The Variable Capital Companies Act 2022: The Game Changer of the Investment Funds Industry

The Parliamentary debates disclose that the Mauritian Government ambitions that the VCC Act will be “a game changer for our jurisdiction as an international financial centre as it cements its valued proposition for cross border investors. It will be a legal structure that can be used in both the traditional and alternative investment fund market space.”

In compliance with Mauritius law, the VCC Act received the President’s assent on 14 April 2022.  However, it has not yet come into force as the date for its coming into operation has not yet been proclaimed in the Government Gazette.

Nevertheless, a review of the novelty which the VCC Act brings to our regulatory landscape is worthy as provides an indication as to where the Government is positioning Mauritius and highlights its efforts to provide more impetus to institutional investors to choose Mauritius.

What is a variable capital company?

Definition

There is no definition of a variable capital company (VCC) under the Companies Act 2001 or the VCC Act.

It is in essence a specialist fund scheme with a wide array of activities spread out in investment portfolios which are segmented through sub-funds and special purpose vehicles with its assets and liabilities segregated and ring-fenced.

The VCC structure may be used for all types of investment funds, including mutual funds, hedge funds, private funds, private equity and real estate funds.

Importantly, the winding-up of the any sub-fund does not automatically trigger the winding-up of the VCC.

Features

• a body corporate with legal personality;
• name must either bear the phrase “Variable Capital Company” or the term “VCC”;
• incorporated with the Registrar of Companies (ROC) as a VCC;
• licensed by the Financial Services Commission (FSC) as a VCC fund;
• operates either through sub-funds or special purpose vehicles which are themselves licensed by the FSC;
• the VCC and its sub-funds or special purpose vehicles share the same directors and registered address; and
• it must adopt a written constitution.

It is mandatory that the constitution of a VCC states that its main object is to operate as a fund and addresses the matters below:

• the underlying policy for the establishment of the sub-funds or special purpose vehicles;
• the assets and liabilities of the VCC are to be assessed on a fair value basis;
• the rights attached to each class of shares of the VCC; and
• a share in the sub-fund operating as a collective investment scheme is to be issued, redeemed or repurchased at a price equal to the proportion of the net asset value of the sub-fund represented by the share.

Corporate Structure

A VCC may be any one of the following structures:

• incorporated by the ROC specifically as a VCC; or
• already incorporated with the ROC but converted into a VCC; or
• registered with the ROC by continuation from a foreign jurisdiction to operate as a VCC.

Status of sub-funds and special purpose vehicles

A sub-fund or a special purpose vehicle is not a subsidiary of the VCC merely by reason of being part of the VCC structure.

However, each sub-fund or special purpose vehicle is entitled to have a separate name and legal entity from the VCC as well as an investment distinct from the VCC and must each be licensed by the FSC. When this is the case, it must file its financial statements separately from those of the VCC and will be treated separately for tax purposes.

Another vital corollary of its legal personality is that any judgment or order delivered by a court in respect of legal proceedings which a sub-fund or special purpose vehicle initiates or to which it is subject to is limited to the sub-fund or special purpose vehicle.

A sub-fund may operate as a collective investment scheme or a closed-end fund and must have the phrase “incorporated VCC sub-fund” in its name.

A special purpose vehicle can only operate as a vehicle ancillary to the VCC or a sub-fund of the VCC. Its name must bear the phrase “VCC special purpose vehicle”. Such a vehicle cannot operate as a fund.

Solvency Test

The VCC Act has modified the solvency test laid down under the Companies Act 2001 inasmuch as the following 2-pronged test applies in respect of a VCC:

1)    is the VCC able to pay its debts as they become due in the normal course of business; and

2)    is the value of the VCC’s assets greater than the value of its liabilities, including its contingent liabilities.

Of interest, the VCC Act goes further than the Companies Act 2001 as it lays down a set of factors which may be considered when the solvency test is applied namely:

• the most recent financial statements of the VCC;
• all other circumstances that all directors know, or ought to know, that affect, or may affect, the value of the VCC’s assets and its liabilities (including contingent liabilities);
• any valuation of assets or estimates of liabilities that are reasonable in the circumstances;
• the likelihood of any contingency occurring;
• any claim that the VCC is entitled to make and can reasonably expect to be met;
• any contingent liability that the VCC may reasonably expect to reduce or extinguish.

Winding-up

A novel feature with the VCC scheme is that the consent of the FSC is mandatory in order that the sub-fund or a special purpose vehicle is wound up voluntarily in accordance with a plan approved by the FSC. In this regard, the VCC Act expressly declares that the FSC will withhold its consent to a plan under a proposed voluntary winding up of a sub-fund or special purpose vehicle where the FSC is not satisfied that the interests of the participants of the sub-fund or special purpose vehicle have been adequately protected.

However, no such consent is required where an application is lodged before the Bankruptcy Division of the Supreme Court to wind-up a sub-fund or a special purpose vehicle. Indeed, such applications are made either by the FSC, a creditor, the CIS manager of a VCC or a sub-fund or the board of directors of a VCC or any of its sub-funds.

CONCLUSION

The introduction of the VCC structure into our international financial centre clearly demonstrates the continued endeavours by the Mauritian Government not only to further enhance the competitive edge of our international financial centre but also sheds light on the fundamental role which our international financial centre is expected to play in building a resilient economy following the aftermaths of the COVID-19 pandemic. Much is therefore awaited in the forthcoming National Budget 2022-2023 towards this end.