RPCs and conventional companies: Sometimes it’s okay to use the less popular option
As testament to the innate flexibility of British Virgin Islands company law, BVI companies come in varying forms, broadly ranging from standard conventional companies, with wide corporate powers to companies with restricted capacity and power to contract or otherwise engage in business or other activities.[1] The vast majority of British Virgin Islands companies fall easily into the former category while the latter specie of company, commonly known as a Restricted Purpose Company (RPC) is by far a rarer creature.
There are likely several reasons for this, including, perhaps most significantly, the appeal of forming a wholly-flexible corporate structure with the ability to enter into any type of transaction or to engage in any type of activity. Such companies have an unrestricted capacity[2] to undertake any business or other activity or to enter into any transaction and it is difficult to miss the rather obvious appeal such unfettered flexibility holds for many.[3] After all, no one owning or managing a BVI company should have to worry about being fettered in their ability to enter into different types of transactions... or should they - at least in certain instances? The freedom to transact certainly works in favour of those owning or managing BVI companies but what of the interests of those with whom BVI companies contract? Certainly, no one disputes the utility and value of the conventional company but there are undoubtedly occasions where the unique characteristics of an RPC will work best.
One area where the RPC has clearly demonstrated its value is that of structured finance.[4] Despite the continuing dominance of conventional companies in such transactions, the use of RPCs has gained some ground in this sphere due to the measure of investor security which accompanies the use of a special purpose vehicle which is constitutionally (rather than simply contractually) restricted from carrying out certain activities. RPCs are generally used as special purpose vehicles, usually for the purpose of issuing debt instruments and there is undeniable appeal for investors (investing in a bond/note issuance for instance) and comfort borne from the knowledge that an issuer is incapable of breaching its covenants because certain actions which it may seek to engage in (such as disposing of assets, granting of security or attempting to put the relevant issuer into liquidation for instance) would be prima facie void. Therein lays the unique appeal of the RPC.
Below is a brief comparison of the key features of conventional companies and RPCs:
Conventional companies | RPCs | |
Naming requirements | Largely unrestricted | Name must end with “(SPV) Limited” or “(SPV Ltd” |
Capacity and power | Unrestricted capacity to carry on or undertake any business or other activity, to do any act or enter into any transaction | Restricted capacity and powers to only undertake specific activities |
Memorandum of Association | Company has the option of stating specific purposes | Must state the purposes of the company |
Saving provision | BVI statute provides a saving provision such that no transfer of assets by or to a company or other act of a company is invalid simply by reason of the fact that the company did not have the capacity, right or power to perform the relevant act | The saving provision does not apply |
Constructive notice | No person is deemed to have notice or knowledge of publicly filed documents relating to a company (including its memorandum and articles of association) | The entire world is deemed to have notice of the constitutional documents |
Dealings with third parties | Transactions with third parties acting in good faith are not vulnerable only because of a failure to comply with the relevant corporate formalities | All third parties are deemed to have notice of the restricted powers of an RPC |
Incorporation fee/annual licence fee | US$450 | US$7,500 |
While flying squarely in the face of the traditional legal position which speaks to the protection of third parties dealing with companies[5], the creation of a bespoke vehicle, formed expressly for the purpose of executing its stated mandate[6] demonstrates not only the willingness of the British Virgin Islands to adapt to the market conditions which called for its creation in the first place but also its proclivity for innovation.
One could ask – why not simply adapt the constitutional documents of a conventional company to suit the needs of the specific transaction to include restrictions on the types of activities in which the company may engage? Certainly, the disparity in the initial and annual fees associated with forming both types of companies would give pause to many, pushing most in the direction of the conventional company. And while there is nothing to prevent the use of a conventional company in this manner, it is nevertheless worth noting a vital difference between the two – with a modified conventional company, any breach of its constitutional documents, (though problematic for its directors as it could potentially result in liabilities for breach of duty), will not invalidate the transaction while the opposite is true for any breach of the constitutional documents of an RPC. Sometimes, depending on the level of risk involved for investors, the level of protection afforded by the constitutional construct of an RPC is precisely what the transaction warrants and in such instances, cost is certainly no deterrent.
That said, RPCs should be taken for what they are – a bridge between market demand for structured financing transactions and the need for special purpose vehicles which protect both investor and issuer (from potential loss and potential breach respectively). They will not suit the needs of all investors and were clearly never generally meant to operate as a strict alternative to conventional companies given their obvious differences but the value which they bring to certain types of transactions is nevertheless clear. RPCs are not meant to function in the exact way in which conventional companies do and while daunting for many for this very reason, they do have their place within the corporate landscape and should probably enjoy more popularity within the market than they do.
[1] With the exception of illegal activities of course.
[2] This is due in large part to the statutory abolition of the ultra vires doctrine for such companies.
[3] Individuals who own and operate BVI companies should not generally be fettered in relation to the types of transactions which they engage in.
[4] Notwithstanding the obvious fit with such transactions, RPCs can certainly also be used for other types of transactions.
[5] This has always been that companies are corporate entities with the power to enter into transactions and by extension, that persons transacting or conducting business with or otherwise dealing with companies should not be concerned about the validity of a transaction simply because it falls outside of the company’s corporate capacity.
[6] Its powers will be stated in its Memorandum of Association.
