With commercial property companies’ debt burdens reaching pre-2008 levels and warnings being issued this month by the European Central Bank, in this article we outline some of the key issues to be considered and steps which may be taken by BVI real estate holding companies to protect their position in the face of rising financing costs and other inflationary pressures.
Commercial real estate holding companies are currently facing unprecedented pressures from higher financing costs and falling commercial property income, on top of the existing issues regarding rental income following the COVID-19 pandemic and concerns regarding the energy efficiency of older property stock. In its twice-yearly financial stability review published on 21 November 2023, the European Central Bank noted that the average debt of larger European property companies has risen to above ten times their earnings. Chinese real estate companies are also facing significant macroeconomic pressures.
Debt Servicing Issues
One of the key concerns arising from rising borrowing costs and/or delayed or reduced rental income is the inability of real estate holding companies to service their debt in a timely manner and the desire to avoid distressed asset sales/enforcement of security by creditors. There are a number of practical steps which may be taken in such circumstances, including:
- refinancing or extending the maturity date of existing financing;
- equity raises or other forms of capital injections; or
- negotiating with existing tenants to allow them to sublet unneeded floor space or allowing tenants to downsize in return for extending leases.
Plans and Schemes of Arrangement and Creditor Arrangements
If the above approaches are not sufficient to alleviate the pressure on a holding company’s cash flow, it may be necessary for the company to restructure. The BVI Business Companies Act provides two mechanisms for carrying out a wide range of corporate restructurings by way of court approval — plans and schemes of arrangement. Both mechanisms provide for compromises to be reached between a BVI company and its creditors or members (or a class of them) and are available where a company does not have sufficient member or creditor support to carry out a proposed action, or where it is otherwise desirable to “wrap” an action in a court sanctioned arrangement.
Once a plan or scheme of arrangement has been duly approved and sanctioned by the court (which may include oversight from a court appointed provisional liquidator) it will be binding on the company, its members and creditors, and interested parties will typically have no right to dissent. Care must however be taken to ensure cross-border recognition of any schemes, particularly where local law security has been granted over real estate and other assets.
The BVI Insolvency Act also provides restructuring mechanisms for BVI companies which are insolvent or approaching insolvency, including:
- the appointment of a “light touch” provisional liquidator, the purpose of which is to assist the company to restructure debts or otherwise achieve a better outcome for creditors than would be achieved by liquidation; and
- creditor arrangements, which enable BVI companies to compromise liabilities with creditors without the need for court involvement but under the supervision of by a nominated insolvency practitioner.
Creditor arrangements in particular are very flexible and allow for debts to be varied or cancelled, although the rights of secured or preferential creditors cannot be affected without their written consent.
If security has been granted over the assets or shares of a BVI company, a secured creditor may seek enforcement against the company following the occurrence of an event of default. In respect of charges governed by BVI law, secured creditors may have to resort to the following statutory remedies: (i) the right to sell the assets; and (ii) the right to appoint a receiver who may vote any charged shares of the BVI company and receive distributions in respect of the same. In respect of security governed by foreign law, the enforcement remedies available to the chargee or mortgagee will depend on the relevant foreign law and the instrument creating the mortgage or charge. As noted above, this will be of particular relevance where local law security has been granted over real estate assets.
It is important for BVI companies to proactively assess their existing security and the priorities of such security during the course of any restructuring. Charges which are publicly registered in the BVI take priority over those which are not so registered, and generally also have priority over those which are subsequently registered. Key dates ought to be diarised and continuously monitored in respect of what constitutes an “event of default” and the subsequent triggering of enforcement remedies. For example, in respect of BVI law governed charges, statutory enforcement remedies are not exercisable until 30 days after a default (or such shorter period as may be specified in the instrument creating the charge). Legal advice on the governing law of the security should be sought in respect of potential enforcement remedies and their timings.
For more information regarding the process for the enforcement of security over the assets or shares of BVI companies please see Conyers’ publications “Granting and Enforcing Security over Assets of British Virgin Islands Companies” and “Granting and Enforcing Security over Shares of British Virgin Islands Companies”.
It is very important that directors of BVI companies which may be approaching insolvency take steps to evaluate the position of the company. Among other things, a director of a BVI company can be personally liable if he or she fails to take appropriate steps to commence formal liquidation where there is no reasonable prospect of the company avoiding insolvent liquidation.
Under BVI law, solvency is judged by two key tests:
- Can the company pay its debts as they fall due (the cash flow test); and
- Do the company’s assets exceed its liabilities (the balance sheet test).
The fundamental question directors should consider, both when financial difficulties first become apparent and on an ongoing basis until the financial difficulties are resolved, is whether there are reasonable prospects that the company will avoid insolvent liquidation. If the answer is that there are no such reasonable prospects, the directors should take appropriate steps to appoint an insolvency practitioner to act as liquidator of the company as soon as reasonably practicable.
For further information regarding issues and considerations for companies which may be approaching insolvency please see Conyers’ publication “Under Pressure: Key considerations and practical tips for BVI companies approaching insolvency”.
The practical steps that a BVI holding company should take will depend on the individual set of circumstances. As such, obtaining tailored professional advice at an early stage is important. Directors of BVI companies should however be alive to any warning signs of impending financial difficulty and, as soon as they are aware that there may be concerns about the company’s solvency or prospects for continued solvency, they should take the following steps.
Seek legal and financial advice
- Seek legal advice as soon as possible, as well as other appropriate professional advice aimed at reviewing whether insolvent liquidation is inevitable or whether there are potential ways of resolving or mitigating the financial difficulties.
- Review D&O insurance and the cover provided by it.
- Remain apprised of the company’s financial situation at all times, including if appropriate by obtaining reports from the CFO, accountants or other financial experts, particularly in relation to companies with complex cash flow or balance sheet issues.
- Keep the company’s position under constant review for so long as the financial difficulties continue and seek further professional advice as to the implications of any change in the company’s position.
Ensure proper record keeping
- Ensure that adequate and up-to-date records are being kept to be able to ascertain the company’s financial position.
- Ensure that directors’ decision making is properly and accurately recorded, including the reasons why they are taking decisions. This includes holding regular meetings of directors with appropriate minutes kept which record the ongoing evaluation of decisions and, specifically, the company’s financial position and prospects.
Consider interests of creditors
- Be aware of who the company’s creditors are, the nature and extent of those liabilities and ensure there is a clear plan to discharge the company’s debts as they fall due.
- To the extent repayment of creditors depends on achievement of a business plan or financial projections, continuously re-asses the business plan and projections to ensure they remain valid and substantiate plans to repay creditors.
- To the extent existing indebtedness will need to be refinanced with new debt or equity regularly assess the viability of refinancing plans and ensure the necessary processes for refinancing are started and progressed on a timely basis. This is particularly important in an environment where interest rates are rising.
- If a director concludes (or thinks there is a sufficient risk such that the directors ought to conclude) that there is no reasonable prospect of the company avoiding insolvent liquidation, seek legal advice and take such steps as are necessary to appoint an insolvency practitioner to act as liquidator, as well as taking all steps reasonably available to minimise losses to creditors in the meantime.
- Exercise caution about entering into any transaction which could be considered to be a voidable transaction were the company to enter formal insolvency within the applicable vulnerability period or any dividends, share buybacks and redemptions where the solvency of the company is in doubt.
We are here to help
Tailored professional advice should be sought in respect of individual circumstances. Please feel free to reach out to your usual Conyers contacts with any questions regarding BVI real estate holding companies, refinancing/restructuring, insolvency or enforcement proceedings against BVI companies. We are always available to provide continuing support and would be pleased to help.
This article is not intended to be a substitute for legal advice or a legal opinion. It deals in broad terms only and is intended to merely provide a brief overview and give general information.