Cayman Islands: Ship Finance In The Cayman Islands

Last Updated: 14 May 2001
Article by Anne C Todd

"He hath founded it upon the seas" is the motto found under the Cayman Islands crest which appears on most official documentation.

It is therefore of no surprise that this tiny island situated in the middle of the Caribbean Sea in the triangle between Florida, Cuba and Central America enjoys a rich seafaring heritage and is host to a first class international shipping registry catering for vessels of all sizes and classes from small yachts to super tankers.

In this article, I explore the reasons why ship financing transactions using Cayman Islands vehicles are and remain a popular option although it must be noted that registration of vessels in the Cayman Islands is beyond the scope of this article and is covered elsewhere.

Political Background

The Cayman Islands enjoy a stable legal and economic relationship with Britain monitored through the Foreign and Commonwealth Office. Unlike England and Wales, however, the Cayman Islands have a written constitution and enjoy a large measure of autonomy and self-regulation whilst, in tandem, Britain assumes responsibility for their defence and appoints a Governor.

Legal System

The legal system in the Cayman Islands has developed its own legislation and, where such legislation is silent, relies on the common law of England and Wales which is of persuasive authority in the Cayman Islands. In particular, The Merchant Shipping Law of the Cayman Islands, although primarily based on the corresponding law of England and Wales has been adapted to accommodate issues unique to the Cayman Islands and is extensive in nature.

Consequently all the legal principles essential for ship financing transactions such as trusts, chattel mortgages, charter arrangements, conditional sales, instalment sales, loans and joint venture arrangements exist under Cayman Islands law. Cayman courts will also recognise and enforce contractual agreements and security interests created under laws other than Cayman Islands law if validly created under the relevant laws.

Cayman Islands legislation is responsive to the needs of the financial community and has been quick to introduce changes to enable business to be conducted more effectively, for example, the recent legislation referred to below. Much innovative legislation in other dependencies stems from legislation drafted in the Cayman Islands.

The Cayman Islands is a jurisdiction which is user friendly for financiers. For instance:

  1. There is no equivalent under Cayman insolvency law to English administration proceedings. Therefore it is unlikely that a creditor with valid security created over a vessel will become embroiled in lengthy insolvency proceedings. Except in exceptional circumstances, no court proceedings are necessary to enforce a lender's ownership rights granted pursuant to a charge over the shares in the special purpose vehicle ("SPV") or a mortgagee's security interest, and repossession of a vessel from a Cayman vehicle should not be unduly affected by Cayman Islands legal proceedings. Financiers may therefore concentrate on securing physical repossession of the vessel in the jurisdiction where the vessel is located/flagged.
  2. By virtue of recent changes in law, the principle of contractual subordination has now been given statutory recognition so it is no longer necessary to revert to artificial techniques for these purposes. Furthermore, set-off provisions and netting arrangements will be taken into account on the insolvency of a Cayman company.
  3. Loans may be written with interest rates that vary with profits without such arrangements resulting in the financier being subordinated to the rights of other creditors.
  4. Recent statutory provisions have clarified the uncertainties created by the English decision in "Charge Card" about the validity of banks taking charges from customers over accounts held with the bank itself. Such charges may now be created validly under Cayman Islands law and, as such, may be of relevance where an SPV grants a charge, for instance, over a charterhire earnings account held with and in favour of, the lending bank in a transaction.

Structuring And Administration Of Cayman Islands Special Purpose Vehicles

The Cayman Islands are the domicile of a significant number of subsidiaries of first class financial institutions providing local administrative services to SPVs. A first class offshore administrator, coupled with the typical "security package", should afford the lender a high degree of confidence in adopting the offshore structure.

The typical offshore leasing structure vests ownership of the vessel with an SPV which acquires the vessel through funding by way of loan from the lender or alternatively the vessel may be the subject of a bareboat charter to the Cayman SPV. The vessel is then chartered to the shipping company/end user. The SPV will typically be established as an "off-balance sheet vehicle" with its issued share capital held by an offshore trust company on charitable or purpose trusts. The lender will take security over the vessel, over the SPV’s rights as owner/charterer and usually security over the issued share capital of the SPV itself. Typical powers or discretions included in the charitable or purpose trust would restrict any disposition of the shares in the SPV or its winding up. These tend to be drafted as provisions prohibiting the trustee from taking such actions without the consent of the lender. This is usually not thought to be a degree of control that would give a lender control or consolidation issues in its home jurisdiction. Following the termination of the transaction the trust will terminate and the trust property (namely, the net asset value of the SPV, which will be the issued share capital and any transaction fees earned by the SPV net of its expenses) will be distributed by the trustees to such one or more charities as the trust document provides.

The attraction of this structure from a lender’s perspective is as follows:

Ownership of the vessel does not vest with the shipping company/end user but with an SPV owned and controlled by a trust company which holds title in off-balance sheet capacity. Ownership therefore vests in a vehicle which is unlikely to be hostile to the lender in a default scenario when the lender seeks to enforce its security. From the lender’s perspective this "ownership" arrangement may provide the lender with advantages that are closer to those that would come with retaining title to the vessel itself whilst avoiding the consolidation of the vessel on its own balance sheet. The assignment by the SPV of its rights under the charter agreement with the shipping company/end user will also give the lender effective control of the enforcement of rights of the SPV as against the shipping company/end user under the charter.

In the event of a default, if the lender seeks deregistration in the shipping company/end user’s jurisdiction, the lender should be able to count on the exercise of the deregistration rights rather than having to rely solely on a mortgagee’s rights. Certain jurisdictions do not recognize the mortgagee’s right to deregister and may otherwise limit the mortgagee’s remedies (for example to a local judicial sale), thus making exclusive reliance on a mortgagee’s rights potentially unsatisfactory for the lender.

The principal loan and security documentation will generally be entered into by the SPV rather than the shipping company/end user, thereby avoiding potential enforcement problems in the shipping company/end user’s own jurisdiction where the legal system may be very different from the English system.

In addition to legal certainty, ownership of the vessel will be in a jurisdiction with political, economic and social stability which may give comfort to a lender in cases where the vessel is chartered to a jurisdiction where there is perceived risk.

Ownership of the vessel will vest in a bankruptcy-remote structure which should be unaffected by the bankruptcy of the shipping company/end user, thus avoiding the significant difficulties that could arise if title to the vessel vested with the shipping company/end user or in a special purpose subsidiary or affiliate established by it.


Taxation or, more properly, the absence of direct taxation and therefore the absence of withholding tax on account of any charge to tax is a principal reason for establishing the SPV in an offshore jurisdiction. The Cayman Islands currently have no direct forms of taxation but instead have a system of indirect taxation in the form of import duty, licence fees, incorporation fees and stamp duties some of which may not apply in the context of a ship financing transaction. There is therefore no taxation of charterhire payments, of interest or principal on loans. In order to give comfort that the no-tax regime will continue, certain types of SPV may obtain from the Cayman Islands Government a guarantee against the imposition of taxation in the future, known as the "Undertaking as to Tax Concessions", which undertakes to exempt the recipient SPV and its shareholders, for a period of twenty years, from most forms of relevant taxation if introduced in the Cayman Islands during that period. Thus, the lender may be assured not only that the SPV structure will not involve adverse tax consequences based on current legislation but that that will remain the situation for the duration of the transaction.

Types Of SPV

The most popular type of SPV used in ship finance transactions is the exempted limited company which may benefit from the tax exemption undertaking referred to above. This type of vehicle (as well as the other vehicles mentioned below) may be established cheaply and very quickly. However there are various other types of vehicle which may be used according to the requirements o the transaction parties in question. Cayman limited duration and limited life companies possess the relevant criteria to enable the vehicle to be treated (notwithstanding its corporate status in the Cayman Islands) as a partnership in certain other jurisdictions for tax purposes and to enable the shareholders to benefit from the tax transparency of such vehicle for their own purposes.

Unit trusts are often used as alternative vehicles for the benefit of investors in jurisdictions where participation in a unit trust is more attractive than shares in a company. There may, for example, be less regulation of an offering of units in a unit trust rather than shares in a company or more favourable tax treatment for the investor may be achieved.

The Cayman exempted limited partnership, where the business of the partnership is managed by a general partner and the investors as limited partners benefit from limited liability, incorporates the most attractive features from limited partnership laws of other jurisdictions, including the USA. As in the case of unit trusts, a limited partnership may offer a more attractive regulatory regime and tax treatment for investors in certain jurisdictions. Additionally, the exempted limited partnership may also obtain a tax exemption undertaking, valid for a period of up to fifty years from its date of issue.

These are then, in brief, some of the reasons why the Cayman Islands are and remain one of the most popular offshore jurisdictions for ship financing transactions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions