI Government and financial services industry to maintain a high level of international cooperation” and a “welcome recognition of the BVI’s continuous efforts to maintain high standards of financial integrity.”
A key reason for the BVI’s removal from the EU Blacklist were the extensive changes to the BVI business companies legislation, namely the BVI Business Companies (Amendment) Act 2022 and the BVI Business Companies (Amendment) Regulations 2022 (together, the “2022 Amendments”), that came into force on 1 January 2023.
In the last quarter of 2022, BVI practitioners commented positively on the 2022 Amendments describing them variously as reflecting the BVI’s commitment “to its place at the forefront of combatting financial crime in all its forms”, representing a “continuous improvement of the BVI Business Act”, and being “well measured, designed to strengthen the reputation of the BVI and its laws among all stakeholders without prejudicing the fundamental qualities of BVI companies law”.
There is no doubt that on the whole the 2022 Amendments have been positive. In particular, the more onerous record keeping regime has benefited the jurisdiction immensely. However, it has also become clear that in evolving the restoration regime, fresh problems have been created which do not sit easily with the general praise directed towards the 2022 Amendments.
Integral to the BVI business companies regime is the requirement set out in the BVI Business Companies Act 2004 (as amended) (the “BCA”) that all companies must have a registered agent. The only exception to this requirement is where a company is in liquidation within the meaning of section 160 of the Insolvency Act 2003 (the “IA”).
A central problem with the new restoration regime is the introduction of a new precondition requiring the new registered agent to make a declaration that it has updated all the required information pertaining to the company (the “Section 218A Declaration”). This requirement is set out at section 218A of the BCA and provides that on an application to restore a company, the Court may make an order to restore the company to the Register subject to inter alia (i) the Court being satisfied that a licensed person has agreed to act as registered agent of the company; and (ii) the registered agent making a declaration in the approved form that the company’s records have been updated as required under section 213(3B). Section 213(3B) requires that a registered agent must update (as necessary) and maintain all of the company’s information the registered agent is required to keep, including the company’s register of members, register of directors, and customer due diligence information required under the laws relating to money laundering, terrorist financing and proliferation financing. A failure to abide by these requirements could constitute an offence under Regulation 17 of the BVI Anti-money Laundering Regulations, Revised Edition 2020 (the “AML Regulations”). Such an offence is punishable by a fine of up to US$100,00 if convicted summarily or $150,000 if convicted on indictment.
A problem arises because the draftsmen of the new legislation appear to have assumed that the persons applying to restore a company are those “closest to” the company (e.g. former members or former directors) who are able to provide the required information to the new registered agent. The classic example being where a company has been struck off and dissolved owing to an inadvertent failure to pay its annual fees. However, section 218 of the BCA provides standing to a much wider class of persons eligible to apply to the Court to restore a company than just the former members or former directors. This reflects a much broader range of scenarios where it might be necessary and desirable to restore a company. Such persons include those who are not going to be able to acquire and provide the relevant information to the new registered agent for the simple reason that they are not connected to the company. An example might be a creditor who will not have access to the passport or other documents required to verify the identity of the company’s directors or beneficial owners. Under the new conditions, since they are unable to provide this information to the new registered agent, the Section 218A Declaration cannot be made, the precondition at section 218A(1) is not satisfied and the Court has no power to restore the company.
This is an unsatisfactory situation. Clearly when the 2022 Amendments were drafted and approved, the legislature intended that all the persons specified in section 218(2)(a)-(f) of the BCA would have standing to apply to restore a dissolved company. Indeed, the 2022 Amendments actually expanded the class of persons with standing to apply. However, because of the new Section 218A Declaration requirement, most of these persons will be unable to actually restore a company.
This has become a real problem in situations where, for example, a creditor seeks to restore a BVI company that is evading its debts or where a dissolved company is implicated in an international fraud. Even if that creditor has cogent evidence of the company’s role in the fraud sufficient to justify the appointment of a liquidator over the company once restored, it will be unable to restore the company because the creditor is unlikely to have access to “all of the company’s information the registered agent is required to keep” (in particular, updated “Know Your Client” information on the company’s directors and beneficial owners). In complex cases of international fraud involving multiple offshore structures, entire global asset recovery strategies can be disrupted and potentially compromised by the new restoration regime’s preconditions.
The obvious solution to the problem is to amend the legislation to remove or modify the Section 218A Declaration as a precondition on certain types of application. However this is likely to be a longer term solution given the length of time required for legislative reform.
The BVI Financial Services Commission (the “FSC”), which represents the interests of the Registrar of Companies on applications to restore, has recognised the problem highlighted above and is willing to work with parties to achieve the right outcome. However the position continues to be in flux and needs to be formalised. The FSC’s approach at the time of writing is as follows: Where a creditor seeks to restore a company for the purposes of then applying to appoint a liquidator, the appropriate practice is for the creditor to file two sets of proceedings and make arrangements for those proceedings to be consolidated and heard together.
Although pragmatic, this practice adds expense and is conceptually problematic. The position the FSC appears to take is that where the Court has ordered the appointment of liquidators, it is not necessary for the company to have a registered agent since the exception in section 91(5) will apply, and thus there is no need for a Section 218A Declaration. However, logic would dictate that a dissolved company does not exist, therefore it must be restored first before liquidators can be appointed. If the act of restoring comes first, it is hard to see why a Section 218A Declaration is not still required.
One potential solution on a creditor’s application to restore a company following voluntary liquidation, is to apply to replace the voluntary liquidator with a BVI insolvency practitioner pursuant to the new section 211A of the BCA. This section permits a creditor to apply to appoint an eligible insolvency practitioner as liquidator of the company in the place of the voluntary liquidator if the Court is satisfied that the company is insolvent. Conceptually, this should obviate the need for a Section 218A Declaration since the company would be restored into insolvent liquidation and therefore there is no need for it to have a registered agent.
Unfortunately, the FSC appears to take the position that because such a liquidation would not be one strictly within the meaning of section 160 of the IA (which requires the members to either have passed a qualifying resolution or an application to have been made under section 161 of the IA) a registered agent is still required. This analysis is based on a strict interpretation of section 91(5) of the BCA which states that a company requires a registered agent unless it is in liquidation within the meaning of section 160 of the IA. Section 160 states that the liquidation of a company commences at the time at which a liquidator is appointed as provided in section 159 and continues until it is terminated in accordance with section 232. The problem with this literal approach is that sections 160 and 159 of the IA do not provide a comprehensive list of all the ways in which a company may enter insolvent liquidation. Both the new section 211A and section 211 of the BCA provide alternative routes to insolvent liquidation. As a matter of principle, there is no difference between an insolvent liquidation commenced by one of the mechanisms set out in section 159 of the IA and one commenced by either section 211 or 211A of the BCA. In all cases the liquidations are governed by the IA and are of the same character and effect, rendering the role of a registered agent otiose. To draw a distinction based on whether the liquidation is commenced by a provision in the BCA or the IA, is wholly artificial. It is anticipated that the BVI Commercial Court will have to decide the issue in the near future.
A further potential solution to the Section 218A Declaration problem, is whether for the purposes of a creditors application to restore a company (where the intention is to apply to appoint a liquidator in short order after restoration) the relevant provisions of the BCA, in particular the words “update (as necessary)” in section 213(3B), can be given a purposive interpretation to the effect that the proposed liquidators can be treated as the registered agent’s “applicant for business” or “customer” within the meaning of Regulation 2 of the AML Regulations. If they can, the registered agent could make the Section 218A Declaration having obtained KYC documentation from the proposed liquidators themselves rather than KYC documentation pertaining to the directors and the beneficial owners of the company. The Court’s willingness to permit such an approach would likely turn on the particular facts of the case. It seems likely that the Court would need to be persuaded of the existence of strong grounds to appoint liquidators over the company. This would involve setting out a strong case of either the company’s insolvency or to appoint liquidators on just and equitable grounds.
The 2022 Amendments have been received positively by the BVI financial services community and lauded as an affirmation of the BVI’s commitment to maintaining high standards of financial integrity. It is ironic, however, that the new restoration regime appears to have inadvertently made it harder for creditors to restore dissolved BVI companies. This places a significant potential obstacle in the way of international asset recovery efforts to recover the proceeds of fraud and other criminal activity. It is imperative that the legislation is amended as soon as possible to give effect to the express intention of the BVI legislature that the full class of persons listed in Section 218 of the BCA are able to restore a company. Against this backdrop, while the 2022 Amendments represent a welcome step forward in the continual fight against international fraud, further tweaks are necessary to ensure the perpetrators of international fraud can properly be held to account.
The article was first published in Insol World on 13 December 2023.