This article first appeared in Volume 12, Issue 1. of International Corporate Rescue, published by Chase Cambria Publishing.

Gary Smith reviews the decision of the United States Bankruptcy Court Southern District of New York in re: Soundview Elite, Ltd., et al., Debtors (Case No. 13-13098 (REG)) as another good example of the willingness of the US courts to share jurisdiction in the interests of comity in cross border insolvency cases.

Download Full PDF Version

A statutory demand is a formal demand for payment of a debt made by a creditor to a debtor. It may be used as the basis for an application for a petition to wind up a Cayman company.

Service and content of Statutory Demand

The Companies Winding up Rules 2008 (as amended) provide guidance as to the form and content of a statutory demand as well as the mode of service within the Cayman Islands.

A statutory demand should be in the format of CWR Form 1 and must be signed by:

a. the creditor; or

b. if the creditor is a firm, any partner of the firm; or

c. if the creditor is a corporate body, any director or officer who is authorised to make such a demand.

The demand must set out the amount and currency of the debt, the date on which the debt fell due, and the consideration for the debt. It must also contain the creditor’s address, or, if signed by someone other than the creditor himself, it should include the contact details of the partner, director or officer who sign on behalf of the creditor.

If the amount claimed includes any charge by way of interest not previously notified to the company as included in its liability, or any other charge accruing from time to time, the statutory demand must state the grounds upon which the company is liable to pay such interest or charge and contain particulars of the way in which such interest or charge are calculated.

Additionally, a statutory demand must include a statement that if payment is not made within 21 days of the date upon which it is served on the company, the company will be deemed to be insolvent and a winding up petition may be presented against the company in accordance with sections 92(d) and 93(a) of the Companies Law (2013 Revision).

The original hard copy should be delivered by hand to the company’s registered office – transmission of a copy by facsimile or e-mail alone is not sufficient to constitute good service. Once a statutory demand is served, the debtor has 21 days to either settle the debt, or to arrange to secure or compound for the debt to the satisfaction of the creditor. If, after 21 days, the debt has not been paid, or an agreement has not been reached and the statutory demand has not been set aside, the creditor may present a petition to the Court for a winding up order if the debt in question exceeds CI$100 (approximately US$120).

Disputing the debt/Counterclaim

The Court may dismiss a petition for the winding up of a company if the debt is disputed, or there is a genuine or serious cross claim. If the debt is disputed, the Court must be satisfied that there is a genuine dispute on substantial grounds (Re A Company (No. 006685 of 1996) [1997] BCC 830). If the creditor is aware of a genuine dispute prior to the service of the demand, cost penalties may arise (Re A Company (No. 006789 of 1995) [1996] 1 WLR 491). Therefore, the creditor should consider the possibility of a dispute or whether the creditor is able to pay before serving the statutory demand.

A court may also dismiss a petition where there is a genuine and serious counterclaim. In order for the petitioner to succeed in face of a genuine counterclaim, it must be one which the debtor is unable to litigate, be for an amount which does not exceed the petitioner’s claim, or reduce the debt to below CI $100 (approximately US$120) and there should be no circumstances that would make it inappropriate for the petition to be dismissed or stayed (Re Bayoil SA [1998] BCC 988).

For more specific advice on statutory demands in the Cayman Islands, please contact:

Gary Smith

E gary.smith@loebsmith.com
T  +1 (345) 749 7590

View Full PDF

In This Issue

An Overview of Cayman Law Governing Hedge Funds

What are the key statutes and regulations that govern hedge funds in the Cayman Islands? Which regulatory bodies regulate hedge funds?

What are the main legal vehicles used to set up a hedge fund and what are the key advantages and disadvantages of using these structures?

What are the key disclosure or filing requirements (if any) that must be completed by the hedge fund?

Download Full PDF Version

The legal landscape for Cayman Islands domiciled private equity and venture capital funds has changed significantly in 2014 as a result of the coming into force of two new laws in the Cayman Islands. Attached is an analysis article written by Corporate Partner Gary Smith, setting out the principal legal changes that will impact on the formation, launch and operation of Cayman Islands domiciled private equity and venture capital funds.

Download Full PDF Version

IN THIS ISSUE

The Cayman Islands continue to be the leading offshore jurisdiction for the establishment of both hedge funds and private equity funds. Typically, private equity funds are structured in Cayman as exempted limited partnerships (“ELPs”) and the introduction of the Exempted Limited Partnership Law, 2014 (the “New ELP Law”), which has repealed the previous law and came into force on 2nd July 2014, is aimed at enhancing the attractiveness of Cayman as the leading offshore jurisdiction for private equity funds.

The New ELP Law aims (i) to confer even greater contractual flexibility on the general partner (“GP”) and limited partners (“LPs”) of ELPs in order that they can regulate their affairs within the limited partnership agreement (“LPA”) , and (ii) to reflect some developing trends in the formation, regulation and operation of private equity funds which bring Cayman, as it relates to ELPs, more closely aligned with Delaware law.

Foreign partnerships can act as a GP

The list of persons who qualify as a GP of an ELP has been extended to include 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 foreign limited partnership is registered as a foreign limited partnership in Cayman. Whilst a foreign company has been able to be the GP of an ELP upon registration as a foreign company in Cayman, a partnership established outside Cayman was not previously able to act as a GP of an ELP.

In the context of private equity funds, the extension of entities that can qualify as a GP of an ELP will improve structuring possibilities for fund managers by allowing a foreign limited partnership to be the GP of both an offshore ELP and an onshore limited partnership.

Requirement of a GP to act in the interest of the ELP

Under the previous ELP law, a GP was under an absolute duty to act in good faith in the interest of the ELP. This duty could not be restricted, limited or varied by the terms of the LPA between the GP and the LPs. The requirement to act in the interest of the ELP often raised the issue of conflicts of interest for the GP, particularly when it acted as GP to more than one ELP. A GP which acted as the sole GP to several private equity funds (structured as ELPs) had to, for example, consider how to discharge its statutory duty to act in good faith in the interest of each fund, in relation to investment opportunities. The New ELP Law retains the absolute duty on the GP to act in good faith and, whilst retaining the duty to act in the interest of the ELP, makes it subject to any express provision in the LPA to the contrary.

Going forward, the LPA may set out in whose interests the GP must act in any particular circumstance. By this change, the New ELP Law has provided additional flexibility to the GP and LPs of an ELP and effectively provided a mechanism for the GP and LPs to remove some of the conflicts of interest issues that a GP had to consider previously (e.g. vis – à – vis dealing with investment opportunities for competing funds) . It is important to note, however, that if the LPA has no express provision with regard to whose interest the GP must act in certain given circumstances, then the fallback position is that the GP must act in good faith in the interest of the ELP (i.e. in the collective interest of all LPs of the ELP).

Status of LPs when the Partnership ceases to have a qualifying GP

Under Cayman law, an ELP is required to have at least one qualifying GP who shall, in the event that the assets of the ELP are inadequate, be liable for all debts and obligations of the ELP. If that sole qualifying GP ceases to be the qualifying GP of the ELP (e.g. the GP ceases to be registered as a foreign company in Cayman), it was previously unclear as to whether this fact adversely affected the limited liability status of the LPs in that ELP. The New ELP Law now confirms that even if the ELP ceases to have a qualifying GP, the LPs will not, on that basis, lose the benefit of statutory limited liability.

Limited Partners owe no fiduciary duties

Section 19(2) of the New ELP Law confirms, if confirmation was required, that 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.

Similarly, section 24(2) of the New ELP Law states that a member of any board or committee of the ELP does not, in the absence of express provisions in the LPA to the contrary, owe any fiduciary duty in exercising any of its rights or authorities, or otherwise in performing any of its obligations as a member of any board or committee of the ELP.

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 advisory boards or committees of the ELP.

Register of Security Interests

The New ELP Law requires the GP to maintain a register of security interests over any partnership interest at the registered office of the ELP. The register of security interests must contain the identity of the grantor and grantee, the partnership interest or part thereof over which the security interest has been granted, and the date on which notice of the security interest was validly served. Written notice of the grant of a security interest over the partnership interest or part thereof must be given to the ELP at its registered office by the grantor or grantee in order for such notice to be deemed validly served .

The register of security interests of the ELP may be inspected by any person during usual business hours.

Register of Partners

Section 29 of the New ELP Law provides that the register of limited partners need only record the following in respect of each ELP (and therefore need no longer contain financial information, e.g. LP contributions and details of return of contributions to LPs):

The name and address of each LP;

The date on which a person became an LP;

The date on which the LP ceased to be an LP.

The register of limited partners may be inspected by all LPs subject to any express or implied term of the LPA, and may also be inspected by any other person with the consent of the GP.

Register of Contributions

Details of capital contributions by LPs to the ELP and details of payments representing a return of contribution by the ELP to LPs are no longer required to be kept in the register of limited partners. Section 30 of the New ELP Law requires the GP to maintain a separate record of contributions with the following information:

The amount and date of the capital contribution(s) of each LP

the amount and date of any payment representing a return of the whole or any part of the contribution of any LP.

Any person may have access to the register of contributions with the consent of the GP.

The changes introduced in respect of the register of limited partners and register of contributions provide the GP with the ability to prevent or restrict an LP from accessing financial information pertaining to other LPs’ capital contribution and/or return of contributions by the ELP.

Where the register of limited partners and the register of contributions are maintained at a place other than the registered office of the ELP, the GP is required to maintain at the registered office a record of the address where these registers are maintained.

Admission formalities simplified

The New ELP Law has clarified previous concerns regarding whether or not it was possible to admit a new LP to the ELP without having the LP execute counterpart agreements or enter into a deed of adherence to agree to become bound by the terms of the LPA. The conditions and process for admission of LPs to the ELP and for the transfer of LP interests, have been simplified.

The conditions and process for admissions and the transfer of LP interests can be set out in the LPA . Provided those conditions and procedures have been complied with or waived in accordance with the terms of the LPA, the admission will be valid. This change will allow investment managers to determine their own conditions and procedures for admitting LPs.

Expansion of safe harbors for LPs serving on advisory boards

A limited partner of an ELP can lose its limited liability status if it takes part in the conduct or management of the business of an ELP. The New ELP Law has expanded the non-exhaustive list of safe harbours for activities that an LP can do in respect of the ELP in which it holds an interest without losing its limited liability status. The list has been extended to include:

Serving on advisory boards or committees of the ELP

Serving on the board of directors or a committee of, consulting with or advising or being an officer, director, shareholder, partner, member, manager, trustee, agent or employee of, a company in which the ELP has an interest (such as investment portfolio companies).

Ability of Advisory Board/Committee members to enforce terms

Where the LPA contains provisions governing the establishment and regulation of any boards or committees of the ELP (including, the manner and terms of appointment; powers, rights and obligations; and the rights of members and former members of boards or committees to exculpation or to be indemnified out of the sets of the ELP), then subject to the express terms of the LPA, any person duly appointed to be a member of any board or committee of the ELP in accordance with those provisions will be deemed to have notice of and shall have the benefit of those provisions in the LPA. Moreover, those provisions in the LPA will not be unenforceable by a board or committee appointee solely on the basis that such person is not a party to the LPA.

This provision will give comfort to persons who sit on ELP advisory boards and committees that they can benefit from terms in the LPA relating to their committee or board (e.g. rights to exculpation and indemnification) even if they are not a party to the LPA.

Remedies for default given statutory recognition

The New ELP Law provides more certainty with respect to the enforceability of remedies for LP default contained in the LPA. If the LPA provides that where an LP fails to perform any of its obligations under, or otherwise breaches the LPA (e.g. where LP fails to commit additional capital when called upon to do so) , that LP may be subject to or suffer remedies for, or consequences of, the failure or breach specified in the LPA (e.g. reducing, eliminating or forfeiting the defaulting LP’s partnership interest in the ELP), then those remedies or consequences in the LPA will not be unenforceable solely on the basis that they are penal in nature.

Previously, default remedies which are routinely included in LPAs (e.g. reducing, eliminating or forfeiting the defaulting LP’s partnership interest in the ELP where it fails to contribute committed capital or failed to commit additional capital when called upon to do so) ran the real risk of being subject to legal challenge on the basis that they were penalties (i.e. remedies which go well beyond a reasonable assessment and measure of the loss suffered as a consequence of the default) and may be unenforceable as a matter of Cayman law generally. The New ELP Law has now clarified that these default provisions, which are routinely included in LPAs, will not be unenforceable solely by virtue of being deemed a penalty.

Additionally, the GP has been given flexibility in determining whether or not to trigger the default provisions in the LPA upon a default by an LP. The GP will not be liable for its decision to impose any remedies or consequences or for its decision not to do so, provided that the GP’s decision is made in good faith.

Strike Off regime for ELPs

A strike off regime has been introduced for ELPs which is very similar to that which applies to Cayman companies. The regime allows ELPs to effect a soft termination by being struck off the Register of ELPs without being required to fully wind up and dissolve.

Where the Registrar has reasonable cause to believe that the ELP is not carrying on business or is not in operation, or if the GP makes an application to the Registrar, the Registrar may strike the ELP off the Register of ELPs. The GP, any LP or creditor of the ELP who objects to the ELP being struck off, on grounds that the ELP was in fact carrying on business, in operation or otherwise at the time that it was struck off, may apply to the Cayman court to have it restored to the Register of ELPs.

The application to restore the ELP to the Register must be made within two years of the strike off date. If the two-year period has elapsed, approval may be sought from the Cayman Government to allow the restoration as long as this is sought within a ten-year period from the date the ELP was struck off the Register.

Transfer out by ELPs by way of continuation permitted

ELPs may now formally deregister in Cayman and re-domicile to another jurisdiction. Previously, there was no formal process for an ELP to transfer from Cayman to another jurisdiction with ease.

Execution Formalities

Under the New ELP Law, the LPA no longer needs to be executed as a deed and witnessed in order to make valid a power of attorney granted in it. It also allows for the grant of powers of attorney to be irrevocable without the need to satisfy the requirements that would otherwise apply under Cayman law. The New ELP Law states that this change will have retroactive effect and so validates any power of attorney contained in any LPA which was executed prior to 2nd July 2014 .

Another significant change which has the effect of removing the application of the English caselaw decision in the Mercury case [2008] EWHC 2721 from applying in Cayman is in section 27 of the New ELP Law. Section 27 confirms that an LPA, or any agreement pursuant to which any person agrees to make any commitment or contribution to an ELP (e.g. subscription agreement) will be validly executed where the complete agreement is executed or where any signature or execution page to the agreement is attached with the relevant party’s express or implied authority. This validates the normal practice of collating signature pages in advance of closing and then attaching them to the final form documents.

Dual foreign names

Similar to the position for Cayman exempted companies, ELPs will now have the ability to use a dual foreign name which can be particularly useful for ELPs carrying on business non-English-speaking jurisdictions (e.g. China and Russia).

July 2014

View Full PDF

Licence and Registration, please! – The new licensing and registration regime for Directors of Cayman Islands companies.

Cayman Islands introduce new regime for registration and licensing of Directors

On 4th June 2014, the Directors Registration and Licensing Law, 2014 (the “ Law ”) came into force in the Cayman Islands. The Law requires all directors (wherever they reside in the world) of “ Covered Entities ” to register with the Cayman Islands Monetary Authority (“ CIMA ”). The Law has also introduced a licensing regime for “Professional Directors” and “Corporate Directors”.

1. What are “Covered Entities”?

Only Directors of Covered Entities are impacted by the Law. “Covered Entities” are: (i) mutual funds regulated by CIMA and (ii) companies which maintain a registration as an Excluded Person under the Securities Investment Business Law (e.g. investment managers and investment advisors which are incorporated as Cayman companies and provide investment management, investment advisory services , or other securities investment business exclusively for sophisticated persons, high net worth persons, etc ) .

2. Which Directors will not be affected by the Law?

The Law applies only to Directors of Cayman mutual funds which are registered with, and regulated by, CIMA. Accordingly, a Director of a mutual fund which is exempted from registration with CIMA under section (4) of the Mutual Funds Law (2013 Revision) or any other Cayman domiciled investment fund which is not registered with, and regulated by, CIMA will not be affected by the Law. The Directors of Cayman Islands exempted companies which are not “Covered Entities” are not impacted by the Law.

3. Time period during which Directors need to register

Each Director of existing Covered Entities must register with CIMA by 4th September 2014 (i.e. within 3 months of the Law coming into force) in order to avoid contravening the Law.

Where an individual is to be appointed as a Director of a Covered Entity for the first time after June 4th 2014 (the date on which the Law came into force) that individual will need to be registered with CIMA before being appointed as a Director. The 3 months grace period to register with CIMA will not apply to new appointments taking effect after June 4th 2014 .

4. Penalty for failing to register

A Director who fails to register before the 3 months deadline, will be in contravention of the Law and runs the risk of committing an offence and being liable on conviction to a maximum fine of approximately US$60,976.00, to imprisonment for 12 months, or to both.

5. How does a Director complete registration with CIMA?

Each individual who is a director of less than twenty (20) Covered Entities, will have to submit to CIMA the individual’s name, date of birth, nationality, home address, email and telephone contact details, and the names and registration numbers of the Covered Entities for which the individual acts as a director. The individual will also have to provide some basic confirmations (e.g. confirmation as to whether the individual has ever been convicted of a criminal offence involving fraud or dishonesty, and confirmation as to whether the applicant has ever been the subject of an adverse finding, financial penalty, sanction or disciplinary action by a regulator, self-regulatory organization or professional regulatory body).

The registration and the submission of the Director’s information will take place via CIMA’s dedicated web-portal. The payment of the applicable registration fee will be processed by credit card and will also take place via the web-portal . The application fee to register is approximately US$171.00 and the registration fee for the first calendar year will be US$683.00. Thereafter the annual registration fee will be approximately US$854.00.

6. Are there any on – going requirements?

The Law requires each registered Director to provide to CIMA, on or before the January 15th in each calendar year, the information the Director had provided on registration ( including any updated Information) and pay to CIMA the prescribed annual fee. If the registered Director fails to pay the prescribed annual fee by January 15th, there will be a surcharge of one – twelfth of that fee for every month or part of a month after the 15th January in each year that the fee is not paid.

If there is any change in the registration information provided to CIMA, the Director is required to inform CIMA of the change within 21 days. Any change to information provided, including minor changes, will be regarded by CIMA as being material and need to be notified to CIMA. This includes any additional appointments or terminations from the list of Covered Entities in respect of which the individual is a Director. Under the Law, failure to inform CIMA of changes is an offence and on summary conviction carries a maximum fine of approximately US$24,390.00 .

7. When might CIMA refuse to register a Director?

The approval of a n application for registration is not automatic. An application may be refused by CIMA if CIMA is aware that the applicant (a) has been convicted of a criminal offence involving fraud or dishonesty; or (b) is the subject of an adverse finding, financial penalty, sanction or disciplinary action by a regulator, self-regulatory organization or a professional disciplinary body.

Where registration has been refused by CIMA, the person may re-apply for registration if there is a material change in the circumstances relevant to the application.

8. Which Directors will require a license from CIMA?

The Law requires a “Professional Director” (that is, a natural person who holds twenty (20) or more of directorships of Covered Entities) to be licensed by CIMA . “Corporate Directors ” (that is, a body corporate appointed as a director for a covered entity) of Covered Entities, irrespective of the directorship numbers held, will also need to be licensed by CIMA. There are two exemptions to the professional director licensing regime. Where one of the exemptions applies, the Professional Director will instead be required to comply with the registration regime outlined above (however CIMA will require certain additional information to be provided as part of the application to register) . CIMA may grant a license with or without conditions. In granting a license to a Professional Director , CIMA must be satisfied that:

(a) that the applicant has sufficient capacity to carry out the applicant’s duties as a professional director; and(b) that the applicant is a fit and proper person for licensing as a professional director.

In determining whether an individual is a “fit and proper person” , CIMA will have regard to all circumstances, including that person’s:(a) honesty, integrity and reputation;

(b) competence and capability; and

(c) financial soundness.

Professional Directors will also be required to be covered by a minimum level of insurance.

9. Exemption from the requirement on “Professional Directors” to obtain a license

The Law sets out two exemptions for Professional Directors who would otherwise be required to be licensed. The first exemption is where the person serving as the professional Director is a director, employee, member, officer, partner or shareholder of a holder of a company management license or a mutual fund administrators license issued by CIMA.

The second exemption is particularly relevant to Fund Managers. This exemption applies where:(a) the person serving as the director of the Covered Entity is a natural person;

(b) the person serving as the director of the Covered Entity is also a director, an employee, a member, an officer, a partner or a shareholder of a “fund manager” (i.e. a person providing investment management services or investment advisory services or a promoter under the Mutual Funds Law) of a mutual fund regulated under the Mutual Funds Law;

(c) the fund manager is registered or licensed by an overseas regulatory authority listed in the Schedule to the Law (e.g. SEC, CFTC, FINRA in the United States or the FCA in the United Kingdom);

(d) acts as a director for a Covered Entity by virtue of that person’s relationship to the fund manager; and

(e) is registered with CIMA under the Law. Accordingly, individuals who have twenty (20) or more directorships of Covered Entities but who hold such directorships through being a director, an employee, a member, an officer, a partner or a shareholder of a US fund manager that is SEC registered, for example, will not be required to obtain a license. However, that individual will be required to register with CIMA.

10. Timetable for applying for license and penalties

Individuals who have twenty (20) or more directorships of Covered Entities will be required to apply to be licensed as a Professional Director within three (3) months of the Law coming into force. If a Professional Director fails to comply with the applicable licensing requirements under the Law he or she commits an offence and on summary conviction carries a maximum fine of approximately US$121,951.00 and/or up to 12 months’ imprisonment.

View Full PDF