Cayman Islands: Business Law Developments In The Cayman Islands

Last Updated: 16 September 1998

Business law developments in the Cayman Islands during 1998 included the coming into force of significant new legislation in the areas of trusts and captive insurance. Also worthy of mention is the Cayman Islands Stock Exchange which has achieved notable successes in its opening year of operations.

Special Trusts (Alternative Regime) Law

The Special Trusts (Alternative Regime) Law ("STAR") was enacted for two primary reasons; first, to make provision for the creation of non-charitable purpose trusts and, secondly, to create an entirely new regime for a new kind of trust.

Under English law principles, the position has always been that a trust can exist either for persons or for charitable purposes. Consequently, trusts for purposes which do not fall within the definition of what is charitable are invalid. The rationale for this is that for a valid trust to exist there must be a person who can enforce the obligations of the trustee to administer the trust in accordance with its terms. Clearly this requirement is satisfied when the trust is established for a class of individual beneficiaries. In the context of Cayman Islands charitable purpose trusts, this requirement is also satisfied as the Attorney-General can enforce the trustees' obligations.

The principal reason for enacting legislation to allow for non-charitable purpose trusts was to offer a solution to situations where, for tax, accounting or other reasons, it is undesirable for any of the parties involved in a transaction to be beneficiaries of the underlying trust and where a charitable trust would not be appropriate. This is typically the case in many offshore financing transactions where, for example, purpose trusts are often used to hold the shares in special purpose vehicles (such as specialist debt issuers) or to hold non-participating shares in investment companies or the shares of private trust companies. That said, private purpose trusts are likely to have many other applications, both of a commercial and non-commercial nature.

The issue of who will enforce a non-charitable purpose trust which, by definition, will not have any beneficiaries as such, is dealt with by STAR by requiring that the trust instrument must provide for the appointment of at least one "enforcer" who shall have standing to enforce the trust. Enforcers may be obligatory enforcers or voluntary enforcers and the beneficiaries may, but need not be, enforcers. It is expected that this ability to separate "enforcement" rights from "beneficial" rights is likely to give rise to a wide range of estate planning and other applications.

As indicated above, STAR is more than just purpose trust legislation because it allows for an entirely new kind of trust to be set up under an alternative statutory regime. If the settlor wants STAR to apply to his trust, the trust deed must contain a declaration to this effect. In the absence of any such declaration, orthodox trust principles will apply, wholly unaffected by STAR. It is likely however that the special features of STAR will have numerous uses in the person trust context. For example, the ability to deny enforcement rights to some or all of the beneficiaries is likely to be of particular use in many tax and estate planning situations. STAR will also enable trusts to be established with mixed objects, for persons as well as for purposes. It should also be noted that the rule against perpetuities does not apply to STAR trusts which means that a STAR trust, unlike an orthodox trust, can be established on a perpetual basis.

The Trusts (Amendment)(Immediate Effect and Reserved Powers) Law

The main provisions of this new law are concerned with the reservation of control and enjoyment by settlors over the trustee and trust assets. This is very often an area where tension arises when planning an offshore trust because the settlor is invariably anxious to reserve as much control as possible over the trust property but at the same time must be careful that, by so doing, he does not undermine the fundamental integrity or validity of the trust. Obviously, if it can be shown that, by virtue of the substantial powers reserved to himself, the settlor has failed to divest himself of dominion and control over the trust property, the trust is likely to be avoided as being nothing more than a nomineeship or sham. If a trust is set aside on this basis, the result will be that the settlor will remain the beneficial owner of the property in question and will be subject to the taxation or other risks which prompted the establishment of these arrangements in the first place.

The principal sections of this new law insert new provisions into the Trusts Law, being the principal trust statute in the Cayman Islands. A key provision is that, in construing a trust instrument, the court will now presume that it is intended to have immediate effect. In many cases, especially where the settlor has reserved substantial powers to himself, trusts are attacked on the grounds that the trust provisions were not intended to take effect during the life of the settlor but only upon his death. Accordingly, this new statutory presumption may save certain trusts from being construed as invalid testamentary dispositions.

This new law also lists a number of specific powers and interests which may be reserved by a settlor without invalidating the trust. Although this will provide helpful clarification in this area, it will nonetheless remain essential that any trust which reserves wide powers to the settlor is carefully drafted in order that it does not infringe fundamental trust principles.

The Companies (Amendment) (Segregated Portfolio Companies) Law

The captive insurance industry in the Cayman Islands continues to grow rapidly, the Cayman Islands being the second largest domicile for captive business in the world.

The concept of captive insurance companies is straight-forward, the captive insures the risks of its parent company or the group of companies of which it forms part. However, in some cases, a company wanting to set up its own in-house captive insurance facility may not be large enough to warrant establishment of its own wholly-owned captive. This has led to the concept of a "rent-a-captive" facility whereby the company shares a captive with other like-minded companies by "renting" part of its share capital. This obviously necessitates internal arrangements being set up in such a rent-a-captive structure to avoid cross-liability of one shareholder to the other shareholders.

The inherent weakness in the rent-a-captive concept is however that, like all companies, it is a single legal person so far as third parties are concerned. Accordingly, if a third party creditor makes a claim against a rent-a-captive which has a deficiency of assets in respect of any particular portfolio, all the other assets of the company, both those which are general to the company and those which are exclusive to individual clients who have rented capital, are available to meet third party claims. In order to address this fundamental difficulty and to provide opportunities in other areas, the Companies (Amendment) (Segregated Portfolio Companies) Law has been enacted in the Cayman Islands pursuant to which insurance companies can now be registered with so-called "segregated portfolios" which provide to each "portfolio" security and segregation from the affairs and liabilities of the other portfolios.

This ability to create segregated portfolios within a company's capital structure is intended however to have wider applications outside the "rent-a-captive" theme. As a single example only, wholly-owned captives of large corporations may now wish to divide up their insurance exposure by the use of separate portfolios, segregated perhaps by type of risk, geographical location or corporate division.

Cayman Islands Stock Exchange

This year has been the first full year of operations of the Cayman Islands Stock Exchange ("CSX") which has undergone rapid development since its inception. By the time of its first anniversary in July 1998, the CSX had 107 issuers approved for listing. Of these, seventy-one were mutual funds, thirty-six were international specialist debt issuers and one an international company listed on the London Stock Exchange. Although the CSX has concentrated mainly on offshore mutual funds and specialist debt securities, it is hoped that it will be able to accommodate new products in the near future. For example, rules are currently being formulated for global depositary receipts and covered warrants.

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.

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