By Jeffrey Kirk & Victoria Chen, Appleby

This article examines the laws of Bermuda, Cayman Islands, and the British Virgin Islands (the “BVI”) as such laws concern the registration, variation and release of charges and other security interests created over assets and certain rights of companies (not including charges over land, ships or aircrafts) and the impact, if any, of registration on the determination of the order of priority of competing charges.

Bermuda

Public Registration: Part V of the Bermuda Companies Act 1981 (as amended) (the “Companies Act”) provides for the operation of a public register of charges, a system of registration and of priorities amongst registered and unregistered charges. It applies to any charge on the assets of a Bermudian company wherever situated and to any charge on property located in Bermuda created or acquired by a company incorporated outside Bermuda.

Registration is not mandatory and failure to register a charge does not render the security interest void or invalid against the creditors or the liquidator of the company. However, the effect of registration is to confer priority over any charge (of a similar type) registered subsequently (irrespective of the date of creation of such charge) and over any unregistered charge. Charges created before 1 July 1983 continue to have the priority they had prior to that date, irrespective of whether they were subsequently registered under the provisions of the Companies Act.

There is no time limit for registration of a charge. However, in view of the fact that priority of the charged interest is determined by the date of registration, it is advisable to register a charge as soon as possible following its creation.

In relation to assignments of life insurance policies issued by Bermuda long-term insurers, priority over the interests created by the assignment (which are choses-in-action) is determined pursuant to the Bermuda Life Insurance Act 1978. This Act provides that, subject to policies which have beneficiaries irrevocable appointed by an assignee, priority is determined according to which assignor or assignee first gives written notice of the assignment to the Bermuda long-term insurer.

Registration Filing: A certified copy of the security document and with the relevant registration form containing the particulars of the charge are required to be filed with the Bermuda Registrar of Companies (the “Bermuda Registry”). The filing may be made by the company, (as chargor) or the chargee. In practise, it is often the Bermuda counsel for the chargor that registers the charge, as a condition precedent under the underlying financing or other arrangements.

A certificate of registration of charge will subsequently be issued by the Bermuda Registry.

Amendment of Registration Filing: Where the registered charge is amended, for instance by (i) the addition, removal or replacement of a chargee (as may occur in a syndicated lending arrangement where a lender assigns their rights to a replacement lender participant); or (ii) in the event that the security document has been varied, an original or certified copy of such document recording and evidencing the amendment, together with the requisite filing form detailing how the registered charge has been varied would be filed with the Bermuda Registry. Filing of such amendment does not affect the priority interest of that charge and the charge will continue to have priority from the date on which it was initially registered.

Release of Registration Filing: Upon the underlying obligation being satisfied and consequently, the relevant charge is to be released, a certified copy of the release document and a memorandum of satisfaction (signed by two directors of the chargor company) would be filed with the Bermuda Registry. The Bermuda Registry stamps the original registration form and the memorandum of satisfaction, whereafter the charge has been satisfied.

British Virgin Islands

Private Registration: A BVI company is required by the BVI Business Companies Act (the “BCA”) to keep a register of charges. Particulars of each charge created by that BVI company must be entered in the register of charges of the company as maintained at the company’s registered office or at the office of the company’s registered agent. There is no time limit within which details of the charge must be entered on the company’s register of charges. In practise, the BVI counsel for the chargee will verify that the details entered by the registered agent have been correctly entered.

Public Registration: In addition to a private registration, an application may be made with the BVI Registry of Corporate Affairs (the “BVI Registry”) to register particulars of the charge in the register of registered charges for the company maintained by the BVI Registry. This is not mandatory.

There is no time limit within which particulars of the charge must be entered in the company’s register of registered charges at the BVI Registry. Failure to enter particulars on either register (public or private) does not affect either the validity or the enforceability of the charge. It should be noted, however, that public registration determines the priority of (similar) charges created on or after 1 January 2005. Accordingly, it is advisable to register a charge, in both the public and private registers, as soon as possible following its creation. However, it should be noted that under the BCA, a registered floating charge does not enjoy priority relative to a subsequently registered fixed charge unless the floating charge contains a negative pledge clause prohibiting the creation of further charges ranking equally or in priority.

Public Registration Filing: A copy of the security document is required in order to effect the public filing with the BVI Registry. Public registration filing is made by entering the particulars of the charge in the relevant electronic registration form and filing same in the electronic filing platform operated by the BVI Registry.

The recent BVI Business Companies Amendment Act 2012 (the “Amendment Act”), which came into effect on 15 October 2012, has clarified that an application to register, vary or release a charge by a chargee (or person authorised to act on the chargee’s behalf) may only be filed by a person qualified to act as a registered agent in the BVI or a

BVI legal practitioner (which includes Appleby) acting on behalf of the chargee or its authorized agent.

After the application to register a charge has been electronically filed, the BVI Registry will subsequently issue a certificate of registration of charge.

Amendment of Registration Filing: Where there is a variation in the terms of the charge registered, a copy of the variation document, together with a filing form is to be completed detailing how the registered charge has been varied. Filing of a variation does not affect the priority of the charge. The charge will continue to have priority as on the date it was initially registered. The BVI Registry will then issue a certificate of variation of charge.

Release of Registration Filing: Upon the underlying obligation being satisfied and consequently, the relevant charge is to be released, a copy of the release document and the filing form would be filed with the BVI Registry. The BVI Registry will subsequently issue a certificate of cessation of charge.

Notation: If the shares of a BVI company have been granted as security interest, it is also common practise to apply to the registered agent of the BVI company whose shares are to be charged, for a notation to be made on the register of members of that company. The effect hereof is designed to impute knowledge to any potential purchaser for value of the shares in that BVI company that shares are subject to the security interest. A third-party

purchaser for value of the shares, who does not have notice of the equitable mortgage or charge, will not be subject to it. All earlier security has priority over the equitable mortgage or charge. Further, such notation on the register of members can be filed with the BVI Registry.

Cayman Islands

Registration of Charges:

Private Registration: There is no system of public registration of charges in the Cayman Islands. A Cayman Islands company is required under theCompanies Law (2011 Revision) to maintain an internal register of mortgages and charges. This register is open to inspection by members and creditors of the company. Failure to register a charge on this private register does not render the security interest void nor invalid against the creditors or a liquidator of the company and there is no time limit for registration.

Priority of security interests is determined by reference to the common law (including relevant English cases which are of persuasive effect), rather than purely by reference to a system of registration. Therefore, the approach is, broadly and in summary: (1) as between competing interests the first-in-time prevails; (2) a legal interest acquired for value and without notice overrides a prior equitable interest; and (3) as between competing consensual security interests in debts and other choses-in-action, priority may go to the holder of a security interest subsequent in time if the holder of it has no notice or a prior security interest, and is the first to notify the debtor of his interest (the rule in Dearle v. Hall (1828) 3 Russ 1). In light of these rules, and in the event that questions of priority fail to be determined under Cayman Islands law, entry of particulars of a mortgage or charge on the internal register of a Cayman company may help in establishing the priority.

In order to effect registration on the internal register, the registered office will require a copy of the relevant charge document. In practise, the chargee’s Cayman counsel will liaise with the Cayman company’s registered office to ensure that the description in the internal register of mortgages and charges is accurate.

In circumstances where a charge is being varied or released, the chargee’s Cayman counsel will liaise with the registered office to ensure that the description of the variation of charge or release is correct. The registered office will require a copy of such variation or release document.

Some chargees have requested that the Registry of Companies of the Cayman Islands stamp a copy of the page of the internal register of mortgages and charges of the Cayman company chargor which records the registration of the charge. This can be done for a fee. It should be noted, however, that this stamping carries no legal effect.

Notation: If the shares of a Cayman company have been granted as security interest, ordinarily one of the conditions precedent set out in the underlying financing documents would be that a notation is to be made on the register of members of the Cayman chargor company, recording the security interest granted in the shares. This has the benefit, (to the chargee) of imputing knowledge to any potential purchaser of the shares (in that company), of the security interest. Generally, a third-party purchaser for value of the shares, who does not have notice of the equitable mortgage or charge, will not be subject to it.

Stop Notices: It is available to any person beneficially interested in shares (such as a secured creditor under an equitable mortgage) to file a stop notice with the Cayman Islands Grand Court. The effect of a stop notice is that the company is then prevented from registering any transfer of the shares charged until 14 days after the Cayman company has given the interested party notice of the proposed transfer. A prescribed form of notice together with an affidavit must be filed. A copy of the notice and a supporting affidavit, stamped by the court, must also be served on the registered office of the Cayman company. The stop notice will not prevent the transfer being registered, but will give the interested party (chargee) an opportunity to enforce its security or put the third party on notice of its security interest prior to such registration.

Conclusion

While each of Bermuda, the BVI and the Cayman Islands provide security registration frameworks or mechanisms to provide for priority amongst competing security interests and to secured creditors, with some measure of protection for their security interests, one should note the differences in each jurisdiction.

In Bermuda, both notice and priority of a charge are established by means of public registration under the Companies Act. However, public registration is optional. There is no private register.

In the BVI, companies have an obligation to register charges privately. Public registration of charges is relevant to the determination of priority; however, this is also optional.

Whilst there is an obligation upon companies in the Cayman Islands to enter any security charges in their private registers of mortgages and charges, such registers do not stand as conclusive evidence of either the existence or the priority of charges.

What can be reflected in the security protection frameworks operating in each of these three offshore jurisdictions is the creditor friendly environment which is designed to facilitate financing and other transactions and provide lenders and chargees with the security and certainty that they require.

JEFFREY KIRK

Partner

Hong Kong

[email protected]

VICTORIA CHEN

Associate

Hong Kong

[email protected]

This publication is intended only to provide a summary of the subject mattered covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice.

October 2012

© Appleby