New restructuring process for Cayman Islands
The Cayman Islands legislature gazetted the Companies (Amendment) Bill, 2021, on 21 October, which introduced a new corporate restructuring process. The bill represents a welcome development to the restructuring regime in the Cayman Islands and once again fortifies the Cayman Islands’ reputation as a leading offshore financial hub and a popular destination for foreign investment opportunities. This article examines the amendments introduced in the bill and the implications for existing and prospective investors in the Cayman Islands.
Current position under the Cayman Companies Act, 2021. Before the introduction of the bill, there was no formal restructuring regime in the Cayman Islands akin to the UK’s administration process or to Chapter 11 proceedings in the US. Under the act, the only option available to a company in distress is to appoint provisional liquidators, which will trigger a moratorium that will in turn allow the company breathing space and, where appropriate, enable it to propose a restructuring to its creditors.
In practice, this means that a winding-up petition against the company will first have to be presented for it to undergo any restructuring. That can be done by the company – through a shareholders’ special resolution – its creditors or contributories. Further, directors may present a winding-up petition on the company’s behalf without needing the sanction of a shareholders’ special resolution provided that such power is expressly provided for in the company’s articles and assuming it was incorporated after 1 March 2009.
At the hearing of a winding-up petition, the court has jurisdiction to, inter alia, make appropriate orders to facilitate a restructuring of the company. This would ordinarily involve the appointment of provisional liquidators to facilitate the restructuring process. The presentation of a winding-up petition alone will not give rise to a moratorium. Only the making of an order for the appointment of a provisional liquidator, or an official liquidator, will have that effect.
The new regime under the bill. With the introduction of the bill, part V of the act will be amended to include provisions for a company restructuring. The new provisions introduce a formal, standalone restructuring procedure for companies outside the traditional winding-up regime prescribed in the act.
The new regime establishes the concept of a “restructuring officer”, a qualified insolvency practitioner who acts as an officer of the court, and who will supervise the company’s restructuring process.
A company’s directors are empowered under that regime to present a petition for the appointment of a restructuring officer. This can be done without a shareholders’ resolution or any express power in the company’s articles. That being said, the company’s members may have grounds to restrain the directors from doing so where there is a provision in the company’s articles that expressly prohibits this.
Under the proposed section 91B, a company may present a petition to the court for the appointment of a restructuring officer on the basis that the company is, or is likely to become, unable to pay its debts and intends to present a compromise or arrangement to its creditors, or classes of creditors, either pursuant to the act, the law of a foreign country, or by way of a consensual restructuring.
It will therefore no longer be necessary for a winding-up petition to be presented as a precursor to a court-supervised restructuring, and the court will not have the power to wind up the company when presented with a petition to appoint a restructuring officer. Pending the hearing of that application, the company may also apply ex parte to the court for the appointment of an interim restructuring officer.
An automatic moratorium would be triggered upon the presentation of a petition to appoint a restructuring officer. This would prevent the continuation or commencement of any proceedings against the company without the leave of a court, including all foreign proceedings and any proceedings to wind up the company. However, secured creditors will still be able to enforce their security against the company, without needing court sanction and without seeking the approval of the restructuring officer.
The powers conferred on a restructuring officer are generally flexible and will be subject to the court’s discretion.
Where the restructuring officer proposes to pursue a scheme of arrangement as part of the company’s restructuring plan, he/she may make an application within the restructuring proceedings without the need for separate proceedings under the act for sanction of that scheme. As a result, there will be significant time and cost savings for a company already in distress.
In addition to the introduction of a standalone restructuring regime, there is another notable amendment in the proposed legislation. That amendment will allow directors of companies incorporated after the bill comes into force to present a winding-up petition on behalf of the company on the grounds that the company is unable to pay its debts as they fall due or, where a winding-up petition has been presented, to apply on the company’s behalf for the appointment of a provisional liquidator.
As stated above, at present, directors may present a winding-up petition on the company’s behalf without the sanction of a special resolution passed at a general meeting only if such power is expressly provided for in the company’s articles of association and the company was incorporated after 1 March 2009. The new bill, however, grants directors this authority without either of the restrictions. It will be necessary for provisions to be included in the company’s articles to either expressly remove or modify the directors’ authority in this regard, should the stakeholders wish to depart from this statutory right.
Implications for the client
The client as creditor. The interests of creditors of a company intending to appoint a restructuring officer are well protected under the regime introduced in the bill. Among other things, the petition for the appointment of a restructuring officer must be heard on an inter partes basis unless the company can otherwise satisfy the court that there are grounds justifying an ex parte application.
In addition, creditors of the company, including contingent or prospective creditors, may apply to the court to seek either a variation or discharge of the order appointing a restructuring officer, or for that officer’s removal or replacement. Thus, for example, if the creditor has concerns about the independence of the restructuring officer proposed by the company, they will have an opportunity to nominate their own candidate.
If the restructuring under the guidance of a restructuring officer fails, and the company is subsequently wound up, the winding-up will be deemed to have commenced from the presentation date of the petition for the appointment of a restructuring officer. This will affect, inter alia, the scope of the official liquidators’ powers to claw back any preference payments made to creditors within the relevant period.
The bill presents a welcome approach to facilitate company restructurings in the Cayman Islands. The benefits of the “light touch” provisional liquidation under the current regime are retained, while the negativity and stigma associated with a winding-up petition are no longer present with the establishment of a standalone restructuring process. It is anticipated that this will present a more collaborative and cohesive approach in cross-border restructurings.
Carey Olsen Singapore
10 Collyer Quay #29-10
Ocean Financial Centre
Tel: +65 6911 8310
Overview of Cayman Islands investment funds regime
With its agile regulatory framework, independent political and legal environments, flexible structuring options, tax neutrality and well-developed infrastructure, the Cayman Islands is set to remain the perfect investment funds jurisdiction in 2022, and continue to offer Asia-based fund managers and investors the ideal location to capitalise on opportunities.
Despite 2021 being a challenging year globally, the number of investment funds registered with the Cayman Islands Monetary Authority (CIMA) increased by more than 9.7% over the year. The continuing appeal of the Cayman Islands as an investment funds jurisdiction is attributable in part to the sensible policies of its government and the commercially practical regulatory system.
The government recently introduced a raft of legislation in its continuing efforts to strengthen oversight and keep in line with global standards and industry developments.
Regulation of private funds and limited investor funds. In particular, the Cayman Islands enhanced its investment funds regulation by requiring all Cayman Islands-based private equity and venture capital investment funds to be registered with the CIMA. Since registrations commenced in 2020, there are now more than 14,680 “private funds” (closed-ended funds where investors do not have the option to redeem) and limited investor funds (15 or fewer investors) registered.
CIMA rules on net asset value (NAV) calculation, content of offering documents and segregation of assets. In 2020, CIMA published three rules for regulated funds: (1) rules on the calculation of NAVs; (2) rules on the segregation of assets; and (3) rules on the contents of offering documents. The rules aim to enhance the standard of disclosures made to investors and to ensure fund assets are adequately segregated from the fund operator’s assets, and accounted for.
Economic substance legislation. As a result of the Organisation for Economic Co-operation and Development’s (OECD) global base erosion and profit shifting (BEPS) initiative, and the EU code of conduct group substance requirements modelled on BEPS action 5, the Cayman Islands enacted the International Tax Co-operation (Economic Substance) Act (2021 Revision) (ESA). Under the ESA, certain vehicles formed or registered in the Cayman Islands are required to have “economic substance” in the Cayman Islands.
Importantly, regulated investment funds are outside the scope of the ESA and not required to have economic substance in the Cayman Islands. Cayman Islands managers may be in scope and require specific advice.
Data Protection Act. The Data Protection Act (as revised) regulates the processing of all personal data in the Cayman Islands or by Cayman Islands entities. It impacts all entities established in the Cayman Islands, and applies irrespective of whether personal data is processed outside of the Cayman Islands or if the personal data relates to non-Cayman Islands resident individuals. This provides significant comfort to investors regarding the processing of their personal data.
Anti-money laundering (AML) regime. The Cayman Islands has comprehensive legislation and guidelines to combat money laundering practices. The principal legislation is the Proceeds of Crime Act (as revised), the Anti-Money Laundering Regulations (as revised) and related guidance notes, which apply to a range of business activities conducted in the Cayman Islands, including investment funds and investment managers.
Independent legal system
As a British overseas territory, the Cayman Islands enjoys economic and political stability, and a high degree of independence compared to some of its competitors. Its laws are a combination of common law, equity and statute based heavily on English law. It has a sophisticated judiciary, and the English Privy Council remains the highest court of appeal for Cayman Islands decisions.
Investment funds established in the Cayman Islands may take several different forms and new types of fund structures are constantly being developed. This flexibility enables fund managers and investors to adapt their investment fund structures to best capitalise on new opportunities.
The core investment vehicles are companies, unit trusts and limited partnerships, or a structured combination of these. In the Cayman Islands there is no tax imposed on income, capital gains or share transfers at the entity level, leaving investors and fund managers to be taxed on income and capital gains received in the jurisdictions where they reside. There are also no foreign exchange controls in the Cayman Islands.
Exempted companies have many of the characteristics of companies in other jurisdictions where investment funds exist. A board of directors manages the operation, while investors own shares that each carry an entitlement to a proportion of the profits or gains of the relevant class of shares, equal to that of any other share in the same class of shares in the company.
Most corporate investment funds are “open-ended”, meaning that investors have the right to redeem their interest or subscribe for more shares periodically. Both are usually based on the prevailing NAV per share of the particular class of fund shares.
Limited liability companies (LLCs) are similar in key respects to Delaware limited liability companies. The LLC is a versatile entity with a hybrid of the benefits of an exempted limited company and partnership. An LLC is a body corporate with a separate legal personality to its members but maintains the internal accounting and record keeping flexibility of an exempted limited partnership. An LLC may either be managed by its members in accordance with its agreement, or by “managers” appointed by the members. Its members benefit from limited liability to the amount of each member’s agreed maximum contributions, with substantial contractual freedom to agree to the internal workings of the LLC vehicle set out in an agreement within the framework of the LLC Act. US investors may prefer an LLC, given their familiarity.
Exempted segregated portfolio companies. The segregated portfolio company allows the creation of separate portfolios, which operate as a separate pool of assets and liabilities. Each segregated portfolio can have a separate investment strategy. If one portfolio incurs substantial liabilities in excess of its assets, that will not affect other segregated portfolios. The segregation of assets provides statutory protection for umbrella funds created within a single legal entity, and potentially lessens the administrative burden for the fund. In some circumstances, it may also allow investors to switch between portfolios without incurring a tax charge in their tax domicile. The segregated portfolio company structure is very popular.
Exempted unit trusts, in contrast to a company, is not a separate legal entity under Cayman Islands law, but a trust arrangement where legal ownership of the fund’s assets is vested in a trustee who holds the assets on trust for the benefit of the unit holders. The exempted unit trust will be constituted by means of a trust instrument made by a Cayman Islands licensed trustee company, and will be governed by common law and the Trusts Act. Japanese investors are familiar with the unit trust.
Exempted limited partnerships are a type of partnership widely used for investment funds, particularly closed-ended funds, covering private equity or venture capital. One or more of the partners is a general partner who has legal responsibility for the operation and management of its business, together with unlimited liability for the debts of the partnership.
The remaining partners are limited partners who are restricted from participating in the management of the partnership’s business, but who have liability for the partnership’s debts limited to the extent of their investment. An exempted limited partnership is not a separate legal entity from its partners under Cayman Islands law.
The Cayman Islands has a well-developed network of highly organised international professional services firms, many of whom also have a presence in Asia and can provide time-sensitive access to funds, managers and investors.
Cayman Islands investment funds have become instrumental in providing digital asset and cryptocurrency investment strategies. There are particular challenges with conducting AML on investors who subscribe for fund shares in cryptocurrency, along with how to value and custody such assets. The Cayman Islands is at the forefront of procedures to deal with these risks.
2022 and beyond
For the above-mentioned reasons, the Cayman Islands continues to set the standard for investment fund jurisdictions, and is the perfect location for funds to target opportunities in 2022 and beyond.
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Aristodemou Loizides Yiolitis, Shanghai Representative Office (Cyprus)
Unit 2, 9/F, Tower 3, Lujiazui Finance Plaza
826 Century Avenue, Pudong New Area,
Shanghai – 200120, China
Tel: +86 21 2030 7888