The BVI Business Companies Act, 2004 (as amended) (the "Act") gives a BVI business company (a "company") a high degree of flexibility in when and how it may make distributions.
What is a distribution?
A distribution has a wide meaning under the Act, being, in relation to a distribution to a shareholder:
- the direct or indirect transfer of an asset, other than the company's own shares, to or for the benefit of the shareholder; or
- the incurring of a debt to or for the benefit of a shareholder,
in relation to shares held by 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.
How can distributions be funded?
Distributions can be made from any sources, subject only to the company meeting the statutory solvency test, described below. There is no requirement for retained profits or reserves or for distributions to be made by reference to a specific period. This gives a great deal of flexibility to companies in how they pay or return amounts to shareholders.
Must distributions be made in cash?
Distributions are not limited to cash, and may include the transfer of property and assets in specie.
Do upstream guarantees and security constitute distributions?
To the extent that the grant of an upstream or cross-stream guarantee and/or security involves the incurrence of a debt for the benefit of a shareholder, it may constitute a distribution.
It is prudent therefore that where a company is granting an upstream or cross-stream guarantee or security, the directors not only consider the financial implications for the company but also include the required Solvency Statement (defined below) in the resolutions approving the transaction.
What is the process and requirements for making a distribution?
The directors of a company can approve a distribution at any time and of such amount as they think fit, provided that the resolution of directors authorising the distribution must include a statement (a "Solvency Statement") that, in the opinion of the directors, the company will, immediately after the distribution, satisfy the solvency test set out in the Act (the "statutory solvency test"), being that:
- the value of the company's assets exceeds its liabilities; and
- the company is able to pay its debts as they fall due.
What if the financial position changes after a distribution is authorised but before it is made?
If, after a distribution is authorised but before it is made, the directors cease to be satisfied on reasonable grounds that the company will, immediately after the distribution is made, satisfy the statutory solvency test, any distribution made by the company is deemed not to have been authorised.
Are shareholders and/or directors liable for unauthorised distributions?
Where a shareholder receives a distribution at a time when the company did not, immediately after the distribution, satisfy the statutory solvency test, the shareholder is liable to repay the distribution unless (a) the shareholder received the distribution in good faith and without knowledge of the company's failure to satisfy the statutory solvency test; (b) the shareholder has altered its position in reliance on the validity of the distribution; and (c) it would be unfair to require repayment in full or at all.
If, in such circumstances, a director failed to take reasonable steps to prevent the distribution being made, the director may be personally liable to the company to repay to the company so much of the distribution as is not able to be recovered from the shareholders.
Memorandum and Articles of Association
In addition to the statutory solvency test and other requirements under the Act, a company's memorandum and articles of association may also contain bespoke provisions regarding the making of distributions. For example, they may contain restrictions on making distributions, preferences as to who may receive distributions, and/or additional procedural requirements which must be satisfied in order for a distribution to be properly made. Accordingly, a company's memorandum and articles of association should be reviewed carefully prior to any distribution being authorised.
Former IBC Act companies
Certain older companies which were incorporated under the predecessor to the Act, the International Business Companies Act, 1984 (the "IBC Act"), and which have been automatically re-registered under the Act but not disapplied certain transitional provisions, are subject to a different statutory regime for distributions.
For such companies, dividends (including in specie) may only be declared and paid out of "surplus". For these purposes:
- "surplus" is broadly a company's net assets, as shown in its books of account, minus its capital; and
- "capital" is the sum of the aggregate par value of the company's issued shares (plus amounts designated as capital of shares without par value) and amounts transferred from surplus to capital by resolution of directors.
In practice, where the transitional provisions apply, there is a slight reduction in flexibility, and it is important that the directors are aware of the different rules and the director resolutions reflect the correct test.
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.
