British Virgin Islands companies are generally free to dispose of their assets on such terms as the directors think fit, but where the assets being disposed of constitute 50% or more of the company’s total assets, then section 175 of the BVI Business Companies Act, 2004 requires that all shareholders (even shareholders holding non-voting shares) must be formally notified of the proposed disposal, and that the disposal must then be approved by a resolution of the shareholders. The main exception is that no shareholder approval is required if the disposal is made in the “usual or regular course of business”.
Until recently it was a matter of conjecture as to how the requirement “usual or regular course of business” should be applied with respect to single purpose vehicles which hold a single asset. On the one hand, dealing with that asset is the company’s principal (and only) business. Accordingly selling that asset at the appropriate point for the company’s financial benefit might be said naturally to fall within the usual and regular course of its business. The alternative view was that the provision existed to protect shareholders by requiring that any wholesale disposition of the company’s property must be approved by them before it proceeds; and furthermore, the word “course” seems to suggest there must be something ongoing in the nature of the business (as indeed the word “business” itself implies), rather than a one-off function.
The British Virgin Islands courts finally had an opportunity to express its view in on the matter in Ciban Management Corp v Citco (BVI) Ltd (BVIHCV 2007/031). In that case the relevant company was not a true SPV, but it had been a property holding company at the time of the relevant disposition it was a single asset vehicle which sold its sole remaining property. The court firmly expressed the view that if the company’s business was holding property, that necessarily implied selling property where it was appropriate to do so, and therefore the sale was within the usual and regular course of the company’s business. Accordingly it was held that no breach of the relevant statutory provision occurred as a result of failing to notify the sole shareholder or seek his consent.
Unfortunately, having made that determination, it followed that it was therefore unnecessary for the court to consider what the consequences of breaching the section might be. It is clear that a failure to seek and obtain shareholder consent will allow a disaffected shareholder to exercise their rights to have their shares repurchased by the company for fair value under section 179. However it is unclear if any further consequences might also arise, and in particular, whether the board of directors might be personally liable for breaching the statutory duty, and if so whether any liability of the directors is owed to the company itself or to the body of shareholders. On the facts of the case, a right to have shares purchased for fair value would have been of limited benefit as the board had been accused of selling its only asset for a significant undervalue, and so requiring the company to purchase a shareholders’ shares for fair value would be cold comfort; the central complaint was that shareholder value had been destroyed by the undervalue sale and that would not have been remedied by ordering the company to use those proceeds of the undervalue shares to repurchase the sole shareholder’s shares. Determination of those issues will seemingly have to wait for another day.
Harneys represented the successful defendants in the case.
The case actually related to section 80 of the International Business Companies Act, 1984 - the predecessor of the BVI Business Companies Act, 2004. However the wording of the two sections is identical.