BVI Securities and Investment Business Act, 2010

[OGIER]

British Virgin Islands: BVI Securities and Investment Business Act, 2010
29 April 2010

Following the completion of an industry consultation, the British Virgin Islands ('BVI") has enacted the Securities and Investment Business Act, 2010 ("SIBA"). The enactment of SIBA represents an extremely important step for the continued development of the financial services sector within the BVI, providing the jurisdiction with a further modern and user friendly statute, in tune with the current regulatory environment, which will complement the BVI Business Companies Act, 2004 and the Insolvency Act, 2003.
Background

The objectives of SIBA are principally fourfold, in that it:

* introduces an investment business licensing regime to regulate entities conducting "investment business" in or from within the BVI;
* adopts restrictions on and regulations for the making of "public issues of securities" into the BVI;
* repeals the current Mutual Funds Act, 1996 and introduces an updated and modernised statutory regime, through SIBA and the Mutual Funds Regulations, 2010 which will regulate the BVI's investment funds industry; and
* introduces a market abuse regime.

Key Features of SIBA

The key features of SIBA are as follows:
Investment Business

Any person carrying on activities constituting "investment business" in or from within the BVI will under SIBA be required to hold an investment business license specifically authorising that kind of investment business. For these purposes, the types of activity constituting investment business are as follows:

* dealing in investments;
* arranging deals in investments;
* managing investments;
* providing investment advice;
* providing custodial services with respect to investments;
* providing administrative services with respect to investments; and
* operating an investment exchange.

Schedule 1 of SIBA gives a fairly broad definition of the types of things constituting "investments" for the purposes of SIBA.

Schedule 2 of SIBA makes provision for certain investment activities to be excluded from constituting investment business (detailed in Schedule 2 Part B of SIBA as "excluded activities") and for certain types of persons conducting investment business from being excluded from the requirement to hold an investment business license under SIBA (detailed in Schedule 2 Part C of SIBA as "excluded persons").

Significantly, the scope of SIBA will cover any BVI company carrying on investment business anywhere in the world and any person soliciting a person (including a BVI entity) in the BVI in order to offer a service constituting investment business. Therefore, the investment business provisions under SIBA will have application to both (i) BVI entities conducting investment business outside the BVI; and also (ii) BVI and non-BVI entities conducting investment business within the BVI (unless those activities constitute an exclude activity or the entity conducting the investment business qualifies as an excluded person).

Once licensed to conduct investment business, SIBA makes provision for various systems and controls for the operation of a licensee's business, covering corporate governance, advertisements and other administrative functions. A further regulatory regime will be implemented through the Regulatory Code, 2009 (the "Regulatory Code"), which has been amended so as to bring investment business licensees within the scope of the Regulatory Code, which came into force in the BVI on 1 February 2010.
Public Issues of Securities

Another feature of SIBA is that it introduces provisions regulating the offering of securities into the BVI.

Under the public issues provisions, subject to limited exceptions, no security may be offered to the public in the BVI unless (i) the offer is contained within a "registered prospectus"; and (ii) the offer complies with the Public Issuers Code. For these purposes, an offer of securities to any person in the BVI or an offer received by a person in the BVI is an offer of securities to the public.

Importantly, the mere receipt by a BVI company at its registered office of an offer of securities will not, in itself, be sufficient to make that offer constitute a public offer. Where an offer is deemed to be a public offer and so requiring the prospectus to be registered with the FSC, SIBA and the Public Issuers Code provide for prospectus content requirements. In addition, for public issues by BVI companies, certain provisions of the BVI Business Companies Act, 2004 are disapplied by Schedule 6 of SIBA.

As an ongoing obligation for public issuers, any amendments or supplements to a registered prospectus are also required to be registered with the FSC and a copy of all such amendments or supplements made available to every person who received a copy of the original prospectus.

In addition to the normal common law remedies available, SIBA also gives the Courts the powers to grant a compensation order in favour of subscribers who purchased securities offered pursuant to a public offer in reliance of a prospectus and suffered loss or damages as a consequence of any untrue or misleading statement contained within that prospectus or omission from that prospectus. Such orders may be made against the issuer; its directors; any guarantor of the issue; any person accepting responsibility for the prospectus; any promoter of the offer (including directors of the promoter); and any other person authorising the contents of the prospectus.
Mutual Funds

SIBA repeals the Mutual Funds Act, 1996 and introduces an updated and modernised statutory regime for the regulation of the BVI funds industry, through SIBA and the Mutual Funds Regulations, 2010. The framework for the regulation of BVI funds is not materially altered by the enactment of SIBA, such that many of the legislative changes made under SIBA and the Mutual Funds Regulations, 2010 merely codify the existing FSC policy which has developed over recent years in line with evolving international standards.

Notable changes introduced by SIBA are as follows:

* a codification of the requirement for BVI funds to have at least two directors;
* a requirement for all BVI funds to appoint an authorised representative resident in the BVI (being an agent licensed by the FSC to provide authorised representative services);
* a change in the minimum initial investment which may be made by investors investing into professional funds, requiring, subject to limited exceptions, all investors to make an initial minimum investment of at least US$100,000 (the previous position under the Mutual Funds Act, 1996 was that a majority of the investors into professional funds were required to invest at least US$100,000);
* a change in the timeframe pursuant to which professional funds are able to commence business before receiving recognition from the FSC, enabling professional funds to commence business for up to 21 days before receiving FSC recognition, provided that the professional fund's application for recognition is submitted to the FSC for consideration within 14 days of the launch date (the previous position under the Mutual Funds Act, 1996 was that a professional fund could commence business for up to 14 days before receiving FSC recognition); and
* a requirement for professional and private funds intending not to appoint either an investment manager, administrator or custodian to apply to the FSC for an exemption from the requirement to appoint such a functionary.

In addition to the above, SIBA codifies the current FSC policies in relation to ongoing reporting obligations for funds recognised as either private or professional funds or registered as public funds.
Market Abuse

SIBA introduces a market abuse regime which introduces prohibitions against insider dealing in the BVI. The market abuse regime introduced under SIBA is very much in line with accepted international standards.
Transitional Provisions

SIBA provides for transitional provisions for existing BVI entities which are, on the date of SIBA coming into force either currently licensed under the Mutual Funds Act, 1996 or currently carrying on business activities which constitute "investment business" under SIBA. These transitional provisions will apply during the first six months following the enactment of SIBA and will enable such entities to come into compliance with SIBA during the transitional period without being in breach of SIBA. This will therefore facilitate the smooth transitioning for such entities into the new regulatory regime created by SIBA.

[Phillip Kite]

British Virgin Islands: Legal Update: BVI Case Notes
23 April 2010


New Rules

New Commercial Court rules now apply. See link here for ease of reference. The new rules deal with a number of procedural points including case management conferences, pre-trial reviews and also include significant changes to the previous High Court costs regime.

Insolvent Funds

There continues to be numerous issues surrounding the "creditor/investor" debate in fund's litigation. There have been a number of cases of particular note. First of all Citco Global v Y2K Finance where a winding up petition was brought on two basis. First of all, alleged improper redemption payments made by the fund prior to the suspension of redemptions. The Commercial Court was of the view that it would not permit minority shareholders to wind up a company on the basis that it had, or might have, claims against its directors as this would be inconsistent with the rule in Foss v Harbottle (1843) 2 Hare 461.

The second ground was based on a loss of substratum argument and by the time of the hearing the fund agreed that it should be wound up, but the directors wanted the opportunity to realise assets, repay investors and then enter into a voluntary liquidation procedure. Although the Court preferred a wide definition of loss of substratum, it refused to make a compulsory winding up order as the directors were acting within the articles of association in making repayments and any investor would have the more appropriate unfair prejudice remedy.

The second major case is Western Reserve International Ltd v Reserve International Liquidity Fund which gave specific guidance on the "creditor/investor" issue. Although cases depend on their individual articles of association and other documents, the Court provided very useful guidance on this area and on the operation of section 197 of the Insolvency Act which provides that:

"A member, and a past member, of a company may not claim in the liquidation of the company for a sum due to him in his character as a member, whether by way of dividend, profits, redemption proceeds or otherwise, but such sum is to be taken into account for the purposes of the final adjustment of the rights of members and, if appropriate, past members between themselves."

In Reserve the "investor" argued that it had redeemed was therefore a creditor and able to wind up the fund. The Court decided that the effect of the articles was that if a redemption request was received before 5pm on a dealing day, the redemption of the investor's shares was completed on that day. The Court noted that the redemption was submitted before any suspension period and the investor had therefore become a creditor for the unpaid redemption proceeds in its capacity as a seller entitled to a price of shares. Accordingly section 197 did not preclude the petition.

Our Distressed Funds Group has prepared a detailed analysis of the Reserve ruling. Reserve has been appealed and we will bring you the result of that appeal.

In another recent decision, Barefield Nominees Limited v Westford Special Situations Fund Ltd., the BVI Court held that a feeder fund electing to redeem an investor in specie must provide quantifiable assets and that, in this instance, a share in the Master Fund would not be adequate. The decision was fact specific but is an important reminder to funds seeking to make redemption payments in kind to be very wary as to exactly what is being proffered in satisfaction.
Cross-Border Insolvency

Harney also recently acted for BVI and Hong Kong joint-liquidators in obtaining court sanction to enter into a memorandum of understanding ("MOU") with a United States Receiver appointed over the same BVI company. The MOU, also approved by the California District Court, defined what assets each office holder should gather according to where they are situated.

The MOU, the first known of its kind, was important in that it manages the duties of liquidators and a receiver (not appointed via "insolvency proceedings") to co-ordinate and streamline asset gathering activities for the benefit of the creditors

"Stand alone" injunctions

In the recent case of Black Swan Investment I.S.A. v Harvest View Limited the BVI High Court held that it was within its discretion to grant a "stand alone" freezing injunction in support of foreign proceedings. It was previously thought, by reason of the English House of Lords case of The Siskina [1979] AC 210, that the Court could not grant a freezing injunction unless the injunction was made in support of a claim which the Court granting it had jurisdiction to enforce by final judgment - often referred to as "a substantive cause of action". However, the BVI Court held that such an interpretation of The Siskina was incorrect and all that Lord Diplock was saying in that case was that the High Court in England had no power to grant an injunction except in protection or assertion of some legal right which it has jurisdiction to enforce by final judgment. As has subsequently been held in the English case of Channel Tunnel Group v Balfour Beatty Ltd [1993] AC 334, this formulation does not preclude the English court from granting an interlocutory injunction ancillary to a claim for substantive relief to be granted by a foreign court or an arbitral body. Citing the dissenting judgment of Lord Nicholls in the Privy Council decision ofMercedes Benz Ag v Leiduckit was held that since there was no reason in principle why a claimant could not enforce a foreign money judgment in the BVI Courts, there seemed no logical reason why he should not be able to make a claim for ancillary relief to a foreign award or judgment, such as a freezing injunction.

This decision has particular relevance in offshore jurisdictions because the business of companies incorporated in such places is invariably transacted abroad and disputes between parties who own them and others are often resolved abroad. The BVI Court noted that it would be "highly detrimental" to the reputation of an offshore jurisdiction if potential judgment creditors seeking to have resort to judgment debtors' assets located in such jurisdictions were required to first commence substantive proceedings in order to claim ancillary relief. It was noted that similar conclusions have been reached by the Court of Appeal of Jersey and Guernsey.