The British Virgin Islands (BVI) as one of the leading international financial centers (IFCs) globally with over 360,000 active companies1, has developed a flexible, commercial and innovative system of corporate law. An important practical component and mechanism of BVI law relates to distributions made by BVI companies, particularly the use of distributions in structuring transactions.
Distributions in the context of shareholding generally refers to a company's payment or transfer of cash, shares, in-kind assets or physical products to its shareholders. Under section 56 of the BVI Business Companies Act (as revised) (BCA) a distribution by a company to a member (shareholder) is defined as:
- the direct or indirect transfer of an asset, other than the company's own shares, to or for the benefit of the member; or
- the incurring of a debt to or for the benefit of a member, in relation to shares held by a shareholder, or to the entitlements to distributions of a member who is not a shareholder, and whether by means of the purchase of an asset, the purchase, redemption or other acquisition of shares, a transfer of indebtedness or otherwise, and includes a dividend.
WHAT IS A DISTRIBUTION AND WHEN IS A REPURCHASE OR REDEMPTION A DISTRIBUTION?
The definition is wide yet not overly prescriptive. Given the breadth of the definition, it is important to consider what constitutes a distribution on a case-by-case basis but two of the most apparent forms of a distribution are:
- a dividend (whether in cash or in-kind); and
- the purchase, redemption or buyback of shares by a company.
Under the BCA this form of distribution does not include redemption of shares made pursuant to rights flowing from sources other than the corporate actions of the BVI company, for instance:
- a redemption otherwise than at the option of the company pursuant to section 62 BCA (redemption at the option of the shareholder);
- a mandatory redemption of minority shares pursuant to section 176 BCA;
- a purchase, redemption or other acquisition of shares at fair value as a result of a dissenting shareholder requiring it to do so under section 179 BCA; or
- a company acquiring its shares by way of surrender pursuant to section 59(1A) BCA.
In the corporate reorganisation and solvent reorganisation context, a transfer of shares of a subsidiary or of assets of that subsidiary to a BVI incorporated parent's shareholders would classify as a distribution.
In the financing context, an upstream guarantee or granting security over assets may also constitute a distribution.
In the context of shareholder protection, where a distribution is to be made of more than 50% in value of the company's assets and which disposition falls outside the usual or regular course of business, section 175 BCA may apply. With the result that express shareholder consent to that distribution be provided or that the memorandum and articles of association (M&As) of the BVI company otherwise carves-out the requirement for such shareholder consent.
RIGHTS OF A SHAREHOLDER TO A DISTRIBUTION
Subject to the company's M&As, the default position under section 34 BCA is that a share in a company confers on a holder a right to one vote at a meeting of the shareholders, a right to an equal share in any dividend paid in accordance with the BCA and the right to an equal share in the distribution of the surplus assets of the company.
A company may negate, modify or add to those rights in its M&As which provides a company with immense flexibility to create and design class rights of shareholders that suit the parties' commercial needs including in the context of distributions. For instance, a BVI company may confer no or preferential rights to distributions and/or limit the participation of a shareholder in a distribution to certain assets of the company. A company may also design restrictions on a distribution and procedural requirements in order for the company to make a distribution. These options are useful in designing solvent restructurings.
WHAT IS REQUIRED TO MAKE A DISTRIBUTION? THE SOLVENCY TEST
Subject to the company's M&As, the directors may authorise a distribution at any time and for any amount as they think fit, provided that they are satisfied, on reasonable grounds, that the company will immediately after the distribution satisfy both a balance sheet solvency test (the value of the company's assets exceeds its liabilities) and cash flow solvency test (the company is able to pay its debts as they fall due). The company's M&As may incorporate additional requirements to the solvency test but cannot derogate from that test, being the minimum standard.
The directors should have regard to their directors' duties when authorising a distribution and consider the sources of financial information upon which they rely in satisfying the solvency test. The directors' resolution authorising the distribution must include a statement to the effect that the directors are satisfied on reasonable grounds that the solvency test has been satisfied.
SOURCE OF FUNDING FOR A DISTRIBUTION
It is important to note that there are no maintenance of capital rules under the BCA. There is no allocation of the consideration received by shareholders for the shares issued between working capital and share premium or share surplus accounts. However, the flexibility afforded under BVI corporate law permits the founders of BVI companies to elect to retain the share premium / working capital allocations, should they so wish (to be recorded in the M&As).
There may be circumstances where a shareholder elects to inject additional capital, as equity, into a BVI company without the issue of additional shares to that shareholder. Whilst there is no need (as a matter of BVI law – unless expressly provided for in the M&As) to allocate such additional capital contribution to share premium or to working capital, as a matter of accounting practice and financial records, this will normally be treated as surplus and is therefore available for distributions.
The solvency test approach does not require a BVI company to demonstrate any form of distributable reserves or require the company to make the distribution to be made out of surplus. Effectively, this enables a BVI company to make a distribution payment out of income or capital accounts.
DISTRIBUTION CLAW-BACK
A distribution made at a time when the BVI company did not, immediately following the distribution, satisfy the solvency test is deemed not to have been authorised and may be subject to claw-back by the company. However, pursuant to section 58(1) BCA, claw-back is not possible if the receiving shareholder received the distribution in good faith and without knowledge of the solvency test failure or has altered their position in reliance on the validity of the solvency test declaration or where it would be unfair to require partial or full repayment of the distribution.
Where claw-back from the shareholders is not possible, the directors face personal liability to the company. If a distribution of a lesser amount would have satisfied the solvency test, the BVI court may permit the shareholder to retain that lesser amount or direct that the director is liable for the difference between that lesser amount and the actual amount of the distribution.
DIVIDEND WAIVER OR PAYMENT DIRECTION
A scenario that is frequently experienced in a multi-layered corporate group structure is that of transmission of a dividend from a BVI subsidiary through intermediary group BVI holding companies to an ultimate parent company. Rather than have each BVI intermediate holding company receive and then itself declare and pay a dividend, it is open to those companies to waive the rights to those dividends or direct that the dividends are to be paid to the ultimate parent company. It is important, from a corporate governance perspective, that any such waiver or directive as to an alternate payee of the dividend, be recorded and approved by resolution by the directors of the respective BVI companies and that such resolutions deal with and approve the solvency test.
DISTRIBUTIONS IN THE CONTEXT OF INTRA-GROUP FINANCING AND REORGANISATION ('HIVE-DOWNS')
Subject to the BCA, any contrary provisions in its M&As and general BVI law, a BVI company has full capacity and powers to undertake any activity or operations or to enter any transaction. This full capacity and power applies irrespective of corporate benefit. A number of BVI company M&As will stipulate that the company may act in the best interests of its parent or affiliated entity even if such acts may not be in the corporate best interests of that BVI company. This enables a BVI company to provide financial assistance to its parent or affiliated entities through the provision of subsidiary loans and guarantees and providing security.
The section 56 BCA definition of a distribution includes the incurring of a debt to or for the benefit of a shareholder in relation to shares held by that shareholder. Where that debt (including the provision of guarantees or security in relation to such debt) is related to the repurchase, redemption or other acquisition of those shares in the BVI subsidiary (the company making the distribution and initiated by that BVI subsidiary) by that company acquiring its shares from its shareholder, such a corporate action will then be regarded as a distribution.
Subject to its M&As, the solvency test and shareholder consent, a BVI company may redeem, purchase or otherwise buy-back its shares. Dependent upon the M&As, these shares may be cancelled or held as treasury shares for re-issuance, subject to certain restrictions.
Consequently, these intra-group financing distributions and share buy-backs are effective mechanisms using distributions to achieve 'hive-downs' (transferring all or part of the assets or business of a company to its BVI subsidiary) and thereby achieve intra-group reorganisation.
DISTRIBUTIONS IN THE CONTEXT OF 'HIVE-UP' REORGANISATION
The section 56 BCA definition of what constitutes a distribution includes the direct or indirect transfer of an asset, other than the company's own shares. Therefore, dividends comprising an issuance of the BVI subsidiary shares would not constitute a distribution and therefore are not subject to the solvency test.
In the context of intra-group reorganisation, where the distribution comprises the assets (including all the shares in further down-stream subsidiaries) or the business of the BVI subsidiary being distributed upwards to its shareholder/parent, this is an effective mechanism to achieve 'hive-ups' (transferring all or part of the assets or business of a company to its parent) and thereby achieve this form of intra-group reorganisation.
TAX EFFICIENCY AND CONSIDERATIONS
The general position is that BVI companies are exempt from tax in relation to all dividends, other distributions and other amounts paid by a BVI company, as well as in relation to capital gains realised with respect to a BVI company. These tax exemptions do not apply where the transactions contemplated involve the transfer of interest in land situated in the BVI or if they are in relation to transfers of shares, debt obligations or other securities of a BVI land-owning company.
When considering distributions to be made by BVI companies to non-BVI shareholders, it is important to obtain tax advice in the jurisdiction(s) where the shareholder(s) are domiciled, in order to clarify that jurisdiction's tax treatment of the distributions received.
CONCLUDING REMARKS
Distributions, including payment or transfer of dividends is often viewed as a relatively minor area of importance in BVI corporate law. However, it is an area of law that may have far-reaching implications for the BVI company, its shareholders, subsidiaries and its directors. In addition, distributions are effective corporate mechanisms to achieve reorganisations.
Failure to ensure compliance with the BCA requirements relating to the solvency test and other legal aspects may result in severe repercussions for the BVI company and its group entities.
The foregoing is a brief look at distributions under the BCA. Please note that this article does include information on BVI companies incorporated in older legislation to the BCA.
Footnote
1 BVI FSC Statistical Bulletin Q4 2023 (as at 31 December 2023)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.