Cayman Islands: Exempted Companies - June 2017

Introduction

An exempted company (a "Company") is the most commonly used type of Cayman Islands company for international transactions. This note describes certain features of a Company. It is intended to be a summary only, and is not exhaustive. It is not a substitute for detailed legal advice, which can be obtained from your usual Walkers contact or any of the Walkers partners listed at the end of this note.

Legislation

A Company is subject to the Companies Law (2016 Revision) of the Cayman Islands (the "Law").

Constitution

The constitution of a Company consists of a memorandum of association (the "Memorandum") and (almost invariably) articles of association (the "Articles").

Pursuant to the Law, any one or more persons associated for any lawful purpose may, by subscribing their names to the Memorandum, and otherwise complying with the Law in respect of registration, form an incorporated company.

Any proposed company applying for registration under the Law, the objects of which are to be carried out mainly outside the Cayman Islands, may apply to be registered as a Company.

The most common form of Company is a company limited by shares, with a share capital divided into shares having a par value.

It is permissible, though unusual, for a Company to issue shares which have no par value. In such a case the entire consideration paid for the shares is treated as share capital. This has certain disadvantages, including that dividends may not be paid out of share capital.

Legal form

A Company has separate legal personality.

From the date of incorporation, the subscribers of the Memorandum, together with such other persons as may, from time to time, become members of the Company (also referred to in this note as shareholders), shall be a body corporate with the name contained in the Memorandum, capable forthwith of exercising all the functions of a natural person of full capacity irrespective of any question of corporate benefit, and having perpetual succession.

Nature of business permitted

The objects of a Company will be set forth in the Memorandum. In a majority of cases, the objects clause will be worded very broadly using a formulation such as, "the objects for which the Company is established are unrestricted and the Company shall have full power and authority to carry out any object not prohibited by any law".

A Company may not trade in the Cayman Islands with any person, firm or corporation except in furtherance of the business of the Company carried on outside the Cayman Islands.

A Company that is not listed on the Cayman Islands Stock Exchange is prohibited from making any invitation to the public in the Cayman Islands to subscribe for any of its securities.

Certain activities are regulated in the Cayman Islands and a Company may be required to obtain a licence or to register with the Cayman Islands Monetary Authority if it wishes to carry on such activities. These include banking business, trust business, company management, insurance business, mutual fund administration, business of a mutual fund and securities investment business.

Registration requirements

Upon the filing with the Registrar of Companies (the "Registrar") of:

  1. the Memorandum and Articles (if any);
  2. the appropriate filings fees; and
  3. a declaration from the subscriber to the effect that the operation of the Company will be conducted mainly outside the Cayman Islands,

a Company shall be deemed to be registered, and the Registrar shall issue a Certificate of Incorporation.

The Certificate of Incorporation will generally be issued within five working days, or within two working days upon payment of an express government fee.

Name

It is not necessary for a Company's name to contain words or abbreviations such as 'Limited', 'Ltd', 'Inc', 'Corp' etc. There are certain restricted names, for example, those including the words 'royal', 'imperial', 'bank', 'assurance', 'insurance'.

Registered office

A Company must have a registered office situated in the Cayman Islands to which all notices and communications may be addressed.

Restrictions on number of members

A Company must have a minimum of one shareholder at any time. Unless provided for in the Articles, there is no maximum number of shareholders.

A Company must have at least one share in issue, but there is no minimum paid-in capital requirement. Fractional shares may be issued if the Articles so permit.

Residency requirements

There are no residency or qualification requirements for directors or shareholders of a Company. Corporate directors are permitted.

A Company is not required to hold board meetings or shareholder meetings in the Cayman Islands or anywhere else unless so required by its Articles.

A company secretary is not required.

Changes to registered details

Certain changes to the registered details in respect of the Company must be notified to the Registrar. The nature of the relevant change affects the filing requirements and the time limits for making the relevant filing.

Amendments of the Memorandum or Articles, or the name of the Company, may only be made by special resolution of the voting shareholders. The change is effective upon passing of the special resolution, but must be filed with the Registrar within fifteen days. The Registrar nonetheless may reject a change of name and direct that a new name be chosen.

A Company may increase, consolidate or sub-divide its share capital. Increases of authorised share capital may only be made by ordinary resolution of the voting shareholders. The change is effective upon passing of the ordinary resolution, but must be filed with the Registrar within 30 days.

A Company may reduce its authorised (but unissued) share capital if authorised by its Articles by special resolution of the voting shareholders. A Company may only reduce its issued share capital if authorised by its Articles, with the approval of a special resolution of its voting shareholders and with the confirmation of the Court. It may however be able to redeem or repurchase shares in certain circumstances, even where this leads to an effective reduction in the issued share capital.

Changes to the identity, names and addresses of the directors and officers of the Company must be filed with the Registrar within 60 days.

Amendment of constitution

Amendments of the Memorandum or Articles, or the name of the Company, may only be made by special resolution of the voting shareholders.

A resolution is a special resolution when:

  1. it has been passed by a majority of not less than two-thirds (or such greater number as may be specified in the Articles) of such members as, being entitled to do so, vote in person or, where proxies are allowed, by proxy at a general meeting of which notice specifying the intention to propose the resolution as a special resolution has been duly given; or
  2. if so authorised by the Articles, it has been approved in writing by all of the members entitled to vote at a general meeting of the Company.

Powers and liabilities of directors

The Articles will invariably provide that the business of the Company shall be managed by the directors. Shareholders do not generally participate in the management of the Company's business.

Directors owe fiduciary duties to the Company. These duties include a duty:

  1. of loyalty/duty to act in best interests of the Company;
  2. to act for a proper purpose;
  3. not to fetter director's discretion;
  4. to avoid conflicts;
  5. not to make secret profits from the director's position as director;
  6. to act fairly as between different shareholders; and
  7. to act with skill and care.

These duties are owed to the Company itself, and not generally to individual shareholders. In the event of a breach of duty, the directors may be personally liable to account to the Company.

Books and records

A Company shall cause to be kept a register of its members containing the names and addresses of the members of the Company, the shares held by each member, the amount paid, or agreed to be considered as paid, on the shares of each member, the date on which the name of any person was entered on the register as a member, and the date on which any person ceased to be a member.

The register of members is not open to public inspection. Cayman corporate services providers must, however, collect beneficial ownership information on all companies, and such information is available to certain domestic and international governmental authorities. The register of members need not be kept in the Cayman Islands.

The register of members shall be prima facie evidence of any matters by the Law directed or authorised to be inserted therein.

A Company is required to keep at its registered office a register of all mortgages and charges specifically affecting property of the Company, and to enter in such register in respect of each mortgage or charge a short description of the property mortgaged or charged, the amount of charge created and the names of the mortgagees or persons entitled to such charge. It is an offence for the Company not to make such an entry, but failure so to do does not invalidate the mortgage or charge. The register of mortgages shall be open to inspection by any creditor or member of the Company at all reasonable times.

A Company is also required to keep at its registered office a register containing the names and addresses of its directors and officers, and shall send to the Registrar a copy of such register. The register of directors and officers is not open to public inspection.

A Company shall cause to be kept proper books of account, giving a true and fair view of the state of the Company's affairs and to explain its transactions, with respect to:

  1. all sums of money received and expended by the Company and the matters in respect of which the receipt and expenditure takes place;
  2. all sales and purchases of goods by the Company; and
  3. the assets and liabilities of the Company.

A Company shall cause all books of account to be retained for a minimum period of five years from the date they were prepared, and any company that knowingly and wilfully fails to do so will be subject to a penalty.

There are no generally accepted accounting principles in the Cayman Islands and therefore it is open to a Company to select whichever accounting conventions it chooses.

A Company shall cause minutes of all resolutions and proceedings of its members and of its directors to be duly kept in writing.

The only publicly available information in respect of a Company is its name, company number, date of incorporation, registered office, the type of company (eg exempted) and whether the Company is active or has been struck off. The memorandum and articles of association are not publicly available.

Liability of shareholders

No contribution shall be required from any member exceeding the amount, if any, unpaid on the shares in respect of which he is liable.

As most Companies issue shares that are fully paid upon issue, the effect of this provision is that no further sums are payable by the holders of such shares once they have paid for their shares in full.

There are certain rare cases where a court will permit the limited liability status of a Company to be pierced, such as where no corporate governance formalities have been observed and a shareholder has treated the Company as its alter ego for the purpose of evading a personal liability.

Transfer of interests

The transferability of shares will be set forth in the Articles. Commonly, shares may only be transferred with the prior consent of the directors of the Company.

A company is permitted to hold shares in treasury.

There is no Cayman Islands stamp duty payable on the transfer of shares.

Distributions

A Company may make distributions by way of dividend provided that there are no restrictions (either express or implied) in its Memorandum or Articles. A Company may only make distributions by way of dividend out of profits or (provided that immediately following the date that the dividend is proposed to be paid the Company is able to pay its debts as they fall due in the ordinary course of business) out of its share premium account.

Dissolution

A Company may be wound up voluntarily:

  1. when the period, if any, fixed for the duration of the Company by the Articles expires;
  2. whenever the event, if any, occurs, upon the occurrence of which it is provided by its Memorandum and Articles that the Company is to be dissolved;
  3. the Company has, by special resolution of its members, adopted a special resolution requiring the Company to be wound up voluntarily; or
  4. the Company has, by ordinary resolution of its members, adopted an ordinary resolution requiring the Company to be wound up voluntarily on the basis that the Company is unable to pay its debts as they fall due.

The winding up of a Company will occur automatically, however, to the extent that the necessary procedures have not been followed, the passing of the fixed duration or the occurrence of a certain event is grounds for a petition to the court by a creditor or member on the basis that the Company did not wind itself up as required.

Upon the commencement of the winding up a liquidator is appointed (although it should be noted that the appointment of a voluntary liquidator shall only take effect upon the filing of his consent to act with the Registrar of Companies). There are no restrictions on who may act as liquidator on a solvent winding up, but the need to comply with certain duties and procedures under Cayman Islands law means that generally a professional in the Cayman Islands is appointed. However, where the court appoints the liquidator, the liquidator is required to be a qualified insolvency practitioner under the Insolvency Practitioners Regulations 2008 (as amended). The liquidator steps into the shoes of the directors and is responsible for gathering in the assets of the Company, satisfying its liabilities and then distributing the remaining amounts to the shareholders in accordance with the Articles. Within 28 days of the commencement of a voluntary winding up, the liquidator, or in the absence of a liquidator, the directors shall make certain statutory filings with the Registrar of Companies including a notice of winding up, the liquidators consent to act and (where the supervision of the court is not being sought) a declaration of solvency (signed by all the directors). In the case of a company carrying on a regulated business (ie a mutual fund) notice of the winding up must be served on the Cayman Islands Monetary Authority. The notice of the winding up is required to be published in the Cayman Islands in the Gazette. Any liquidator or director who fails to comply with such filing requirements is liable to a fine of $10,000.

It should be noted that the directors' declaration of solvency is required to be in a prescribed form and state that a full enquiry has been made into the company's affairs and that to the best of the directors' knowledge and belief, the Company will be able to pay its debts in full together with interest at the prescribed rate within a period not exceeding twelve months from the commencement of the winding up. Directors should bear in mind the forward looking nature of this test as the future solvency of the Company (including all actual and contingent liabilities) must also be considered. All directors are required to sign the solvency statement and must have reasonable grounds for the statements made. To the extent that a statement is made without reasonable grounds, each director is liable to a fine of $10,000 or imprisonment for two years, or both.

Once the above process is complete, a final shareholders' meeting is held and the liquidator's accounts are approved. The liquidators make their final return to the registrar of Companies informing the Registrar of Companies that the liquidation has been completed. Three months after the liquidators have submitted their final return, the Company is deemed to be dissolved and, from that point on, ceases to exist.

Alternatively, where the Registrar has reasonable cause to believe that a Company is not carrying on business or is not in operation (including upon the submission of a director of the Company), he may strike the Company off the register and the Company shall thereupon be dissolved. If a Company or any member or creditor thereof feels aggrieved by the Company having been struck off the register in accordance with the Law, the Court on the application of such Company, member or creditor made within two years or such longer period not exceeding ten years as the Governor may allow of the date on which the Company was so struck off, may, if satisfied that the Company was, at the time of the striking off thereof, carrying on business or in operation, or otherwise, that it is just that the Company be restored to the register, order the name of the Company to be restored to the register. Any property vested in or belonging to any Company struck off the register under the Law shall thereupon vest in the Financial Secretary and shall be subject to disposition by the Governor, or to retention for the benefit of the Cayman Islands.

Winding up is therefore a more final form of terminating a Company than striking it off.

Tax status and annual return

A Company may apply for an undertaking from the Financial Secretary to the effect that, for a period of twenty years from the date of such undertaking (extendable by a further ten years):

  1. no law which is thereafter enacted in the Cayman Islands imposing any tax to be levied on the profits, income, gains or appreciations shall apply to the Company or its operations; and
  2. no such tax nor any tax in the nature of estate duty or inheritance tax will be payable by the Company:

    1. on or in respect of the shares, debentures or other obligations of the Company; or
    2. by way of the withholding in whole or in part of any relevant payment.

An annual fee payable on or before 31 January of between US$854 and US$3,132 (depending on the Company's authorised share capital) is payable to the Registrar. An annual return must also be filed on or before 31 January in every year. Penalties will be levied for late filings.

For a Company that is not regulated or licensed under any other law, no financial statements need to be filed with any Cayman Islands governmental agency, and no annual audit is required.

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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