Section 145(1) of the Companies Law (2013 Revision) (the “Law”) 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 other creditors shall be invalid if made, incurred, taken or suffered within six (6) months immediately preceding the commencement of a liquidation.

Section 93 provides that a company shall be 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.

Pursuant to section 100 of the 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.

It is important to note that a payment to a related party of a company shall be deemed to have been made with a view to giving a creditor a preference if made within the preceding period of six (6) months. Section 145(3) provides that a creditor shall be treated as a “related party” if it has the ability to control the company or exercises significant influence over the company in making financial and operating decisions.

Section 146(2) of the Law provides that 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. The official liquidator bears the burden of establishing an intent to defraud and no action may be brought under this section after six years following the date of the relevant disposition. A number of important definitions are set out in section 146(1):

(a) “disposition” has the meaning ascribed in Part VI of the Trusts Law (2011 Revision);

(b) “intent to defraud” means an intention to willfully defeat an obligation owed to a creditor;

(c) “obligation” means an obligation or liability (which includes a contingent liability) which existed on or
prior to the date of the relevant disposition;
(d) “transferee” means the person to whom a relevant disposition is made and shall include any successor
in title; and
(e) “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 monies worth is significantly
less than the value of the property which is the subject of the disposition.

However, the rights of the transferee are subject to some protection. Pursuant to section 145(5) of the Law in the event that any disposition is set aside under this section and the Court is subsequently satisfied that the transferee has not acted in bad faith:

(a) the transferee shall 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 defense of the action or proceedings; and
(b) the relevant disposition shall 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).

Pursuant to section 147, if in the course of a 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 in such a manner are liable to make such contributions, if any, to the company’s assets as the Court thinks proper. The Commercial Disputes and Litigation Team at Loeb Smith has a wealth of experience of advising on the setting aside of antecedent transactions and would be happy to assist with any queries you may have. For more specific advice on setting aside of antecedent transactions in the Cayman Islands, please contact:

David Harby
Head of Commercial Disputes and Litigation
+1 (345) 749 7494
david.harby@loebsmith.com

All Cayman FIs are required to register with the Cayman Islands Tax Information Authority no later than 30 April 2015.

Cayman FIs are able to register via the Cayman Automatic Exchange of Information Portal (“Portal”). Cayman FIs can access the Portal from a direct link on the Cayman Islands government website: www.tia.gov.ky. There is also a guidance note on the website detailing how to use the Portal.

Registration involves Cayman FIs providing electronic notification to the Cayman Islands Tax Information Authority in the prescribed form including the following information:

Name

Categorization under the U.S. IGA

GIIN

The full name, address, designation and contact details of the natural person identified and authorized by the Cayman FI to be the principal point of contact (“PPOC”) for the Cayman FI for all purposes of compliance with the Cayman Regulations which implemented U.S. FATCA and U.K. FATCA domestically into Cayman Islands law.

Registration electronically via the Portal is conditional upon each Cayman FI that has one or more Reportable Accounts uploading a PDF Document on that Cayman FI’s letterhead specifying an individual and providing authorization to the individual to be assigned as PPOC on behalf of the Cayman FI. The PDF Document should be signed by an appropriate person of the Cayman FI. Although this is not specified as a requirement, it is anticipated that Cayman FIs will appoint the individual named as their FATCA Responsible Officer on the Internal Revenue Service FATCA FFI Registration Portal (which Cayman FIs would have accessed to obtain their GIIN) to be their PPOC for the purpose of registration with the Cayman Islands Tax Information Authority.

Cayman FIs should also note that 31 May 2015 is the deadline for electronic reporting via the Portal in respect of each Reportable Account. There is no longer a mandatory requirement to make a NIL return.

The broad scope of the Foreign Account Tax Compliance Act (“US FATCA ”) introduced by the United States (“US”) and the implementation of that broad scope of application into Cayman Islands law means that it is very important for Cayman Islands domiciled entities to each undertake an assessment of whether or not it is a Financial Institution under Cayman Islands law for the purposes of US FATCA. The vast majority of existing hedge funds, real estate funds, private equity funds, and venture capital funds, investment managers and investment advisors domiciled in the Cayman Islands are impacted by US FATCA.

Under Cayman Islands law, all Cayman Islands Reporting Financial Institutions are required to apply for registration with the US Internal Revenue Service (“IRS”) to obtain a Global Intermediary Identification Number (GIIN) before 31 December 2014 in order to avoid 30% withholding tax being imposed on US source income and to avoid possible fines and penalties under Cayman Islands law. This registration requirement applies even for those investment entities which have no US based investors and receive no US source income.

Additionally, there are ongoing due diligence and annual reporting obligations which have been introduced by Cayman Islands law for the purposes of US FATCA which impact directly on Cayman Islands Financial Institutions, including investment entities.

Background

US FATCA was introduced by the US in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act with the purpose of reducing tax evasion by US citizens. US FATCA requires financial institutions outside the US (“Foreign Financial Institutions” or “FFIs”) to report information on Financial Accounts held by their US customers to the IRS. These requirements are contained in the relevant US Treasury Regulations (“US Regulations”). The information to be reported by Foreign Financial Institutions is equivalent to that required to be reported by US citizens in their US tax returns.

If Foreign Financial Institutions do not comply with the US Regulations, a 30% withholding tax is imposed on US source income of that Foreign Financial Institution. FFIs are also required to close accounts where their US customers do not provide information to be collected by the FFIs.

The US recognised that in some jurisdictions there are legal barriers to implementing US FATCA as well as some practical difficulties for FFIs in complying with US FATCA. Two model intergovernmental agreements (Model I IGA and Model II IGA) were developed to overcome the legal issues and to reduce some of the burden on the Foreign Financial Institutions.

On 29 November 2013, the Cayman Islands and the US signed an intergovernmental agreement (“US IGA”) to, among other things, implement US FATCA based on the Model I IGA. To accommodate the non-direct tax system in the Cayman Islands, the US IGA is a model 1B (non-reciprocal) IGA. As an IGA partner jurisdiction, Cayman Islands based Financial Institutions will not be subject to a 30% withholding tax on US source income, unless they fail to meet the requirements set out in the US IGA and in Cayman domestic implementing legislation. Under the terms of the US IGA, Cayman Islands Financial Institutions are required to provide the Cayman Islands Tax Information Authority (“Competent Authority”) with information in relation to Financial Accounts held by Specified Persons on an annual basis. The Competent Authority will then forward that information to the IRS.

The Tax Information Authority Law (2013 Revision) as amended and the Tax Information Authority (International Tax Compliance) (United States of America) Regulations, 2014 (the “Cayman Regulations”) are now in force in the Cayman Islands and together they constitute Cayman’s domestic legislation for implementing US FATCA requirements set out in the US IGA into Cayman Islands law. In July 2014, the Cayman Islands government also released guidance notes concerning the compliance requirements of the US IGA (the “Guidance Notes”). The Guidance Notes are intended to provide practical assistance to businesses, their advisers and the Competent Authority in interpreting the US IGA.

Scope of the US IGAs application in the Cayman Islands

The US IGA and the Cayman Regulations are extremely broad in scope and apply to all Cayman Islands Financial Institutions, regardless of whether they hold any Financial Accounts for Specified Persons. A Cayman Islands Financial Institution is any Financial Institution organised under the laws of or resident in the Cayman Islands.

For these purposes, organised under the laws of the Cayman Islands means the following:

(a) For a company, if the company is incorporated in the Cayman Islands.

(b) For trusts, if any of the trustees are incorporated, registered or licensed in the Cayman Islands.

(c) For partnerships, if the partnership is established in the Cayman Islands.

The Cayman Regulations states that “Financial Institution” means a person who carries on business in the Cayman Islands as:

i. a custodial institution;

ii. a depository institution;

iii. an Investment Entity; or

iv. a specified insurance company.

For the purposes of this Briefing Note we are focusing exclusively on the definition of Investment Entity which is defined in the US Regulations as including:

“any entity that conducts as a business (or is managed by an entity that conducts as a business) one or more of the following activities of operations for or on behalf of a customer:

(a) trading in money market instruments (cheques, bills, certificates of deposit, derivatives etc.); foreign exchange; exchange, interest rate and index instruments; transferable securities; or commodity futures trading;

(b) individual and collective portfolio management; or

(c) otherwise investing, administering or managing funds or money on behalf of other persons.”

In practice, when applying this definition, an entity that is professionally managed will generally be an Investment Entity, by virtue of the managing entity being an Investment Entity.

All Cayman Islands Financial Institutions will be “Reporting Financial Institutions” unless an exemption is provided in Annex II of the US IGA and applies to classify the Financial Institution as a “Non-Reporting Financial Institution”. This Briefing Note focuses principally on whether an investment entity is a Reporting Financial Institution. However, a brief overview of investment entities that qualify as Non-Reporting Financial Institutions is set out below.

If an Investment Entity is a Reporting Financial Institution, what action is it required to take? 

All Cayman Islands Financial Institutions that maintain Financial Accounts are required to take action. The extent of that action depends on a number of factors including whether account holders are Specified Persons and the value and nature of the Financial Account.

A Reporting Financial Institution is required to register with the IRS (through the IRS online registration portal) on or before 31 December 2014. Successful registration will lead to the Reporting Financial Institution being issued a GIIN by the IRS. US withholding agents (e.g. US banks) will be required to verify the GIIN (against lists that are published by the IRS) on payments made from 1 January 2015 onwards where the payment from withholding agents will be to a Reporting Financial Institution in the Cayman Islands. Prior to 1 January 2015 US withholding agents are not required to verify GIINs but many US withholding agents have commenced doing so.

In respect of all Financial Accounts maintained by a Reporting Financial Institution, that Reporting Financial Institution is required to:

i. establish and maintain arrangements that are designed to identify Reportable Accounts ;

ii. establish and maintain arrangements that are designed to establish the jurisdictions of residence and, where applicable, the US citizenship of an account holder;

iii. establish and maintain arrangements that are designed to identify payments made by the Reporting Financial Institution to a Non-Participating Financial Institution in 2015 and 2016;

iv. implement arrangements to obtain the US federal taxpayer identifying number and date of birth (as applicable) of every Specified Person who holds a Reportable Account;

The Reporting Financial Institution will be required to report annually to the Competent Authority regarding every Reportable Account that it maintains at any time during the calendar year in question (if it maintains no Reportable Accounts during the calendar year in question, the report should state that fact).

As stated above, all Cayman Islands Financial Institutions will be Reporting Financial Institutions which are required to report to the Competent Authority on an annual basis unless an exemption is provided in Annex II of the US IGA or the US Regulations or one which otherwise qualifies as:

i. a Deemed Compliant Financial Institution – Examples in this category include:

a. Financial Institution with a client base almost entirely within the Cayman Islands, subject to certain conditions;

b. Financial Institution with only low-value accounts (no financial accounts with a balance in excess of US$50,000) and no more than US$50m in assets provided it is not an Investment Entity;

c. Sponsored Investment Entity, where a sponsor of the Investment Entity is registered with the IRS, and where required, the sponsor has registered the sponsored entity with the IRS and the sponsor performs all due diligence and reporting obligations of the sponsored entity;

d. Investment advisors and investment managers which are Investment Entities solely because they render investment advice to, and act on behalf of, or manages portfolios for, and acts on behalf of, a customer for the purposes of investing, managing or administering funds deposited in the name of the customer with a Financial Institution; and

e. Collective investment vehicle, subject to certain conditions.

ii. an Owner Documented Financial Institution ; or

iii. an Exempt Beneficial Owner (e.g. the Cayman Islands Government, and certain participation retirement funds and pension funds).

Some Non-Reporting Cayman Islands Financial Institutions (referred to as “Certified Deemed Compliant Financial Institutions”) will not need to register and obtain a GIIN, or carry out the due diligence and reporting requirements under the US IGA. Instead they will need to provide certain documentation to withholding agents to certify their status. Other Non-Reporting Cayman Islands Financial Institutions (referred to as “Registered Deemed Compliant Financial Institutions”) are required to register with the IRS to obtain a GIIN, or be registered by another entity.

Careful consideration should be taken and guidance should be sought when undertaking an assessment of whether or not a Cayman Islands Financial Institution qualifies as a Non-Reporting Financial Institution. There are a myriad of rules and factors that must be taken into account in making the determination.

The information in this FATCA Update has been prepared to provide a general overview of US FATCA as it applies to Investment Entities under Cayman Islands law. Parties seeking specific legal advice regarding their status as a Reporting Cayman Islands Financial Institutions and the requirement to register with the IRS before 31 December 2014 should contact their usual Loeb Smith & Brady contact, or:

Gary Smith
+1 345 749 7590

E: gary.smith@loebsmith.com

December 2014

Copyright © 2014 Loeb Smith & Brady, All rights reserved.

Currently, under the common law applicable to the Cayman Islands, a person must be party to a Cayman Islands law governed contract in order to be able to enforce the provisions of that contract. This applies even where the parties to the contract clearly intended that a Third Party should have rights under the contract. Under the Law, a Third Party will be able to enforce a contractual term granting rights to that Third Party, provided that the contract specifically provides in writing that the Third Party may enforce the relevant contractual term (the “Opt-in Condition”). A term of a contract purporting to confer a benefit on a Third Party will not in itself be sufficient to enable the Third Party to enforce the term. The Opt-in Condition must be met. Only terms which are expressed in writing in the contract to be capable of enforcement by the Third Party will be so enforceable.

The Law will apply to contractual rights and benefits capable of being enforced by a Third Party, including limitation of liability provisions, indemnities and exculpation clauses. In the investment funds context, the new Law is expected to be particularly beneficial in dealing with indemnity and exculpation provisions of limited partnership agreements and shareholders agreements which commonly seek to benefit a wider class of persons than the parties to the agreement itself (e.g. investment manager, each of its affiliates, and each officer, director, employee, agent, stockholder, partner or member thereof).

The new Law should remove the need for separate agreements to deal with indemnity and exculpation provisions.

Under the Law, in order for a Third Party, in his own right, to enforce a term of the contract, the Third Party must be expressly identified in the contract by name, as a member of a class or as answering a particular description, which includes a person nominated or otherwise identified pursuant to the terms of the contract. However the Third Party need not be in existence when the contract is entered into.

The Law will apply to any contract which seeks to confer benefits or rights capable of being enforced by a Third Party. However the Law will not apply to certain contracts (e.g. contract on a bill of exchange; promissory note; or other negotiable instruments; claims against employees under employment contracts; contracts for carriage of goods by sea, road, or air; and letters of credit). Similarly, the Law will not apply in respect of either the Memorandum of Association of a Cayman company or the Articles of Association of a Cayman company which are statutory contracts binding on a Cayman Islands company and its shareholders. Accordingly, a Director or officer of a Cayman Islands company will not be able to rely on the Law to enforce the indemnification provisions typically placed in the Articles of Association of a company in favour of the Director, officer, and their respective heirs, executors, administrators, and personal representatives to be indemnified out of the assets of the company from and against all actions, proceedings, costs, charges, etc. which is incurred or sustained in the execution of their duties.

Contracts made prior to the Law coming into force may be amended to (i) confer benefits on a Third Party, and (ii) to include the Opt-in Condition. However a Third Party will only be able to enforce a right which accrues on or after the date on which the contract is amended.

Where the Third Party seeks to enforce rights under the contract, any remedy that would have been available to the Third Party in an action for breach of contract if the Third Party had been a party to the contract, will be so available. The rules of contract law relating to damages, injunctions, specific performance, and other relief will also apply. Consequently, the Third Party will have no greater rights in respect of enforcing the contract than a party to the contract.

The Law also contains provisions relating to double recovery and relating to the contracting parties varying the contract subject to the assent of the Third Party.

The Cayman Islands Government has published a new Bill that will require all directors, whether Cayman Islands resident or non-resident, of “Covered Entities” to register with the Cayman Islands Monetary Authority (“CIMA”). 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). In addition to registration there will also be a licensing regime. The proposal is that a “Professional Director” (that is, a natural person who holds twenty (20) or more of directorships of Covered Entities will need to be licensed by CIMA and will be subject to enhanced regulatory requirements. Corporate directors of Covered Entities, irrespective of directorship numbers held, will also need to be licensed by CIMA.
A copy of the Directors Registration and Licensing Bill, 2014 can be viewed here.
A detailed briefing note will be issued on introduction of the new Directors Registration and Licensing Law.

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