Modern day company law has largely moved away from the concept of “ultra vires” which sought to limit the ability of a company to enter into transactions outside its stated objects. The British Virgin Islands officially moved away from the concept in 2005 pursuant to provisions under the BVI Business Companies Act. Globally, the move was viewed as a way of protecting third parties who might otherwise be caught off guard and left holding the bag where it is deemed that the company in question had no power to enter into the transaction. Additionally, it gave companies greater flexibility in the transactions they could undertake. Notwithstanding the shift in company law in general, in the area of structured finance the concept of “ultra vires” is alive and well. To specifically accommodate the concept, the BVI Act creates and designates a specific type of company known as a “restricted purposes company.”
Under the Act, a restricted purposes company may only lawfully undertake transactions and activities within its specified purposes. These purposes must be set out in the company’s memorandum of association, which must also include a statement that the company is a restricted purposes company.
The Act also provides that once the company’s purposes have been specified:
- the entire world is deemed to have notice of the company’s restricted purposes and capacity; and
- any transaction which is not within the restricted purposes of the company is invalid.
A restricted purposes company is required by the Act to have a name ending with the phrase “(SPV) Limited” or “(SPV) Ltd” to specifically identify this type of company. The designation also seeks to put persons dealing with the company on notice that they should confirm that a transaction or activity is within the company’s specified purposes. From a BVI perspective, a restricted purposes company is further distinguished by a higher than usual annual government fee of $5,000, which is more than four times the maximum fee and 14 times the minimum fee for a standard BVI business company. This large discrepancy is designed to ensure that restricted purposes companies are only used for the types of sophisticated and high level transactions for which they are intended.
BVI restricted purposes companies will primarily feature in transactions where the purpose of the company is strictly limited and confidence in the transaction as a whole is placed in that limitation. In a typical company (even one with restrictions on its activities), in the event of a breach the normal remedy would be damages. For a restricted purposes company, however, the transaction would be invalid and unenforceable in the BVI, which is fundamental. For these primary reasons, restricted purposes companies are useful in transactions where a rating agency or similar entity might require that the company be viewed as insolvency or bankruptcy remote.
Restricted purposes companies may also be used as quasi-security vehicles by limiting the purposes of the company to incurring specific secured obligations, particularly in situations where holding the security asset may not be possible. In such an instance, the creditor can be confident that there can be no other claims against the company (and therefore the asset) which could compete or have priority.
Succession and estate planning is also an area where restricted purposes companies may be used. In such cases, it may be used to protect the disposal of an asset for a specified period after death by contributing the asset to a restricted purposes company, whose purposes are restricted to holding the asset until a specified date (with no power to deal or dispose of the asset until such date). This structure binds the heirs, upon becoming shareholders of the restricted purposes company, following the death of the individual shareholder.
Restricted purposes companies go back to the old roots of company law, but can still be applicable to modern day transactions. Accordingly, where a structured finance transaction is of a relative size and where benefits can be gained, then consideration should be given to the use of a BVI restricted purposes company. The BVI restricted purposes company with all its features is unique and builds on the BVI’s tradition of ingenuity and evolving creativity in structured finance transactions.
The author, O’Neal Webster partner Christopher Simpson, welcomes your enquiries.