Loeb Smith has acted as Cayman Islands counsel to China Crystal New Material Holdings Co., Ltd., the world’s largest synthetic mica manufacturer in respect of its IPO on the Korea Stock Exchange (KRX)’s KOSDAQ market. It is the first time in four and a half years since a Chinese company has entered the KRX. The company’s shares began trading on 28th January 2016.

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The Loeb Smith team was led by Corporate Partner, Gary Smith.

For more information, please contact:

Gary Smith
Partner
E: gary.smith@loebsmith.com
www.loebsmith.com

Loss of substratum (or reason for existence)

Shareholders of a Cayman Islands company may petition the Grand Court for an order that a company is wound up pursuant to section 92(e) of the Companies Law (As Revised) on the basis that it is “just and equitable” for it to do so. One ground which is often relied on by shareholders for this purpose is that the company has lost its “substratum” or, in other words, its reason for being in existence. The seminal dicta in this area is that of Lord Cairns in In re Suburban Hotel (1867) LR 2 Ch App 737, where he held that:

“It is not necessary for me to decide it; but if it were shown to the Court that the whole substratum of the partnership, the whole of the business which the company was incorporated to carry on, has become impossible, I apprehend that the Court might, either under the Act of Parliament, or on general principles, order the company to be wound up.”

In the recent case of In Re Harbinger Class PE Holdings (Cayman) Ltd (unreported, 10 November 2015) Justice Clifford, noted that subsequent English authorities have followed the approach adopted by Lord Cairns. He quoted the decision of Lord Justice Baggallay in the English case In re German Date Coffee Company (1882) 20 Ch D 169 that:

“It appears to me that the principle involved in the decision of In re Suburban Hotel Company by Lord Cairns amounts to this, that if you have proof of the impossibility of carrying on the business contemplated by the company at the time of its formation, that is sufficient ground for winding up the company. Therefore the question arises in the present case, is there an impossibility of carrying out the objects of the company.”

However, Justice Clifford also noted the confines of the principle of the loss of substratum as set out in Re Kitson & Co Ltd [1946] 1 All ER 435 in which the English Court of Appeal held that there had been no failure of substratum where a company had sold its business, but at the same time was carrying on a similar type of business through a subsidiary. Provided that the company could carry on that type of business, then prima facie at least, it would be impossible to hold that the substratum had gone.

Divergence between the approach taken in the Cayman Islands and the British Virgin Islands in respect of open-ended corporate mutual funds  

In In Re Belmont Asset Based Lending Limited [2010] 1 CILR 83, Jones, J sitting in the Financial Services Division of the Grand Court held:

“To translate these statements into a modern context, it can be said that it just and equitable to make a winding-up order in respect of an open-ended corporate mutual fund if the circumstances are such that it has become impractical, if not actually impossible, to carry on its investment business in accordance with the reasonable expectations of its participating shareholders, based upon representations contained in its offering document. If such a company, organised as an open-ended mutual fund, has ceased to be viable for whatever reason, the court will draw the inference that it is just and equitable for a winding-up order to be made.”

In Harbinger, Clifford, J., noted that whilst this test had been applied in other Cayman Islands cases, the approach had not been followed in other jurisdictions, most notably, the British Virgin Islands, where Bannister, J., in Aris Multi-Strategy Lending Fund Ltd V Quantek Opportunity Fund Ltd (15 December 2010) held that:

“It seems to me that the underlying principle to be extracted from these cases, with the exception of In re Bristol Joint Stock [where Kekewich, J referred to the impossibility of a business being carried on with any hope of success] is that a minority seeking a winding up on the grounds that the business life of a company has come to an end will only be permitted to overcome the will of the majority if they can show that further conduct of the company’s business is impossible.”

Bannister, J., held that the reasoning of Jones, J in Belmont was confined to open-ended investment funds. Indeed, in that case, Jones, J., had referred to “sound policy reasons for making a winding-up order in respect of non-viable mutual funds.” As a consequence, Bannister, J., interpreted the ratio of the English case law authorities to the effect that there will only be a failure of substratum if it is impossible, as opposed to no longer viable, for the business of the company to be carried on.

The approach followed in Harbinger

In Harbinger, Clifford, J., was faced with the task of determining which of the two divergent approaches should be followed. That case concerned the question of the substratum of a subsidiary which had been incorporated as part of a restructuring of a closed-end fund which had suffered significant difficulties as a result of the financial crisis in 2008. The company was intended amongst other matters to hold a special class of shares in the parent fund company which related to largely illiquid assets held by the parent and “ear marked” for disposal so that the special shares would receive the benefit of the allocated assets after the discharge of all prior ranking liabilities of the fund. Clifford J., held that because company in question was not, and never had been, an open-ended corporate mutual fund the test to be applied was:

“founded upon the established underlying principle of the line of authorities referred to which requires the Court to determine whether it has become impossible for the company to achieve the purpose for which it was formed.”

Harbinger would therefore appear to confine the ruling of Jones, J., in Belmont to closed ended mutual funds, or at least to companies within structures where similar policy arguments may apply.

Interpretation of the objects of a company

In Harbinger significant argument was also lead about the interpretation of the objects of the subsidiary company which contained a modern form unrestricted objects clause. Clifford J., held that on the basis of previous authorities, including the BVI authority of Aris cited above, that the Court is required to look beyond a wholly general objects clause to ascertain on the particular evidence in a case the principal or main object of a company in line with the reasonable expectation of its participating shareholders. This is a useful reconfirmation of these principles as they apply to Cayman Islands companies.

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For more information on shareholder disputes in Cayman Islands’ companies please contact:

David Harby
Head of Commercial Disputes and Litigation
E: david.harby@loebsmith.com
www.loebsmith.com

New Enforcement Powers for CIMA to impose Administrative Fines on Cayman Islands’ Regulated Funds and Investment Managers are now in Force.

Introduction

The Monetary Authority (Amendment) Law, 2016 (the “Amendment Law“) which was enacted near the end of 2016 but only came into force on 15th December 2017 gives the Cayman Islands Monetary Authority (“CIMA“) the power to impose administrative fines for non-compliance on entities and individuals who are subject to Cayman Islands regulatory laws (e.g. the Mutual Funds Law, the Securities Investment Business Law, and the Directors Registration and Licensing Law) and/or the Anti-Money Laundering Regulations, 2017 (“AML Regulations“).

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Persons Affected

CIMA’s new powers to impose administrative fines for breach of, or non-compliance with, regulatory laws and/or the AML Regulations will cover, among others:

1. 1. investment funds registered with CIMA;
   2. investment management/advisory companies registered with CIMA (including those registered as an “Excluded Person” under the Securities Investment Business Law);
   3. individuals who are Directors of entities covered under i. and ii. above (irrespective of whether or not the Director is resident in the Cayman Islands) and are registered with CIMA.

Types of Fines

For a breach prescribed as minor, the fine will be CI$5,000 (approx. US$6,000). For a breach prescribed as minor, CIMA also has the power to impose one or more continuing fines of CI$5,000 each for a fine already imposed for the breach (the “initial fine”) at intervals it decides, until the earliest of the following to happen:

(a) the breach stops or is remedied;

(b) payment of the initial fine and all continuing fines imposed for the breach; or

(c) the total of the initial fine and all continuing fines for the breach reaches CI$20,000 (approx. US$24,000).

For a breach prescribed as serious, the fine is a single fine not exceeding: (a) CI$50,000 (approx. US$61,000) for an individual; or (b) $100,000 (approx. US$122,000) for a body corporate. For a breach prescribed as very serious, the fine is a single fine not exceeding: (a) CI$100,000 (approx.US$122,000) for an individual; or (b) CI$1,000,000 (approx. US$1,220,000) for a body
corporate.

CIMA will have six (6) months from becoming aware of a minor breach, or having received information from which the fact of the breach can be reasonably inferred, to impose a fine. There is a two (2) year time limit in respect of the imposition of fines for serious or very serious breaches.

Fines may be imposed even if the relevant breach is not a criminal offence. If a breach is also an offence, the imposition by CIMA of a fine will not preclude separate prosecution for that offence (or be limited by the penalty stipulated for that offence). Equally, any prosecution will not preclude the imposition of administrative fines or penalties.

The Monetary Authority (Administrative Fines) Regulations 2017, which also came into force on 15th December 2017 sets out, among other things, rules and guidance regarding the amount of fines, different categories of breaches, the criteria for exercising fine  discretions, including procedures of imposing fines, appeals, payment and enforcement.

What is CRS and how will it impact Cayman Islands domiciled investment funds?  

The Common Reporting Standard (CRS) will impact Cayman Islands domiciled investment funds with effect from 1 January 2016. The CRS framework represents a globally coordinated approach to the disclosure of income earned by individuals and organizations in order to combat tax evasion.

The CRS represents a significant step towards the global automatic exchange of information (“AEOI”) for tax purposes. Among other things, the application of CRS in the Cayman Islands and other “early adopter” jurisdictions (including the BVI, Jersey, Guernsey, Ireland, and the United Kingdom) will require investment funds (and other financial institutions) to collect tax identification and tax residency information from all new subscribers and transferees (including debt-holders and equity-holders) who become investors on or after 1 January 2016. There are currently more than 90 jurisdictions that have committed to the implementation of CRS. The Cayman Islands are one of the first countries or early adopter jurisdictions that have agreed to implement AEOI exchanges under CRS by September 2017. On 16th October 2015, the Cayman Islands brought into force regulations which implemented the CRS regime into Cayman Islands law.

With effect from 1 January 2016, CRS will impose new investor due diligence and reporting obligations on investment funds and other financial institutions based in the Cayman Islands. Financial institutions should now be preparing for the commencement of CRS by ensuring that marketing and subscription documentation are updated and that appropriate due diligence and reporting procedures are in place, especially for new funds.

How is CRS different from US FATCA?  

Unlike US FATCA which requires Financial Institutions to register with the United States Internal Revenue Service to obtain a Global Intermediary Identification Number (GIIN), under CRS there are no additional registration requirements for Cayman Islands domiciled financial institutions with overseas tax authorities. Information provided to the Cayman Islands Department for International Tax Cooperation (“DITC”) will be exchanged automatically between the DITC and overseas taxing authorities. In order to facilitate the collection of this information, the DITC published self-certification forms on 8 December 2015. These self-certification forms can be used to collect the information required under CRS from in- dividual and entity investors in Cayman Islands investment funds. Along with the publication of these forms, DITC announced that, while investment funds should strive to collect self-certifications from new investors upon subscription, investment funds have 90 days from the subscription date to collect the necessary self-certifications.

The United States (US) has not yet agreed to adopt the CRS. The US will continue to rely on US FATCA and its related network of intergovernmental agreements to achieve the AEOI on tax matters.

Key Timetable Dates  

The Cayman Islands Ministry of Financial Services has outlined the following key dates with respect to CRS in the Cayman Islands:

1 January 2016 – All financial accounts opened with Reporting Financial Institutions from this date and on- wards are required to be subject to “new account”i due diligence procedures.

1 January 2016 – All financial accounts existing as at 31 December 2015 with Reporting Financial Institutions are required to be subject to “pre-existing account”ii due diligence procedures.

31 December 2016 – Due diligence procedures for identifying high-value pre-existing individual accounts shall be completed by 31 December 2016.

30 April 2017 – Deadline by which a Reporting Financial Institution is required to make certain notifications as to its CRS reporting status to the Cayman Islands Tax Information Authority. The CRS requires notification of: (i) the name of the Reporting Financial Institution; (ii) categorization of the Reporting Financial Institutions (i.e. reporting status); and (iii) certain details of its principal point of contact.

31 May 2017 – The first reporting date to the Cayman Islands Tax Information Authority in respect of relevant Reportable Accounts under CRS.

31 December 2017 – Due diligence procedures for identifying lower-value pre-existing individual accounts and for entity accounts shall be completed by 31 December 2017.

What steps should CI Financial Institutions take? 

Financial Institutions (e.g. investment funds and banks) will need to have updated on-boarding procedures to determine CRS status of new account holders from 1 January 2016. Offering documents and subscription agreements for investment funds should be updated to incorporate appropriate references to CRS. Investment funds should be consulting with their administrators with regard to implementing updated on-boarding procedures.

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For more information on the application of CRS in the Cayman Islands please contact:

Gary Smith
Partner
E: gary.smith@loebsmith.com
www.loebsmith.com

On 28 August 2015, Jones, J., gave the first Judgment in the Grand Court of the Cayman Islands on the meaning of “fair value” in merger transactions pursuant to s. 238(1) of the Companies Law (2013 Revision) (the “Law”).

A mareva or freezing injunction is an interim court order, restraining a party from dealing with, or removing, assets from the jurisdiction. Such an order is normally applied for on an basis (or without notice to the respondent) in order to avoid the risk of the dissipation of the assets which the injunction is intended to cover.

In order to be able to obtain a freezing injunction the applicant must show:

1. 1. a good arguable case against the respondent;
   2. that the refusal of an injunction would involve a real risk that a judgment or award in favour of the
      applicant would remain unsatisfied; and
   3. that it is just and convenient for the injunction to be granted.

A good arguable case was described by Mustill, J., in The Niedersachsen [1983] 2 LLR 600 as ‘one which is more than barely capable of serious argument, but not necessarily one which the judge considers to have a better than 50% chance of success’. The element of a real risk requires “solid evidence” of the alleged risk of dissipation as opposed to a mere expression of opinion or assertion of likelihood. Finally, the court must consider whether it is just and convenient to grant the injunction. In determining this, the court will consider factors such as the conduct of the applicant, the rights of any third parties who may be affected and the potential hardship to the respondent.

In VTB Capital Plc v Universal Telecom Management and Anor [2013] (2) CILR 94, the Cayman Islands Court of Appeal held that the Grand Court had jurisdiction to award free-standing mareva injunctions in support of foreign proceedings, including against third parties. The following requirements were set out:

1. 1. the entity against whom the freezing order is sought must be subject to the jurisdiction of the courts of the Cayman Islands;
   2. it does not matter that the Cayman Islands entity is not party to a substantive cause of action recognized by the courts of the Cayman Islands;
   3. the claim against the defendant, whether or not brought in the Cayman Islands, must be justiciable in the Cayman Islands; and
   4. provided that points I to III above are satisfied, there is no reason why the defendant against whom the action is being taken in the foreign court should not be party to the proceedings in the Cayman Islands.

However, in VTB Capital Plc v Malofeev [2011] (2) CILR the Cayman Islands Court of Appeal held that the Grand Court could not grant leave to serve a defendant out of the jurisdiction where the only relief sought was an interim mareva injunction in support of foreign proceedings. This position has now been reversed by the introduction of s.11A of the Grand Court (Amendment) Law 2014. This provides that the Grand Court may by order appoint a receiver or grant other interim relief in relation to proceedings which:

1. 1.  have been or are to be commenced in a court outside of the Islands; and
   2. are capable of giving rise to a judgment which may be enforced in the Islands under any Cayman Islands law or at common law

The Commercial Disputes and Litigation Team at Loeb Smith has a wealth of experience in representing clients in applications for mareva injunctions and would be happy to assist with any queries you may have. For more specific advice on applying for mareva injunctions in the Cayman Islands, please contact:

David Harby