How to enforce Security in the BVI out of court will depend on your Security type. For this guide, we focus on the out-of-court enforcement of Security granted over shares in a company.

How do you create security over shares in a BVI company?

The BVI Business Companies Act 2004 (as amended) (the Act) allows Security to be created over shares (the Shares) in a BVI company (a Company). This can be done by either a legal mortgage, equitable mortgage, or charge.

Section 66(1) of the Act provides for the mortgage or charge to be in writing signed by, or with the authority of, the registered holder of the Shares to which the mortgage or charge relates.

Section 66(5) of the Act sets out the remedies that can be used by the secured party in the event of a default on the debt over which the Security is given. Specifically, subject to the terms of the security documents itself:

  • The power of sale under section 66(5)(a)
  • The power to appoint a receiver under section 66(5)(b)

Both of these remedies can be exercised without needing a court order, per the terms of the security document, as explained in further detail below.

In some rare cases, the security holder may have valid reasons to retain control of the Shares rather than sell the shares or appoint a receiver. BVI law does not prohibit such retention of the shares, though the security holder must be aware that the shares will be subject to redemption by the mortgagor upon the settlement of the debt should it be paid.

What is the timing for enforcement of security?

Section 66(7A) of the Act provides that where the governing law of the mortgage or charge is that of the BVI, and if the instrument creating the mortgage or charge specifically provides the remedies referred to in section 66(5) of the Act will be exercisable immediately upon default occurring.

However, if the security document is silent on the power of sale or power to appoint a receiver being exercisable immediately on default, then section 66(7) of the Act specifies that the remedies in section 66(5) of the Act are not exercisable until an event of default has been ongoing for not less than 30 days, or a default had not been rectified within 14 days of the security holder giving notice of the default and requiring it to be remedied.

How can a security holder take possession of the shares?

To exercise the remedies above, the security holder must own the Shares. Usually, where Security has been granted by way of a legal mortgage over Shares, the security holder will already be the legal owner and, therefore, in possession of the Shares.

This is not usually the case regarding a security holder who has been granted Security through an equitable mortgage or charge. However, a security holder who has been granted Security over Shares by equitable mortgage or charge can be registered as the legal holder of the Shares at any time, and this does not expressly have to be after a default occurs. Usually, when an equitable mortgage or charge over the shares is provided, the security holder will be provided with a pack of documents along with the security document, which will allow for the transfer of the Shares to take place by being completed and the date and given to the registered agent of the company to register the transfer of shares and update the register of shareholders.

These documents include:

  • Undated share transfer form(s)
  • Original share certificates (if any – BVI law does not require share certificates to be issued)
  • A proxy to allow the secured creditor to vote the shares following an enforcement event
  • Signed and undated letters of resignation from the directors of the company and a letter from each director authorising the lenders to date the letters of resignation upon an enforcement event
  • An irrevocable undertaking from the company whose shares are charged to, among other things, register transfers of shares to the secured creditor or its nominee upon enforcement
  • An undertaking from the company's registered agent to, among other things, keep the original register of members until the Security is released and to update the same following the instructions of the secured creditor upon enforcement of the Security
  • Suppose it does not already form part of the security document itself. In that case, the security provider grants a power of attorney to enable the secured creditor to execute and complete documents on the security provider's behalf upon enforcement

How does the power of sale arise?

The power of sale may arise in the following circumstances, none of which necessitate an application to court for an order allowing the sale:

  • Statutory right of sale under section 66(5) of the Act
  • Where the security document is made by way of deed, by an implied statutory right of sale
  • A power of sale arising under common law
  • An express contractual right of sale set out in the security document

Commonly, a security document will have an express provision providing for the power of sale. This contractual provision is relied upon when enforcing Security in most cases. This power of sale is subject to any limitations or conditions in the security document. Still, if expressly provided for, the security holder can sell the shares.

Following section 66(5)(a), the right to sell the shares is available to the security holder as and when it chooses, subject to an obligation to the mortgagor to act in good faith and to obtain the best price reasonably obtainable on the day it exercises its power of sale. The secured party must not merely aim to recover the amount of the debt due. Any surplus proceeds must be remitted to the mortgagor. In the event of a breach of the duty of good faith, the mortgagor can apply to the court to prevent or reverse the sale. However, this duty of good faith does not require the sale to be carried out by any particular method or within a set time frame.

When would a security holder appoint an out-of-court receiver?

The most common method of enforcing Security over Shares is to appoint an out-of-court receiver. This power can arise:

  • Where the security document is made by way of deed, under an implied, statutory right to appoint a receiver
  • The statutory right to appoint a receiver under section 66(5)(b) of the Ac
  • A contractual right is set out in the security document

An order of the court must appoint a receiver if the right of appointment is based on statute, and as such, to appoint a receiver out of court, there must be a contractual right to do so under the security document. We suggest all properly drafted security documents should allow for this, but it is essential to check for this provision.

Where there is a contractual right to appoint a receiver per the terms of the security document, this is the route typically taken in practice. It is usually also quicker and cheaper than a court appointment.

Following section 139, Insolvency Act 2003 (IA 2003), the appointment of a receiver must be made in writing (s.139(1)). The appointment takes effect from the time upon which the receiver receives the written notice of appointment (s.139(2)), but the appointment of a receiver out of court is not effective unless the receiver accepts it before the end of the next business day following the day on which he receives the written appointment (s.139(3)).

Once a receiver is appointed, it can vote and sell the Shares, receive any dividends and exercise other rights attached to the Shares. The receiver will usually effect the secured party's sale of the Shares per its power under section 127 of the IA 2003. Following section 129 IA 2003, when exercising a power of sale concerning the Shares, the receiver owes a duty to obtain the best price reasonably obtainable at the time of sale.

Conclusion

We hope this guide helps you understand how to enforce security in the BVI- Outside of Court. If you have any further questions, please get in contact with Claire Goldstein or Christopher Pease.

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.