A Q&A guide to lending and taking security in the Cayman Islands. The Q&A gives a high level overview of the lending market, forms of security over assets, special purpose vehicles in secured lending, quasi-security and guarantees. It covers creation and registration requirements for security interests; problem assets over which security is difficult to grant; risk areas for lenders; structuring the priority of debt; debt trading and transfer mechanisms; agent and trust concepts; enforcement of security interests and borrower insolvency; cross-border issues on loans; taxes; and proposals for reform.
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This article is part of the PLC multi-jurisdictional guide to finance. For a full list of contents visit www.practicallaw.com/finance-mjg.
The Companies Law (2012 Revision) of the Cayman Islands was recently amended to strengthen the Cayman Islands' reputation as an innovative jurisdiction committed to developing its legislation to meet the needs of the global financial services industry.
The amended law has introduced a number of enhancements, including:
Merger and consolidation provisions. The changes make the existing regime significantly more straightforward to use and also introduce additional flexibility to enable it to be used in a wider range of transactions. The principal revisions include the simplification of shareholder authorisation procedures and enabling a Cayman Islands company to merge and consolidate into foreign companies.
Introduction of treasury shares. Cayman Islands companies now have greater flexibility with regard to their share capital as, upon a repurchase, redemption or surrender of shares, the directors can now determine whether or not to cancel those shares or keep them as treasury shares. Treasury shares can subsequently be cancelled or sold by the company without regard to capital maintenance rules.
Introduction of paperless share transfers. A Cayman Islands company with shares listed on one of a very wide range of global stock exchanges will now be able to record and transfer the listed shares in accordance with the rules of that exchange and its electronic settlement systems.
Ability to surrender fully paid shares. A Cayman Islands company can now permit the surrender of fully paid shares for no consideration (subject to any restriction in the company's articles of association).
Execution of documents. To address the practical difficulties arising out of R (on the application of Mercury Tax Group and another) v HMRC [2008] EWHC 2721 (the Mercury case), which led to an increase in the formalities involved in the execution of documents (in particular, deeds), the amended law introduces a number of helpful clarifications which allow for increased flexibility in relation to the execution of documents.
Branch registers. An exempted company may now cause to be kept a branch register in any country or territory of such category or categories of members as the company may determine from time to time.
Real estate includes:
Land (which includes land covered with water and all things growing on land).
Buildings and other structures or things which are attached to the earth or permanently fastened to land.
Land can be freehold or leasehold. Freehold land is owned permanently and leasehold land is leased for a term of years. Title to land must be registered with the Registrar of Lands at the Cayman Islands Land Registry.
Security over freehold and leasehold land is usually granted by way of a mortgage, being either:
A legal mortgage.
An equitable mortgage.
A legal mortgage is granted by execution of a mortgage agreement between the mortgagor and the secured creditor. The terms of the mortgage will vary, but essentially a mortgage:
Requires transfer of legal title in the land to the secured creditor, subject to a requirement to re-transfer the land upon satisfaction of the underlying secured obligations.
Grants the secured creditor certain powers to deal with the land upon a default.
No later security can take priority over a legal mortgage. Earlier security only has priority if the secured creditor has knowledge of it at the time it becomes legal owner of the land.
An equitable mortgage is treated as an agreement to create a legal mortgage and is effected in accordance with the Registered Lands Law (2004 Revision). This means that upon enforcement it is possible for the secured creditor to have the land transferred into its name. In theory, an equitable charge does not constitute an agreement to transfer legal title to the land. However, the steps that must be taken to evidence such a charge will be materially the same as those required to evidence an equitable mortgage, so there is usually no practical distinction.
An equitable mortgage can be created by:
The execution of an equitable mortgage.
An agreement to create a legal mortgage.
A transfer of land which is not perfected by registering the secured creditor in the Land Registry in accordance with the Registered Lands Law.
A deposit of the relevant title deeds (if any) by way of security.
A third party purchaser for value of the land who does not have notice of the equitable mortgage or charge will not be subject to it. All earlier security will have priority over the equitable mortgage or charge.
In theory, an equitable charge does not constitute an agreement to transfer the legal title to the land. However, the steps that must be taken to evidence this type of charge are materially the same as those required to evidence an equitable mortgage. Therefore, there is usually no practical distinction.
If security is being taken over leasehold property, it may be necessary to:
Obtain the landlord's consent.
Notify the landlord and tenants of the creation of the security interest.
A legal mortgage is perfected by a transfer of the land into the name of the secured creditor. The transfer occurs when the Register of Lands is updated in accordance with the Registered Lands Law.
Other than complying with the Registered Lands Law, an equitable mortgage or charge is not capable of true "perfection", but certain methods are available to improve the quality of the security, such as:
Mortgage agreement. The secured creditor should ensure that there is an agreement evidencing the equitable mortgage and setting out its terms. These will be substantially similar to those set out in a legal mortgage.
Power of attorney. The mortgagor should grant a power of attorney to the secured creditor enabling it to execute a transfer of the land into its name or any other related documentation on default. This can be set out in the mortgage agreement or as a separate power of attorney, but in either case it must be executed as a deed to be effective. A power of attorney granted by way of security is irrevocable.
Tangible movable property consists of assets that can be touched and moved, for example:
Plant.
Machinery.
Equipment.
Trading stock and other bearer debt securities.
Ships and aircraft (see below, Special regime).
If the applicable law to govern the security interest over tangible moveable property was deemed to be Cayman Islands law, the security interest will most commonly be created by way of either a:
Fixed charge.
Floating charge.
The characterisation of the security as fixed or floating is only likely to be relevant in the context of claims by preferential creditors where the security collateral provider is a Cayman Islands company. In that situation, Cayman Islands law determines the priority of the floating charge as against other creditors.
There is limited Cayman Islands case law on the nature of a floating charge, and English case law (which is persuasive in the Cayman Islands) would be likely to be followed in terms of determining the key characteristics and nature of a floating charge.
Under the Companies Law, preferred creditors rank ahead of both unsecured creditors and secured creditors, where the secured creditors' security is in the form of a floating charge.
The secured creditor should ensure that there is an agreement (usually a deed) evidencing the grant of the fixed or floating charge and setting out its terms.
A company must make an entry in its register of mortgages and charges in respect of any security interest created by it in order to comply with section 54 of the Companies Law. However, failure to comply with this requirement does not invalidate the security interest.
In relation to chattels, security can also be created by a conditional bill of sale, which must be recorded in accordance with the Bill of Sale Law (2000 Revision).
Formalities and perfection of security interests over tangible property will depend on the nature of that property and the lex situs of the property.
Ships and aircraft are considered tangible moveable property. However, a special regime applies to the taking of security over ships and aircraft if registered in the Cayman Islands. It is beyond the scope of this chapter to cover this issue.
The most common type of financial instrument over which security is granted in the Cayman Islands is shares. The security interest taken over shares and other financial instruments will depend on the form of the shares and the financial instruments.
Shares. This chapter deals only with the grant of security over shares in an exempted company where the register of shareholders is maintained in the Cayman Islands. Different rules may apply if either:
The register of shareholders is maintained outside the Cayman Islands (the situs of the shares is determined under Cayman Islands conflict of law principles by the location of the register) and the Companies Law permits the register of members to be maintained outside of the Cayman Islands).
The shares are in bearer form.
The most commonly taken security interests over shares are:
A legal mortgage.
An equitable mortgage.
It is not possible to "pledge" registered shares under Cayman Islands law because title to the shares cannot be transferred by physical delivery. Any grant of security over registered shares that is called a "pledge" will typically fall into one of the above categories, depending on its terms, or it may be entirely ineffective.
A legal mortgage. This is granted by execution of a mortgage agreement between the mortgagor and the secured creditor. The terms of the mortgage will vary, but essentially it requires transfer of legal title in the shares to the secured creditor, subject to a requirement to re-transfer the shares upon satisfaction of the underlying secured obligations.
A legal mortgage is perfected by a transfer of the shares into the name of the secured creditor. The transfer occurs when the company's register of shareholders is updated. The company's articles of association will often give its directors discretion over the registration of transfers. Therefore, the secured creditor should require, before entering into the transaction being secured, either:
Removal of the discretion by amendment of the articles of association.
Evidence of approval of the transfer.
From the company's point of view, any legal owner of shares is generally treated as the absolute owner of those shares. This includes a secured creditor who has become the legal owner of the shares under a legal mortgage. The advantages and disadvantages of this for the secured creditor may depend on its own status:
As legal owner, the secured creditor:
receives all distributions on the shares and will be entitled to exercise any voting rights attached to the shares. These rights can be effectively given back to the mortgagor through the grant of proxies. However, such measures will be revocable at any time by the secured creditor;
is subject to any obligations of a registered shareholder, and so it should ensure that:
the shares are fully paid and non-assessable;
it is granted an indemnity from the mortgagor in the mortgage agreement.
Depending on the level of ownership represented by the shares, the secured creditor may find that it is required by the accounting rules of its own jurisdiction to produce consolidated accounts, which include those of the company.
Regulatory difficulties may also arise for both the secured creditor and the company. For example:
the registration of a US bank lender (or its nominee) as owner of the shares may breach US securities and banking laws or regulations;
a shareholding by a taxable US person in a company operating as a mutual fund will generally be prohibited by its constitutional documents.
No later security has priority over a legal mortgage. Earlier security only has priority if the secured creditor has knowledge of it at the time it becomes the legal owner of the shares.
An equitable mortgage or charge over registered shares can be created either:
Accidentally (for example, where there has been an attempt to grant a legal mortgage of those shares, but the appropriate steps to transfer legal title in the shares to the secured creditor have not been taken).
By choice. This is usually used where a legal transfer of the shares would result in legal, accounting or regulatory difficulties.
An equitable mortgage is treated as an agreement to create a legal mortgage. Therefore, upon enforcement it will be possible for the secured creditor to have the shares transferred into its name.
An equitable mortgage can be created by:
An agreement to create a legal mortgage.
A transfer of shares that is not registered by entering the secured creditor in the company's register of members as holder of the shares (this can happen accidentally or where the executed instrument of transfer and share certificate (if any) are delivered to the secured creditor by way of security).
A deposit of any relevant share certificate by way of security.
An equitable mortgage or charge in and of itself is perfected by execution of the equitable mortgage or charge but is not capable of true "perfection". However, certain methods are available to improve the quality of the security:
Power of attorney. The mortgagor grants a power of attorney to the secured creditor enabling it to execute a transfer of the shares into its name or any other related documentation upon default. If governed by Cayman Islands law, this must be executed as a deed to be effective. As a power of attorney granted by way of security, the power is irrevocable.
Executed share transfer. The power of attorney is normally combined with the delivery of a share transfer form executed by the mortgagor, which the secured creditor can then date and deliver to the company upon default.
Articles of association. If the secured shares carry sufficient voting rights to pass a special resolution of the company, the mortgagor should be required to amend the company's articles of association to make enforcement of the security easier. Such changes would normally include:
the removal of any directors' discretion to refuse to register transfers; and
an obligation to take notice of security interests in the shares.
Stop notice. Any person beneficially interested in shares, including the secured creditor under an equitable mortgage or charge, can file a stop notice with the Cayman Islands Grand Court (a prescribed form of notice together with an affidavit must be filed at court). A copy of the notice and the affidavit, stamped by the court, must also be served on the company. The company is then prevented from registering any transfer of the shares concerned until 14 days after it has given the secured creditor notice of the proposed transfer. The stop notice will not prevent the transfer being registered, but will give the secured creditor an opportunity to enforce its security or put the third party on notice of its security interest prior to such registration.
Notice to the company. It may be in the secured creditor's interest to put the company on notice that it has taken security over shares in the company, even though the company is normally prohibited from recognising such security in its articles of association. Notice to the company may give the secured creditor's security interest priority over the company's lien over the shares in respect of any subsequent advances made by the company to the mortgagor shareholder. It is also common to apply for a notation to be made to the register of members of a company to impute knowledge to any potential purchaser of the shares subject to the security interest.
A third-party purchaser for value of the shares, who does not have notice of the equitable mortgage or charge, will not be subject to it. All earlier security has priority over the equitable mortgage or charge.
A company must make an entry in its register of mortgages and charges in respect of any security interest created by it to comply with section 54 of the Companies Law. However, failure to comply with this requirement does not invalidate that security interest.
A company must make an entry in its register of mortgages and charges in respect of any security interest created by it to comply with section 54 of the Companies Law, as noted above. However, failure to comply with this requirement does not invalidate that security interest. Uncertificated or dematerialised securities can be mortgaged or charged.
The nature of the rights to the underlying security must be ascertained to determine the security interest that may be granted by a party. For example, a party may hold legal title to the securities, or only have a contractual claim as against an intermediary, nominee or custodian.
Many dematerialised securities are held through intermediaries. The legal title to the underlying securities is vested in the intermediary in whose account the securities are located and in whose name the securities are registered.
Where the owner of the legal title to the securities is granting a security interest a legal or equitable mortgage can be granted. However, if the grantor of the security interest is not the legal owner of the securities, either:
A charge can be granted over the beneficial interest the grantor has to the securities.
An assignment of the rights attaching to any underlying custody or other agreement can be sought (this is a more likely alternative).
A company must make an entry in its register of mortgages and charges in respect of any security interest created by it to comply with section 54 of the Companies Law. However, failure to comply with this requirement does not invalidate that security interest.
The most common types of claims and receivables over which security is granted in the Cayman Islands are debts and other rights created by contract.
Claims and receivables arising under contract are examples of "choses in action", being a right which can only be asserted by bringing an action and not by taking possession of a physical thing. Claims and receivables can be mortgaged or charged where that mortgage or charge takes the form of an assignment with an express or implied provision for reassignment on redemption. If a chose in action is charged, the charge can be either fixed or floating (see Question 3).
An assignment can be either legal or equitable, depending on the circumstances.
The key requirements of a legal assignment are:
An absolute assignment of the whole of a present (not future) chose in action.
The assignment must be both:
in writing and signed by the assignor;
notified in writing to the debtor.
The usual features of an equitable assignment are as follows:
Only part of a chose in action is assigned.
Written notice has not been given to the debtor over assets that do not currently exist.
Legal assignments must be absolute. Therefore, an assignment by way of a charge cannot be a legal assignment and must take effect in equity only. However, a security assignment by way of a mortgage that transfers ownership of the debt to the secured creditor with a proviso for reassignment constitutes a legal assignment.
The terms of the underlying chose in action must be considered. In some cases, consent of the third party debtor may be required before the grant of any security interest. If a right is expressed as strictly non-assignable by contract, specific consent must be sought from the debtor. If that consent is not obtained, any purported assignment of the debt is not valid against the debtor.
Secured parties should also consider obtaining consent from the third party debtor in any event to ensure that contractual obligations are complied with (for example, payment of receivables in accordance with the assignment terms).
The secured creditor should ensure that there is an agreement (usually a deed) evidencing the assignment and setting out its terms.
To perfect security over specific claims or receivables, notice should be served on the counterparty to the claim or receivable (this is required if an assignment is to take effect as a legal assignment). All forms of security over contractual claims and receivables should be registered in the company's register of mortgages and charges.
A security interest over cash deposits is most commonly created by way of either:
A fixed charge.
A floating charge.
See Question 3 for an analysis on how fixed and floating charges are characterised.
The secured creditor should ensure that there is an agreement (usually a deed) evidencing the fixed or floating charge and setting out its terms.
A company must make an entry in its register of mortgages and charges in respect of any security interest created by it to comply with section 54 of the Companies Law. However, failure to comply with this requirement does not invalidate that security interest.
A charge over cash deposits in and of itself is perfected by execution of the charge but is not capable of true "perfection". However, certain steps are available to improve the quality of the security, for example, notice should be given to the applicable account bank of the existence of the security interest. Acknowledgement and contractual undertakings could be sought from such account bank to confirm its actions only on the instructions of the secured party for the lift of the security interest.
The most common type of intellectual property over which security is granted in the Cayman Islands is trade marks.
Registered and unregistered intellectual property rights (IPRs) can be charged or assigned by way of security (that is, the transfer of ownership of the IPR to the secured creditor with a proviso for reassignment following satisfaction and discharge of the underlying debt).
The secured creditor should ensure that there is an agreement (usually a deed) evidencing the charge or assignment and setting out its terms. It is unusual for the legal rights attached to IPRs to be assigned in any secured lending transaction. If parties have a licence to use IPRs, it can be extremely complex to enter into legal assignments. Therefore, charges and assignments by way of security are more commonplace.
Regard should be had to the value of IPRs if the related business and goodwill of the security grantor are not also being transferred to the secured creditor.
Licences creating IPRs are merely contracts that create rights to use certain intellectual property. Regard should be had to the terms of the licences and the ability of any IPRs to be assigned or charged by way of security. For example, whether:
The IPRs are personal in nature.
Any security arrangements require the licensor's consent.
Any charge or assignment by way of security over IPRs should be registered in the company's register of mortgages and charges.
A charge over IPRs in and of itself is perfected by execution of the charge but is not capable of true "perfection". See Question 5 for an analysis on the perfection steps applicable to assignments by way of security.
It is possible to create equitable security over future assets, provided that both the:
Applicable security document clearly states that the security interest is to attach to assets acquired in the future without any further acts being carried out by any party.
Assets are adequately described in the document creating the security interest, so as to enable the court to identify that the asset acquired falls within the terms of the security.
There is no difficulty with the concept of creating a security interest over a fluctuating pool of assets under Cayman Islands law. However, any such interest is likely to take effect as a floating charge.
Third party consents may be required to create security over certain contractual rights and receivables. There are no particular categories of asset over which it is too difficult to create security under Cayman Islands law.
Most forms of security interest are released by the execution of a deed of release. The deed of release is entered into by both the grantor of the security interest and the secured party, and:
Releases the security created by the identified security agreement.
Discharges the grantor from all personal obligations created by the security agreement.
The release of any security interest created by a Cayman Islands company should be noted in the company's register of mortgages and charges.
It is very common for financing structures to be set up with security being taken over the shares in the Cayman Islands company's shares. However, the general use of SPVs in financing transactions, and the type of security interest used, will depend entirely on the commercial needs of the parties in each case.
Regard must be had, among other things, to the tax implications and other costs associated with the parties:
Holding security over shares (when compared with the same implications of holding security over the underlying assets themselves).
Enforcing that security.
Certain financing structures involving the sale and leaseback of securities, factoring, hire purchase, retention of title and other such structures involving the transfer of ownership of securities are all common in the Cayman Islands. However, these structures are usually governed by the laws of a jurisdiction other than the Cayman Islands.
A transfer should not be recharacterised as creating a security interest if the governing law of the transfer would not recharacterise. However, as the applicable conflict of law rule in relation to recharacterisation is not free from doubt, the recharacterisation risk under the lex situs should also be considered. If Cayman Islands law is relevant because the eligible credit support is located in the Cayman Islands, English authorities would be regarded as persuasive. Therefore, provided the arrangement is not a sham, the Cayman Islands court would respect the parties' intention that the transfer be characterised as such.
See above, Sale and leaseback.
See above, Sale and leaseback.
See above, Sale and leaseback.
See above, Sale and leaseback.
Guarantees are commonly used in the Cayman Islands and can be created verbally or in writing. It is best practice to have evidence of the terms of the guarantee, by either:
Creating a written agreement between the grantor of the guarantee and the guaranteed party, including the terms of the agreement.
Executing a deed poll in favour of the guaranteed party.
There are no financial assistance rules under Cayman Islands law.
The directors of a company providing a guarantee or a security interest must ensure that any proposed transaction is in the best interests of the company as a whole. Guarantee and other security arrangements may be construed as not being in the best interests of a company (and not for the company's corporate benefit) if the granting company receives no commercial benefit from the underlying financing arrangements. In those circumstances:
A Cayman Islands court can, in certain circumstances where the beneficiary of the guarantee or security interest is viewed as a constructive trustee, hold that the guarantee or applicable security interests be set aside as a breach by the directors of their fiduciary duty to act in the best interests of the company.
A shareholder, creditor or liquidator of the granting company can bring an action against the company to have the guarantee or applicable security set aside as a breach by the directors of their fiduciary duty to act in the best interests of the company.
Where the guarantee or security interest is upstream (that is, subsidiary to parent) or cross-stream (that is, to an affiliate), secured parties usually seek the approval of the security grantor's shareholders before entering into the transaction. This should avoid the validity of the transaction subsequently being challenged by a shareholder. However, this may not eliminate the risk of challenge by other parties, or in the event that the company is insolvent or threatened by insolvency.
There are no specific rules or legislation applicable to loans to directors under Cayman Islands law. However, the company's constitutional documents (the memorandum and articles of association) should be reviewed to ensure that a company has the capacity, power and authority to make loans to its directors.
There are no specific usury rules or legislation under Cayman Islands law. However, regard must be had to the calculation of, and levels of, interest and other payments arising under the agreement, as payments that could be considered penal in nature are unenforceable under Cayman Islands law.
The rights of a non-defaulting party may be affected by certain insolvency provisions of the Companies Law (see Question 23).
The Registrar of Lands holds the registered owner of land responsible for compliance with local laws.
However, the Central Planning Authority (Authority) of the Cayman Islands can serve on the owner or occupier of the land, or the person responsible, a notice requiring steps to be taken to abate the injury (section 27, Development and Planning Law). Whoever fails to comply with this notice is guilty of an offence and liable on summary conviction to a fine of KYD200 and, in default of payment or in lieu of the fine, to imprisonment for three months. In the case of a continuing offence, a further fine of KYD10 for each day on which the offence continues applies.
Contractual subordination is both possible and common under Cayman Islands law. Contractual subordination is achieved by the entry into either:
A subordination agreement, under which a creditor, or group of creditors, agrees to rank behind all of the other unsecured debts of a company.
An inter-creditor agreement under which the different classes of creditor agree the priority of their respective claims as against the company.
The Companies Law specifically provides that an agreement to contractually subordinate be recognised in a liquidation of a Cayman Islands company (section 140(2)).
The Companies Law specifically recognises both:
The concept of limited liability.
That creditors (subject to any contractual subordination) rank ahead of shareholders in a company's insolvency.
Therefore, lenders to a Cayman Islands company that is a subsidiary are paid before any surplus is paid to a parent company that can then apply any amounts received to pay its creditors and shareholders.
Inter-creditor arrangements are commonly used in the Cayman Islands. An inter-creditor agreement is an agreement between secured parties that sets out the various security interests and the rights and liabilities of each secured party, and its impact on the other secured parties. Inter-creditor agreements are often used to set out the rights of multiple secured parties and establish priorities in payments, enforcement of security interests and other issues.
The on-sale of a loan and the sale of one or more participations in a loan to a Cayman Islands company are relatively common. However, these arrangements are usually governed by the laws of a foreign jurisdiction. Any sale or participation is usually governed by the same law as that of the underlying loan agreement. The following analysis applies if the governing law is Cayman Islands law.
If a loan is sold, the incoming lender steps into the outgoing lender's shoes under a novation agreement that is entered into by both lenders and the borrower. The novation agreement provides that the outgoing lender be released from its obligations and liabilities under the loan agreement and the incoming lender assumes these obligations and liabilities, each from a specified effective date (usually the date of the execution of the novation agreement).
Any related security interests either:
Vest automatically in the incoming lender, if the security documents provide for this.
Need to be released with new security being granted in favour of the new lender.
In a participation structure, the lender of record in a loan arrangement is able to transfer the risk associated with a loan to a third party. Participations can be either:
Funded (where the sub-participant reimburses the lender of record for its agreed participation in the loan (and any related costs, expenses and indemnity payments)).
Risk based (where the sub-participant agrees only to reimburse the lender of record for a certain percentage of any monies not paid by the borrower under the loan agreement).
The security interests granted to the lender of record in any participated structure remain unaffected.
The concept of a security or facility agent is recognised in the Cayman Islands. There are no restrictions under Cayman Islands law on the enforcement of rights or security interests solely because those rights or security interests are held by an agent. An agent is treated in the same way as any other secured party and is subject to any applicable local laws.
The trust concept is recognised. An ordinary trust can be created under the laws of the Cayman Islands in any form that is acceptable under English law. In addition, a trust can be registered under the Trusts Law (2011 Revision) as an exempted trust. This registration does not affect the form of the trust, but grants the trust an exemption from taxation for up to 50 years. Part VIII of the Trusts Law (2011 Revision) (formerly the Special Trusts (Alternative Regime) Law 1997) facilitates the creation of private purpose trusts and enables a settler to make someone a beneficiary of a trust while at the same time depriving him of the rights of enforcement.
The concept of a security or facility trustee is recognised in the Cayman Islands. There are no restrictions on the enforcement of rights or security interests solely because those rights or security interests are held by a trustee. A trustee is treated in the same way as any other secured party and is subject to any applicable local laws.
The transaction documents in each financing transaction will set out the basis on which the lender can enforce its loan, guarantee or security. The default provisions will reflect the parties' commercial agreement and may provide for a remedy or grace period.
The most common default events include:
Non-payment of any debt due.
Insolvency of an obligor.
Breach of the terms of the transaction documents.
A secured creditor's rights on the enforcement of a security interest should be set out in the enforcement provisions in the transaction documents. These provisions are likely to enable the creditor to:
Take possession of (and vote in relation to) the applicable assets (by transfer of title or notification, depending on the asset in question).
Sell or otherwise dispose of the assets to any third party.
Effect any contractual or other rights of set-off.
Appoint a receiver with a power of sale.
A secured creditor with a valid security interest will normally be entitled to enforce the security interest irrespective of whether the granting company is in liquidation.
There is no equivalent to the US Chapter 11 proceedings or the UK concept of administration or administrative receivers. However, a company's creditor may have a compromise or arrangement imposed on him if both (section 86(1), Companies Law):
A majority in number representing three-fourths in value of the creditors (or class of creditors including the affected creditor) have approved the compromise of arrangement.
It has been sanctioned by the Grand Court of the Cayman Islands.
Although this is not a mandatory insolvency provision, a creditor of a Cayman Islands company can be made subject to an arrangement or compromise affecting his rights without his consent. However, an arrangement or compromise would not affect the enforcement of security rights.
Although the Cayman Islands have recently introduced Delaware-style merger provisions, these mergers cannot occur without a secured creditor's consent.
Liquidation does not generally affect the right of a secured creditor to enforce its security, although if the secured assets are shares in a Cayman Islands company, transfer of title cannot occur without leave of the court.
Any creditor with the benefit of a guarantee granted by a company that is in liquidation ranks as an unsecured creditor of that company and is entitled to receive monies under that guarantee only once all preferred and secured creditors have been paid.
On a company's insolvency, the rights of a non-defaulting party may be affected by certain provisions of the Companies Law. For example:
Any conveyance, transfer of property, charge or payment be made, incurred, taken or suffered by any company in favour of any creditor is invalid if entered into within six months immediately preceding the commencement of the company's liquidation:
at a time when the company is unable to pay its debts as they become due; and
with a view to giving that creditor a preference.
Any disposition of property made at an undervalue by or on behalf of a company with intent to defraud its creditors must be voidable at the instance of its official liquidator. The burden of establishing an intent to defraud must be on the official liquidator.
Any payment made to a related party of a company is automatically deemed to have been made with a view to giving such creditor a preference if the company's business has been carried on:
with an intent to defraud creditors of a company or creditors of any other person; or
for any fraudulent purpose.
For this purpose, a creditor is treated as a related party if it has the ability to control a company or exercise significant influence over the company in making financial and operating decisions.
On a company's insolvency, parties are generally paid in the following order of priority:
Liquidator's costs and expenses.
Fixed charge holders.
General expenses and costs of the liquidation.
Preferred creditors.
Floating charge holders.
Unsecured creditors.
Subordinated creditors.
Shareholders.
Secured creditors with a fixed security interest are entitled to enforce their security interest outside of the company's insolvency and, therefore, their claims are satisfied ahead of certain other claims.
If a scheme of arrangement is in place, that arrangement is likely to specify the order of priorities.
A secured creditor may be able to appoint a receiver. In that case, the receiver's costs are usually paid by the appointing party or out of the assets recoverable on enforcement, depending on what is agreed between the secured creditor and the receiver.
The holder of an equitable security interest will rank after a:
Prior legal or perfected equitable interest in the secured property.
Later legal interest in the secured property created in favour of a bona fide purchaser or mortgagee for value without notice.
Generally, legal assignments rank ahead of equitable assignments and equitable assignments rank in the order in which they were created (assuming no notice is given to the debtor). If, however, an assignee of a legal assignment had notice of a prior equitable assignment, that legal assignment ranks behind the equitable assignment. An anomaly arises in relation to assignments of book debts where an assignment of a book debt binds a subsequent assignee with notice.
In accordance with the rule in Dearle v Hall (1828), successive assignments taken in good faith without notice of any prior assignments rank in the order in which notice is given to the debtor, and not the order of their creation. Therefore, an assignee who acquires a debt in good faith without notice of an earlier assignment and is the first to give notice of the assignment to the debtor obtains a priority over any earlier equitable assignees, subsequent equitable assignees and any subsequent legal assignees.
Ranking of security interests over ships and aircraft are subject to a special regime relating to registration.
The determination of the ranking of any security interest is determined on a case by case basis, depending on the nature of the security interest granted and the underlying assets subject to the security interests. Generally speaking, failure by a company to comply with the requirement to make an entry in its register of mortgages and charges (being the only quasi-perfection step required for some asset types) does not operate to invalidate any validly created mortgage or charge.
There are no restrictions on granting security or guarantees to foreign lenders. However, if the property (in particular, real estate) is located in the Cayman Islands, the lender may wish to approve an agent to enforce the security interest to avoid certain local licensing, registration and conduct of business laws and regulations.
There is no exchange control legislation under Cayman Islands law, and so there are no exchange control regulations imposed.
No stamp duties or other similar taxes are payable, unless the applicable document is executed in or brought into the Cayman Islands.
If a company wishes to enter into a charge or mortgage for Cayman Islands real estate, then stamp duty for that charge or mortgage will be either 1% (for loans under KYD300,000) or 1.5% (for loans of KYD300,000 or greater) of the principal sum. Additionally, a KYD50.00 fee will be payable to register the charge/mortgage at the Cayman Islands Land Registry.
For IPRs, usual practice is to file the applicable agreement creating the security over the IPR with the Registrar of Companies who will charge nominal certification and filing fees.
Court fees are payable in respect of the enforcement of any document in the Cayman Islands.
Unless the document needs to be executed in the Cayman Islands, it is common practice to execute documents outside of the Cayman Islands so that stamp duty is not levied. However, if the documents are executed in, or brought into, the Cayman Islands, stamp duty and court fees are considered nominal in value.
There are no developments pending which are expected to change the current regulatory or legal environment concerning secured lending transactions in the foreseeable future.
T +1 345 814 5345
F +1 345 949 8080
E alasdair.robertson@maplesandcalder.com
W www.maplesandcalder.com
Professional qualifications. England and Wales, Solicitor, 1996 (not practising); Scotland, Solicitor, 1997 (not practising); Hong Kong, Solicitor, 1998 (not practising); Cayman Islands, Attorney-at-Law, 2001
Areas of practice. Structured finance; structured investment funds; derivatives; funds finance; corporate finance; financial regulatory issues.
Alasdair is the global head of the finance practice group of Maples and Calder and serves as a Director of MaplesFS.
T +1 345 814 5242
F +1 345 949 8080
E tina.meigh@maplesandcalder.com
W www.maplesandcalder.com
Professional qualifications. England and Wales, Solicitor, 2002 (not practising); Cayman Islands, Attorney-at-Law, 2005
Areas of practice. Banking and finance, including fund financing, structured finance, securitisations and derivatives.
