Company law: a comparison of Guernsey and BVI
The British Virgin Islands (BVI) and Guernsey are both leading jurisdictions for the establishment and operation of private wealth structures. Both jurisdictions offer benefits: tax neutrality, a modern and adaptable legal regime, pragmatic regulation, and a pool of experienced and suitably qualified service providers.
Increasingly private client structures are using Guernsey and BVI companies. The relevant legislation in each jurisdiction – the BVI Business Companies Act 2004 (BVI Law) and the Companies (Guernsey) Law 2008 (Guernsey Law) – was introduced relatively recently. This article will look at the differences, similarities, advantages and disadvantages of the corporate regime in both jurisdictions.
Corporate benefit and fiduciary duties of directors
Notwithstanding that many private wealth structures will be established for the benefit of one person or one group of people, the directors of any BVI or Guernsey company within that structure will have their own obligations, which must be considered separately from the aims of the structure as a whole.
The concept of corporate benefit, namely that the board of directors of a company must use their powers for the corporate benefit of the company and its members, is present in both jurisdictions. Related to this are the fiduciary duties of directors, which require them to act in a particular manner in respect of the company and its members.
Corporate benefit can be particularly important where a BVI or Guernsey company transfers assets, or seeks to provide debt or equity investment, elsewhere in the private wealth structure. For instance, is there corporate benefit in a company lending interest-free or transferring assets to another entity without consideration, for the purposes of restructuring?
The common-law principles in Guernsey stipulate that directors have a fiduciary duty to act honestly and in good faith with a view to the best interests of the company, and to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. These duties are codified in s120 of the BVI Law. Additionally, the BVI Law expressly allows a director of a company to act in the best interests of one or more of its members when carrying out a joint venture, or for its holding company where the company is a wholly owned subsidiary.
The approval of members of both BVI and Guernsey companies can be sought to provide assurance that the members consider that there is corporate benefit. Members’ ratification of directors’ actions is also possible in both jurisdictions.
The directors of BVI and Guernsey companies can be protected from potential liability. Companies in both jurisdictions can indemnify directors, subject to limitations. For instance, under the Guernsey Law, directors cannot be exempted from liability for negligence, default, breach of duty or breach of trust, and under BVI Law an indemnity is only effective if the director acted honestly and in good faith, and in the best interests of the company.
In the BVI there are no restrictions on distributions, provided directors are satisfied on reasonable grounds that the company will, immediately after the distribution, satisfy balance sheet and cash flow solvency tests. In Guernsey, the directors must be satisfied of the company’s solvency on a similar basis as in the BVI, and must approve a certificate stating that in their opinion the company will, immediately after the distribution, satisfy the solvency test, and the grounds for that opinion.
A BVI company is expressly permitted to give financial assistance to any person in connection with the acquisition of its own shares. In Guernsey, financial assistance is not unlawful if there is power to give financial assistance in the articles, but it does constitute a distribution. Accordingly, the directors must be satisfied on reasonable grounds that the company will, immediately after the financial assistance, satisfy solvency tests.
Redemption of shares
Redeemable shares are permitted under the Guernsey Law and the BVI Law. In Guernsey, shares can be redeemed if permitted by the company’s memorandum or articles. Similarly, in the BVI shares are redeemable with the consent of the holder (assuming the memorandum or articles do not permit shares to be redeemed without consent), and in accordance with statutory provisions, unless disapplied (which is standard). In both the BVI (unless the shares are redeemable on demand of the holder) and Guernsey (except in open-ended investment companies), the directors must be satisfied on reasonable grounds that the company will, immediately after the redemption, satisfy solvency tests.
Buy-back of own shares
Under the Guernsey Law, shares can be bought back with the approval of special resolution for off-market buy-backs, whereas on-market buy-backs must be authorised by ordinary resolution. Similarly to redemptions, the directors must be satisfied on reasonable grounds that the company will, immediately after the buy-back, satisfy solvency tests. This differs from the BVI Law, under which statutory procedures apply to buy-backs unless expressly disapplied by the memorandum or articles. The directors must be satisfied that the company will, immediately after the buy-back, satisfy solvency tests. In either case, any shares bought back must be held in treasury or cancelled.
Issue of bonus shares or shares for non-cash consideration
A company in Guernsey can issue shares for non-cash consideration or as bonus shares. The board of directors must resolve that the consideration for and terms of the issue are fair and reasonable to the company and to all of its existing members, and must approve a certificate confirming this. In cases of the issue of shares for non-cash consideration, the resolutions and the certificate must also include the present cash value of the consideration and the basis for assessing it, and must state that the present cash value of the consideration is not less than the amount to be credited in respect of the shares.
This is similar to the BVI, where the directors must, before issuing shares for consideration other than money, pass a resolution stating the amount to be credited for the shares, their determination of the reasonable present cash value of the non-cash consideration and that, in their opinion, the present cash value of the non-cash consideration for the issue is not less than the amount to be credited for the issue of the shares.
Reduction of share capital
A Guernsey company can reduce its share capital if the directors are satisfied on reasonable grounds that the company will, immediately after the reduction, satisfy solvency tests. A reduction of share capital is a distribution. In the BVI, there is no legal concept of share capital. Nonetheless, if a company’s memorandum or articles refer to an amount of share capital or any amounts are treated as share capital, and the company wishes to return such amounts, or if the company wishes to return the par value of any issued shares, the return is logistically treated as a distribution. A BVI company can change the number of shares it is authorised to issue in accordance with the provisions of the company’s memorandum and articles, usually by way of a directors’ resolution.
Migrating in and out of both jurisdictions is permitted (subject to the laws of the jurisdiction from or to which the entity is migrating).
Both the Guernsey Law and the BVI Law contain statutory provisions enabling a company to merge or consolidate with a company in the same jurisdiction or a foreign company (subject to the laws in the jurisdiction of that foreign company).
Accounts and accounting standards
Guernsey companies must prepare annual audited accounts, but generally the audit requirement may be waived. The accounts must be sufficient to explain transactions and disclose with reasonable accuracy the financial position of the company, but no specific standards are required, although UK Generally Accepted Accounting Practices or International Financial Reporting Standards are most commonly used. The BVI has no specified accounting standards.
In Guernsey a person may be appointed auditor if they are a member of the Institute of Chartered Accountants in England and Wales, the Institute of Chartered Accountants in Scotland or the Association of Chartered Certified Accountants, or is authorised to audit companies by the States of Guernsey on the basis of having similar qualifications. A company or partnership cannot be named auditor unless it is controlled by individuals who would themselves meet the above requirements. In contrast to Guernsey, BVI companies have no requirement to audit their accounts.
Guernsey and BVI companies can be voluntarily wound up if solvent. Approval by a special resolution of members is required for a Guernsey company. Depending on the contents of the memorandum or articles of a BVI company, the directors may be entitled to approve the winding up, failing which it falls to a resolution of the members. A liquidator must be appointed in either case. On completion of the winding up of a Guernsey company, an account must be presented by the liquidator to a final meeting of the company.
This article was written with contributions from William Simpson, Managing Partner of Ogier’s Guernsey office, and Simon Schilder, Partner and Head of the Investment Funds practice in Ogier’s BVI office.
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