Cayman Islands: Too Many Captives?

Last Updated: 6 March 2009
Article by Bonnie Gerow

Congratulations! Despite the volatile market conditions permeating the business world, you may have acquired a business in continuation of the growth of your operations. You have an existing Cayman Islands captive insurance company (having discovered the multiple benefits arising from having such a vehicle in your group) but your new acquisition also has a captive insurance company, providing similar or complementary insurance to that of your existing captive. Alternatively, at some point you may have established a second captive for a particular program or other reasons but the rationale for a separate captive has now fallen away.

What can you do? Often, one of the captive insurance companies can be put into run-off ("Sub A"), thereby reducing regulatory fees, and you can transfer programs and insurance policies into the still active company ("Sub B"). However, frequently Sub A still has outstanding liabilities under its former insurance programs. This requires Sub A to continue to deal with such liabilities until all claims have been resolved and paid out. This can be expensive as you (the "Parent") will still be, in effect, paying the administrative costs for two insurance companies (including annual management fees, registered office fees, government fees and regulatory fees). A merger seems like a reasonable solution – how to proceed is a little more complex and will depend on the specific fact situation. Just what are the options? An overview and analysis along with a brief discussion on the differences between the options follow.

Options

Under Cayman Islands law there are basically two options as to how the merger might be effected:

  1. A statutory amalgamation under sections 86 and 87 of the Companies Law (2007 Revision)
  2. A transfer of assets and liabilities.

Statutory Amalgamation

Under sections 86 and 87 of the Companies Law (2007 Revision), two or more companies may be amalgamated or merged by making a statutorily recognised compromise or arrangement ("Scheme of Arrangement" or "Scheme") between the merging companies and their respective shareholders (or classes of shareholders) and/or their respective creditors (or classes of creditors). Creditors are likely to be involved in the process only where there is doubtful solvency or where creditors might otherwise be prejudiced. This statutory process has its roots in English law and can be used for a number of purposes but is particularly helpful tool in the context of the merger of two or more captives.

In the example of Sub A and Sub B above, the process to effect the amalgamation would start with an application being made by Sub A to the Grand Court of the Cayman Islands to summon a meeting of the Parent (Sub A's shareholder) to consider the proposed Scheme. The meeting is known as the Court Meeting. The application would advise the Court of the proposed statutory amalgamation i.e., to arrange for the remaining assets and liabilities of Sub A to be transferred to Sub B and then dissolve Sub A without having to go through a formal liquidation process. Details of the proposed Scheme would be set out in a scheme document and in an explanatory statement, both of which would be provided to the Parent along with a notice of the Court Meeting.

At the Court Meeting, the proposed Scheme would be approved by the Parent. Once such approval is obtained, the proposed Scheme would still require the sanction of the Court. The Court must be convinced that the Parent's wishes are fairly represented by the vote at the Court Meeting and that the Scheme is one that a reasonable business person would approve. Once Court sanction is obtained, the Scheme is then binding on the Parent.

As part of its order sanctioning the Scheme, the Court may provide for the following:

  • the transfer to Sub B of the whole or any part of the undertaking, property and liabilities of Sub A (the "Liabilities"), in which case the Liabilities automatically vest in Sub B by operation of law;
  • the allotting or appropriation by Sub B of any shares, debentures, policies or other like interests in Sub A which, under the Scheme, are to be allotted or appropriated by Sub B to or for any person;
  • the continuation by or against Sub B of any legal proceedings pending by or against Sub A;
  • the dissolution without winding up of Sub A; and/or
  • such incidental, consequential and supplemental matters as are necessary to secure that the amalgamation is fully and effectively carried out.

The court order sanctioning the Scheme must be filed with the Registrar of Companies within 7 days by both Sub A and Sub B for the order to have binding effect. The insurance licence of Sub A must also be surrendered to the Cayman Islands Monetary Authority (the "Monetary Authority") following the merger.

Specific Considerations with regard to a Statutory Amalgamation

Shareholder approval of the Scheme should not be problematic in our example above as this is effectively an "in-house" merger simply to tidy up the corporate group. However, before embarking on this option, it is prudent to consider whether a particular Scheme of Arrangement involves any potential prejudice to actual or contingent creditors of each company. For example, does the "pooling" of assets and liabilities previously held in two separate companies give rise to any cross-contamination risks? There are solutions for this particular example but all potential issues should be flushed out before proceeding.

A significant advantage of the Scheme is the automatic novation of all non-personal contracts from Sub A to Sub B without the administrative burden of having to novate of each and every policy, reinsurance contract and fronting agreement which would of course involve the approval of the various policyholders, reinsurers/reinsureds and fronting carriers.

The involvement of the Court in the process will inevitably impact both the cost and timetable of the transaction. However, one shortcut that can be used, if applicable, is found in Practice Direction No. 1/2002. It states that, if a proposed Court Meeting consists of a small number of persons who are willing to be bound by the terms of a Scheme of Arrangement (and the persons have provided evidence of such), the Court has the discretion to waive the requirement for formal class meetings. In our example, it would be appropriate to obtain the necessary evidence (a letter from the Parent to Sub A and Sub B giving its approval for the Scheme) and ask the Court to waive the Court Meeting.

Transfer of Assets and Liabilities

As an alternative to a Scheme of Arrangement, the merger could be effected by a simple transfer of assets and liabilities. Sub A and Sub B will generally enter into a business transfer agreement whereby Sub B acquires the remaining assets and assumes the liabilities of Sub A. The consideration will often be the issuance of shares in Sub B to Sub A. All policies and other contracts of Sub A, however, will need to be novated to Sub B with the approval of the policy holders and other contracting parties.

Sub A can then be liquidated (through a voluntary liquidation under the Companies Law (2007 Revision)), the insurance licence of Sub A is surrendered to the Monetary Authority and any remaining assets are distributed to the shareholders of Sub A (in this case, the Parent).

This option avoids the cost and timing implications arising from the involvement of the Court in the Scheme. However, as there is no automatic transfer of policies and other non-personal contracts, there is the administratively burdensome and time-consuming exercise of having to novate each and every policy and contract. There is also the disadvantage that Sub A still has to go through a liquidation process.

Conclusion

Both options described above are practical solutions for removing redundant captives in a corporate group, although the amount of work in each case should not be under-estimated. In the case of a Scheme of Arrangement, a typical timeframe from making the application to the Court to the Scheme being sanctioned would be approximately 6 weeks. The preparation and finalisation of the scheme document, explanatory statement and ancillary documentation would generally take 4 weeks, for an overall timeframe of around 10 weeks.

In the case of a transfer of assets and liabilities, a likely timeframe would be around 4 weeks but this excludes the time involved in dealing with the novation of policies and contracts which is likely to run on for several weeks after the merger has been effected. This does not include the time involved for the voluntary liquidation process that must also be completed in order to remove the redundant captive.

A transfer of assets and liabilities is generally less expensive in terms of professional fees and disbursements, principally because involvement of the Court is not required. However, its drawback is the need for the novation of each and every policy and contract and the requirement to wind up Sub A. Both of these are avoided with the Scheme of Arrangement because of the automatic novation and dissolution derived from the order of the Court.

Any corporate group with one or more redundant captives in its stable may well wish to consider these options as a means of tidying up their structure and achieving cost savings.

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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