Cayman Islands
Answer ... The following statutes are important in secured financing transactions in the Cayman Islands:
- the Companies Act (2021 Revision), which governs the various corporate forms, their establishment, winding-up and the registration of charges and mortgages;
- the Contracts Law (1996 Revision);
- the Contracts (Rights of Third Parties) Act 2014, which governs third parties’ rights under contracts;
- the Exempted Limited Partnership Act (2021 Revision), which governs the creation and registration of security interests over limited partnership interests;
- the International Tax Co-operation (Economic Substance) Act (2021 Revision), which governs the substance requirements to be maintained in the Cayman Islands for entities that fall within this regime;
- the Property (Miscellaneous Provisions) Act (2017 Revision), which governs the valid creation of charges over debts and assignments of choses in action;
- the Trust Act (2021 Revision);
- the Powers of Attorney Act (1996 Revision); and
- the Private Funds Act (2021 Revision) – please see question 4.3
Cayman Islands
Answer ... The Cayman Islands is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards – please see question 12.4.
Cayman Islands fund structures are generally subject to the Foreign Account Tax Compliance Act (FATCA)/Common Reporting Standard (CRS) reporting regimes of the Cayman Islands. FATCA requires foreign financial institutions (FFIs) (Cayman Islands funds are largely in scope) to report information on accounts of US taxpayers to the US Internal Revenue Service. The conclusion of a Model 1B inter-governmental agreement between the United States and the Cayman Islands facilitates compliance with FATCA reporting requirements, allowing a Cayman FFI to report directly to the Tax Information Authority of the Cayman Islands and once it complies with the relevant reporting and procedural requirements, it will be treated as a deemed compliant FFI and will not be subject to automatic withholding on US source income.
The Cayman Islands has also entered into and implemented similar multilateral arrangements with more than 100 jurisdictions as part of the CRS regime, which provides for the collection and automatic disclosure of information to the tax authorities in the jurisdiction of tax residence of the investor of the investment amount of that investor in a Cayman Islands fund and in respect of any distributions paid to that investor.
There is a high level of compliance with the FATCA/CRS regimes and their reporting requirements in the Cayman Islands, and lenders can obtain comfort from ongoing compliance from tailored contractual protections in the finance documents.
Cayman Islands
Answer ... Secured lending is not regulated by the Cayman Islands Monetary Authority (CIMA) and no authorisations, consents, approvals, licences, validations or exemptions are required by law from any governmental authorities or agencies or other official bodies in the Cayman Islands in connection with the entry into or enforcement of rights thereunder by a cross-border lender or secured creditor.
From a lender’s perspective, investigating the regulatory status of a Cayman Islands borrower and its compliance with any relevant statutory requirements should form part of its due diligence and facility agreement documentation process. Open-ended mutual funds and closed-ended private funds are regulated by CIMA, and a failure to register with CIMA and the subsequent loss of such registration represents a credit risk for the lender. Hence, typically facility documentation will require a Cayman Islands fund borrower to provide evidence of compliance with all relevant requirements and give undertakings to maintain its CIMA regulatory status. Please see also question 4.3.
The anti-money laundering and combatting of terrorist financing (AML) regime of the Cayman Islands requires Cayman Islands entities conducting relevant financial business (eg, funds regulated by CIMA) to:
- designate an individual to act as their anti-money laundering compliance officer; and
- adopt written policies and procedures to meet the requirements of the AML regime.
From a lender’s perspective, a non-AML compliant Cayman Islands borrower could pose a reputational risk or even result in non-compliance with its own AML obligations. In serious cases of non-compliance with the Cayman Islands’ AML regime by a borrower, CIMA has the power to apply to court to seek an order for its winding-up – something that would no doubt trigger a default under the finance documents. Therefore, as part of its due diligence, a lender should request evidence from a prospective borrower of compliance with its AML obligations and may also insert covenants in the finance documents requiring a fund borrower to maintain compliance with the requirements of applicable AML regimes.
For FATCA/CRS compliance, please see question 1.2.
Under the Securities Investment Business Act (2020 Revision), a Cayman Islands person that conducts securities investment business must be licensed by or registered with CIMA. Accordingly, most fund managers, advisers and placement agents that are organised or have a place of business in the Cayman Islands fall within the scope of the Securities Investment Business Act. Review of the status of a Cayman Islands fund manager under the act therefore forms part of the lender’s due diligence – particularly when a closed-ended fund borrower has delegated to its manager the authority to exercise to borrow or the power of the general partner to call capital contributions from the limited partners of the fund.
The financing activities of alternative non-fund credit providers incorporated in the Cayman Islands fall within the scope of International Tax Cooperation (Economic Substance) Act (2021 Revision) (which implements the economic substance standards of Action Point 5 of the Organisation for Economic Co-operation and Development Base Erosion and Profit Shifting initiative and applies to corporate, non-fund entities incorporated in the Cayman Islands) Pursuant to the ES Act, an in-scope entity must satisfy the economic substance test and comply with certain notification and reporting obligations under the ES Act.
Cayman Islands
Answer ... The Cayman Islands is a well-recognised international banking jurisdiction. It has a very advanced financial services sector and it is regularly classified by the Bank for International Settlements as one of the top 10 banking jurisdictions by cross-border activities. In addition to the large cross-border banking sector, the Cayman Islands continues to be favoured for the establishment of investment funds, portfolio companies and corporate entities involving secured lending arrangements. The legal framework continues to be creditor friendly and favoured by many financial instructions and alternative credit providers. Although there are no government guarantee schemes available for lenders, the sophisticated legal framework of secured lending in the Cayman Islands has no Chapter 11 or equivalent procedures that might frustrate enforcement of security arrangements. The laws of the Cayman Islands provide certainty of execution and outcome to lenders and, as such, secured lending and fund financings to Cayman Islands borrowers are increasing in number and volume on a yearly basis.