General Framework

Owing to the robust but flexible nature of Cayman Islands law, Cayman Islands incorporated entities are commonly seen in all forms of international cross-border business and finance transactions. The Cayman Islands is a principal offshore jurisdiction for private equity funds and hedge funds and is a market leader in the structured and asset-backed finance space. It is also a domicile of choice for registering and financing ships and aircraft, as well as for international real estate finance, project finance and joint ventures and other structures for property, oil and gas, energy and other infrastructure projects. To accommodate this broad popularity, a full range of debt facilities is made available on deals. The type of facility used in any given transaction varies and is mostly driven by wider commercial and legal factors affecting the borrower and guarantor parties and their immediate business needs.

As a matter of Cayman Islands law and regulation, there are no particular advantages or disadvantages between incurring indebtedness in the form of bank loans versus debt securities. In the vast majority of cases, with international finance transactions, Cayman Islands law is not the governing law of the underlying transaction documents, except in relation to certain security agreements. Cayman Islands law will however be relevant to the documents in relation to the corporate requirements where a borrower, guarantor or debt security issuer is a Cayman Islands incorporated vehicle.  As such, the initial structuring of those deals will typically be driven by “onshore” factors connected with the general governing law of the documents (usually English or New York law).

The most significant lending transactions continue to occur in the investment funds arena, in particular, Cayman Islands domiciled private equity funds.  The main types of security for funds (established as exempted limited partnerships, exempted companies and limited liability companies), are security over capital calls and security over equity interests.

There is currently no form of income, corporate or capital gains tax and no estate duty, inheritance tax or gift tax in the Cayman Islands. Accordingly, no taxes, fees or charges (other than in certain circumstances, stamp duty) are payable either by direct assessment or withholding in the Cayman Islands pursuant to Cayman Islands law.

Regulation

To the extent they are involved, under Cayman Islands law, all locally incorporated banks are generally required to maintain a minimum net worth of KYD400,000 or its equivalent in other currencies (subject to certain exceptions for smaller banking institutions). The Cayman Islands Monetary Authority (CIMA) has adopted the guidelines set by the Basel Committee for Bank Regulation and Supervision Practices for capital adequacy requirements. The Basel Committee recommends a minimum risk asset ratio of 8%; however, CIMA has applied a minimum risk asset ratio of 10%.

Cayman Islands bank lending is largely limited to the domestic market.  However, where an international bank is lending through a Cayman Islands branch, there are regulations that may limit the ability to extend credit to debtors organised in, or operating from, certain jurisdictions. The Cayman Islands observes and applies all international sanctions extended to it by the United Kingdom and has robust anti-money laundering, anti-terrorist financing and anti-proliferation financing legislation. Accordingly, debtors may be exposed to criminal sanctions and fines if bank loan proceeds are used in connection with any such unlawful activity. In restricted circumstances, it is possible for a financial service provider that is incorporated and operating in the Cayman Islands to apply to the Financial Secretary of the Cayman Islands, pursuant to UN Sanctions (Overseas Territories) Orders, for a licence to proceed with certain activities that would otherwise be prohibited.

CIMA also serves as the regulator for investment funds, with over 13,000 regulated open-end funds and over 17,000 regulated closed-end funds. The ongoing regulatory obligations for private funds include:

• To pay annual registration fees.
• To file audited financial statements with CIMA within six months of the financial year end, together with a fund annual return.
• To comply with certain requirements set out in the Private Funds Act relating to valuations, title verification and cash monitoring.
• To keep a record of the identification codes of any securities traded or held by the fund.
• To keep the fund’s assets segregated and accounted for separately from the assets of any other person.
• To update CIMA within 21 days of becoming aware of any material changes to any information provided to CIMA at registration.
• To comply with the anti-money laundering regulations, including the appointment of anti-money laundering officers.
• To comply with FATCA/CRS notification, due diligence and reporting obligations.
• To comply with CIMA’s various rules and statements of guidance, in particular, the Governance Rule which requires the private fund to hold at least one annual meeting of the operator of the fund.
• To appoint a contact person to take advantage of the alternative route to compliance or maintain a register of beneficial owners pursuant to the Cayman Islands Beneficial Ownership Regime (see further in “Updates and Trends” below).

Collateral and Guarantee Support

There are Cayman Islands entities operating at all levels of a given corporate structure across bank loan financing transactions, whether as borrowers, parent companies, holding companies, affiliates or subsidiaries. Regardless of their position within the organisational structure, Cayman Islands entities are often required to provide security as collateral or guarantees for the transaction, and it is in this context that Cayman Islands legal considerations will most frequently arise in an international bank financing. There are no statutory or other limitations that arise as a matter of Cayman Islands law; however, particular restrictions or limitations on borrowing or providing security or guarantees may be set out in an entity’s constitutional documents.

In the context of the provision of guarantees, the issue of corporate benefit for the entity in question must be taken into account. Due consideration and confirmation of corporate benefit (ie, that the provision of the guarantee is in the best interests of the entity) should be clearly addressed in the authorising resolutions of the Cayman Islands guarantor, particularly in the case of subsidiaries providing upstream guarantees.

Subject to any licensing or residency restrictions that may apply to a regulated entity, no authorisations or consents are required from any government authorities in the Cayman Islands in connection with the granting of a guarantee and there is no requirement that any document be filed in order to ensure its legality, validity and enforceability.

The most common categories of assets pledged to secure bank loan financings are:

• interests in a Cayman Islands entity (eg, shares in an exempted company, limited partnership interests of an exempted limited partnership, and interests in a limited liability company);
• contractual rights under various contracts governed by Cayman Islands law (eg, for a capital call financing, an assignment of call rights under the partnership agreement of a Cayman Islands exempted limited partnership);
• movable assets registered in the Cayman Islands (eg, ships and aircraft); and
• Cayman Islands bank accounts.

The most common methods of creating or attaching a security interest under Cayman Islands law include:

• an equitable share mortgage over shares in a Cayman Islands exempted company;
• a charge over a Cayman Islands exempted limited partnership or limited liability company interests;
• an assignment of rights (by way of security) under various Cayman Islands law-governed contracts (eg, for a capital call financing, the assignment of call rights under the partnership agreement of a Cayman Islands exempted limited partnership will grant security over the rights of a partnership and its general partner to call for capital from its investors);
• mortgages over ships or aircraft, where the aircraft or vessel is registered in the Cayman Islands;
• all asset debenture (fixed and floating charge) over the assets of a Cayman Islands company; and
• a charge over a Cayman Islands bank account.

In respect of a Cayman Islands share mortgage or a charge over interests in a limited partnership or limited liability company, these security interests are equitable in nature. The shareholder or limited partner grants the security in favour of the lender but remains the legal title holder of record until the lender enforces the security following an event of default under the finance documents.

While a legal mortgage or charge is possible under Cayman Islands law and would avoid the risk of being defeated by a bona fide third-party purchaser for value, many lenders prefer to take the equitable interest. This is because the legal interest would require the lender to hold legal title to the shares or interest throughout the security period and this often holds tax, regulatory and practical consequences.

Subject to certain exceptions, there are generally no perfection requirements in the Cayman Islands and a security document does not need to be filed, registered or recorded in the Cayman Islands, as there is no public or central register of security; priority of security is broadly determined by the “first in time” principle. Cayman Islands companies and limited liability companies are required to maintain a register of mortgages and charges in respect of securities granted by the entities. However, entry on such a register is not a perfection step but it does provide priority to a lender or security agent based on the order of registration.

Security interests granted over certain assets such as land, intellectual property rights, ships and aircraft do need to be registered at the relevant registry in the Cayman Islands for the asset in question.

Whenever a security interest is created by way of an assignment of contractual rights under a Cayman Islands law-governed agreement (such as an assignment of call rights in connection with security over capital contributions on a capital call financing) or is granted over limited partnership interests or limited liability company interests, then service of notice on certain third parties is required to perfect the interest and establish priority.

A security interest over cash deposits is generally created by way of fixed or floating charge. In accordance with Cayman Islands conflict-of-law rules, the appropriate law to govern any security over cash deposited with a bank will be the law applicable where the bank is located (or the location of the bank branch in which the deposit is made).

Stamp duty

No stamp duty will be payable unless the applicable security document is executed in or brought into the Cayman Islands. The amount of stamp duty will vary depending upon the type of security document and the identity of the assets subject to the security interest. 

Enforcement

With the exception of certain limited circumstances in connection with foreclosure in respect of specific assets, such as ships and aircraft, a secured party can enforce its security pursuant to a Cayman Islands security agreement without a court order or any government consent. The applicable Cayman Islands law security agreement will set out the rights of the secured party upon enforcement. It will typically contain a power of sale and the right to appoint a receiver and will otherwise set out various self-help remedies, often specific to the type of security being taken.

In the case of security over shares, limited partnership interests or limited liability company interests, the charger will have granted (among other rights) a right to the secured party (or its nominee) to be entered in the relevant register of shareholders, limited partners or members, as applicable, in place of the charger. The registration of the secured party on the relevant register converts the lender’s security from an equitable to a legal interest and places the secured party in the position of “mortgagee in possession”, enabling it to exercise control rights attaching to the interests (ie, to vote and receive dividends) and to sell the interests to realise their value and discharge the secured obligations under the finance documents.

The rights of a secured party are protected by statute upon the insolvency of a Cayman Islands entity, ensuring the priority of any secured creditor.  However, any disposition of property or transfer of shares made while a Cayman Islands company is subject to a winding-up order or liquidation will be void without the consent of the court or liquidator, depending on the circumstances.

The courts of the Cayman Islands will observe and give effect to the choice of the applicable governing law of an agreement assuming that the choice of law has been made in good faith and would be regarded as a valid and binding selection which would be upheld by the courts of that jurisdiction as a matter of the relevant law.

In the case of a foreign judgment, the Cayman Islands courts will recognise and enforce the same without re-examination of the merits of the case, provided that such judgment is given by a foreign court of competent jurisdiction and is final, for a liquidated sum, not in respect of taxes or a fine or penalty, and was not obtained in a manner and is not of a kind that its enforcement is contrary to the public policy of the Cayman Islands.

Updates and Trends

Beneficial Ownership Regime

On 31 July 2024, the Beneficial Ownership Transparency Act, 2023 and accompanying regulations were brought into force. The Beneficial Ownership Regime replaced the former requirements to maintain a beneficial ownership register that had been set out in a variety of statutes. An alternative route to compliance (namely, notification of certain required particulars rather than maintaining a beneficial ownership register) is available for:

• entities or subsidiaries of entities listed on the Cayman Islands Stock Exchange or another approved stock exchange;
• entities licensed under a Cayman Islands regulatory law; and
• mutual funds or private funds regulated by CIMA.

Cayman Islands registered funds can nominate a contact person to hold up-to-date information on their beneficial owners that can be provided to the relevant Cayman Islands authorities within 24 hours of any request. The contact person must be a Cayman Islands fund administrator or other entity licensed by CIMA.

Trends

The Cayman Islands continues to be a jurisdiction of choice for the establishment of investment funds and other corporate vehicles that utilise secured lending arrangements in a variety of forms. The Cayman Islands’ creditor-friendly legislation provides great comfort to counterparties in secured lending transactions.

Over the past few years, there has been a significant increase in the establishment and use of private credit funds and non-financial institution lending. Continued diversification and sophistication in fund structures will reinforce Cayman’s global leadership in alternative finance. It is expected that the use of private credit lending in place of traditional financial institutions will continue to increase over the next 12 months and beyond.