The Cayman Islands exempted company (including the segregated portfolio company) is the corporate vehicle of choice for series financing, mergers utilizing the Cayman merger regime, banking and finance transactions, investment funds, and other corporate transactions. The popularity of the exempted company is principally as a result of the Cayman Islands being rightly recognized as a stable jurisdiction which promotes legal and commercial certainty to control reputational risk for both the Cayman Islands and its business partners.

The flexibility of the structure of the Cayman Islands exempted company is one of its main appeal. For example, Cayman Islands’ companies law does not require any director or officer of the company to be resident in the Cayman Islands. The register of shareholders and minute books are not required to be held in the Cayman Islands and can be held in another jurisdiction. The company is not required to hold an annual general meeting of shareholders (unless this is required under a regulatory law). There is no Cayman Islands law requirement for an exempted company to undertake an annual audit (unless this is required under a regulatory law).

The incorporation procedure for an exempted company is simple, incorporation fees are low and no regulatory authority approval is required. Exempted companies can be incorporated within 5-7 business days on a standard basis and on a twenty-four (24) hours “express” basis.

There is no statutory prohibition on an exempted company providing financial assistance with regard to the acquisition of its own shares. The directors of the exempted company owe a fiduciary duty to the company to act in good faith in the best interests of the company in agreeing to provide the financial assistance.

The company is permitted to use its share premium account to fund the payment of dividends to shareholders subject to it remaining solvent after such payment.

The Cayman Islands does not impose stamp duty on the transfer of shares, other than in relation to the transfer of shares in a company which holds real estate in the Cayman Islands.

A shareholder is not subject to Cayman Islands taxes with respect to any distribution received from the company (including dividend and other distributions upon liquidation of the company) or with respect to any gain realised upon the sale, redemption or exchange of shares. There is no withholding of taxes with respect to any dividend or other distribution made to a shareholder on the sale, exchange or redemption of shares. No gift, estate or inheritance taxes will arise in the Cayman Islands on the transfer of shares by way of gift by, or on the death of, a person who is not a resident of the Cayman Islands.

The exempted company can merge with another corporate entity which can be either another Cayman Islands company or a company from another jurisdiction which has a comparable merger regime. The surviving company from the merger can either be a Cayman Islands exempted company or a company from another jurisdiction. The Cayman Islands merger regime is very popular for completing the “take private” of Cayman Islands companies listed on various stock exchanges including NASDAQ and the New York Stock Exchange.

The Cayman Islands legal regime provides a high degree of commercial confidentiality. The Register of Shareholders of exempted companies is not available for inspection by members of the public. There is no Cayman Islands requirement for the accounts or financial statements of the company to be publicly filed.

The Cayman Islands is a British Overseas Territory. The law of the Cayman Islands is based on English common law, together with local statutes appropriate for both international and local business. The Government has an active agenda to enact legislation to enhance Cayman Islands’ position as a leading international offshore financial centre. The jurisdiction is committed to providing a stable, responsible and responsive business environment and therefore takes an aggressive approach to countering money laundering, tax evasion or any other criminal activity. The jurisdiction also operates a business friendly and well-regulated financial system underpinned not only by a belief in proportionate, risk-based regulation and a conviction to integrity and transparency, but also by the belief that appropriate regulation and international cooperation drive commercial success.

The development of the Cayman Islands as an international financial centre has led to a sophisticated business environment with a full range of services including banks, trust companies, lawyers, accountants, insurance managers, mutual fund managers and fund administrators, and all the expected support services. There are approximately 324 banks and trust companies licensed in the Cayman Islands, including 47 of the 50 largest banks in the world.
Following the conclusion of the most recent plenary on 23 June 2023 of the Financial Action Task Force (the “FATF”), the FATF has determined that the Cayman Islands has substantively fulfilled its action plan to be removed from the list of “jurisdictions under increased monitoring” (the “Monitoring List”) subject only to the completion of an on-site visit by the FATF later this year, which forms part of the FATF’s standard process for removing a jurisdiction from the Monitoring List, the Cayman Islands will be delisted. As the EU has previously confirmed that it does not require the Cayman Islands to take additional steps beyond those set out in the FATF’s action plan to facilitate removal from the EU AML List, it is widely expected that the Cayman Islands will also be removed from the EU AML List.
The features set out above continue to enhance the Cayman Islands’ popularity as the leading jurisdiction for structuring international investments and other finance transactions.

This publication is not intended to be a substitute for specific legal advice or a legal opinion. If you require further advice relating to the formation of a Cayman exempted company or the structuring of finance, corporate or investment transactions using a Cayman exempted company, please contact us. We would be delighted to assist.
E: gary.smith@loebsmith.com

E: robert.farrell@loebsmith.com

E. peter.vas@loebsmith.com

E. elizabeth.kenny@loebsmith.com

E: cesare.bandini@loebsmith.com

E: wendy.au@loebsmith.com

E: vivian.huang@loebsmith.com

E: faye.huang@loebsmith.com

Loeb Smith is an offshore corporate law firm, with offices in the British Virgin Islands, the  Cayman Islands, and Hong Kong, whose Attorneys have an outstanding record of advising  on the Cayman Islands’ law aspects and BVI law aspects of international corporate,  investment, and finance transactions. Our team delivers high quality Partner-led professional  legal services at competitive rates and has an excellent track record of advising investment  fund managers, in-house counsels, financial institutions, onshore counsels, banks,  companies, and private clients to find successful outcomes and solutions to their day-to-day  issues and complex, strategic matters.

A Captive insurance company is a wholly-owned subsidiary insurer that provides risk mitigation services for its parent company or related entities. In its simplest form, the “Captive” wholly-owned subsidiary is incorporated to insure against one or more risks to which its parent company is exposed. It is essentially a form of self-insurance which is put in place within a group corporate structure for a number of reasons. Captives are usually established in the context of a company’s risk management strategy and are typically put in place because those risks which are looking to be insured by the Captive are either non-insurable or priced too high in the current market.

The potential benefits of having a Captive insurance company include:

i. lower insurance costs,

ii. tax advantages,

iii. underwriting profits,

ability to tailor coverage for hard to insure or emerging risks,

ability to apply alternative strategies to deal with insurance market cycles,

ability to allocate costs to business units,

vii. provide financial incentives for loss control,

viii. offer flexibility in managing risk, 

offer creative insurance solutions, and consolidate risk management, and greater control over coverage.

The Cayman Islands has historically been a jurisdiction for Captive insurance companies and is currently one of the leading Captive hubs in the world, both in terms of number of Captive insurance companies and total assets under management, owing to Cayman’s world-wide reputation as a highly professional, yet business friendly and well-regulated environment with a philosophy of imposing proportionate, risk-based regulations and rules backed by consistency of enforcement. In particular, the Cayman Islands is the absolute leader domicile for healthcare sector Captives, with healthcare-related Captives taking up over a third of Cayman’s Captive industry.

According to the latest data released by the regulatory authority for Captive insurance companies, which in the Cayman Islands is the Cayman Islands Monetary Authority (“CIMA”), there are currently 666 Captive insurance companies in Cayman. Single parent Captives (more commonly known as “Pure Captives”), Segregated Portfolio Companies (“SPCs”) and Captives with two or more shareholders (“Group Captives”) make up the largest part of Captives in the Cayman Islands, counting 278, 153 and 128 companies, respectively.

SPC’s growing popularity in the Captive insurance industry is partly owed to the fact that such structures allow insurers to add additional participants in a reinsurance programme without risk of cross liability. A distinctive feature of all SPCs, in fact, is that the assets and liabilities of each segregated portfolio (also referred to as ‘cells’) are, as the name suggests, segregated from one another. Each SPC cell, however, does not have legal personality and ownership of the underlying assets in the cells is through classes or series of shares in the SPC which are designated to that particular cell.

The SPC structure is often seen in the context of the so-called ‘Rent-A-Captives’ whereby those wishing to reap the benefits of a Captive insurance company (either for their own insurance or reinsurance) whilst minimizing matters such as time, upfront costs and maintenance, can simply become shareholders in an existing SPC and ‘rent’ a cell. The participants in a rent-a-Captive structure pay premiums and service fees into the cell and in return they get access to the capital base they need to underwrite the risk as well as an entitlement to any distributions made out of that cell.

There are also Portfolio Insurance Companies (“PICs”) which can be seen as a slight variation of the SPCs mentioned above. A PIC is similar to an SPC except that its cells have separate legal personality.

Other forms of Captives include “Association Captives” which are insurance companies owned by an association to meet the insurance needs of its members, and “Agency Captives” which are insurance or reinsurance companies owned by one or more insurance agents and are used to insure against the risks of those agents or any of their clients.

As with any other industry, the Cayman Islands is a dynamic jurisdiction and strive to offer cutting edge solutions to industry problems owing to the strong relationship and continuous dialogue between the regulator and the private sector. This is no different when it comes to the insurance industry. Captives in the Cayman Islands are principally governed by the Insurance Act, 2010 (the “Act”).

To establish a Captive in the Cayman Islands CIMA will require a formal application for a Class “B” Insurer’s Licence. This application is prescribed in the Act, and requires, among other things, the following information:

Name of applicant. This refers to the name that the Class “B” Insurer company will bear, which should be pre-approved for use by CIMA and the Registrar of Companies.

A detailed business plan. CIMA will expect to see from the business plan that the proposed Captive operation has been thoroughly researched and properly planned with, among other things, feasibility studies and risk management studies supporting the proposal. It is a requirement of the Act that all Captive insurance companies appoint a local insurance manager and the appointed insurance manager is usually integrally involved in the application process.

iii. Three (3) years’ financial projections.

Personal details and references for proposed directors and shareholders. A completed Personal Questionnaire should be provided in respect of ALL proposed Directors, Officers and Managers. A “police clearance certificate” is also required, but CIMA will accept a sworn Affidavit as an acceptable “other certificate”.

Last two (2) years’ audited statements and/or notarised net worth statement of ultimate beneficial owners.

Confirmation of appointment from a Licensed Insurance Manager and Approved Auditor.

Under the Act, the Class B insurer license is reserved to Captives and is sub-divided into three sub-groups, each relating to a different percentage of the insurer’s related business underwritten by it by reference to net premiums (i.e. Class B(i) 95% or more, Class B(ii) over 50%, and Class B(iii) equal or less than 50%, respectively).

These subdivisions allow CIMA to provide for different thresholds as to (a) Minimum Capital Requirement (“MCR”), (b) Prescribed Capital Requirement (“PCR”) and, consequently, (c) margin of solvency, under The Insurance (Capital and Solvency) (Classes B, C And D Insurers) Regulations, 2012 (the “Regulations”).

(a) Minimum Capital Requirement

Under the Regulations, the MCR, which is described as the minimum capital that an insurer must maintain in order to operate in accordance with the Act, for each Class B licensee is as follows:

In this Briefing Note, we provide a brief overview of the principles governing derivative actions in the Cayman Islands, both in a company and in a limited partnership setting.

A derivative action is one commenced by one or more minority shareholders on behalf of a company of which they are member in respect of loss or damage which that company has suffered. Such a claim can only be brought in certain circumstances and amounts to an exception to the rule that a company, as a separate legal person, should sue and be sued in its own name (often referred to as the rule in Foss v Harbottle (1843), 2 Hare 461; 67 E.R 189). The circumstances in which such a claim may be brought were set out by Jenkins, L.J., in Edwards v Halliwell [1950] 2 All E.R. 1064:

“It has been further pointed out that where what has been done amounts to what is generally called in these cases a fraud on the minority and the wrongdoers are themselves in control of the company, the rule [in Foss v Harbottle] is relaxed in favour of the aggrieved minority who are allowed to bring what is known as a minority shareholders’ action on behalf of themselves and all others. The reason for this is that, if they were denied that right, their grievance could never reach the court because the wrongdoers themselves, being in control, would not allow the company to sue.”

The true nature of a derivative claim is often misunderstood. In the leading case on such actions in the Cayman Islands, Renova Resources Private Equity Limited [2009] CILR 268, at p. 275, Foster, J cited the explanation of such actions offered by Professor Gower in Modern Company Law, 3rd ed. (1969), at 587:

“Where such an action is allowed, the member is not really suing on his own behalf nor on behalf of the members generally, but on behalf of the company itself. Although (…) he will have to frame his action as a representative one on behalf of himself and all the members other than the wrongdoers, this gives a misleading impression of what really occurs. The plaintiff shareholder is not acting as a representative of other shareholders, but as a representative of the company (…) In the United States (…) this type of action has been given the distinctive name of a “derivative action,” recognising that its true nature is that the individual sues on behalf of the company to enforce rights derived from it.”

Derivative claims, as with the majority of actions commenced in the Cayman Islands, are normally begun by serving a writ and statement of claim on the relevant defendant or defendants. Grand Court Rules O.15, r.12A provides that where a defendant gives notice of an intention to defend the claim, then the plaintiff must apply to the Court for leave to continue the action. Such an application should be supported by affidavit evidence verifying the facts on which the claim and entitlement to sue on behalf of the company are based. The same must be issued within 21 days of the later of (a) the date of service of the statement of claim; or (b) the date when notice of an intention to defend was given. Further, the application, together with the affidavit evidence in support and any exhibits, must be served on the defendant or defendants not less than 10 clear days before the date for the hearing of the application (known as the return date). Where the plaintiff does not meet this deadline, the defendant may apply for the dismissal of the action.

Pursuant to Grand Court Rules O.15 r.12A(8) on the hearing of the application, the Court may grant leave to continue the action for such period and upon such terms as it thinks fit, dismiss the action, or adjourn the application and give such direction as to joinder of parties, the filing of further evidence, discovery, cross-examination of deponents and otherwise as it considers expedient.

In Renova Resources Private Equity Limited, Foster, J., affirmed the application in the Cayman Islands of the test to be applied in determining whether to grant leave to continue the action put forward by the English Court of Appeal in Prudential Assur. Co. Ltd v Newman Indus. Ltd (No. 2) [1981] Ch. 257. Foster, J., held that:

“(…)there are two elements to this: first the plaintiff [is] required to show prima facie that there [is] a viable cause of action vested in the company and, secondly, that the alleged wrongdoers [have] control of the company (or could block any resolution of the company or the board) and thereby prevent the company bringing an action against themselves.”

The Judge further held that (at p. 283):

“For the plaintiff to obtain leave to continue with the action, I consider that I must be satisfied in the exercise of my discretion that its case is not spurious or unfounded, that it is a serious as opposed to a speculative case, that it is a case brought bona fide on reasonable grounds, on behalf of and in the interests of the company and that it is sufficiently strong to justify granting leave for the action to continue rather than dismissing it at this preliminary stage.”

Foster, J., ruled that in order to satisfy the Court in the above terms it was necessary for the plaintiff to do more than show the absence of the grounds required for a strike-out in the ordinary course of litigation. However, the Court should not look to hold a mini-trial of the issues. Instead, the Court should form a view based on its first impressions, having regard to its assessment of all of the evidence before it, including any evidence submitted by the defendant.

The First and Fifth Defendants in Renova Resources Private Equity Limited had sought to argue based on the English authority Airey v Cordell [2007] Bus. L.R. that the Court needed to go further and consider whether a hypothetical independent board acting reasonably would have brought the claim and proceeded with the case. After considering the authorities in the area, Foster, J., concluded that such a question was only relevant where the shareholder in question sought an indemnity for his costs from the company on whose behalf the action was being taken.

In Renova Resources Private Equity Limited the Grand Court held that in appropriate circumstances multiple derivative actions would be permitted. In that case the plaintiff had brought an action in respect of loss incurred by a wholly-owned subsidiary of the company in which it was a shareholder and therefore loss to the subsidiary caused indirect loss to its parent company and shareholders. However, the rule against recovery of reflective loss applied such that a shareholder or parent company would not be permitted to claim for indirect losses which mirrored those losses suffered directly by the relevant subsidiary or indeed sub-subsidiary on whose behalf the action was being brought.

In Top Jet Enterprises Limited v Sino Jet Holding Ltd and Jet Midwest Incorporated [2018] CILR 18 the Grand Court held that a shareholder of a Cayman Islands company does not require leave from the Cayman courts (pursuant to Grand Court Rules O.15 r.12A(2)) to pursue a derivative action in a foreign jurisdiction and identified circumstances where an aggrieved shareholder may bring an action against a third party. It was held in that case that, if it can be shown that (i) the matter at hand falls within an exception to the rule in Foss v Harbottle allowing a minority shareholder to sue in the name of the company, and (ii) the third party is either “a party or accessory to or closely associated with the conduct which gives rise to the fraud on the minority”, then a derivative claim against a third party may be permissible.

In a recent decision by the Cayman Islands Court of Appeal in Kuwait Ports Authority & Ors v. Port Link GP Ltd & Ors (CICA (Civil) Appeal Nos. 002 & 003 of 2022, 20 January 2023), the Court of Appeal was asked for the first time to deal with the issue of derivative claims brought by a limited partner on behalf of an exempted limited partnership pursuant to section 33(3) of the Exempted Limited Partnership Act (2021 Revision) (the “ELP Act”) which provides that limited partners may bring an action on behalf of an exempted limited partnership if any one or more of the general partners with authority to do so have, without cause, failed or refused to institute proceedings.

The Court of Appeal’s judgment involved decisions on two separate matters: (i) direct claims brought by limited partners against the general partner, and (ii) derivative claims brought by limited partners both against the general partner and third parties. For the purposes of this note, we will focus on the latter.

As regards the derivative claims brought against the general partner, these were not successful for two main reasons. Firstly, the limited partnership in the case at hand had not suffered any loss or damage and therefore the limited partnership did not have a claim of its own to bring, which in turn meant that the limited partners could not bring a claim derivatively. Secondly, the claims were struck out due to the fact that the limited partners had an adequate alternative remedy in the form of a direct claim against the general partner such that a derivative action was not necessary.

With respect to the derivative claims brought against third parties, the Court of Appeal decided in the limited partners’ favour as it was found that the general partner was under a relevant inhibition due to a conflict of interest which meant that the general partner had, without cause, failed to institute proceedings within the meaning of section 33(3) of the ELP Act and it therefore justified the limited partners’ ability to bring a derivative claim in the circumstances.

This judgment will no doubt be of interest to all of those private equity investors and/or venture capitalists who have, or are looking to, set up their investment vehicle in the Cayman Islands by way of the established GP-LP structure.

For more information relating to derivative claims and/or shareholder/partner disputes more in general, please contact a member of the team at Loeb Smith.
E: gary.smith@loebsmith.com

E: robert.farrell@loebsmith.com

E: cesare.bandini@loebsmith.com

Loeb Smith is an offshore corporate law firm, with offices in the British Virgin Islands, the  Cayman Islands, and Hong Kong, whose Attorneys have an outstanding record of advising  on the Cayman Islands’ law aspects and BVI law aspects of international corporate,  investment, and finance transactions. Our team delivers high quality Partner-led professional  legal services at competitive rates and has an excellent track record of advising investment  fund managers, in-house counsels, financial institutions, onshore counsels, banks,  companies, and private clients to find successful outcomes and solutions to their day-to-day  issues and complex, strategic matters.

Under the Companies Act (As Revised) of the Cayman Islands (the “Companies Act”), the Registrar of Companies (the “Registrar”) will de-register a Cayman Islands exempted company incorporated with limited liability and with a share capital (the “Applicant”) which proposes to be registered by way of continuation as a body corporate limited by shares under the laws of any jurisdiction outside the Cayman Islands (the “Relevant Jurisdiction”) if:

1.1 the Applicant proposes to be registered by way of continuation in a jurisdiction which permits or does not prohibit the transfer of the Applicant;

1.2 the Applicant has paid to the Registrar a fee equal to three (3) times the annual fee that would have been payable in the January immediately preceding the application for de-registration; and

1.3 the Applicant has filed with the Registrar, notice of any proposed change in its name and of its proposed registered office or agent for service of process in the Relevant Jurisdiction.

In order to be effective, the transfer must be approved in accordance with the Applicant’s Memorandum and Articles of Association. Usually, a special resolution of the shareholders of the Applicant will be required. Depending on the terms of the Applicant’s Articles of Association, it may even be necessary to amend the Applicant’s Memorandum and Articles of Association to permit de-registration. The directors of the Applicant must approve the de-registration and transfer by way of continuation.

An affidavit must be sworn by a director of the Applicant. The director must swear that, having made due enquiry, he or she is of the opinion that:

i. no petition or other similar proceeding has been filed and remains outstanding or order made or resolution adopted to wind up or liquidate the Applicant in any jurisdiction;

ii. no receiver, trustee or administrator or other similar person has been appointed in any jurisdiction and is acting in respect of the Applicant, its affairs or its property or any part thereof;

iii. no scheme, order, compromise or other similar arrangement has been entered into or made whereby the rights of creditors of the Applicant are and continue to be suspended or restricted;

iv. the Applicant is able to pay its debts as they fall due;

v. the application for de-registration is bona fide and not intended to defraud creditors of the Applicant;

vi. any consent or approval to the transfer required by any contract or undertaking entered into or given by the Applicant has been obtained, released or waived, as the case may be;

vii. the transfer is permitted by, and has been approved in accordance with, the Memorandum and Articles of Association of the Applicant;

viii. the laws of the Relevant Jurisdiction with respect to transfer have been or will be complied with; and

ix. once re-registered the Applicant will continue as a body corporate limited by shares under the laws of the Relevant Jurisdiction.

The affidavit must also include a statement of the assets and liabilities of the Applicant made up to the latest practicable date before the making of the affidavit.

The Applicant must deliver to the Registrar an undertaking signed by a director that notice of the transfer has been or will be given within 21 days to the secured creditors of the Applicant (if there are no secured creditors an appropriate negative statement to that effect may be included in the director’s affidavit).

The Registrar is required to publish in the Cayman Islands Gazette details of the de-registration, the jurisdiction under whose laws the Applicant will be registered or existing and the name of the Applicant if changed from the current name.
In so far as it is possible, it is advisable that the re-registration of the Applicant in the Relevant Jurisdiction is co-ordinated with its de-registration in the Cayman Islands so that both events take place on the same day. If not, there could be a period in which the Applicant is not registered in any jurisdiction (or is registered in two at the same time).

The Registrar, if she is not aware of any other reason why it would be against public interest to de-register the Applicant, will issue a de-registration certificate under her hand and seal of office stating that the Applicant has been de-registered as an exempted company and enter into the Register of Companies the date of de-registration.

From the date of the de-registration the Applicant shall cease to be an exempted company under and subject to the Companies Act.
From the date of de-registration the Applicant shall continue as a company under the laws of the Relevant Jurisdiction provided that this shall not operate to:

i. create a new legal entity;

ii. prejudice or affect the identity or continuity of the Applicant as previously constituted;

iii. affect the property of the Applicant;

iv. affect any appointment made, resolution passed or any other act or thing done in relation to the Applicant pursuant to a power conferred by the Memorandum and Article of Association of the Applicant or by the laws of the Cayman Islands;

v. affect the rights, powers, authorities, functions and abilities or obligations of the Applicant or any other person; or

vi. render defective any legal proceedings by or against the Applicant any legal proceedings that could have been continued or commenced by or against the Applicant before its de-registration may, notwithstanding re-registration, be continued or commenced by or against the Applicant after de-registration.

This Briefing Note is not intended to be a substitute for specific legal advice or a legal opinion. It deals in broad terms only and is intended to merely provide an overview and general guidance on the de-registration and transfer by way of continuation of Cayman Islands exempted companies. For more specific advice on the de-registration and transfer by way of continuation of Cayman Islands exempted companies, please refer to your usual Loeb Smith contact or:

Gary Smith
Partner
Loeb Smith Attorneys

Cayman Islands

T: +1 (345) 749 7590

M: +1 (345) 525 0900

E: gary.smith@loebsmith.com

Elizabeth Kenny

Senior Associate

Loeb Smith Attorneys

Cayman Islands

T: +1 (345) 749 7594

M: +1 (345) 325 4824

E: elizabeth.kenny@loebsmith.com

www.loebsmith.com

This Briefing sets out, among other things, the following positions under Cayman law with respect to matters to consider when a Cayman company faces liquidity issues and financial difficulties which might lead to the relevant entity’s insolvency:

i. The liquidator of a Cayman company can apply to the Court to set aside a transaction of the company in favour of any creditor, at a time when the company is unable to pay its debts, where such transaction was entered into with a view to giving such creditor a preference over other creditors, if such transaction was made, incurred, taken within six (6) months immediately preceding the commencement of a liquidation of the company.

ii. The Directors of a Cayman company, the General Partner of an ELP and the Manager of an LLC should exercise caution and seek legal advice from Cayman legal counsel where there is any uncertainty about the solvency (on a cashflow basis) of the applicable Cayman entity which they are managing. These situations might, for example, arise within the context of an investment fund with severe liquidity issues.

iii. Every disposition of property made at an undervalue by or on behalf of a Cayman company with intent to defraud its creditors is voidable at the instance of its official liquidator.

iv. If in the course of the winding up of a Cayman company it appears that any business of the company has been carried on with intent to defraud creditors of the company or

creditors of any other person or for any fraudulent purpose, the liquidator may apply to the Court for a declaration that any persons who were knowingly parties to the carrying on of the business with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose are liable to make such contributions, if any, to the company’s assets as the Court thinks proper.

v. When Directors of a Cayman company are considering their fiduciary duties, the weight to be given to the interests of creditors will increase as the company’s financial difficulties become increasingly serious. Creditors’ interests will take precedence over the interests of the company’s shareholders at the point where insolvent liquidation or administration is inevitable.

The Companies Act (As Revised) of the Cayman Islands (the “Act”) provides that “every conveyance or transfer of property, or charge thereon, and every payment obligation and judicial proceeding, made, incurred, taken or suffered by any company in favour of any creditor at a time when the company is unable to pay its debts within the meaning of section 93 with a view to giving such creditor a preference over the other creditors shall be voidable upon the application of the company’s liquidator if made, incurred, taken or suffered within six months immediately preceding the commencement of a liquidation.”

It is important to note that a payment to a “related party” of the Cayman company shall be deemed to have been made with a view to giving a creditor a “preference” and therefore would be voidable upon the application of the company’s liquidator if made, incurred, taken or suffered within six (6) months immediately preceding the commencement of a liquidation.

A creditor is treated as a “related party” if it has the ability to control the Cayman company or exercises significant influence over the company in making financial and operating decisions.

A Cayman company is deemed to be unable to pay its debts if:

(a) it fails to comply with a statutory demand;

(b) the company fails to satisfy a judgment debt; or

(c) it is proven to the satisfaction of the Court that the company is unable to pay its debts.

Under Cayman law, the compulsory winding up of a company is deemed to commence at the time of the presentation of the petition for the winding up or, in the case of a voluntary liquidation, at the time of the resolution or expiry of the relevant period, or occurrence of an event provided by the company’s Articles of Association upon which the company is to be wound up, or in the case where a restructuring officer has been appointed pursuant to section 91B or 91C of the Act and the order appointing the restructuring officer has not been discharged, at the relevant time on the date of the presentation of the petition to appoint a restructuring officer pursuant to section 91B of the Act.

Every disposition of property made at an undervalue by or on behalf of a company with intent to defraud its creditors shall be voidable at the instance of its official liquidator (i.e. the liquidator of a Cayman company which is being wound up by order of the court or under the supervision of the court and includes a provisional liquidator). The official liquidator bears the burden of establishing an “intent to defraud” (i.e. the official liquidator must establish that there was an intention to wilfully defeat an obligation owed to a creditor). The intention to defeat a creditor needs only be “a” purpose and not the sole or dominant purpose. No legal proceedings may be brought by the official liquidator under after six (6) years following the date of the relevant disposition or transaction.

The term “undervalue” in relation to a disposition of a company’s property means (i) the provision of no consideration for the disposition; or (ii) a consideration for the disposition the value of which in money or money’s worth is significantly less than the value of the property which is the subject of the disposition.

However, the rights of the transferee of such property are subject to some protection. In the event that any disposition is set aside and the Court is subsequently satisfied that the transferee has not acted in bad faith: (i) the transferee will have a first and paramount charge over the property which is the subject of the disposition, of an amount equal to the entire costs properly incurred by the transferee in the defence of the action or proceedings; and (ii) the relevant disposition will be set aside subject to the proper fees, costs, pre-existing rights, claims and interests of the transferee (and of any predecessor transferee who has not acted in bad faith).

If in the course of the winding up of a Cayman company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose, the liquidator (i.e. official liquidator or voluntary liquidator) may apply to the Court for a declaration that any persons who were knowingly parties to the carrying on of the business with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose are liable to make such contributions, if any, to the company’s assets as the Court thinks proper. Directors of a Cayman company will face the real risk of liability when managing a company’s business if that business is carried on fraudulently. Unlike dispositions at an undervalue, there is no applicable limitation period for fraudulent trading.

In addition to Cayman companies, Cayman Islands law as stated above may also apply to limited liability companies (LLCs) and exempted limited partnerships (ELPs). Accordingly, the Directors of a Cayman company, the General Partner of an ELP and the Manager of an LLC should exercise caution and seek legal advice from Cayman legal counsel where there is any uncertainty about the solvency (on a cashflow basis) of the applicable Cayman entity which they are managing. These situations might, for example, arise within the context of an investment fund with severe liquidity issues. Directors should consider carefully the point at which creditors’ interests take priority over shareholders’ interests and how those interests are best served (e.g. appointment of a liquidator or a restructuring officer). Failure to seek urgent advice on their duties could increase the Directors’ exposure to risk of personal liability.

The fiduciary duty of directors is to act in good faith in the interests of a Cayman company. The interests of the company have until recent times been treated as being the interests of its members as a whole. However, in the UK Supreme Court’s decision given on 5 October 2022 in BTI 2014 LLC (Appellant) v Sequana SA and others (Respondents), which is persuasive authority in the Cayman Islands, it was re-affirmed that directors of financially distressed companies are required to consider, as one of the relevant factors, the interests of creditors. The Supreme Court concluded that the weight to be given to the interests of creditors will increase as the company’s financial difficulties become increasingly serious. Creditors’ interests will take precedence over the interests of the company’s shareholders at the point where insolvent liquidation or administration is inevitable.

Transactions which are void ab initio

When a winding up order has been made, any disposition of the company’s property and any transfer of shares or alteration in the status of the company’s members made after the commencement of the winding up is, unless the Court otherwise orders, void.

The commencement of a winding-up is the date a petition is presented to the Court (or, if the company was first placed into voluntary liquidation, the passing of that resolution) rather than the date when the Court grants a winding-up order. Accordingly, any transaction during the period between the presentation of a winding-up petition and its resolution before the Court, will be avoided if a winding-up order is ultimately granted, unless the Court validates the transaction.

The presentation of a winding-up petition can have a material adverse effect on a company’s business, due to the uncertainty during the period between the presentation of a winding-up petition and its resolution before the Court. A validation order takes away that uncertainty and enables companies to continue to operate in the ordinary course of their business prior to the hearing of the petition.

Any transfer of shares, not being a transfer with the sanction of the liquidator, and any alteration in the status of the company’s members made after the commencement of a voluntary winding up is void. Unlike a compulsory liquidation, a transfer of the company’s property is not automatically void. There is not normally the same uncertainty with voluntary liquidations because upon the appointment of a voluntary liquidator, all of the powers of the directors cease and are displaced by the voluntary liquidator (except so far as the company in a general meeting or the voluntary liquidator sanctions their continuance). Accordingly, the transfer of property is not automatically void but any transfer of property effected by the company after the appointment of a voluntary liquidator should be authorized by the liquidator.

This Briefing Note is not intended to be a substitute for specific legal advice or a legal opinion. For more specific advice on setting aside of antecedent transactions in the Cayman Islands, please contact any of:

E: gary.smith@loebsmith.com

E: robert.farrell@loebsmith.com

E. peter.vas@loebsmith.com

E: wendy.au@loebsmith.com

E: elizabeth.kenny@loebsmith.com

Loeb Smith is an offshore corporate law firm, with offices in the British Virgin Islands, the  Cayman Islands, and Hong Kong, whose Attorneys have an outstanding record of advising  on the Cayman Islands’ law aspects and BVI law aspects of international corporate,  investment, and finance transactions. Our team delivers high quality Partner-led professional  legal services at competitive rates and has an excellent track record of advising investment  fund managers, in-house counsels, financial institutions, onshore counsels, banks,  companies, and private clients to find successful outcomes and solutions to their day-to-day  issues and complex, strategic matters.

The most common structure for a Cayman Islands domiciled private equity fund (“PE fund”) or a Cayman Islands domiciled venture capital fund (“VC fund”) is as an exempted limited partnership (“ELP”) formed under the Exempted Limited Partnership Act (As Revised) (“ELP Act”). However, there are some Fund sponsors who choose a Cayman Islands exempted company or a Cayman Islands limited liability company (LLC) instead of an ELP as the corporate structure for their PE funds or VC funds for a number of reasons, including, their own specific onshore tax or regulatory requirements or benefits, or the investors are more familiar with or prefer to invest in a Cayman Islands exempted company or LLC.

Who can be General Partner?

The ELP is required to have a general partner (“GP”) which is most commonly a Cayman Islands exempted company. However, a foreign company upon its registration as a foreign company in the Cayman Islands or another ELP are able to qualify as the GP of an ELP. The list of persons who may qualify as a GP of an ELP also includes a limited partnership or limited liability partnership established in a recognized jurisdiction (e.g. United States, United Kingdom, Hong Kong, BVI, Singapore, Jersey, Luxembourg) (a “foreign limited partnership”) provided such a foreign limited partnership is registered as a foreign limited partnership in the Cayman Islands.

The Directors and shareholders of the GP are typically persons who are affiliated with the sponsor of the PE fund or VC fund. There is no requirement for any Director or shareholder of the GP to reside in the Cayman Islands. The GP will not be carrying on a ‘relevant activity’ for economic substance purposes in solely acting as the GP of an ELP.

Who are the Limited Partners?

The limited partners of the ELP will be the investors subscribing for limited partnership interests in the ELP. There are no restrictions on the number of limited partners that may be admitted to an ELP. There is no requirement for any limited partner of the ELP to reside in the Cayman Islands.

No Corporate Personality

An ELP does not have a legal personality of its own. The ELP is a legal arrangement between its GP and its limited partners and the terms of this legal arrangement are governed principally by the terms of the limited partnership agreement (“LPA”). The contractual rights and equitable interests in the assets of the ELP are held on trust for the ELP by its GP (and, if there is more than one GP, by the general partners jointly).
The ELP Act states clearly that (i) relevant provisions of the Cayman Islands’ Partnership Act are preserved in relation to ELPs, and (ii) the principles of common law and equity applicable to partnerships also apply to ELPs.

Tax Transparency

Not having its own legal personality, the ELP is generally regarded from an onshore tax perspective as being tax transparent (or as having “see-through”, “look-through” or “flow-though” status, which signify the same thing) with the effect that the ELP itself will not be liable to any onshore taxes; and value distributed by it will “flow-through” to the investors (and may be subject to local taxes in their hands).

Limited Liability

A limited partner of the ELP will not lose its limited liability unless it takes part in the conduct of the business of the ELP in its dealings with persons who are not partners of the ELP as if it was, for the period of participating in the ELP’s business, a general partner of the ELP. In such circumstances, the limited partner may be liable to a person who transacts business with the ELP with actual knowledge of the limited partner’s participation in the management/operation of the ELP and who then reasonably believed the limited partner to be a general partner.

A limited partner may not participate in the conduct of the ELP’s business, and all contractual documents and papers must be executed by the GP as the contracting party acting on behalf of the ELP. As stated above, any limited partner participating in the management/operation of the ELP, as though it were a GP will, for that period of management participation be liable for the debts and obligations of the ELP, if the ELP goes insolvent, to any person transacting business with the ELP through the limited partner and who had actual knowledge of such limited partner’s participation and who reasonably believed that limited partner to be a general partner.

The ELP Act sets out certain non-exhaustive “safe harbours” of activities in which a limited partner may engage without risk of being deemed to be participating in the conduct/management of the ELP’s business and thereby losing its limited liability status. These include:

i. holding an office or interest in, or having a contractual relationship with, a general partner or being a contractor for or an agent or employee of the ELP or of a general partner or acting as a director, officer or shareholder of a corporate general partner;

ii. consulting with and advising a general partner or consenting or withholding consent to any action proposed, in the manner contemplated by the LPA, with respect to the business of the ELP;

iii. investigating, reviewing, approving or being advised as to the accounts or business affairs of the ELP or exercising any right conferred by the ELP Act;

iv. acting as surety or guarantor for the ELP either generally or in respect of specific obligations;

v. approving or disapproving an amendment to the LPA;

vi. calling, requesting, attending or participating in any meeting of the partners;

vii. taking any action that results in the winding up or the dissolution of the ELP;

viii. taking any action required or permitted by the LPA or by law to bring, pursue, settle or terminate any action or proceedings brought pursuant to section 33(2) of the ELP Act;

ix. serving on any board or committee of the ELP, a general partner, the limited partners or the partners, or by appointing, electing or otherwise participating in the choice of a representative or any other person to serve on any board or committee, or by acting as a member of any board or committee either directly or by or through any representative or other person, including giving advice or consenting, or refusing to consent, to any action proposed by the GP on behalf of the ELP and exercising any powers or authorities or performing any obligations as a member of that board or committee in the manner contemplated by the LPA;

The LPA may nonetheless provide for any amount of limited partner participation in the conduct of the ELP’s business.

A limited partner of an ELP owes no fiduciary duty to any other partners of the ELP or to the ELP itself in exercising any of its rights or performing any of its obligations under the LPA, except to the extent that it has expressly agreed to such fiduciary obligations in the LPA. Partners may nevertheless agree to set out certain fiduciary obligations in the LPA. They might, for example, agree to impose fiduciary duties on members of an LPAC or other advisory committees of the ELP.

With the consent of the GP, a limited partner may transfer or grant a security interest over its partnership interest in the ELP, subject to it complying with any provisions in the LPA dealing with the requirement for consent. In the case of a transfer of a partnership interest, the transferee is typically admitted to the ELP in accordance with the formalities prescribed in the LPA. When the requirements for admission have been met, the ELP Act provides that the incoming partner is deemed to have agreed to and be bound by the terms and conditions of the LPA as if all parties had together duly executed and delivered it. The GP may also, subject to the terms of the LPA, transfer or grant a security interest in its general partnership interest with the written consent of any other general partner.

The LPA typically includes provisions setting out the consequences for a partner who fails to perform any of its obligations under the LPA. The LPA may, for example, provide that if a limited partner fails to contribute to the ELP such funds as have been committed, that partner shall forfeit its partnership interest. The ELP Act expressly provides that such provisions in the LPA will not be unenforceable solely on the basis that they may be penal in nature.

The ELP Act provides that if a limited partner receives a payment representing a return of any part of that person’s contribution or is released from any outstanding obligation in respect of that person’s commitment and at the time that the payment was made or the release effected:

i. the ELP is insolvent including where the payment or release causes the insolvency; and

ii. the limited partner has actual knowledge of the insolvency of the ELP,

then for a period of six (6) months commencing on the date of that payment or release but not thereafter, the limited partner shall be liable to the ELP for the amount of the payment or the due performance of the released obligation in respect of that person’s commitment in each case to the extent that the repayment or performance of the released obligation is necessary to discharge a debt or obligation of the ELP incurred during the period that the contribution or commitment represented an asset of the ELP.

The Private Funds Act (2021 Revision) (the “PFA”) requires the registration of “private funds” with the Cayman Islands Monetary Authority (“CIMA”). A “private fund” includes an ELP that “offers or issues or has issued investment interests, the purpose or effect of which is the pooling of investor funds with the aim of enabling investors to receive profits or gains from such entity’s acquisition, holding, management or disposal of investments, where:

(a) the holders of investment interests do not have day-to-day control over the acquisition, holding, management or disposal of the investments; and

(b) the investments are managed as a whole by or on behalf of the operator of the private fund, directly or indirectly, but does not include:

(i) a person licensed under the Banks and Trust Companies Act (2021 Revision) or the Insurance Act, 2010 [Law 32 of 2010];

(ii) a person registered under the Building Societies Act (2020 Revision) or the Friendly Societies Act (1998 Revision); or

(iii) any non-fund arrangements”

The PFA applies to PE funds, VC funds, and other types of closed-ended funds which fall within the definition of “private fund” above and so ELPs need to consider (i) whether their business falls within the scope of a “private fund” as defined, and (ii) the issue of registration with CIMA.

An ELP may also be used for the purposes of operating a mutual fund and in that case, the GP of the ELP needs to consider (i) whether their business falls within the scope of a mutual fund, and (ii) the issue of registration with CIMA.

Formation and registration of an ELP and its GP can take place either on a same-day express basis with the payment of an express fee of approximately US$488 to the Registrar of Companies or within 5-7 business days on a standard basis.

There are no capital gains, income, profits, withholding, estate or inheritance taxes in the Cayman Islands. The ELP can apply for (and can expect to obtain) an undertaking from the Cayman Islands government that no form of taxation that may be introduced in the Cayman Islands will apply to the ELP for a period of 50 years from the undertaking being given. The GP can also apply for (and can expect to obtain) an undertaking from the Cayman Islands government that no form of taxation that may be introduced in the Cayman Islands will apply to the GP for a period of 20 years from the undertaking being given.

Ongoing obligations of an ELP

The GP has the responsibility for maintaining (or causing to be maintained) the following statutory registers:

i. Register of limited partners. This register must contain the name and address of each limited partner and the date on which a person became or ceased to be a limited partner. The register of limited partners can be kept anywhere in the world. If the register is kept at a place other than the registered office it must still be readily accessible, as it is required to be made available at the registered office should there be a notice or order for production under the Cayman Islands’ Tax Information Authority Act. The register of limited partners can be kept in electronic form and must be updated within 21 days of any changes. The ELP Act provides that subject to any express or implied term of the LPA, the register (and the record of address at which the register is maintained if it is not maintained at the registered office) is open to inspection by all partners and by any other person with the consent of the GP. If the GP defaults in complying with the above requirements for maintaining the register of limited partners it commits an offence and is liable on summary conviction to a fine of approximately US$12,200 for each day that the default continues and the GP is required to indemnify any person who thereby suffers any loss.

ii. Record of contributions and payments. The ELP Act also provides that the GP must maintain a record of contributions and payments which must show the amount and date of the contribution or contributions of each limited partner and the amount and date of any payment representing a return of the whole or any part of the contribution of any limited partner, and this record may be kept within or outside of the Cayman Islands but must be updated within 21 days of any change and be accessible to the registered office. These records are only available for inspection by any person (including a limited partner) with the consent of the GP.

iii. Register of security interests in relation to limited partnership interests. The ELP Act places an obligation on the GP to maintain or cause to be maintained at the ELP’s registered office, a register of security interests that have been granted over any limited partnership interest. When a security interest is granted over the whole or any part of a limited partnership interest, the ELP Act requires that notice must be given by the grantor (i.e., the limited partner) or the grantee (e.g., the lender) to the ELP at the registered office. The GP must then enter on the register of security interests (i) the identity of the grantor and the grantee, (ii) the relevant partnership interest, and (iii) the date on which notice of the security interest was validly served. The register must be open for public inspection during regular business hours. Any security interest has priority according to the time that the written notice is validly served at the registered office.

iv. Changes to the Section 9 Statement. Any changes to the Section 9 Statement of the ELP must be promptly notified to the Registrar of Exempted Limited Partnerships, by filing an amended statement signed by the GP. In general, changes must be notified within 60 days; however, a change to the GP is required to be filed within 15 days of the change and is not effective until that filing is made.

The GP is required to keep (or cause to be kept) proper books of account. The records must be sufficient to give a true and fair view of the business and financial condition of the ELP and to explain its transactions. The accounting records are required to be retained for a minimum period of five (5) years. Subject to the terms of the LPA, each limited partner may demand and receive from the GP a true and full picture of the state of the business and financial condition of the ELP. There is no requirement for the accounts of an ELP to be audited each year under the ELP Act, although this may be required if the partnership is otherwise regulated, for example under the PFA or the Mutual Funds Act.

The GP is required to make an annual return to the Registrar of Exempted Limited Partnerships in January each year regarding compliance with the ELP Act and to pay an annual return fee. The annual return will generally be signed on behalf of the GP by the ELP’s registered office agent.
This Briefing Note is not intended to be a substitute for specific legal advice or a legal opinion. It deals in broad terms only and is intended to merely provide an overview and general guidance on Cayman Islands exempted limited partnerships only. For more specific advice on the formation and usage of exempted limited partnerships as investment funds, and in corporate and financing transactions, please refer to your usual Loeb Smith contact or:

Gary Smith
Partner
Loeb Smith Attorneys
Cayman Islands
T: +1 (345) 749 7590
M: +1 (345) 525 0900