1 Legal framework
1.1 Beyond general commercial and contract laws, what other specific laws and regulations govern secured finance in your jurisdiction?
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
1.2 Do any bilateral and/or multilateral treaties or trade agreements have particular relevance for secured finance in your jurisdiction?
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.
1.3 Beyond normal governmental institutions, are there regulatory or tax bodies that play a particular role in secured finance your jurisdiction? What powers do they have?
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.
1.4 What is the government's general approach to secured finance in your jurisdiction? Are there government guarantee/support schemes available to lenders, and if so what are the qualifications to that support?
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.
2 Secured finance market
2.1 How mature is the secured finance market in your jurisdiction? Are the majority of the transactions purely bilateral and domestic, or is there an international syndicated market for secured financing under your domestic law?
In terms of assets under management, the Cayman Islands is the largest offshore jurisdiction for investment funds and financing structures. The secured finance market is very sophisticated, innovative and influential. One reason for this is a particular legal and regulatory framework that pays specific regard to the requirements of sophisticated institutions, fund managers, lenders and investors. Based on well-established English common law principles, the legal regime is highly developed and creditor friendly, and has been enhanced by specific statutory enactments, invariably driven by user input. The judicial system is reputable, highly efficient and well regarded. As the Cayman Islands is a British Overseas Territory and Crown Dependency, the Judicial Committee of the Privy Council comprised of UK Supreme Court judges is the final court of appeal. This provides market participants with the certainty of recognised and well-understood legal precedent.
The majority of secured lending transactions are cross-border – either syndicated or club deals (depending on the size) – and are governed by either English or New York law. Please see question 2.2. The domestic lending market is dominated by bilateral financings provided for local businesses. Although not within the scope of this Q&A, the domestic capital market is well developed and the Cayman Stock Exchange is regularly used and well established for listing debt and equity securities.
In addition to traditional bank lending, we have seen an increase in alternative credit providers. Please see question 3.1.
2.2 Are there any bodies in your jurisdiction/region that promote the use of standard documentation and best practices in secured finance transactions? If so, are these widely used and followed?
There are no separate bodies in the Cayman Islands that promote the use of standard documentation and best practices in secured finance transactions. As the facility documentation is usually governed by New York or English law (largely based on the Loan Syndications and Trading Association (LSTA) and Loan Market Association (LMA) terms, respectively) the standard LMA/LSTA documentation is widely used and followed. As the market is dominated in various fund financing structures, the terms of the facility documentation will vary depending on the framework of the borrower and its investment structure. The documentation will need to be particularly tailored where:
- the borrower has a single investor (known as a ‘separately managed account'); or
- there are multiple separately managed accounts in the structure (known as the ‘umbrella structure').
The Cayman Islands law governed security package is determined by the structure and investments of the borrower. Cayman Islands law provides full flexibility as to the types of assets over which security can be validly created. In a multi-tiered ‘master-feeder' structure, lenders might require cascading security in the security package; and with ‘parallel fund' structures, cross-collateralisation may be necessary. Corporate borrowers might also secure their financing over other assets such as ships, aircraft, receivables or intellectual property.
2.3 What significant secured finance transactions have taken place in your jurisdiction in recent times?
The most significant finance transactions continue to occur in the investment funds space, where funding is provided to Cayman Islands domiciled private equity funds or their portfolio companies. During the COVID-19 pandemic, the crisis forced asset managers to explore alternative liquidity solutions and traditional secured financing has been boosted by liquidity solutions used to unlock value from the equity in the portfolio of funds via net asset value based, whole portfolio or preferred equity financing. In addition to pursuing liquidity strategies for existing products, the market dislocation caused by the pandemic has caused many sponsors to consider taking advantage of new investment opportunities. As demand increases for investment strategies targeting volatility, we have seen the establishment of new funds with strategies categorised as market dislocation or event driven. We have also seen the growth of direct lending funds with litigation funding investment objectives and debt funds established for investing in underlying credit pools secured by crypto assets. We also see increasing numbers of crypto funds being established in the Cayman Islands to conduct their cross-border investment activities.
Although securitisations are not within the scope of this Q&A, it is worth mentioning that the Cayman Islands is generally considered to be one of the leading jurisdictions for the formation of securitisation vehicles.
3 Secured finance providers
3.1 Who are the key providers of secured finance in your jurisdiction? Is there a thriving alternative credit market (beyond bank lenders)?
The lending market of the Cayman Islands comprises banks and alternative credit providers. Private credit funds as lenders are extremely active in financing private equity funds and portfolio companies and providing credit for their acquisition, real estate, infrastructure and development activities. Private credit funds have demonstrated their ability to provide bespoke expertise and flexible capital, and can finance beyond the traditional means of bank lending. As some traditional lenders are continuing to experience pressure on risk appetite, liquidity and funding costs, the landscape is shifting towards structured financing solutions and we expect that private credit fund lenders will continue to grow their market share in the secured finance market. Private credit asset under management growth is likely to be buoyed by the global hunt for yield and long-term investors which need to match income with liabilities are likely to drive demand for assets of private credit funds with steady income streams.
3.2 What requirements and restrictions apply to secured finance providers in your jurisdiction? Do these vary depending on (a) the type of entity; (b) whether the lender is domestic or foreign?
There are no restrictions which apply to secured finance providers under Cayman Islands law; although please see question 1.3 in relation to the requirements under the International Tax Cooperation (Economic Substance) Act for Cayman Island non-fund alternative credit providers.
4 Secured finance structures
4.1 What secured finance structures are most commonly used in your jurisdiction?
While Cayman Islands domiciled funds and their portfolio companies dominate the borrowing market, we increasingly see corporate borrowers using dedicated Cayman Islands special purpose vehicles. Given the absence of restrictions under Cayman Islands law and regulation as to investment objectives, Cayman Islands alternative investment funds are used for the full range of alternative strategies, including hedge, private equity, venture capital, infrastructure, real estate and private debt, as well as traditional long-only investing. Consequently, the variety of fund structures and underlying investment pools necessitates a broad range of bespoke financing solutions. A newly formed private equity fund with a large amount of uncalled capital will typically borrow against the capital commitments of the investors (known as ‘subscription facilities'), and secure such borrowings by assigning the rights over the capital calls by way of security. Midway through the fund's investment period, the borrowing base may also be formed by reference to the net asset value of the fund's assets (known as ‘hybrid' or ‘net asset value' (NAV) facilities). Private debt and credit funds more often seek NAV-type facilities, borrowing against a portfolio of loans and securing such borrowings by way of share security over the portfolio companies. Secondaries that acquire and hold limited partnership and other equity interests in existing funds may secure their borrowings over those interests. There has also been recent growth in NAV facilities for real estate and infrastructure funds.
As for the more liquid hedge fund alternative strategies, their financing may involve traditional lending (eg, to bridge subscriptions and redemptions with security over collateral assets, much like a traditional mutual fund bridge funding); although their principal financing of trading activity typically entails gearing through margin, repurchase agreements, derivatives and other synthetic structures. This often leads to quasi-security arrangements, including title transfer security and sophisticated netting arrangements. Private credit funds as borrowers can borrow against the cash flow of the portfolio of loans on a secured or unsecured basis. They can securitise the portfolio or use other synthetic structures (eg, using credit default swaps or risk participations) to transfer some of the risks of holding the loan positions. Private credit funds can even raise collateralised loan obligation financing over larger portfolios by issuing sophisticated risk and return-based tranches of securities. Where the loan portfolio cannot be so easily assigned or secured, the Cayman Islands special purpose vehicles, custodian or trust-based structures come to the fore and can be deployed to house the loan portfolio in anticipation of future financing needs.
4.2 What are the advantages and disadvantages of these different types of structures?
The financing and security structures must ultimately fit the commercial, legal, regulatory, tax and structural considerations of the borrower and should not restrict the business activities of the borrower in a way that might prevent it from servicing its debt. The advantages of structuring a secured lending transaction in the Cayman Islands is that the Cayman Islands legal regime is inherently sophisticated and flexible, and such flexibility will equip the contractual parties with various structural solutions best suited for their commercial needs.
4.3 What other factors should parties bear in mind when deciding on a secured finance structure?
In relation to Cayman Islands fund borrowers that are within the scope of the Private Funds Act (PFA), lenders must be aware that a private fund cannot accept capital contributions without the fund first complying with the registration requirements imposed under the PFA. Given the importance of this registration, it is usually a condition precedent to closing fund finance facilities that a closed-ended fund borrower registers with the Cayman Islands Monetary Authority before finance is extended and provides evidence of continuing compliance with applicable PFA obligations. In addition, contractual protections are customarily incorporated in the finance documents to provide early warnings of non-compliance.
5.1 What types of security interests are available in your jurisdiction? Which are most commonly used and which are recommended (if different)?
A Cayman Islands chargor may grant security over any of its assets. The four main types of security recognised under Cayman Islands law are:
- mortgages (legal and equitable);
- charges (fixed and floating);
- liens; and
5.2 What are the formal, documentary and procedural requirements for perfecting these different types of security interests (ensuring that they are enforceable against debtors and third parties)?
Other than the Land Registry, there is no public system of registration of security in the Cayman Islands and therefore no basis for constructive knowledge of a registered charge. A Cayman Islands company security provider is required under the Companies Act (2021 Revision) to note a short description of the secured asset, the amount of the security and the name of the secured creditor on its internal register of mortgages and charges, which must be maintained at its registered office in the Cayman Islands. Failure to register leaves the mortgagor or chargor and its directors open to financial penalty, but does not invalidate the security itself; and unlike some jurisdictions (eg, England and Wales), there is no statutory time limit within which registration must take place. It is nevertheless important for lenders to:
- review a company's internal register of mortgages and charges as part of their initial due diligence; and
- ensure that their security is registered as soon as possible following its creation (although this will not by itself guarantee priority in ranking of such mortgage or charge over any mortgage or charge existing prior to its creation).
In addition to updating the register of mortgages and charges with details of security created by the company itself, when a mortgagor or chargor grants security over its shares in a Cayman Islands incorporated company, it is common practice to enter a notation in the register of members of that company to give notice of the security to third parties. However, the memorandum and articles of association of a Cayman Islands company and the register of members of a Cayman Islands exempted company are not publicly available documents. As such, not only is there no principle of constructive knowledge in relation to the contents of those documents, but it also follows that appropriate specific consents to inspect them must be obtained. In the case of a security interest granted over a partnership interest in a Cayman Islands exempted limited partnership, the general partner is required under the Exempted Limited Partnership Act (ELPA) to note security interests in respect of which it has received valid notice in the register of security interests of the partnership and under the ELPA, such register may be inspected by any person during usual business hours.
5.3 What are the main types of collateral used as security in your jurisdiction and what specific points should be borne in mind regarding each?
Mortgages: Legal mortgages are the most comprehensive and secure form of security. A legal mortgage is the transfer, by conveyance or assignment, of the legal ownership of an asset by way of security. This transfer is subject to an obligation to re-transfer ownership of the asset to the mortgagor if the mortgagor discharges its liabilities. Advice should always be obtained as to whether any such transfer triggers an onshore tax liability.
An equitable mortgage is the transfer by the mortgagor of its beneficial interest in the relevant asset to the mortgagee while the legal interest remains with the mortgagor. An equitable mortgage is weaker than a legal mortgage because a bona fide purchaser for value of the legal estate without notice of an equitable mortgage will take free from the equitable mortgage. An assignment will be equitable if it:
- relates to an equitable interest over a chose in action;
- relates to future rights; or
- does not satisfy the notification requirement of a legal assignment.
Charges: Charges are always equitable in nature. Chargors do not transfer legal or equitable interests in the asset to the chargee; nor do they confer a right of possession. Instead, the chargee has a right to resort to the asset in order to realise it and apply the sale proceeds towards payment of its debts. A fixed charge over a particular asset should give the chargee control of any dealing or disposal of the asset of the chargor, as dealing or disposal of the secured asset will be prohibited under the security document. This prohibition is crucial, as without sufficient control over the secured asset being granted in favour of the chargee, the fixed charge risks being recharacterised as a floating charge. In contrast to a fixed charge, a floating charge ‘floats' over the charged asset or assets prior to default, meaning that the chargor is free to deal with the asset without reference to the chargee until the occurrence of a default, which causes the floating charge to crystallise over the asset and become a fixed charge. The Exempted Limited Partnership Act (2021 Revision) expressly recognises that any asset of an exempted limited partnership may be subject to a floating charge.
Liens and pledges: Liens and pledges are dependent upon delivery of possession of the secured asset; thus, they are rarely used in Cayman law governed security structures.
5.4 Can security be taken over property, plant and equipment in your jurisdiction? If so, how?
Security over land is ideally taken by way of a legal mortgage. It is also possible to create an equitable mortgage over land where the beneficial title in the land is transferred to the creditor, but legal title remains with the chargor. We often see an equitable mortgage where the parties have agreed that a legal mortgage will come into effect only if certain events occur or where the formalities required for a legal mortgage cannot be met. An equitable mortgage suffers from certain disadvantages compared to a legal mortgage; but except in the case of fraud by the chargor, these disadvantages are often accepted. Security should be registered with the Cayman Islands Land Registry. Security over plant, machinery and equipment may be caught by a legal mortgage over the land if those assets are sufficiently attached to the mortgaged land; however, a fixed charge is usually granted over these types of assets. A fixed charge is generally used only for identifiable assets and where a creditor can show sufficient control over the asset. No specific documentation formalities are required to create a fixed charge; although for movable assets and other types of assets, it may be advisable to affix some sort of notice to the asset to give third parties notice of the security.
5.5 Can security be taken over cash (including bank accounts generally) and receivables in your jurisdiction? If so, how?
A security interest over cash deposits can be created by a mortgage or a charge, and will ultimately depend on the commercial intention of the parties and the level of control maintained over such cash deposits. In accordance with Cayman Islands conflict of law rules, the appropriate law to govern any security over cash deposited with a bank will be the law applicable where the bank is located (or the location of its branch where the cash was deposited).
Receivables arising under contract are choses in action, being a right which can be asserted only by bringing an action and not by taking possession of a physical asset. Receivables can be mortgaged or charged. A legal mortgage over choses in action (or debt) created by an absolute assignment in writing (which is not purported to be by way of charge only) can secure borrowings over capital commitments or provide security for borrowings of limited partners over their partnership interests. Additionally, in order for such an assignment to take effect as a legal assignment, express notice in writing must be given to the debtor, trustee or other person from which the assignor would otherwise have been entitled to claim the debt or chose in action. In the case of security over investors' capital commitments, the relevant limited partners (for partnerships) or shareholders (for corporate entities) and, in the case of security over a partnership interest, the general partner (on behalf of the partnership), should receive the notice of assignment. If an assignment relates only to part of a chose in action and/or does not involve the notification of the debtor, such an assignment will be equitable.
Assignment by way of charge generally refers to circumstances where the chargee and the chargor contractually agree that the chargee has a fixed or floating charge over the chose in action. The effect of the charge (being an encumbrance on the chose in action) is that the benefit of the chose in action is assigned to the chargee for the duration of that charge, so it obtains the right to use the chose in action (and receive any proceeds obtained in respect of it) to discharge the debt.
5.6 Can security be taken over company shares in your jurisdiction? If so, how?
Security over shares in Cayman Islands companies where the register of members is maintained in the Cayman Islands is usually taken in the form of a legal or equitable mortgage, depending on whether the secured party wishes to take legal title to the shares prior to a default of the secured obligation. Different rules may apply if:
- the register of members is maintained outside of the Cayman Islands; or
- the shares are in bearer form.
In accordance with Cayman Islands conflict of law rules, the appropriate law to govern any security over registered shares in a Cayman Islands company is determined according to the law applicable to the location of the register of members. While it is possible to grant security over shares as a matter of other laws, enforcement of such security may prove problematic. A legal mortgage is perfected by a transfer of the shares into the name of the secured creditor. The transfer occurs when the company's register of members is updated. The company's articles of association will often be amended to remove the discretion of the directors to prevent the transfer of shares to the secured creditor, thus enhancing the lender's position (and will prohibit amendments to the articles of association which would prejudice the secured creditor's position). An equitable mortgage cannot be truly perfected, but there are certain ways to enhance the position of the secured creditor, such as delivery of a duly executed undated share transfer together with a power of attorney authorising the secured creditor to date and deliver the share transfer upon the borrower's default.
5.7 Can security be taken over inventory/moveables in your jurisdiction? If so, how?
Security can be taken over inventory or stock by way of a fixed or floating charge and/or a pledge. A floating charge is more common, given the changing nature of inventory in the usual course of a chargor's business.
5.8 What charges, fees and taxes (including notary and similar fees) arise from the perfection of a security interest? Do these vary depending on the type of assets used as collateral?
If a security document is executed in or brought into the Cayman Islands, it will be subject to stamp duties. A charge or mortgage created over Cayman Islands real estate will also attract stamp duty in the amount of either 1% (for loans under CI$300,000) or 1.5% (for loans of CI$300,000 or greater) of the principal sum. A charge or mortgage created over Cayman Islands immovable assets will attract stamp duty in the amount of 1.5% of the principal sum. Additionally, a CI$50 fee will be payable to register the charge/mortgage at the Cayman Islands Land Registry. Assignment of chose of actions will attract a nominal CI$100 stamp duty. Court fees are also payable in respect of the enforcement of any security document in the Cayman Islands.
5.9 What are the respective obligations and liabilities of the parties under the security documents?
As in any common law jurisdiction, the purpose of any security created in favour of a lender is to recognise that the lender will be able to look to the particular asset or the sale proceeds obtained from that asset if the borrower fails to discharge its liabilities in accordance with the finance documents. Moreover, a secured lender will be protected on the borrower's insolvency, and should be repaid in full and ahead of the borrower's other creditors subject to any rules of priority, provided that its security is validly perfected and not capable of being set aside. Cayman Islands law-governed security documents usually grant a power to the secured creditor to appoint a receiver under the terms of the security document to sell the secured asset on its behalf. Although this contractual power is typically exercisable upon a borrower's default, the parties can freely agree how to govern their contractual relationship and, as such, a receiver could be appointed even before a default in circumstances where, for example, the secured creditor reasonably believes that its security is in jeopardy.
5.10 What other considerations should be borne in mind by all counterparties when perfecting a security interest in your jurisdiction?
Lenders should review the relevant constitutional documentation (ie, the partnership agreement or articles of association, as applicable) to ensure that the granting and enforcement of security are permissible (or at least not prohibited or hindered thereunder). If it is not, they should insist upon the removal of any prohibition of transfer or assignment in favour of the secured creditors prior to the financing being put in place.
A lender taking security for a loan will want to ensure that if the security provider defaults or becomes insolvent, its security is protected, and (so far as possible) the amount secured is repaid in full and ahead of the security provider's other creditors. To ensure this, the security that the lender takes must be properly perfected by satisfying certain procedural requirements to make the security valid against any relevant third parties. Absent contractual subordination and subject to perfection requirements, fixed charges and mortgages rank in priority of floating charges and preferential debts rank in priority of floating charges. Under Cayman Islands law, preferential debt includes wages, taxes and certain sums to employees. Security over choses in action created under Cayman Islands law will rank in priority according to the date of perfection (ie, the date on which notification is given to the debtor) and following notification, the underlying debtor cannot exercise its set-off rights against the secured creditor.
6.1 What types of guarantees are available in your jurisdiction? Which are most commonly used and which are recommended (if different)?
Provided that there is adequate corporate benefit (please see question 6.5) and it is not restricted in its constitutional documents, a Cayman Islands company or partnership has the legal capacity to grant upstream, downstream or cross-guarantees.
6.2 What are the formal, documentary and procedural requirements to perfect a guarantee?
Guarantees can be validly created orally or in writing. Guarantees, being quasi-security, do not create a security interest; hence, they are incapable of being perfected. In terms of formalities, guarantees are often executed as a deed to avoid any arguments regarding due consideration. Deed poll guarantees can be created validly only by deeds.
6.3 What charges, fees and taxes (including notary and similar fees) arise from the perfection of a guarantee?
If the guarantee is executed in or brought into the Cayman Islands, it will be subject to stamp duties. Court fees are also payable in respect of the enforcement of any guarantee in the Cayman Islands.
6.4 What are the respective obligations and liabilities of the parties under the guarantee?
Under a guarantee, the guarantor guarantees the payment obligations of one party to a contract to another party thereto. Subject to the terms of the guarantee document, lenders do not obtain any security solely by virtue of the guarantee. The guarantor will be entitled to be subrogated to the rights of the secured lender against the borrower upon payment of the guaranteed obligations.
6.5 What other considerations should be borne in mind by all counterparties when taking the benefit of a guarantee in your jurisdiction?
The provision of a guarantee by a company may be subject to any limitations contained in the guarantor's constitutional documents and will also be subject to corporate benefit limitations. The directors of a Cayman Islands company that proposes to guarantee the obligations of another entity must ensure that this is in the best interests of the guarantor (and if the guarantee is governed by Cayman Islands law, that the guarantor receives consideration or grants the guarantee by way of deed). If the guarantor does not derive commercial benefit from the transaction, the corporate benefit to the company could be called into question. In those circumstances, a shareholder, creditor or liquidator of the guarantor could bring an action against the company before a Cayman Islands court, which could order that the guarantee be set aside. In addition, the directors could incur personal liability where they have breached their fiduciary duty to act in the best interests of the company, although collateral contractual provisions usually provide for broad director exculpation and indemnification.
7 Financial assistance
7.1 What requirements and restrictions apply with regard to the provision of financial assistance in your jurisdiction? What specific implications do these have for secured finance transactions?
There are no statutory financial assistance rules under Cayman Islands law equivalent to those existing under English law.
8 Syndicated lending
8.1 Is the concept of an agent or trustee recognised in your jurisdiction? If not, how is security taken for multiple lenders?
Loan Syndications and Trading Association (LSTA)/Loan Market Association (LMA) form facilities tend to be designed as syndicated structures whereby the security interest is granted in favour of a security trustee which holds it on trust for the benefit of the secured creditors. Cayman Islands law applies common law trust principles and therefore recognises trust arrangements. There are no restrictions under Cayman Islands law on the enforcement of rights or security interests solely because those rights or security interests are held by an agent.
8.2 What requirements and restrictions apply with regard to syndicated lending in your jurisdiction?
There are no special requirements under Cayman Islands law with regard to syndicated lending. The concept of a security or facility trustee is recognised in the Cayman Islands. There are no restrictions on the enforcement of rights or security interests solely because those rights or security interests are held by a trustee. A trustee is treated in the same way as any other secured party and is subject to any applicable local laws.
8.3 What other considerations should be borne in mind by all counterparties when engaging in syndicated lending in your jurisdiction?
New York or English law tends to be selected as the governing law in financing transactions in which Cayman Islands borrowers or obligors are involved. When those facility agreements are based on LSTA/LMA forms, they are designed to be freely transferable by the lenders. Fund borrowers in particular heavily negotiate loan transfers and attempt to regulate potential eligible transferees by way of white lists, black lists or explicit transfer restrictions in the facility agreements. In addition to the provisions of the applicable facility agreement, one must also have regard to any applicable provisions of the relevant governing law to ascertain any rules regulating loan trading transactions.
In terms of any Cayman Islands law-governed security interest that has been created to secure the obligations arising under a tradable loan, the transfer or assignment provisions in the relevant security document or documents typically follow those of the facility documentation. If the loan is validly transferred to a new lender, the Cayman Islands law-governed security should also transfer upon execution of the relevant documentation. Assuming that the security trustee remains in place following a loan transfer, no further registration requirements need to be completed. In other circumstances (eg, in respect of bilateral loans, where no security agent has been appointed or if there is a change of security agent), the details of the new creditor (and security agent, if applicable), following a loan and security transfer, should be noted on the register of mortgages and charges of the borrower.
9 Taxes, charges and fees
9.1 What taxes and similar charges are levied in the secured finance context in your jurisdiction? Do these vary depending on whether the lender is a domestic or foreign entity?
The Cayman Islands has no direct taxation regime as a matter of centuries-old fiscal policy. Accordingly, no taxes are imposed under Cayman Islands law on the profits, income, gains or appreciations of Cayman Islands borrowers; and there is no withholding in respect of any dividend, distribution or interest payment by a Cayman Islands borrower. Nominal stamp duties apply to documents executed or brought into the Cayman Islands. There are no exchange or currency controls in the Cayman Islands.
9.2 Are any exemptions or incentives available?
There are no government incentives under Cayman Islands law for lenders.
9.3 What other significant costs will be incurred by the counterparties in entering into a secured finance transaction? Do these vary depending on whether the lender is a domestic or foreign entity?
The rules set out in question 9.1 and 9.4 apply equally to domestic and foreign lenders.
9.4 What strategies might the counterparties consider to mitigate their tax and other liabilities in the secured finance context?
Notwithstanding the absence of direct taxation, a Cayman Islands borrower formed as an exempted company desiring additional comfort on this matter may obtain an undertaking from the Government of the Cayman Islands that:
- for a period of 20 years from the date of the undertaking certificate, no laws of the Cayman Islands imposing any tax on profits, income, gains or appreciation shall apply to such borrower; and
- no tax in the nature of estate duty or inheritance tax shall be payable on the equity interests of that borrower.
A borrower formed as an exempted limited partnership may obtain a similar undertaking for a period of 50 years. A unit trust fund may also obtain a similar undertaking for a period of 50 years, provided that it excludes investors resident or domiciled in the Cayman Islands (other than Cayman Islands exempted companies and non-resident companies).
10 Judicial enforcement
10.1 In the event of default, what options are available to enforce a security interest or guarantee? Is self-help available in your jurisdiction in connection with the enforcement of security (if so, in what circumstances) or must enforcement action be pursued through the courts?
The transaction documents will ultimately govern the rules of enforcement of a security interest or a guarantee. Self-help is the primary option. The main remedies available to a creditor to enforce its security are to:
- take possession of the secured asset;
- exercise the power of sale;
- appoint a receiver with a power of sale;
- effect contractual or legal rights of set-off; and
- appropriate financial collateral.
The preferred method for enforcing security is usually the appointment of a receiver; and a secured creditor with a valid security interest will normally be entitled to enforce the security interest irrespective of whether the security provider is in liquidation.
10.2 How long does the enforcement process generally take and what steps does this typically involve? Do these vary depending on any applicable requirements or restrictions (eg, requirement for public auction or regulatory consents)? Do these vary depending on whether the lender is a domestic or foreign entity?
Ideally, enforcement should be straightforward and quick. The preferred enforcement method is for a secured lender to appoint a receiver to take possession of assets. This should be capable of being effected immediately, as it should be based on a contractual right to appoint one. There may be further steps that need to be taken depending on the class of asset involved. For example, in some cases it may be necessary to serve statutory notices and hold a public auction before enforcing against real estate assets. A receiver will generally owe a duty to take reasonable steps to obtain the best price reasonably obtainable when selling a secured asset. Should there be a challenge to the lender's entitlement to enforce, it may be necessary to seek intervention from the court. In the Cayman Islands, there is a bespoke court dedicated to financial services disputes. The length of court proceedings is context specific and dependent upon the court diary; but in financial services cases, expect the court to be efficient and proactive. In simple cases it may be possible to obtain a judgment in a matter of months, but this could take much longer. If the governing law of the contract is not Cayman Islands law, the proceedings may take longer, as the court will need to hear expert evidence on that foreign governing law. Cayman Islands law does not distinguish between domestic and foreign lenders.
10.3 What other considerations should be borne in mind when enforcing a security interest or guarantee in your jurisdiction?
The most important consideration is to take local advice at the time the security package is put together. In the Cayman Islands, as anywhere, many different types of legal entity are used, such as limited companies, segregated portfolio companies, limited partnerships and trusts, among others. Each structure has advantages and disadvantages from an enforcement perspective. Likewise, it is important to consider what assets are to be secured and where they are located to ensure maximum prospects of successful enforcement. As a (very) general rule, the more control the lender can maintain over an asset, the better the chances of enforcing. With cash, for example, a lender will ideally require cash to be deposited in an account controlled by the lender. There will of course be give and take, depending on the needs of the borrower; but a close analysis of the asset class and legal structure at a very early stage is recommended.
10.4 Are direct agreements with contractual counterparties well understood in your jurisdiction?
Direct agreements are well understood in the Cayman Islands, although direct agreements will usually be governed by the governing law of the financing documents, such as English or New York law.
10.5 What other avenues are available to a lender to safeguard its position in connection with security or guarantees?
In addition to out-of-court remedies and court enforcement, contractual quasi-security provisions can be beneficial for any lender. The inclusion of netting, set-off, limited recourse and non-petition provisions in contracts is a well-established practice and recognised under Cayman Islands law, and such provisions are crucial building blocks in certain special purpose vehicle and synthetic financing structures. Segregated portfolio companies offer structural segregation by ring-fencing assets and liabilities on a segregated portfolio basis. Negative pledges included in security documents have proved useful in preventing the creation of subsequent charges ranking in priority or pari passu with the security interest that they purport to protect.
11.1 How (if at all) do bankruptcy proceedings impact on the enforcement of security by a creditor?
When a winding-up order is made or a provisional liquidator is appointed, no suit, action or other proceedings – including criminal proceedings – can be proceeded with or commenced against the company except with the leave of the court and subject to such terms as the court may impose. This rule does not apply to any enforcement of security by a secured creditor, as such enforcement does not require an order of the court of the Cayman Islands.
11.2 In what circumstances can antecedent transactions be unwound for preference? What other similar measures apply in this regard?
Upon commencement of a winding-up process, certain transactions of an insolvent company are susceptible to challenge, pursuant to provisions of the Companies Act, as outlined below. These legislative measures derive from the common law principle that a court will not allow an entity to arrange its affairs to frustrate the legitimate interest of its creditors in the event of its insolvency.
Fraudulent dispositions: A disposition of property made at an undervalue by or on behalf of a company with an intent to defraud its creditors is voidable by the liquidator. Such action must be brought within six years of the date of the relevant disposition. The burden of proof in establishing the intent to defraud lies with the liquidator. Creditors may in some circumstances bring fraudulent disposition claims themselves, outside of the liquidation process, in accordance with the Fraudulent Dispositions Act.
Fraudulent trading: If, in the course of the winding up of a company, it appears that any business of the company has been carried out with an intent to defraud its creditors or the creditors of any other person, or for any fraudulent purposes, the liquidator may apply to court for a declaration that any persons that were knowingly parties to such fraudulent trading will be liable to make such contributions (if any) to the company's assets as the court thinks proper. There is no prescribed time under the Companies Act prior to the winding up of the company during which the contested trading must have taken place.
Voidable preferences: Every conveyance or transfer of property or charge thereon, and every payment obligation and judicial proceeding made, incurred, taken or suffered by a company at a time when it was unable to pay its debts (as defined in the Companies Act) and made or granted in favour of a creditor with a view to giving that creditor a preference over the other creditors of the company will be invalid if it occurred in the six months immediately preceding the commencement of liquidation of the company.
Clawback claims are quite rare in the Cayman Islands. Bringing a successful claim is challenging, given the difficulty of satisfying the requirements of fraudulent intent or an intent to prefer. Many of the above provisions are based on historic legislation from England and Wales, which have since been updated to lower the threshold to bring a claim. A lender with valid first-ranking security is unlikely to be affected by a clawback claim in any event, because the assets that are the subject of its security interest will fall outside the scope of the liquidation of the company, provided that the original grant of security is not the subject of the clawback challenge.
11.3 Are any types of entities excluded from the bankruptcy regime in your jurisdiction? If so, what alternative regimes apply?
12 Governing law and jurisdiction
12.1 What law typically governs secured finance agreements in your jurisdiction? Do any specific requirements apply in this regard?
Where a combination of jurisdictions is involved in the structure, there is an added level of complexity, as different governing laws may govern different aspects of the contractual arrangements. In complex, cross-jurisdictional fund structures, while the governing law of the financing documents is usually English or New York law, the governing law of an exempted limited partnership agreement in respect of a Cayman Islands exempted limited partnership, for example, could be the law of the Cayman Islands. In some cases, the general partner could be formed outside the Cayman Islands and in those circumstances, generally, we would expect that security over the capital call rights of the general partner will follow the governing law of the partnership agreement, although due diligence of the documentation is certainly required.
Similar issues should be considered in light of the situs of other security assets. The Cayman Islands do not generally have any mandatory provisions of law that would require Cayman Islands security to be taken over assets with their situs within the jurisdiction, and the courts will generally respect and give effect to valid foreign law security interests. Consideration should, however, be given to the applicable governing law and situs in the event of enforcement.
As outlined in question 5.6, security over shares of a Cayman Islands company should be Cayman Islands law governed if the register of members of such company is maintained in the Cayman Islands.
Regardless of the governing law of the security, in respect of any security taken over an asset with a Cayman Islands situs, any Cayman Islands law perfection requirements should be followed. Moreover, where the mortgagor or chargor is a Cayman Islands company or a limited partner of a Cayman Islands exempted limited partnership, the foreign law security should be noted in:
- the register of mortgages and charges, in the case of a company; or
- the register of security interests, in the case of a security interest created over a partnership interest in a Cayman Islands exempted limited partnership.
12.2 Is a choice of foreign law or jurisdiction valid and enforceable? In the case of a choice of foreign law of jurisdiction, will any provisions of local law have mandatory application? Are submission to jurisdiction provisions that operate in favour of one party only enforceable?
The courts of the Cayman Islands will recognise and give effect to the choice of the parties to a contract of a particular governing law if the selection was made in good faith and would be upheld as a matter of that governing law by the courts of that jurisdiction. Where the parties have agreed to submit disputes arising from or in connection with their contract to the courts of a particular jurisdiction, a judgment obtained in such jurisdiction (other than certain judgments of a superior court of any state of the Commonwealth of Australia) will be recognised and enforced in the Cayman Islands at common law without any re-examination of the merits of the underlying dispute, by an action commenced on the basis of the foreign judgment debt. This is provided that such judgment:
- was given by a foreign court of competent jurisdiction;
- is final and conclusive;
- is for a liquidated sum;
- is not in respect of taxes or a fine or a penalty; and
- was not obtained in a manner and is not of a kind whose enforcement would be contrary to the public policy of the Cayman Islands.
Unilateral jurisdiction clauses are enforceable under Cayman Islands law.
12.3 Are waivers of immunity enforceable in your jurisdiction?
Yes, provided that such waiver constitutes a legal, valid, binding and enforceable obligation under the law governing such waiver.
12.4 Will foreign judgments or arbitral awards be enforced in your jurisdiction? If so, how?
The Cayman Islands is party to the New York Convention and the relevant parts of the New York Convention are incorporated in the Foreign Arbitral Awards Enforcement Act (1997 Revision). The courts of the Cayman Islands will recognise and enforce arbitral awards made pursuant to an agreement to arbitrate in a jurisdiction which is party to the New York Convention. The grounds for refusing to recognise or enforce an award of a tribunal seated in a foreign jurisdiction that has ratified the New York Convention are limited. They are as follows:
- A party to the arbitration agreement was (under the law applicable to it) under some incapacity;
- The arbitration agreement was not valid under the law to which the parties subjected it or, failing any indication thereon, under the law of the country where the award was made;
- The party was not given proper notice of the appointment of the arbitrator or the arbitration proceedings, or was otherwise unable to present its case;
- The award deals with a difference not contemplated by or not falling within the terms of the Foreign Arbitral Awards Enforcement Act submission to arbitration or contains decisions on matters beyond the scope of the submission to arbitration;
- The composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties or, failing such agreement, with the law of the country in which the arbitration took place; or
- The award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, it was made.
Recognition or enforcement may also be refused if:
- the award is in respect of a matter that is not capable of settlement by arbitration; or
- it would be contrary to public policy of the Cayman Islands to recognise or enforce the award.
13 Trends and predictions
13.1 How would you describe the current secured finance landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?
At the time of writing, we are experiencing an active market, with rebounding deal volumes and robust private equity fundraising and capital deployment activities. We expect that in the next 12 months, special situations funds and distressed assets investments will continue to grow and hedge and derivatives products across the market will increase. Sustainable and social impact financing have also been the driving the focus of the markets, with environment, social and governance-focused investment funds and impact financing of sustainable developments on the rise. In the post-pandemic landscape, traditional secured financing has been boosted by liquidity solutions used to unlock value from the equity in the portfolio of funds via bet asset value-based, whole portfolio and preferred equity financing. In addition to pursuing liquidity strategies for existing products, the market dislocation caused by the COVID-19 pandemic has caused many sponsors to consider taking advantage of new investment opportunities. As demand increases for investment strategies targeting volatility, we have seen the establishment of new funds with strategies categorised as market dislocation or event-driven. We also see the continuous growth of cryptocurrency funds, funds issuing digital assets and various financing transactions secured by digital assets.
In accordance with Preqin's assets under management (AUM) forecast model, between the end of 2020 and the end of 2025, global AUM in alternatives is expected to increase by 60%. We have no doubt that the growth of the private equity and private credit markets will continue at considerable pace; and with that, we anticipate larger-scale and increasingly complex fund and financing structures. The Cayman Islands will remain a favoured offshore jurisdiction for investment funds, due to its sophisticated legal and regulatory framework and high level of compliance. We expect that some of the pandemic-driven innovative liquidity solutions will become core financing options throughout the lifecycle of investment funds.
14 Tips and traps
14.1 What are your top tips for the smooth conclusion of a secured finance transaction in your jurisdiction and what potential sticking points would you highlight?
We have no doubt that the growth of the private equity (as borrowers) and private credit (as alternative lenders) markets will continue at considerable pace and with that, we anticipate larger-scale and increasingly complex multi-fund structures. In our view, it will therefore become increasingly important to ensure close collaboration between fund finance and fund establishment lawyers at the inception of each fund, to ensure that fund entities will have sufficient liquidity to meet their investment objectives throughout the entire fund cycle. For the smooth conclusion of a secured finance transaction, Cayman Islands law advice should be sought at an early structuring/term sheet stage.
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.