Tania Dons of Conyers Dill & Pearman provides an overview of legislative changes, legal issues and case law of note in the Cayman Islands over the last quarter.
The Directors Registration and Licensing Law and related regulations are now in force. Cayman has introduced further legislation, regulations and guidance notes to address FATCA. Consideration is also being given to a controversial public central register of beneficial owners of companies in this jurisdiction.
There have been a number of interesting decisions in the Cayman Islands’ Grand Court and the Court of Appeal recently, two of which are considered below.
In the matter of ICP Strategic Credit Income Fund Ltd (In Liquidation), Grand Court of the Cayman Islands (Financial Services Division), Cause No. 82/269 of 2010, per Jones J (4 April and 15 May 2014)
The Joint Official Liquidators of ICP Strategic Credit Income Fund Ltd (In Liquidation) applied to the Grand Court for sanction to bring proceedings in the United States against Barclays Bank PLC and DLA Piper LLP under s.147 of the Cayman Islands’ Companies Law. The intention was to have those U.S. proceedings funded pursuant to a contingency fee agreement with New York law firm Reid Collins & Tsai LLP.
The judgment is important because Justice Jones took the opportunity to provide what amounts to a helpful guide in respect of the Cayman court’s approach to liquidator’s applications (pursuant to s. 110 of the Companies Law) for sanction to commence proceedings within and outside of the jurisdiction. Justice Jones also discussed the type of litigation funding and contingency fee agreements the court would be willing to sanction, and what they should contain.
In respect of application by a liquidator for sanction to commence proceedings, the judge confirmed that the court must be satisfied that the causes of action against the proposed defendants have a reasonable prospect of success and that the interests of the creditors will be best served by allowing proceedings to be commenced.
Justice Jones also found that the considerations which apply to litigation funding agreements generally apply equally to contingency fee agreements, save that there is an additional public policy consideration which renders all contingency fee agreements unlawful and unenforceable if they relate to litigation which will be conducted in the Cayman Islands. However, the judge went on to state that such agreements, where expressed to be governed by Cayman Islands’ law, which would be contrary to public policy if performed within the Cayman jurisdiction, are capable of being valid and enforceable if the terms require that it be performed wholly outside the Cayman Islands and in a foreign country where performance would not be contrary to the public policy of that country.
Furthermore, the proposed contingency agreement must: 1) comply with the requirements of the Cayman Islands Companies Winding Up Rules Order 25; 2) the performance of the agreement in question must be permitted by the law and professional conduct rules applicable in the country in which the litigation is to be conducted; and 3) the official liquidator must not fetter his fiduciary power to control the litigation.
A secondary issue considered was whether “court” in s.147 of the Companies Law means that the Cayman courts have exclusive jurisdiction to determine liability under the section. In this respect, the judge found that the Cayman courts do not have exclusive jurisdiction, and that s.147 claims can be brought by liquidators outside of the Cayman Islands.
The Government of the Commonwealth of the Northern Mariana Islands v William H Millard and Patricia Millard, Court of Appeal of the Cayman Islands, C.I.C.A. (Civil) CACV013-14/2013, per Chadwick J, Campbell J, Martin J (15 April 2014).
This case involved the Millards, U.S. citizens, who had moved from the Northern Mariana Islands (the Commonwealth) to the Cayman Islands in 1990. In 1987, while resident in the Commonwealth, they had sold their interest in a computer business for US$76.8 million, filed U.S. tax returns and paid approximately US$4.7m in taxes. They were then notified that the Commonwealth considered that tax payment to be insufficient. In 1994, the Commonwealth obtained judgments in their own jurisdiction against the Millards in the amount of US$36 million, which, because of interest, had increased to approximately US$123 million.
On May 10, 2013, the Millards petitioned the Cayman court for bankruptcy, and on May 29, 2013, Justice Jones made absolute orders for bankruptcy for each of them. The Millards then had standing to file petitions in the Bankruptcy Court of New York seeking Chapter 15 recognition of the Cayman bankruptcy proceedings (the foreign main proceedings) for the purpose of the UNCITRAL Model Law on Cross-Border Insolvency, which they did on May 15, 2013. They were granted provisional relief by the U.S. court staying the enforcement proceedings by the Commonwealth in the United States. The Commonwealth was therefore left in a position where they were unable to enforce the judgment debt in the U.S., and could not enforce the debt in the Cayman Islands because Cayman policy is to refuse enforcement of foreign revenue debt.
The Commonwealth appealed Justice Jones’s bankruptcy orders, firstly on the basis that the way in which the judge dealt with the hearing amounted to a serious procedural irregularity. The Commonwealth’s second complaint related to the judge’s substantive decision to make the bankruptcy order. In determining the second complaint, the Court of Appeal considered first whether insolvency is essential to a debtor’s petition for bankruptcy, and secondly, what assets and liabilities may be taken into account for the purpose of establishing insolvency if it was in fact a requirement.
In respect of the first point, the Court of Appeal stated that the assumption underlying the whole of the Bankruptcy Law is that it is dealing with insolvency. Therefore, although a debtor’s petition need not allege any grounds, it is nevertheless necessary that the material supporting it must establish a credible case of insolvency.
In respect of the second point, the Court of Appeal stated that the debts that are capable of being taken into account do not have to be debts incurred in the Cayman Islands; they may be taken into account wherever in the world they were incurred, so long as they are enforceable in the Cayman court. Similarly, assets may be taken into account wherever they may be situated, and furthermore, the ability to take into account foreign assets may enable the existence of debts that are unenforceable in the Cayman court to be taken into account as a matter of valuation.
The Millards had argued that they were insolvent and had initially included the Commonwealth’s judgment debt as a liability in proving their insolvency. Once this liability was removed from the valuation, because of its unenforceability in the Cayman Courts, the Millards had a substantial surplus of assets over liabilities. The Court of Appeal therefore allowed the appeal on the basis that the Millards could not establish a prima facie case of insolvency and so were not entitled to present petitions for their own bankruptcy.
The Directors Registration and Licensing Law and Regulations
The Directors Registration and Licensing Law, 2014 (the Director Law), which seeks to regulate directors of certain “covered” entities established in the Cayman Islands, including registered funds and “excluded persons” under the Securities Investment Business Law, came into force on June 4, 2014, (save certain sections on capacity) following publication in the Cayman Islands Gazette of The Directors Registration and Licensing (Registration and Licensing) Regulations, 2014.
The classes of directors that are to be regulated have been discussed in earlier updates, namely registered directors, professional directors and corporate directors. The Director Law applies to each category whether or not the director is resident in the Cayman Islands. The Director Regulations have now provided further color as to the fees to be charged by the Cayman Islands Monetary Authority and the procedure for registration. While there has been some negative feedback from investment fund managers about the need to pay a further fee to CIMA, the fact that the fees were set at a reasonable level has been of assistance in managing this process with affected clients.
Those persons seeking to be appointed as a director of a covered entity for the first time, on or after June 4, 2014, are required to be licensed with CIMA in advance of taking up the position. Persons acting as directors of covered entities as at June 4, 2014 have three months from that date to obtain a license (or six months from June 4, 2014 for corporate directors).
A registered director is required to pay an application fee of US$170.74 together with a fee of US$682.93 upon application to be registered and then an annual fee thereafter of US$853.66. A fee of US$731.71 is payable on surrender of registration.
As part of the application process, the registered director must provide CIMA with required personal information and also:
- (i) details as to whether the applicant has ever been convicted of a criminal offence involving fraud or dishonesty; and
- (ii) details as to whether the applicant has ever been the subject of an adverse finding, financial penalty, sanction or disciplinary action by a regulator, self-regulatory organization or professional regulatory body.
A professional director is required to pay an application fee of US$609.76 together with a fee of US$3,048.78 upon application to be licensed and then an annual fee thereafter of US$3,658.54. The fee for surrender of a professional director license is US$975.61.
As part of the application process, the professional director must provide CIMA with required personal information as well as:
- (i) personal details in the form of a questionnaire prepared by CIMA;
- (ii) not less than three references acceptable to CIMA, including one character reference and one reference verifying the good financial standing of the applicant and a police or other certificate from a source acceptable to CIMA that the applicant has not been convicted of a serious crime or any offence involving dishonesty; and
- (iii) evidence of insurance coverage (minimum aggregate cover of one million dollars and a cover of one million dollars for each and every claim).
A corporate director is required to pay an application fee of US$975.61 together with a fee of US$8,780.49 upon application to be licensed and then an annual fee thereafter of US$9,756.10. The fee for surrender of a corporate director license is US$975.61.
As part of the application process, the corporate director must provide CIMA with required due diligence information on the company, its directors, managers, officers and shareholders, as well as:
- (i) personal details, to be provided by all of the directors, managers and officers of the company, in the form of a questionnaire prepared by CIMA;
- (ii) personal details of persons holding more than ten per cent of the company’s issued share capital or total voting rights, in the form of a questionnaire prepared by CIMA;
- (iii) not less than three references acceptable to CIMA verifying the good character and financial standing of each director, manager and officer of the company and each shareholder and each beneficial shareholder who is a natural person holding more than ten per cent of the applicant’s issued share capital or total voting rights;
- (iv) the names and addresses of the principal and registered offices of all parent companies and all subsidiary companies of the company; and
- (v) evidence of insurance coverage (minimum aggregate cover of one million dollars and a cover of one million dollars for each and every claim).
Companies that are not ordinary companies, ordinary non-resident companies, exempted companies or foreign registered companies under the Cayman Islands Companies Law are not eligible to qualify as a corporate director. Accordingly, any foreign corporate entity currently acting as a director of a covered entity and/or wishing to take up the position of a corporate director of a covered entity will need to register first as a foreign entity under Part IX of the Companies Law and then apply for a license.
Licensing and registration in practice – web portal
Application and payment for registration and licensing is being processed through CIMA’s online registration portal. CIMA has issued a unique identification number to each director and it will be that number that the director will use to log on to the web portal.
CIMA anticipates that it will take up to 48 hours to approve and register a registered director. Professional and corporate directors, however, will receive confirmation of their license within four weeks.
Directors will be required to update CIMA within 21 days in the event there is a change to the information provided. At the time of filing the annual return, the director will be required to confirm that there are no changes to the information provided in the application.
Information obtained by CIMA as part of the registration and licensing process will not be publicly available. The public, however, will be able to search for a director’s name to see whether the director has been registered or licensed in accordance with the Directors Law.
New FATCA-related legislation
The Cayman Islands has issued guidance notes and passed the Tax Information Authority (Amendment) (No. 2) Law, 2014 in connection with the United States Foreign Account Tax Compliance Act (FATCA) and the related Intergovernmental Agreements (IGAs) between the Cayman Islands and each of the United States and the United Kingdom. Now that all of these laws, regulations and guidance notes are in place, businesses in the Cayman Islands should be gearing up to put their reporting procedures in place and ensure that they understand the requirements applicable to them under the Cayman IGAs.
Cayman Islands Tax Information Authority Guidance Notes: The Cayman Islands Tax Information Authority issued guidance notes in July 2014 relating to the international tax compliance requirements of the IGAs. The guidance notes provide consolidated, practical guidance to assist industry in interpreting and applying the IGAs and the U.S. and U.K. FATCA agreements.
The Tax Information Authority (Amendment) (No. 2) Law, 2014: The law, which facilitates the automatic exchange of information under the Tax Information Authority Law (2013 Revision) (the Principal Law), was published in the Cayman Islands Gazette on July 1, 2014, and came into force immediately. The amendments to the Principal Law also apply from 1 July 2014.
The Tax Information Authority (International Tax Compliance) (United Kingdom) Regulations, 2014 and the Tax Information Authority (International Tax Compliance) (United States of America) Regulations, 2014: These regulations came into force on July 4, 2014, and set out in greater detail the reporting and due diligence obligations of reporting financial institutions in the Cayman Islands.
The Foreign Judgments Reciprocal Enforcement (Amendment) Bill, 2014
The bill was gazetted on June 30, 2014, and proposes substantial changes to the current law, including the removal of the requirement for reciprocity. This law provides a mechanism pursuant to which judgments of senior courts in other jurisdictions can be enforced by way of an administrative filing in the Cayman courts.
It provides for countries that offer “substantial reciprocity” to be extended this privilege (only Australia at this stage). Monetary judgments of senior courts of all other countries are still able to be recognized in Cayman but through a more rigorous common law process of enforcement. Similar laws throughout the commonwealth all have reciprocity as their foundation. Accordingly, there is some controversy surrounding this bill as removal of the requirement for reciprocity has the potential to disadvantage the Cayman Islands. Countries could seek to be added to the schedule to the bill by exerting political pressure, with Cayman losing its leverage to obtain equal treatment. We will watch this bill with interest as it moves through the legislative process.
Public central registry of beneficial owners
In response to the push towards greater global transparency, the United Kingdom recently announced plans to create a public, central registry of information on the beneficial ownership of companies registered in the U.K. In June 2014, it was announced in the Queen’s Speech that the U.K. government will bring forward legislation to introduce same in relatively short order. During that month, a delegation from the U.K. government also visited the Cayman Islands to promote the virtues of such a registry in this jurisdiction and to encourage the Cayman Islands to follow the U.K.’s lead.
The Cayman Islands’ government, business leaders and representational bodies, including the Chamber of Commerce, Cayman Finance and the Law Society, have so far spoken out against these proposals on grounds of privacy rights and a lack of universal application (there is no international consensus on this issue and, therefore, no “level playing field”). Many believe the public register proposed by the U.K. is inferior to the private, sector-led anti-money laundering and tax information exchange systems that are already in place here. There is also a real risk of abuse of a public register of this nature – commercially sensitive information would become publicly available, undermining competition and innovation, and private wealth information may be accessed by journalists, competitors, even kidnappers.
While some pressure is being exerted on U.K. overseas territories to follow the U.K. in implementing the public register, discussions are still ongoing. We will follow the debate as it continues to unfold.