The British Virgin Islands ("BVI") has a long established reputation for providing cost effective corporate structures for raising finance and for acting as efficient gateways for collective investments. BVI funds do not add extra layers of taxation to the taxes investors already pay in their home country.This creates a level playing field for investors from all jurisdictions.
BVI corporate structures are well understood globally and investors continue to be attracted to the BVI for its common law legal principles, dedicated commercial court, administrative simplicity and the ability to ring-fence liabilities through the use of segregated portfolio companies. The BVI is a member the International Organization of Securities Commissions ("IOSCO") and maintains the high regulatory standards required by such membership.
BVI corporate framework and securities laws are recognised by regulators worldwide, making it easy for BVI companies to list their shares on the major stock exchanges worldwide, including the London Stock Exchange, LSE's AIM exchange, the New York Stock Exchange, NASDAQ, the Hong Kong Stock Exchange, and the Toronto Stock Exchange, to name a few. This is important as it provides a choice of exit routes for the investors, in addition to the private sale of shares and secondary buyout options.
The absence of an additional layer of tax, the ease of incorporation and economical ongoing costs of using a BVI company and the high standards required by IOSCO, make the BVI one of the most utilised offshore jurisdictions for establishment of investment funds. In addition, however, it should not be overlooked that a significant advantage of using the BVI for investment funds structures, is that the BVI is a creditor friendly jurisdiction.
Whilst the amount of leverage used by hedge funds can vary substantially, dictated by the strategy being utilised and several other variables, I am yet to come across a hedge fund that does not employ some form of leverage to generate outsized investment returns. Closed-ended funds have also relied on leverage to create a positive difference between the longer-term return and the short-term cost of borrowing. It has been increasingly difficult for investment funds globally to borrow in the current environment, and creditor protection is an important advantage when it comes to raising debt.
So, how does the BVI corporate model assist with this?
Firstly, the enforceability of netting and set off provisions is recognised by statute. This is particularly important for prime brokers and ISDAs.
Secondly, there is no US style Chapter 11 or UK administration provisions in force in the BVI. The appointment of liquidators over a fund under the BVI Insolvency Act brings about a moratorium on claims against the fund, but this does not prevent the enforcement of security by a secured creditor. The Insolvency Act provides only very limited categories of preferred creditors on insolvency.
Thirdly, one of the major advantages for a lender to a BVI fund is that the BVI legislation provides a simple and robust regime for registration of security. Short particulars of security given by a BVI fund may be registered publicly in the BVI thereby providing statutory priority of enforcement waterfall, which may be varied by contractual subordination agreements.
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.