Families and businesses in Hong Kong, mainland China and across Asia have long used BVI or Cayman corporate vehicles as holding entities for their businesses and assets. However, as we have seen from last year’s decision by the Hong Kong court, in Jacky Zong v Kelly Fuli Zong (the Wahaha case), it is very important that:

  1. Offshore trusts are established and have assets transferred into them during the settlor’s lifetime, not through posthumous instructions;
  2. Independent professional trustees operate the trust rather than family members, where interests may conflict as was the case in Wahaha, where the interests of Kelly Zong at the helm of the Wahaha group clearly conflicted with the interests of her three half-siblings who were seeking to be acknowledged as beneficiaries; and
  3. All trust structures are formally documented with unambiguous terms including clear details of the assets under the trust.

Cayman trusts offer certainty protection

Trusts established under Cayman Islands law are well known for providing tax benefits, flexible structures and effective mechanisms for asset protection and management, with a legal framework based on English common law designed to enhance certainty in court decisions. Chinese high net worth (HNW) persons find these features appealing when seeking to separate personal wealth from risks. Once assets are properly settled into a trust, legal title passes to the trustee, removing them from the settlor’s personal estate and from creditor risks, other business risks, and certain political and economic risks.

BVI trusts aid Asian wealth

Even accounting for CRS reporting obligations, and other rules and restrictions on the transfer of capital from China and other countries into offshore structures, there has been an increase in the use of BVI trusts by investors in Asia. As was shown by the Wahaha case, HNW families now acknowledge the importance and value of such planning in preserving and protecting wealth. Trusts, when properly established during the lifetime of the settlor, allow wealth to pass to beneficiaries outside of probate, avoiding the delays, publicity and costs of estate administration.

Settlor retains control in VISTA/STAR trusts

Both the Cayman Islands and the BVI have created special trust regimes that deal with the major concern around losing control of underlying businesses.

BVI VISTA trust. The VISTA regime in the BVI disapplies certain traditional trustee duties in relation to trusts owning shares in BVI companies. Although a BVI company’s shares are held in a VISTA trust, the directors of that company are free to administer the company as they see fit, without intervention from the trustee. Key family members may also take up the role of an “Office of Director Rules Appointor”, which allows them to have control over the members of the board of the BVI company. The BVI VISTA trust therefore addresses families’ need for succession planning while retaining some level of control of the underlying companies.

Cayman STAR trust. The STAR trust is unique to the Cayman Islands and can be structured for specific purposes including for the health and wellbeing of family members and/or for the education of the family’s children overseas, giving settlors great flexibility to define outcomes and governance mechanisms.

The settlor may retain a degree of control over other aspects, such as the power to approve distributions, the power to appoint and remove trustees, and the power to revoke the trust.

BVI Cayman trusts are tax neutral

Neither the BVI nor the Cayman Islands imposes taxes on income or capital gains on the assets in these trusts, increasing the interest of foreign investors. Both jurisdictions allow resident trustees and non-resident trustees to act, and both the BVI and the Cayman Islands remain tax-neutral with respect to the assets in the trust, which is particularly attractive for Chinese clients holding global assets.

Trustee ownership preserves client confidentiality

From a confidentiality and asset protection perspective, the counterparty of a BVI company or a Cayman company will only see the trustee as the legal owner of the company, and the settlor’s details will not appear in any publicly accessible documents. This privacy is a significant advantage for clients concerned about reputational exposure or political sensitivity.

Key distinctions between VISTA and STAR trusts

This article was first published in Asia Business Law Journal and be found here. https://law.asia/cayman-and-bvi-trusts-chinese-high-net-worth-families/

This publication is not intended to be a substitute for specific legal advice or a legal opinion. For more information or specific legal advice, please contact:

E: gary.smith@loebsmith.com

E: yuri.zhang@loebsmith.com

Share to WeChat

“Scan QR Code” in WeChat and tap ··· to share.

QR Code

Hong Kong (18 May 2026) We are delighted to announce that Partner Vanisha Harjani was recognised by ALB Offshore Client Choice 2026. Asian Legal Business spotlights the offshore lawyers across Asia who have earned the strongest recognition from their clients.

Vanisha Harjani has earned client trust through her solid expertise in cross-border matters and is recognised for the complexity and innovation of her work. Recently, Vanisha led the Hong Kong Loeb Smith Attorneys team acting as BVI counsel in one of the most prominent capital markets deals in Asia winning the Best Structured Finance Deal of the Year (Hong Kong – FinanceAsia Achievement Awards) and Significant Deals 2026 – Best Securitization (North Asia- Hong Kong – The Asset Triple A Awards) for the Hong Kong Capital Finance Corporation Limited (HKCFC)’s residential mortgage-backed securitisation (RMBS) transaction, as arranged by United Overseas Bank with HKCFC MBS 5 Limited as the issuer (Issuer) Notably, this transaction marked Hong Kong’s first rated RMBS in more than two decades, marking a milestone for Hong Kong’s capital markets and promoting greater funding diversification among newer originators despite a challenging residential property market.

Share to WeChat

“Scan QR Code” in WeChat and tap ··· to share.

QR Code

Overview

Valerie Ghysels is a Legal Manager in Loeb Smith Attorneys’ Corporate and Funds Group in the firm’s Hong Kong office. Valerie advises on corporate transactions including M&A, private equity transactions and series financings, and also on the formation and launch of Cayman Islands and BVI funds across a range of asset classes.

 

Prior to joining Loeb Smith Attorneys, Valerie was an Associate at a Magic Circle law firm in Brussels (Belgium), where she practised as a Belgian‑qualified lawyer and advised on complex, multi‑jurisdictional corporate transactions for institutional and multinational clients.

 

Valerie is admitted as a lawyer in England and Wales and Belgium, and speaks English, French and Dutch.

Latest Updates and News

INSIGHTS | 05 June 2026

Wahaha ruling underscores benefits of lifetime offshore trusts

Families and businesses in Hong Kong, mainland China and across Asia have long used BVI or Cayman corporate vehicles as holding entities for their businesses and assets.
INSIGHTS | 05 June 2026

Cayman Islands – Cryptoassets and Blockchain (part 2)

Fiat currency transactions – What rules and restrictions govern the exchange of fiat currency and cryptoassets?
INSIGHTS | 04 June 2026

Cayman Islands – Cryptoassets and Blockchain (part 1)

What legal framework governs cryptoassets? Is there specific legislation governing cryptoassets and businesses transacting with cryptoassets?
INSIGHTS | 21 May 2026

Voidable Transactions in the British Virgin Islands

In certain circumstances, the liquidator of a British Virgin Islands (“BVI”) company may be able to set aside certain transactions which took place in the lead up to the company’s liquidation. It is important for those concerned with the affairs of a BVI company that they are aware…
INSIGHTS | 19 May 2026

Preference shares and redemption rights in the Cayman Islands – an overview

Explore the key features of preference shares and redemption rights in Cayman Islands exempted companies, including investor protections, redemption procedures, and legal considerations for venture capital and private equity investors.

This article will provide a general overview of the steps involved in the formation and running of a closed-ended investment fund in the Cayman Islands pursuant to the Private Funds Act (As Revised) (the “Act”).

Type of legal entity used in formation of a private fund

Whilst there are no statutory requirements as to the type of legal entity that should be used in the establishment of a closed-ended fund pursuant to the Act, the type of entity most commonly used for this purpose is the Exempted Limited Partnership (“ELP”). Whilst other types of corporate vehicles can be used, such as a Cayman Islands Exempted Company, these are more commonly deployed in the context of an open-ended investment fund pursuant to the Mutual Funds Act (As Revised).

Who runs a private fund?

If a closed-ended fund (referred to under the Act as a private fund) is structured as an Exempted Company, it will be the directors of that company who operate it. However, as part of the registration of the fund with the Cayman Islands Monetary Authority (“CIMA”), it will be necessary to ensure that there are at least two directors appointed; this is known as the “four eyes principle” to ensure proper corporate governance and investor protection and is a prerequisite for registration as a private fund with CIMA.

If the fund is established as an ELP, the two-director rule does not apply directly to the ELP as ELPs do not have separate legal personality and therefore do not have directors. An ELP must, however, have a qualifying “general partner” who operates the ELP on behalf of the limited partners. It is at the general partner level that the “four eyes principle” will apply in this context and so a general partner must also have at least two directors.

Presently, it is not necessary for the directors of a private fund (or the directors of a general partner of an ELP which is registered as a private fund) to be registered pursuant to the Directors Registration and Licensing Act (As Revised).

Private Funds Act – obligation to register as a private fund

Only closed-ended funds that fall within the definition of a “private fund”, as defined in the Act, will be required to register with CIMA under the Act as a private fund and will be regulated as such. The Act defines a “private fund” as:

“…a company, unit trust or partnership that offers or issues or has issued investment interests, the purpose of 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…”

The term “investment interest” is defined in the Act as an interest in the issuing vehicle which carries an entitlement to participate in the profits or gains of the vehicle and which interests are not redeemable or re-purchasable at the option of the investor.

Whether a particular structure will fall within this definition and be subject to regulation can be highly nuanced. We therefore recommend that you speak with an experienced Cayman Islands investment funds attorney to determine whether your proposed project would be regulated or whether an exemption from registration might be available.

For example, the Act itself contains a list of “non-fund arrangements” which are not considered to be “private funds”. The list of non-fund arrangements is extensive and quite broad in remit but we would specifically highlight the following non-fund arrangements:

  • Joint ventures;
  • Proprietary vehicles;
  • Holding vehicles;
  • Debt issues and debt issuing vehicles;
  • Structured finance vehicles; and
  • Sovereign wealth funds.

It should also be noted that single investor funds will also fall outside of the remit of the Act on the basis that where there is only one investor, there will not be any “pooling of investor funds” as required by the above quoted definition of “private fund”.

Registration as a Private Fund under the Act

Where a particular project falls within the definition of a “private fund” and where it is not a “non-fund arrangement”, the corporate vehicle will be required to apply to CIMA for registration as a private fund under the Act.

In order to be registered under the Act, the fund will need to submit a completed application to CIMA via its online portal together with supporting documentation, including its offering document (which should contain, as a minimum, the information specified by CIMA in its Rules on Content of Offering Memorandum) and evidence of the appointment of an auditor and an administrator.

The application must (per section 5 of the Act) be submitted to CIMA (together with payment of the applicable registration fee) within 21 days after its acceptance of capital commitments from investors for the purposes of investments (although the application can be submitted at any time before capital commitments are received). The fund must be registered with CIMA as a private fund before it receives any capital contributions from investors.

Regulatory obligations of private funds

In addition to the above, there are certain other key obligations with which private funds must comply.

Where the fund makes any change (or becomes aware of any change) which materially affects any information that was delivered to CIMA as part of the fund’s registration as a private fund, it must file details of the change with CIMA within 21 days of the change taking effect or of the fund becoming aware of the change. Whilst the Act only requires ‘material’ changes to be notified to CIMA, in practice CIMA tends to be notified of all changes given what is ‘material’ is open to interpretation.

Private funds must also file an annual return with CIMA and pay an annual registration fee in order to maintain its registration.

Ongoing requirements

The Act requires that private funds have in place certain mechanisms and safeguards relating to an annual audit of the fund, the valuation of the fund’s assets, the safeguarding of the fund’s assets, cash monitoring and the identification of securities.

  • Audit – the fund must engage an approved Cayman Islands auditor to prepare its audited financial statements annually. CIMA maintains a list of the approved auditor firms who are able to provide this service. Such audited financial statements must be filed with CIMA within six (6) months of the end of each financial year of the fund.
  •  Valuation of fund assets – the assets of a private fund must be valued periodically. What is considered to be an appropriate period between valuations will depend on the asset class(es) in which the fund is invested. However, valuations should, as a minimum, be carried out at least annually. Each valuation must be carried out by an independent and suitably qualified professional valuer who is familiar with the relevant asset class. If the valuer is not independent, then CIMA reserves the right to have the valuation independently verified at the cost of the fund. Otherwise, if the valuation of assets is carried out by the fund itself or by its investment manager, the valuation function must be independent from the portfolio management function of the fund and any conflicts of interest are required to be identified, managed, monitored and disclosed to investors.
  •  Safeguarding of the fund’s assets – private funds are, generally speaking, required to appoint a custodian to hold, in segregated accounts maintained in the name of the fund, the fund’s assets which are capable of physical delivery or capable of registration in a separate account except that the private fund shall not be required to appoint a custodian if it has notified CIMA and it is neither practical nor proportionate to do so, having regard to the nature of the private fund and the type of assets it holds. The duty of custodian appointed is to verify the fund’s title to its assets based on information provided by the fund together with any externally available information. If a custodian is not appointed, the verification of the fund’s title to its assets must be carried out either by the fund’s administrator or by the fund itself or its investment manager. In the case of title verification by the fund or its investment manager, the title verification function must be independent from the portfolio management of the fund and any conflicts of interest are required to be identified, managed, monitored and disclosed to investors in the fund.
  • Cash monitoring – private funds are required to appoint any of an administrator, custodian or the investment manager to (1) monitor the cash flows of the fund; (2) ensure that all cash has been booked in cash accounts maintained in the name of the fund; and (3) ensure that payments made by investors to the fund for the purposes of investment have been received. If such monitoring is not undertaken by an independent third party, CIMA reserves the right to have the cash monitoring verified at the cost of the fund. In the case of cash monitoring undertaken by the fund or its investment manager, as above, the cash monitoring function must be independent from the portfolio management of the fund and any conflicts of interest are required to be identified, managed, monitored and disclosed to investors in the fund.
  •  Identification of securities – if the private fund in question regularly trades securities or holds them on a consistent basis, it must keep records of the identification codes (such as ISIN codes or CUSIP codes) of those securities that it trades and holds, and such records must be made available to CIMA on request.

Other obligations

In addition to its obligations under the Act and guidance issued by CIMA, private funds are also subject to other obligations under the laws of the Cayman Islands in relation to matters such as FATCA / CRS compliance and, in respect of anti-money laundering legislation and regulations.

  • FATCA / CRS – Private funds tend to be classified as ‘Reporting Financial Institutions” for the purposes of FATCA and CRS. Each private fund is therefore required to undertake detailed due diligence on each of its investors (which is typically undertaken on its behalf by its administrator). The fund must also provide information to the Tax Information Authority of the Cayman Islands in respect of each of its investors who constitute ‘reportable accounts’.
  • Anti-money laundering – Private funds conduct “relevant financial business” for the purposes of the Proceeds of Crime Act (As Revised) and the Anti-Money Laundering Regulations (As Revised) (being together the “AML Requirements”). Private funds are therefore required to have robust policies and procedures in place to ensure that the AML Requirements are adhered to. The fund must have a detailed Anti-Money Laundering Compliance Manual which contains detailed guidance on the policies and procedures that must be followed in carrying out the fund’s activities, ranging from the onboarding process for investors, record-keeping, processes for the reporting of suspicious activity and other risk management matters.
  • Beneficial ownership – The Beneficial Ownership Transparency Act (“BOTA”) requires Cayman Islands exempted companies, ELPs, and limited liability companies to maintain a beneficial ownership register unless an alternative route to compliance applies. Under the BOTA, alternative routes to compliance are available to categories of legal persons such as private funds and each private fund will be required to provide its corporate services provider in the Cayman Islands with:
  1. written confirmation of the category into which it falls; and
  2. the required particulars specific to it.

The private fund is required to appoint a principal point of contact (“PPoC”) who is responsible for responding to any request for beneficial ownership information received from the Cayman Islands Competent Authority (“Competent Authority”) in relation to the private fund. The PPoC must be licensed in the Cayman Islands and will be required to provide the requested beneficial ownership information to the Competent Authority within 24 hours of a request being made, or such other timeframe as may be stipulated in the request.

Each private fund must also appoint three (3) officers to assist with compliance with the AML Requirements; these are the anti-money laundering compliance officer, money laundering reporting officer, and deputy money laundering reporting officer.

Economic Substance

On the basis that private funds are a form of investment fund, private funds that are registered under the Act are not ‘relevant entities’ for the purposes of the International Tax Co-operation (Economic Substance) Act (As Revised). Whilst, therefore, private funds will not be required to demonstrate the extent of their ‘substance’ in the Cayman Islands, they will nonetheless be required to make an annual notification under this legislation to confirm their status as an investment fund.

Conclusion

If you are considering establishing a private fund in the Cayman Islands, it is imperative that you have experienced Cayman Islands legal counsel by your side to assist you in navigating the legislative, regulatory, and compliance landscape. We have a strong reputation for our technical excellence, responsive, forward-thinking and insightful approach to advising clients on offshore Investment Funds and would be happy to be your trusted advisor on the formation, launch and ongoing advisory of your Cayman Islands private fund.

Further Assistance

View Full PDF

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 matters discussed in this Briefing, please contact us.  We would be delighted to assist.

E: gary.smith@loebsmith.com
E: robert.farrell@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: vanisha.harjani@loebsmith.com
E: vivian.huang@loebsmith.com
E: faye.huang@loebsmith.com

Share to WeChat

“Scan QR Code” in WeChat and tap ··· to share.

QR Code

Hong Kong (12 February 2026) Off the back of winning the Best Structured Finance Deal of the Year (Hong Kong) at the FinanceAsia Achievement Awards 2025, Loeb Smith is proud to announce that Hong Kong Capital Finance Corporation Limited (HKCFC)’s residential mortgage-backed securitisation (RMBS) transaction, as arranged by United Overseas Bank with HKCFC MBS 5 Limited as the issuer (Issuer), has been named the Significant Deals 2026 – Best Securitization (North Asia- Hong Kong) at The Asset Triple A Awards.

This accolade recognises the complexity and innovation of the HK$1,503 million rated, privately placed fixed-rate RMBS issued by HKCFC MBS 5 Limited, rated Aa2(sf) and A3(sf) by Moody’s. Notably, this transaction marked Hong Kong’s first rated RMBS in more than two decades, marking a milestone for Hong Kong’s capital markets and promoting greater funding diversification among newer originators despite a challenging residential property market.

Loeb Smith acted as BVI counsel to HKCFC MBS 5 Limited, led by Vanisha Harjani, Partner in the Loeb Smith Hong Kong office.

Commenting in Hong Kong, Partner Vanisha Harjani said: “It is encouraging to see the British Virgin Islands remain a popular and important jurisdiction for issuers in onshore structured finance deals. We are optimistic about the market outlook and remain committed to serving our clients in Asia and those seeking to establish a presence there. This award reflects the strength of Loeb Smith’s corporate and finance capabilities and our commitment to delivering innovative solutions in complex markets. We are honoured to have advised HKCFC MBS 5 Limited on Hong Kong’s Best Structured Finance Deal of the Year.”

View Full PDF

Share to WeChat

“Scan QR Code” in WeChat and tap ··· to share.

QR Code

Our firm has been ranked as Lexology Legal Influencer for Dispute Resolution – Central and South America for Q4 2025. We are proud that Loeb Smith’s articles were ranked as Legal Influencer in all quarters of 2025! Many thanks to our readers and to our contributing author colleagues for making it possible.  Find out more about our Litigation and Disputes service.

Share to WeChat

“Scan QR Code” in WeChat and tap ··· to share.

QR Code

Hong Kong (20 January 2026) Loeb Smith is proud to announce that Hong Kong Capital Finance Corporation Limited (HKCFC)’s residential mortgage-backed securitisation (RMBS) transaction, as arranged by United Overseas Bank with HKCFC MBS 5 Limited as the issuer (Issuer), has been named Best Structured Finance Deal of the Year (Hong Kong) at the FinanceAsia Achievement Awards 2025.

This accolade recognises the complexity and innovation of the HK$1,503 million rated, privately placed fixed-rate RMBS issued by HKCFC MBS 5 Limited, rated Aa2(sf) and A3(sf) by Moody’s. Notably, this transaction marked Hong Kong’s first rated RMBS in more than two decades, marking a milestone for Hong Kong’s capital markets and promoting greater funding diversification among newer originators despite a challenging residential property market.

Loeb Smith acted as BVI counsel to HKCFC MBS 5 Limited, led by Vanisha Harjani, Partner in the Loeb Smith Hong Kong office.

Commenting in Hong Kong, Partner Vanisha Harjani said: “It is encouraging to see the British Virgin Islands remain a popular and important jurisdiction for issuers in onshore structured finance deals. We are optimistic about the market outlook and remain committed to serving our clients in Asia and those seeking to establish a presence there. This award reflects the strength of Loeb Smith’s corporate and finance capabilities and our commitment to delivering innovative solutions in complex markets. We are honoured to have advised HKCFC MBS 5 Limited on Hong Kong’s Best Structured Finance Deal of the Year.”

View Full PDF

Share to WeChat

“Scan QR Code” in WeChat and tap ··· to share.

QR Code

Loeb Smith Attorneys: Reflecting on a Remarkable 2025

circle shape

Share

circle shape

Related Contents

Share to WeChat

“Scan QR Code” in WeChat and tap ··· to share.

QR Code

Wonderful news: Loeb Smith Attorneys’ Cayman Islands team has once again been recognised in the rankings of Legal500, one of the top international publications that evaluates law firms and legal professionals worldwide.

In the 2026 edition, Loeb Smith Attorneys reaffirms its strong Cayman Islands positioning standing out in the Investment Funds practice top tier firms and receiving an accolade for Client Satisfaction.

This recognition highlights the trust our clients place in us, the depth of our expertise and the strength of our multidisciplinary teams focused on delivering outstanding client service.

We are very proud of our team and thankful to our clients for taking their time to talk to Legal500. Here is what our clients shared to Legal 500 about us:

‘Their deep knowledge of the nature of digital assets, wallet structures, and Web3 business
models is reflected directly in their drafting. Instead of relying on generic fund templates, they
proactively incorporate crypto-specific wordings and clauses into fund documents, making them
clear, accurate, and practical for all stakeholders, from fund managers to service providers and
even auditors.’

***

‘I’ve worked with Loeb Smith on a number of crypto fund matters, including fund formation,
regulatory compliance, and handling in-kind subscriptions using digital assets.’

***

‘Gary Smith is particularly impressive. He is not only highly knowledgeable on the legal side but
also well-versed in how crypto businesses operate in practice. Their ability to explain complex
regulatory matters in plain language makes decision-making much easier on our end and the
crypto client side.’

View Full PDF

Share to WeChat

“Scan QR Code” in WeChat and tap ··· to share.

QR Code

Cayman Islands exempted companies are widely utilized in structuring cross-border finance transactions. One of the key reasons for this is that the Cayman Islands provides a flexible and well-tested regime for secured financing transactions that is attractive to borrowers and lenders alike. The process for creating security in the Cayman Islands is also straightforward and will not typically impact the timeframe of a proposed transaction.

In this brief guide, we address certain of the key Cayman Islands law points pertaining to the creation and protection of security over shares (the “Secured Shares”) in a Cayman Islands exempted company (the “Secured Company”).

Creation of Security

The Companies Act (as Revised) of the Cayman Islands (the “Act”) does not contain any provisions with respect to the creation of security over Secured Shares in a Secured Company. Therefore, the security should adhere to the following principles derived from common law:

    1. it must be in writing;
    2. the security document must be signed by, or with the authority of, the security provider; and
    3. the security document must clearly indicate the intention to create security over the Secured Shares and the amount secured or how that amount is to be calculated.

Cayman Islands law recognizes various forms of security over assets, including equitable mortgages and charges which are most commonly taken over Secured Shares in a Secured Company.

Execution Formalities and Regulatory Approvals

Cayman Islands law does not prescribe a particular mode of execution with respect to security over Secured Shares in a Secured Company and it is not necessary for such security to be certified, notarized or apostilled to make the security valid or enforceable from a Cayman Islands law perspective. That being said, in practice, a security document with respect to Secured Shares in a Secured Company is customarily executed as a deed.

From an execution standpoint, it is important to review the memorandum of association and articles of association (the “M&A”) of the relevant security provider and the relevant Secured Company, to the extent it is a party to the security document, to ensure compliance with any applicable signing formalities.

Unless security is being taken in a Secured Company which is a “regulated person”, such as a bank or a mutual fund, no regulatory approvals are necessary to create valid and enforceable security as a matter of Cayman Islands law.

Stamp Duty and Taxes

No stamp duty or taxes are payable with respect to the creation of security over Secured Shares in a Secured Company or upon any transfer thereof in an enforcement as a matter of Cayman Islands law so long as:

    1. the security document and any ancillary documents thereunder are not executed or delivered in, brought into, or produced before a court of, the Cayman Islands; and/or
    2. the Secured Company does not have an interest in land in the Cayman Islands, or shares in a subsidiary that has an interest in land in the Cayman Islands.

Governing Law of the Security

Cayman Islands law permits security over Secured Shares in a Secured Company to be governed by Cayman Islands law or foreign law.

In cross-border finance transactions, it is relatively common for the governing law of a security document over Secured Shares in a Secured Company to be aligned with the governing law of the principal finance documents. One advantage of adopting a foreign governing law clause in a security document is that it may make available certain additional remedies (such as appropriation) which are not available under Cayman Islands law. Care should however be taken to ensure that there are no conflicts of law issues where a security document is governed by foreign law. English, Hong Kong and Singapore law are frequently adopted to govern security over Secured Shares in a Secured Company and no major conflicts of law issues are likely to arise.

Cayman Islands law governed security document

Where the security document is governed by Cayman Islands law, so long as it is in customary form, the secured party is entitled to the following remedies in the event of a default:

    1. the right to take possession of the Secured Shares in the Secured Company (subject to redemption by the security provider upon the settlement of the debt);
    2. the right to sell the Secured Shares in the Secured Company; and
    3. the right to appoint a receiver who may:
        1. vote the Secured Shares in the Secured Company;
        2.  receive distributions in respect of the Secured Shares in the Secured Company; and
        3. exercise other rights and powers of the security provider in respect of the Secured Shares in the Secured Company.

If the secured party acquires legal title to the Secured Shares in the Secured Company, it also has a right of foreclosure. This remedy extinguishes the security provider’s legal and beneficial title to the Secured Shares in the Secured Company but not its obligation to pay any secured and unpaid sums. Foreclosure involves a time-consuming and costly court process and is not usually exercised in practice given its draconian nature.

For further details regarding the enforcement of security over Secured Shares in a Secured Company, please refer to our guide entitled “Enforcing security over shares in a Cayman Islands exempted company”.

Foreign law governed security document

Where the security document is governed by foreign law, the:

    1. security document should comply with the requirements of its governing law to be valid and binding; and
    2. remedies available to a secured party are governed by the governing law and the terms of the security document.

Application of Proceeds of Enforcement

Subject to any provisions to the contrary in the security document, all amounts that accrue from the enforcement of the security document are applied in the following order of priority:

    1.  firstly, in paying the costs incurred in enforcing the security document;
    2. secondly, in discharging the sums secured by the security document; and
    3. thirdly, in paying any balance due to the security provider.

Security Deliverables

The terms of a well-drafted Cayman Islands law governed security document with respect to Secured Shares in a Secured Company and the principal finance document will usually require the security provider to deliver the following documents to the secured party to assist with an enforcement:

    1. any original share certificate(s) with respect to the Secured Shares in the Secured Company;
    2. an undated share transfer form with respect to the Secured Shares in the Secured Company;
    3. an undated resignation letter from each director of the Secured Company;
    4. a letter of authorization from each director of the Secured Company authorizing the secured party to date each undated letter of resignation upon the occurrence of a default under the security document;
    5. an irrevocable proxy with respect to the Secured Shares in the Secured Company in favor of the secured party;
    6. a letter of instruction to the Secured Company’s registered office service provider containing, among other things, directions to register a transfer of Secured Shares in the Secured Company upon the occurrence of a default under the security document;
    7. a letter of acknowledgement from the registered office service provider with respect to the instructions referenced in the letter of instruction;
    8. if the security provider is a Cayman Islands exempted company, a certified copy of its register of mortgages and charges showing the security created over the Secured Shares in the Secured Company (see further below);
    9. a certified copy of the Secured Company’s register of members annotated to show the security created over the Secured Shares in the Secured Company (if commercially agreed – see further below);
    10. if the security provider is a Cayman Islands exempted company, a copy of the board resolutions of its board of directors authorizing:
        1. its entry into and execution of the security document; and
        2. the updates to its register of mortgages and charges;
    11. a copy of the board resolutions of the Secured Company authorizing:
        1. its entry into and execution of the security document (if it is a party);
        2. its register of members to be annotated (if commercially agreed); and
        3. its register of members to be annotated (if commercially agreed); and
    12. special resolution passed by the Secured Company with respect to certain changes to its M&A, if required (see further below).

Security Protection Steps

Register of mortgages and charges of a Cayman Islands security provider

Pursuant to section 54 of the Act, if the security provider is a Cayman Islands company, it must record particulars of the security created over any Secured Shares in the Secured Company in its register of mortgages and charges. The register of mortgages and charges must include:

    1. a short description of the property mortgaged or charged;
    2. the amount of charge created; and
    3. the names of the mortgagees or persons entitled to such charge.

There is no statutory timeframe within which the register needs to be updated. However, a well-advised secured party will request that the register is updated promptly so that third parties that inspect it are on notice of the security.

Any variations and releases of charge should also be reflected in the register of mortgages and charges.

As there is no statutory regime for registering security interests under Cayman Islands law, the common law rules of priority continue to apply. In general terms, these rules specify that priority between competing security interests is determined by the dates on which the relevant security interests were created. It is important to note that inserting details of mortgages and charges in the register of mortgages and charges of a Cayman Islands company does not confer priority on a charge in respect of the relevant secured asset.

Register of members of the Secured Company

A Secured Company may annotate its register of members to include:

    1. a statement that security has been created over the Secured Shares;
    2. the name of the secured party; and
    3. the date on which the statement and the secured party’s name are entered in its register of members.

Although it is optional to annotate a Secured Company’s register of members with details of any security that has been created, this puts third parties that inspect the register on notice of the security. Therefore, a secured party usually insists on this.

M&A of the Secured Company

A secured party will usually request the Secured Company to make certain changes to its M&A to ensure, among other things, that there are no restrictions on the transfer of Secured Shares in the Secured Company which may impede enforcement action. Any changes to the Secured Company’s M&A must be made by passing special resolutions. Although such resolutions need to be filed with the Registrar of Companies of the Cayman Islands within 15 days of being passed, they take effect upon signing.

Further Assistance

This publication is not intended to be a substitute for specific legal advice or a legal opinion. For specific advice on the matters covered in this Legal Insight, please contact your usual Loeb Smith attorney or any of the following: 

E: vanisha.harjani@loebsmith.com
E: max.lee@loebsmith.com

This article was first published in the Hong Kong Lawyer: https://law.asia/cayman-digital-asset-law/Granting and Protecting Security Over Shares in a Cayman Islands Exempted Company | Hong Kong Lawyer.

Share to WeChat

“Scan QR Code” in WeChat and tap ··· to share.

QR Code

Follow us on WeChat and receive latest news

wechat-logo WeChat QR