Knowledge

Corporate guarantees are perhaps more common in the British Virgin Islands ("BVI") than in other jurisdictions given the accommodating nature of the statutory environment in which BVI companies operate. As a result when structuring security packages for BVI operating and holding companies, it is important for a lender not to overlook the ability to take an inter-group corporate guarantee as an additional security measure, which may not be available in other jurisdictions.

Corporate guarantees are perhaps more common in the British Virgin Islands ("BVI") than in other jurisdictions given the accommodating nature of the statutory environment in which BVI companies operate. As a result when structuring security packages for BVI operating and holding companies, it is important for a lender not to overlook the ability to take an inter-group corporate guarantee as an additional security measure, which may not be available in other jurisdictions.

Corporate benefit
The main issue with inter-group guarantees relates to "corporate benefit", or more specifically the lack thereof. As far back as 1883, Lord Bowen[1], channeling Sir Toby Belch in Shakespeare's Twelfth Night reminded us that "there are to be no cakes and ale except such as are required for the benefit of the company".

Often the company granting the guarantee is not the direct beneficiary of the financing proceeds and as such, the arrangement presents no direct benefit to the company providing the guarantee. This creates a problem in two respects. First, common law corporate principles dictate that any activity of a company must present a benefit to the company. Second, the directors, being fiduciaries, are charged with exercising their authority and power in the best interests of the company. The BVI Business Companies Act[2], 2004 ("BCA") has effectively dealt with both these issues.

Power and capacity
The BCA has addressed the issue relating to corporate power and capacity in two ways. First, there is express power in the BCA[3] for companies to guarantee an obligation or liability of any person and to secure such obligations by a mortgage, pledge or charge of corporate assets. Second, and more importantly, the BCA provides that BVI companies have the capacity to carry out any activity "irrespective of corporate benefit"[4].

Director obligations
While a BVI company has clear power and capacity to grant inter-corporate guarantees, a secondary issue arises with respect to the manner in which the corporate guarantee is authorized. Directors have an obligation to act in what they believe is the best interests of the company[5] and for a proper purpose[6]. In the case of an upstream guarantee, it is possible under BVI law to provide in the memorandum and articles of association a company, that where the BVI company is a wholly owned subsidiary, the directors may act in the best interests of the parent even where that action may not be in the best interests of the BVI company[7]. Where these clauses are not present in the memorandum and articles, it is prudent for guarantees given for obligations of a third party to be approved by a members' resolution.

Upstream guarantees - distributions?
Under the BCA a "distribution" is widely defined[8] and includes the incurring of a debt for the benefit of a member. This is broad language and has not been judicially considered. The effect of this language is arguably to cause guarantees granted in favour of members (for instance, a parent company) to fall with the definition of "distribution". Given this, it is advisable to err on the side of caution and ensure that the necessary solvency test[9] in relation to distributions is contained in the authorizing resolution and is satisfied with respect of guarantees given for members. The solvency test for this purpose means that:

• There are no reasonable grounds for believing that the value of the company's liabilities exceed its assets; and
• There are no reasonable grounds for believing that the company was unable to pay its debts as they became due.

Failure to satisfy the solvency test in the case of a distribution could result in the recovery of any funds paid out on the guarantee from the relevant member or director[10].

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[1] Hutton v West Cork Railway Co (1883) 23 Ch D 654
[2] Section 28
[3] Section 28
[4] Section 28
[5] Section 120
[6] Section 121
[7] Section 120
[8] Section 56
[9] Sections 56 & 57
[10]  Section 58