Corporate Governance and Directors' Duties: British Virgin Islands
A Q&A guide to corporate governance law in British Virgin Islands.
The BVI Business Companies Act (BCA), which serves as the territory's principal corporate statute, allows for the formation of the following types of companies:
Companies limited by shares.
Companies limited by guarantee not authorised to issue shares.
Companies limited by guarantee authorised to issue shares.
Unlimited companies authorised to issue shares.
Unlimited companies not authorised to issue shares.
The most commonly used corporate entities are companies limited by shares and close to 1 million such companies are registered in the British Virgin Islands (BVI).
The BCA fails to draw a distinction between private and public companies. However, companies engaged in certain types of business, including banking, insurance and investment funds must be licensed.
The answers below focus on companies which are not regulated and on whose business activities BVI law would not impose a licensing requirement.
Companies formed in the BVI and which are referred to in this chapter are subject to a regulatory framework which consists of statutory provisions, the common law and the provisions of the company's memorandum and articles of association (M&A) and the duties of the directors of such companies are formulated on the basis of that regulatory framework.
What is the name of the code? What areas are covered by it (for example, board composition and committees, remuneration, audit and risk)?
How is the code structured (for example, a set of rules or principles and provisions)? What type of companies must comply with the code?
Is the code based on the comply or explain principle? How are companies required to report their application and compliance with the code (for example, in their annual report)?
What are the consequences of non-compliance with the code?
What has been the general response of companies, regulators and shareholder groups to the comply or explain approach? Has it been popular or controversial? Are there plans to reform it?
Board composition and remuneration of directors
Is there a unitary or two-tiered board structure?
Who manages a company and what name is given to these managers?
Who sits on the board(s)?
Do employees have a right to board representation?
Is there a minimum or maximum number of directors or members of the managerial and supervisory bodies?
Structure. There is typically a unitary board structure.
Management. The business and affairs of a company are usually managed by the directors.
Board members. The board comprises directors who may either be individuals or incorporated entities.
Employees' representation. Employees do not have a statutory right to board representation.
Number of directors or members. The BCA requires a company to have at least one director but the legislation fails to stipulate a maximum number. However, a company may limit the maximum number of directors in its M&A.
Are they recognised?
Does a part of the board have to consist of them? If so, what proportion?
Do non-executive or supervisory directors have to be independent of the company? If so, what is the test for independence or what makes a director not independent?
What is the scope of their duties and potential liability to the company, shareholders and third parties?
Recognition. The BCA does not refer to or provide definitions for non-executive, supervisory or independent directors. All directors, irrespective of their title, have identical statutory responsibilities and duties to a company. If a company wants to appoint directors with these specific titles it may do so but it must refer to and define the titles in its M&A.
Board composition. The BCA does not require a company to have non-executive, supervisory or independent directors.
Independence. There is no requirement for any director to be independent of the company.
Duties and liabilities. As the BCA does not make a distinction with respect to non-executive, supervisory or independent directors, their duties and liabilities would be the same as any other director of the company.
Appointment of directors
The first directors of a company must be appointed by the company's registered agent in the BVI and must be appointed within six months of the company's incorporation. Subsequent directors may be appointed by the company's shareholders (unless the company's M&A provide otherwise) and directors may also be appointed by other directors where the M&A allows this.
Removal of directors
Subject to the company's M&A, a director may be removed by the shareholders by a:
Resolution passed at a meeting of shareholders called for the purpose of removing the director or called for purposes including the removal of the director.
A written resolution consented to by 75% of the shareholders of the company who are entitled to vote.
Determination of directors' remuneration
Subject to the company's M&A, the board may determine the remuneration to be received by a director (BCA).
Disclosure of a director's remuneration is not required under BVI law.
Unless specified under the M&A, shareholder approval of the remuneration to be paid is not required.
Management rules and authority
A company's internal management is regulated by the BCA and its M&A. Subject to the M&A, the directors of the company are free to meet at such times and in such manner and places within or outside the BVI as the directors determine to be necessary or desirable. Unless the M&A prescribes a specific notice period, a reasonable notice of a meeting of directors must be given. The M&A may fix a quorum but if none is fixed then a meeting will be duly constituted if half of the total number of directors is present. The BCA does not indicate the percentage of votes required to pass a resolution of directors so this should be addressed in the company's M&A.
The BCA expressly tasks the directors, as a whole, with managing, directing or supervising the business and affairs of the company and it provides that the directors have all the powers to perform their role, unless the M&A imposes restrictions on them.
Restrictions on the powers of the directors may be included in the M&A and it is also possible for the shareholders to pass resolutions restricting the powers of the directors. The BCA has done away with the concept of constructive notice, except in relation to restricted purposes companies. Therefore, third parties acting in good faith may assume that the directors have the power to take the actions they propose. However, any restrictions contained in the M&A of a restricted purposes company are enforceable against third parties.
The board may delegate practically all of its responsibilities to committees of directors consisting of one or more directors. However, certain responsibilities cannot be delegated, such as (BCA):
The power to amend the M&A.
The power to designate committees of directors or delegate to those committees.
The power to appoint or to remove directors or agents.
The power to approve a plan of merger, consolidation or arrangement.
The power to make a declaration of solvency or approve a liquidation plan or the power to make a determination that the company will immediately after a proposed distribution satisfy the solvency test.
The BCA does not impose any requirement on the board to delegate any of its responsibilities.
Duties and liabilities of directors
Theft and fraud.
Health and safety.
General duties. The BCA codifies the equitable and common law duties owed by a director. A director must (BCA):
act honestly and in good faith and in what he believes to be in the best interests of the company;
exercise his powers for a proper purpose and not act, or agree to the company acting, in a manner that contravenes the BCA or the M&A;
exercise his duties with the care, diligence and skill that a reasonable director would exercise in the same circumstances taking into account the nature of the company, the nature of the decision, his position and the nature of the responsibilities undertaken by him.
Theft and fraud. A director who engages in theft or fraud may be criminally liable and may also in his personal capacity be liable to the company, its members and third parties affected by the director's actions.
Securities law. The newly enacted Securities and Investment Business Act imposes additional requirements on directors of regulated entities but as currently in force, the legislation does not impact entities discussed in this chapter.
Insolvency law. In addition to the duties and liabilities imposed by the BCA and common law, directors of a company are also subject to the duties imposed by the BVI Insolvency Act and may be held personally liable when found to be in breach of those duties. The duties are particularly relevant to the directors of a company that is experiencing financial difficulties, or that is contemplating a transaction which may place a company into a position of financial difficulty.
A director may be held liable if he:
has misapplied or retained, or become accountable for, any money or any assets of the company, or has been found guilty of any misfeasance or breach of any fiduciary or other duty to the company. The BVI court may order the director to repay, restore or account for any money or assets, or pay compensation in respect of any misfeasance or breach of duty;
engages in fraudulent trading, that is, the company's business has been carried on with intent to defraud its creditors, or the creditors of any other person, or for any fraudulent purpose. Where this occurs the court may order a director to make a contribution to the company's assets to the extent that the court considers appropriate;
engages in fraudulent conduct, that is, at any time while he was a director of the company or within 12 months preceding the commencement of the liquidation he:
made or caused to be made any gift or transfer of, or charge on, or caused, permitted or acquiesced in the levying of any execution against the company's assets; or
concealed or removed any of the company's assets since, or within, 60 days of the date of any unsatisfied judgment or order for the payment of money obtained against the company.
However, it will not be considered an offence if the director can show that he had no intent to defraud the company's creditors or in the case of a gift, transfer or charge it occurred more than five years before the commencement of the liquidation.
engages in insolvent trading, that is, at a time when he was a director of the company but before the commencement of liquidation, he knew or ought to have concluded, that there was no reasonable prospect that the company would avoid going into insolvent liquidation and he failed to take every step reasonably open to him to minimise the loss to the company's creditors. The court may in such an instance order a director or former director to contribute to the company's assets.
The facts which a director of a company ought to know or ascertain, the conclusions he ought to reach and the steps reasonably open to him which he ought to take are those which would be known or ascertained or reached or taken by a reasonably diligent person having the general knowledge, skill, and experience that may reasonably be expected of a person carrying out the same functions as the director in question and the general knowledge, skill and experience of that director (that is, the test is made up of both objective and subjective elements).
The liability of directors under the Insolvency Act for fraudulent trading and insolvent trading is of a compensatory rather than of a penal nature and any shortfall in a company's assets which is being sought from the director to meet creditors' claims would be calculated on an indemnity rather than a damages basis with no scope for punitive damages. However, the offence of fraudulent conduct does attract a penal penalty (imprisonment up to three years) and/or a fine up to US$10,000 (as at 1 April 2011, US$1 was about EUR0.7).
The court also has the power to make a disqualification order against a delinquent director. If this order is made it will prevent that director from engaging in any prohibited activity, without the leave of the court, for a period determined at the discretion of the court. The prohibited activities include, but are not limited to:
acting as a director of a company; or
in any way, directly or indirectly, being concerned or taking part in the promotion, formation or management of a company.
If a person, subject to a disqualification order, engages in a prohibited activity he commits an offence which attracts imprisonment up to two years and/or a fine up to US$7,500.
Health and safety. Liability in relation to health and safety violations often arises based on the jurisdiction in which the company has its operations and employees. In most instances BVI companies carry out their operations outside of the BVI territory but if a company breaches health and safety regulations in the BVI then a director may be personally liable if he contributed to the breach through neglect or consent.
Environment. Where a company operates in the BVI and breaches BVI environmental laws, no personal liability usually arises for the company's directors.
Anti-trust. There are no anti-trust laws in the BVI.
Other. A director of a subsidiary company is permitted to act in the best interests of its holding company or some of its shareholders in certain circumstances, even though it may not be in the best interests of the subsidiary company itself. If expressly allowed by the company's M&A, a director may act in what he considers to be the best interests of the company's sole holding company or, if the company of which he is a director is not a wholly owned subsidiary, he can act in what he considers to be the best interests of the holding company with the prior agreement of the company's shareholders. The same concept applies where a person is a director of a company carrying out a joint venture between shareholders. A director may act in what he believes to be in the best interests of a shareholder or shareholders who appointed him, even if this is not in the best interests of the company as a whole.
Subject to any provisions to the contrary in the M&A, directors may be indemnified by the company against all expenses including legal fees and all judgments, fines or amounts paid in settlement and amounts reasonably incurred in connection with legal, administrative or investigative proceedings. These statutory provisions apply to both a discretionary indemnity and a mandatory one.
A company can indemnify the director in circumstances where the director is or was or is threatened to be made a party to the proceedings because he is or was a director, or he was, at the request of the company, acting as a director of another body corporate or acting on behalf of another enterprise (for example, a partnership, trust and so on). In those circumstances, the company can indemnify the director, but only if he acted honestly and in good faith and in what he believed to be in the best interests of the company and, in the case of criminal proceedings, he had no cause to believe his conduct was unlawful.
If these conditions are not satisfied, the company must not indemnify him and any purported indemnity by the company is void. The termination of proceedings by judgment, order, settlement, conviction or entering of a nolle prosequi (that is, a prosecutor's application to discontinue criminal charges before trial, or up until, but before verdict), does not by itself create any presumption that the person did not act honestly and in good faith.
The mandatory indemnity applies if the director is successful in defending the proceedings brought against him.
The statutory provisions are not exclusive of any other rights to which a director seeking indemnification or advancement of expenses may be entitled under an agreement or resolution of members or directors.
The BCA does not prohibit a director from obtaining insurance against personal liability. A company can purchase and maintain insurance in relation to a person who is or was a director, against any liability incurred by him or asserted against him, irrespective of whether or not the company had the power under the BCA to indemnify him (BCA).
The BCA defines a director as any person occupying or acting in the position of director by whatever name called.
The Insolvency Act provides an even wider definition and includes:
A person in accordance with whose directions or instructions a director or the board of a company may be required or is accustomed to act.
A person who exercises, or is entitled to exercise, or who controls, or is entitled to control the exercise of powers which, apart from the M&A, would fall to be exercised by the board.
Therefore, duly appointed directors, together with de facto directors and shadow directors may be held liable under the BVI law.
Transactions with directors and conflicts
There are rules in the BCA relating to conflicts of interest between a director and a company.
A director must disclose his interest to the other directors immediately after becoming aware of the fact that he is interested in a transaction entered into or to be entered into by a company for which he acts as a director. The disclosure need not be a disclosure of all matters connected with his interest or with the transaction: it is sufficient for the director to disclose the general nature of his interest, for example, that he is a member, director or officer of the other party to the transaction, and so is to be regarded as interested in the transaction. The disclosure must be brought to the attention of each and every other director. It appears that in the case of a sole director, this requires that the sole director formally disclose his interests to himself. However, the director is not required to make disclosure if the transaction is between himself and the company and it is in the ordinary course of the company's business and on usual terms and conditions.
Unless it is prohibited by the company's M&A, a director can attend a meeting of the directors relating to the transaction, be included for the purposes of a quorum, vote on the resolution, and sign documents or do anything in his capacity as a director.
Failure to disclose has two consequences:
It renders the director liable for a fine of US$10,000.
It renders the transaction voidable at the instance of the company.
The transaction will not be voidable if one of the following applies:
The director disclosed his interest to the board prior to the company entering into the transaction.
The director is not required to disclose his interest by virtue of the provisions of the BCA.
The material facts of the interest were known by the shareholders of the company and they approved or ratified the transaction.
The company received fair value.
Fair value is not defined in the legislation and must be a question of fact in the light of all the circumstances. However, third parties who acquired title or interest in property from someone other than the company for valuable consideration and without knowledge of the circumstances of the transaction between the company and the transferor are protected from the consequences of avoidance. Although not explicitly set out in the BCA, it appears that the right to avoid a transaction is lost by the usual bars at common law such as:
Intervening third party rights.
Where it is impossible to restore the parties to their original positions.
Although the BCA provides fairly comprehensive rules for dealing with conflicts of interest, at no stage does it repeal the common law rules, which in many areas are more restrictive. Therefore, it appears that directors must be mindful to comply with both their statutory duties as well as their common law duties.
There are no restrictions on particular transactions between a company and its directors but the conflict of interest rules apply (see Question 19).
Disclosure of information
Directors are not required by the BCA to disclose any information about the company to the public or regulated bodies. Where a shareholder makes a written request to inspect the company's records, he is only entitled to inspect (BCA):
The company's M&A.
The company's register of directors and register of shareholders.
Any resolutions of members with respect to which he voted.
Subject to a company's M&A, the directors can deny the request if they are satisfied that to allow the inspection would not be in the company's best interest.
A meeting of shareholders may be convened by the directors of a company or by such person or persons as authorised under the company's M&A. Therefore, if a company's M&A allows a particular shareholder to convene a meeting, he may do so. Otherwise, the directors of the company must convene a meeting if they receive a written request to this effect from shareholders entitled to exercise at least 30% (or such lesser percentage as identified in the M&A) of the voting rights in respect of the matter for which the meeting is requisitioned (BCA).
Minority shareholder action
If the company or a director engages, or proposes to engage, in conduct that contravenes the BCA or the company's M&A, a minority shareholder may apply to the court, either to restrain the wrongdoing or to force compliance with the statute or the M&A.
A minority shareholder can also bring an action against the company for breach of a duty owed by the company to him as a shareholder. Where other shareholders are also affected, the court may appoint a shareholder to act for them in a representative capacity.
Where a minority shareholder is of the view that the affairs of the company have been, are being, or are likely to be, conducted in a manner that is, has been, or is likely to be, oppressive, unfairly discriminatory, or unfairly prejudicial to the shareholder, he can bring an action and if the court considers it just and equitable to do so, it may grant one or more of the following remedies:
An order that the company or any other person acquire the shareholder's shares.
An order that the company or any other person pay compensation to the shareholder.
An order regulating the future conduct of the company's affairs.
An order amending the M&A of the company.
An order appointing a liquidator of the company.
An order to rectify the records of the company.
An order setting aside the decisions or acts of the company or its directors that are in breach of the company's M&A.
A minority shareholder can also apply to court to seek the winding-up of a company on just and equitable grounds but this should only be employed as a final option.
Internal controls, accounts and audit
A company must keep records that are sufficient to show and explain the company's transactions and that will, at any time, enable the financial position of the company to be determined with reasonable accuracy (BCA). The directors must, in accordance with their fiduciary duties, ensure such records are kept.
There is no statutory requirement to appoint auditors (see Question 28). Therefore, the requirement for appointing an auditor would usually be set out in the M&A and the M&A would indicate who had the authority to appoint the auditor and the length of the appointment if any.
Corporate social responsibility
There is no requirement under the BCA to appoint a company secretary and the legislation has not identified their specific role. However, if such an officer is appointed his responsibilities would be as set out either in a company's M&A, the directors' resolution that approved his appointment or in some other contract entered into between the company and the company secretary.
Institutional investors and shareholder groups
There is no current proposal to revise the BCA as it relates to directors' duties. However, in certain limited instances the legislation contemplates that there may be regulations which may amend relevant sections of the BCA. Currently, it is uncertain whether any such regulations will be drafted or brought into force in the near future.
Harney Westwood & Riegels
Qualified. British Virgin Islands, 1999; Jamaica, 2001; Anguilla, 2007
Areas of practice. Corporate and commercial.
- On the first plan of arrangement implemented under the BCA, involving the consolidation of three BVI companies to create a single new entity.
- A Uruguay based agriculture company listing on the NYSE.
- A gold mining company with respect to its continuation from Canada to the BVI and subsequent listing on the TSX.
- A TSX listed coal mining company on its acquisition by an Indian energy company, by way of merger.