Cayman Islands company law is primarily codified in the Companies Law (2018 Revision) and the Limited Liability Companies Law, 2016,[1] and to a lesser extent in the Securities and Investment Business Law (2015 Revision). The Cayman Islands is a leading offshore financial centre (also known as a tax haven), and financial services form a significant part of the economy of the Cayman Islands. Accordingly company law forms a much more prominent part of the law of the Cayman Islands than might otherwise be expected.
There are broadly two types of company in the Cayman Islands.
The first, and more prevalent, are companies formed under the Companies Law (2013 Revision). Such companies may be formed as ordinary resident companies, ordinary non-resident companies, exempted companies, exempted limited duration companies (LDC) or special economic zone companies (SEZ).[2]
The second is limited liability companies (or LLCs) formed under the Limited Liability Companies Law, 2016. LLCs are a form of hybrid between companies and partnerships.[3] Although they have separate legal personality (like companies) they do not have share capital, are managed by the majority vote of their members (like partnerships)[4]
Registering a company
In the Cayman Islands any one or more persons may by subscribing their name to a company memorandum incorporate a company for a lawful purpose.[5] In practice, companies are almost invariably formed by professional trust companies rather than members of the public.
Under the Companies Law it is possible to register companies as either a company limited by shares or a company limited by guarantee.[6] A company limited by guarantee may also be incorporated with a share capital. In practice the vast majority of companies are incorporated as companies limited by shares.
Where a company will carry out its business principally outside of the Cayman Islands, it will normally be registered as an exempt company.[7] This broadly replicates the International Business Company concept from other jurisdictions, except that in relation to exempt companies, there is no tax saving. The main benefit of registering as an exempt company is that exempt companies do not need to file accounts.
Exempted companies can also be registered as limited duration companies,[8] or as special economic zone companies.[9] Limited duration companies are required to include "LDC" or "Limited Duration Company" in their name,[10] and special economic zone companies are required to include "SEZC" or "Special Economic Zone Company" in their name.[11]
In the Cayman Islands company may also further be registered specifically as segregated portfolio company.[12] A segregated portfolio company is a company which segregates the assets and liabilities of different classes of shares from each other and from the general assets of the company.[13] All segregated portfolio companies are required to include the designation "SPC" or "Segregated Portfolio Company" in full within their name.[14]
In the Cayman Islands a company has separate legal personality from its members (unlike, for example, a partnership registered under the Exempted Partnership Law (2014 Revision))). The liability of the members of a company is limited to their shares or the amount of their guarantee.[15] Similarly, directors or officers of a company are not normally liable for the company's debts except insofar as they may otherwise be liable for their own conduct or actions. The primary circumstances where liability may be imposed upon directors in relation to their acts as directors are (1) where the director is guilty of fraudulent trading or misfeasance, or (2) where the director undertakes personal responsibility or liability for certain actions.[16]
Conversely, the assets of a company are regarded as belonging solely to the company and not the company's members. In exception circumstances the courts are prepared to "pierce the corporate veil" and treat the assets of the company as belonging to the members (or, conversely, treat the company's obligations as the obligations of the members), but the circumstances in which this will be done are rare and exceptional.[17]
The corporate constitution of a private company registered under the Companies Law consists of the memorandum and articles of association. Companies may adopt the statutory form of Articles (known as "Table A") set out in Schedule 1 to the Companies Law,[18] but in practice very few companies do so.
The memorandum and articles of association of a company are filed with the Companies Registry but are not available for public inspection. The memorandum and articles of association can only be amended by a special resolution,[19] which under Cayman Islands law normally means a two-thirds majority, although this can be increased under the articles of association.[20]
Any amendment to the memorandum or articles normally becomes effective upon the passing of the special resolution. The company is then required to file the special resolution with the Companies Registry, but failure to do so will not affect the effectiveness of the amendment.
Once adopted, the memorandum and articles bind the company and each member of the company as if they had been executed by the same under seal.[21]
The constitutional documents of an LLC is the LLC agreement. This is much more closely akin to a partnership agreement than to the memorandum and articles of association of a company. The LLC agreement is not filed or registered with the Companies Registry.[22]
Corporate governance
The business and affairs of a Cayman Islands company are usually managed by its board of directors.[23] The board must consist of one or more persons, and these may be individuals or companies. Directors owe strict duties of good faith to exercise their powers for a proper purpose and in the best interests of the company.[24] The Companies Law is almost entirely silent in relation to the position of the directors, and the relevant legal principles are all derived from the common law.
The members of the company are legally the owners of the company. Although they do not have the power to dictate to the directors how the company should be managed,[25] they have the power to appoint and remove the board, the through this power exercise indirect control. Resolutions may be passed by the members formally or informally pursuant to the Duomatic principle.
There are no special statutory provisions to protect minority shareholders against "unfair prejudice" on the part of majority shareholders. Accordingly, minority shareholders who are prejudiced in this have to rely upon the common law exceptions to the rule set in Foss v Harbottle,[26] or seek a winding-up of the company on just and equitable grounds. Where a minority shareholder seeks a just and equitable winding-up, the court has a discretion to make a number of alternative orders, such as (a) an order regulating the conduct of the company's affairs in the future; (b) an order requiring the company to refrain from doing or continuing an act complained of by the petitioner or to do an act which the petitioner has complained it has omitted to do; (c) an order authorising civil proceedings to be brought in the name and on behalf of the company by the petitioner on such terms as the Court may direct; or (d) an order providing for the purchase of the shares of any members of the company by other members or by the company itself.[27]
A board of directors may pass resolutions at a meeting (pictured) or by way of unanimous circular written resolutions.
The directors owe their duties to the company itself, and not to the individual members.[28] Accordingly, where a director acts in breach of their duty, then the proper claimant in any action is the company itself. If the company is unable to take any action (because it is controlled by the wrongdoer) the court may authorise a member to bring proceedings in the name of the company by way of derivative action. However the measure of damages will be the loss to the company, and only the loss to the company. A shareholder cannot sue a person for a wrong committed against the company for the "reflective loss" to the value of their shareholding, as this would result in the wrongdoer paying double compensation for the same wrong (once to the company and once to the shareholders).[29]
The emphasis of Cayman Islands company law is to protect the rights of creditors and members (i.e. the sources of capital) as the key stakeholders in the company. The rights of other stakeholders, such as employees, customers and wider society are given comparatively little protection. This reflects the offshore nature of most Cayman Islands companies, and the different social and economic environments in which they operate.
Shares and shareholders
Although Cayman Islands companies can be formed as guarantee companies, in practice almost all companies are registered as shares issuing companies. The issuing of shares is regulated by the company's articles of association.[30]
Shareholders in a Cayman Islands company do not enjoy statutory pre-emption rights or rights of first refusal in relation to new issuances or sales of shares. Although companies may opt into a statutory pre-emption scheme provided for under the legislation, in practice relatively few companies do so. Companies may provide for bespoke provisions relating to such rights in their constitutional documents, and this will sometimes occur in joint ventures or where preferred shareholders invest in the company.
Shareholder voting in the Cayman Islands is still predicated by the normal basis of majority-control. However, where the majority exercises their power in a way which is unfairly prejudicial to the minority shareholders, the court may give relief to the minority shareholders.
Cayman Islands companies may issue bearer shares, but only to a custodian.[31] There are no equivalent restrictions on the power of companies to issue bearer debt securities or bearer share warrants.
Debt finance
Cayman Islands companies are often capitalised primarily with debt rather than equity, whether it is by way of intra-group debt or external borrowing. Companies are not required to file financing statements in the Cayman Islands when borrowing money.
Where a creditor takes security from a company for the indebtedness, that security must be entered in the register of mortgages, charges and other encumbrances of the company.[32] All creditors of the company are entitled to inspect the register upon request.[33]
There are no restrictions prohibiting Cayman Islands companies from giving financial assistance for the acquisition of their own shares, and no requirement to go through a "whitewash" procedure.
There are a number of statutory provisions whereby companies registered in the Cayman Islands may reorganise themselves, either pursuant to a general group reorganisation, or as part of a debt restructuring, or in order to complete an M&A transaction.
Mergers and consolidation. Two or more companies can either merge or consolidate by statute into a single successor company,[34] and the successor company will succeed to the assets of all of the constituent companies and be subject to all of the liabilities and obligations of the constituent companies. In a merger, the successor company is one of the original companies which merged. In a consolidation all of the constituent companies are merged into one new company which did not exist prior to the consolidation. After the merger or consolidation is completed the non-surviving companies are struck-off and cease to exist.
Continuation. Although not so much a reorganisational process in its own right, companies registered in the Cayman Islands are able to redomicile to (or, in the words of the statute, "continue their existence under the laws of") any other jurisdiction which permits companies to change their jurisdiction of registration.[35] Similarly, companies are entitled to migrate to the Cayman Islands from other jurisdictions where those other jurisdictions permit this.[36]
Schemes of arrangement. Companies may enter into a scheme of arrangement whereby the court sanctions a compromise or arrangement which is entered into by the members or creditors of a company.[37] The scheme must be approved by a majority in number and 75% in value.[38] Where the scheme members or scheme creditors have different interests, the court may be order that they be divided into two or more classes for the purposes of voting on the scheme. In Cayman a crude form of debtor-in-possession creditor rehabilitation has evolved along similar lines to the practice in Hong Kong whereby the company itself will make an application for the appointment of a provisions liquidator which operates as a stay upon claims against the company,[39] and then the provisional liquidator will promote a scheme of arrangement to reschedule the insolvent company’s debts.[40]
Cayman Islands corporate insolvency law is almost entirely codified across a number of statutes including the Companies Law, the Bankruptcy Act (1997 Revision) and the Companies Winding Up Rules 2008 . In the Cayman Islands a company will be deemed to be unable to pay its debts if it fails to satisfy a judgment debt or statutory demand letter, or is otherwise proved to the satisfaction of the Court that it is unable to pay its debts.[41] Demonstrating to the Court that a company is balance sheet insolvent is normally sufficient.[42] In each of those circumstances a creditor to petition the court for the appointment of a liquidator. A company may also voluntarily enter liquidation by a special resolution passed by the company's members.[43]
Where a company goes into liquidation, unless the Court otherwise directs, a liquidation committee comprising representatives of key creditors shall be established in respect of every company being wound up by the Court.[44] The purpose of the committee is to provide guidance and input on the creditors’ wishes as a body to the liquidator.
Where a liquidator is appointed (either voluntarily or by the court), the liquidator's primary duty is to collect in all of the company's assets and then distribute them pari passu to the company's creditors.[45] The law confers wide powers upon the liquidator to enable him to do so.[46] Once a liquidator is appointed, unsecured creditors cannot commence legal proceedings against the insolvent company without the leave of the court[47] and any rights of action against the company are converted into claims in the liquidation process. Any disposition of property by the company after the commencement of winding-up is void unless the court otherwise orders.[48] Winding-up is deemed to commence at the presentation of the petition (i.e. upon the making of an order, it "relates back").[49]
Secured creditors generally do not participate in the liquidation process, and may continue to proceed with any enforcement action directly against their collateral pursuant to a valid security interest.[50] Cayman Islands law only provides for a very small class of preferential creditors, and these are rarely commercially significant in insolvent liquidations.[51]
When a company goes into insolvent liquidation, any mutual debts between the company and a creditor intending to prove in the liquidation will be set-off.[52] The right of set-off is mandatory, and cannot be waived. Nor is the right to set-off lost by virtue of the fact that the creditor had notice of the company’s insolvency at the time of extending credit to it.
The Companies Law has incorporated statutory netting relating to financial contracts into Cayman Islands Law, and this will prevail over any other off provision of Cayman Islands insolvency law.[53]
A liquidator may challenge transactions entered into in the twilight period prior to insolvency where such transactions constitute either an unfair preference or an undervalue transaction.[54] However there is no separate avoidance regime for voidable floating charges or for extortionate credit transactions. A liquidator can also pursue former directors (including shadow or de facto directors) and officers of the company for fraudulent trading (but not for mere insolvent trading).[55]
Financial services regulation
Financial services are regulated in the Cayman Islands by the Cayman Islands Monetary Authority (or CIMA), an independent regulator. CIMA’s ambit extends to companies (and any other entities) which are engaged in regulated business. The principal types of business which are regulated are:
Most regulated business in the Cayman Islands is regulated if it is conducted "in or from within" the jurisdiction. Accordingly, if a Cayman Islands is incorporated to provide investment advice in Indonesia, it would still be regulated in the Cayman Islands because it is providing regulated services "from within" the jurisdiction.
Liquidation is the process in accounting by which a company is brought to an end. The assets and property of the business are redistributed. When a firm has been liquidated, it is sometimes referred to as wound-up or dissolved, although dissolution technically refers to the last stage of liquidation. The process of liquidation also arises when customs, an authority or agency in a country responsible for collecting and safeguarding customs duties, determines the final computation or ascertainment of the duties or drawback accruing on an entry.
A number of legal systems make provision for companies trading while insolvent to be unlawful in certain circumstances, and provide for directors to become personally liable for a company's debts if they have acted improperly. In most legal systems, the liability in respect of unlawful transactions only extends for a certain period of time prior to the company going into liquidation.
Corporate law is the body of law governing the rights, relations, and conduct of persons, companies, organizations and businesses. The term refers to the legal practice of law relating to corporations, or to the theory of corporations. Corporate law often describes the law relating to matters which derive directly from the life-cycle of a corporation. It thus encompasses the formation, funding, governance, and death of a corporation.
In accounting, insolvency is the state of being unable to pay the debts, by a person or company (debtor), at maturity; those in a state of insolvency are said to be insolvent. There are two forms: cash-flow insolvency and balance-sheet insolvency.
Salomon v A Salomon & Co Ltd[1896] UKHL 1, [1897] AC 22 is a landmark UK company law case. The effect of the House of Lords' unanimous ruling was to uphold firmly the doctrine of corporate personality, as set out in the Companies Act 1862, so that creditors of an insolvent company could not sue the company's shareholders for payment of outstanding debts.
Wrongful trading is a type of civil wrong found in UK insolvency law, under Section 214 Insolvency Act 1986. It was introduced to enable contributions to be obtained for the benefit of creditors from those responsible for mismanagement of the insolvent company. Under Australian insolvency law the equivalent concept is called "insolvent trading".
In law, a liquidator is the officer appointed when a company goes into winding-up or liquidation who has responsibility for collecting in all of the assets under such circumstances of the company and settling all claims against the company before putting the company into dissolution. Liquidator is a person officially appointed to 'liquidate' a company or firm. Their duty is to ascertain and settle the liabilities of a company or a firm. If there are any surplus, then those are distributed to the contributories.
United Kingdom insolvency law regulates companies in the United Kingdom which are unable to repay their debts. While UK bankruptcy law concerns the rules for natural persons, the term insolvency is generally used for companies formed under the Companies Act 2006. Insolvency means being unable to pay debts. Since the Cork Report of 1982, the modern policy of UK insolvency law has been to attempt to rescue a company that is in difficulty, to minimise losses and fairly distribute the burdens between the community, employees, creditors and other stakeholders that result from enterprise failure. If a company cannot be saved it is liquidated, meaning that the assets are sold off to repay creditors according to their priority. The main sources of law include the Insolvency Act 1986, the Insolvency Rules 1986, the Company Directors Disqualification Act 1986, the Employment Rights Act 1996 Part XII, the EU Insolvency Regulation, and case law. Numerous other Acts, statutory instruments and cases relating to labour, banking, property and conflicts of laws also shape the subject.
Soden v British and Commonwealth Holdings plc [1998] AC 298 is a UK insolvency law case, decided in the House of Lords. It decided that damages for negligent misrepresentation inducing purchase of company shares are not "sums due" to shareholders for the purpose of the Insolvency Act 1986, s 74(2)(f), so that a claim for such damages is not subordinated to claims from other creditors.
Re Peveril Gold Mines Ltd [1898] 1 Ch 122 is a UK insolvency law case concerning liquidation when a company is unable to repay its debts. It held that a member cannot be prevented by a company constitution from bringing a winding up petition. It is, however, possible for a member to make a shareholder agreement and thus contract out of the right to bring a winding up petition outside of the company.
The British Virgin Islands company law is the law that governs businesses registered in the British Virgin Islands. It is primarily codified through the BVI Business Companies Act, 2004, and to a lesser extent by the Insolvency Act, 2003 and by the Securities and Investment Business Act, 2010. The British Virgin Islands has approximately 30 registered companies per head of population, which is likely the highest ratio of any country in the world. Annual company registration fees provide a significant part of Government revenue in the British Virgin Islands, which accounts for the comparative lack of other taxation. This might explain why company law forms a much more prominent part of the law of the British Virgin Islands when compared to countries of similar size.
British Virgin Islands bankruptcy law is principally codified in the Insolvency Act, 2003, and to a lesser degree in the Insolvency Rules, 2005. Most of the emphasis of bankruptcy law in the British Virgin Islands relates to corporate insolvency rather than personal bankruptcy. As an offshore financial centre, the British Virgin Islands has many times more resident companies than citizens, and accordingly the courts spend more time dealing with corporate insolvency and reorganisation.
Cayman Islands bankruptcy law is principally codified in five statutes and statutory instruments:
Coutts & Co v Stock[1999] EWHC 191 (Ch), [2000] 1 WLR 906 is a UK insolvency law case, concerning voidable transactions.
Anguillan company law is primarily codified in three principal statutes:
the International Business Companies Act ;
the Companies Act ; and
the Limited Liability Companies Act.
Anguillan bankruptcy law regulates the position of individuals and companies who are unable to meet their financial obligations.
Hague v Nam Tai Electronics refers to a pair of legal decisions of the Privy Council on appeal from the British Virgin Islands. The first was a unanimous decision given by Lord Hoffman, reported at [2006] UKPC 52, which focussed upon the anti-deprivation rule and secured creditor's rights. The second was a unanimous decision given by Lord Scott, reported at [2008] UKPC 13, and concerned the liability of a company liquidator. The second decision was much more widely reported.
Australian insolvency law regulates the position of companies which are in financial distress and are unable to pay or provide for all of their debts or other obligations, and matters ancillary to and arising from financial distress. The law in this area is principally governed by the Corporations Act 2001. Under Australian law, the term insolvency is usually used with reference to companies, and bankruptcy is used in relation to individuals. Insolvency law in Australia tries to seek an equitable balance between the competing interests of debtors, creditors and the wider community when debtors are unable to meet their financial obligations. The aim of the legislative provisions is to provide:
Provisional liquidation is a process which exists as part of the corporate insolvency laws of a number of common law jurisdictions whereby after the lodging of a petition for the winding-up of a company by the court, but before the court hears and determines the petition, the court may appoint a liquidator on a "provisional" basis. Unlike a conventional liquidator, a provisional liquidator does not assess claims against the company or try to distribute the company's assets to creditors, as the power to realise the assets comes after the court orders a liquidation.
Hong Kong insolvency law regulates the position of companies which are in financial distress and are unable to pay or provide for all of their debts or other obligations, and matters ancillary to and arising from financial distress. The law in this area is now primarily governed by the Companies Ordinance and the Companies Rules. Prior to 2012 Cap 32 was called the Companies Ordinance, but when the Companies Ordinance came into force in 2014, most of the provisions of Cap 32 were repealed except for the provisions relating to insolvency, which were retained and the statute was renamed to reflect its new principal focus.
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