Normally, the investment manager of a Cayman fund would try to beat the calendar year- end deadline to close a Cayman fund which is no longer viable. If registered as a mutual fund with the Cayman Islands Monetary Authority (“CIMA”), this involves the cessation of the business of the Cayman fund, deregistering it as a regulated fund with CIMA and having maximum distributions paid to the Cayman fund’s investors following a liquidation of its assets. Completing this process before the calendar year-end meant that a Cayman fund could, on a successful application to CIMA, avoid the high cost of an audit during the year of termination of the Cayman fund. The Cayman fund could also escape regulatory fees which become due and payable to CIMA immediately following the calendar year-end. However, CIMA’s new rule and updated procedures may now change this plan.
Why is this happening?
CIMA’s new procedures state that “unless a Fund qualifies for an audit waiver, it must provide audited accounts from the date of the last financial year end (for which audited statements have been filed) either to the date of commencement of the winding up where third party liquidator(s) have been appointed, or the date of the final distribution if no third party liquidator(s) have been appointed” . A Cayman fund may therefore be subject to further audit fees if an audit waiver is not granted by CIMA in connection with the final winding up, liquidation and CIMA deregistration of the Cayman fund.
How Cayman funds can avoid this
First, managers of Cayman funds know that CIMA has the power, under the Mutual Funds Law of the Cayman Islands, in relation to the whole or part of any financial year of a CIMA regulated Cayman fund, to exempt the CIMA regulated mutual fund from the audit requirement under the Mutual Funds Law either absolutely or subject to such conditions as CIMA may think fit to impose.
Second, the relevant Cayman fund (if terminating its business and winding up by way of voluntary liquidation) should apply to CIMA as soon as possible to cancel its certificate of registration. This involves the surrender of the Cayman fund’s original certificate of registration and other required documents.
Third, managers of Cayman funds should be aware that CIMA recently issued a statement that the requirement of a Cayman fund (registered with CIMA) to produce audited accounts either to the date of commencement of the winding up or to the date of the final distribution will apply to all Cayman fund deregistration applications submitted to CIMA on or after 1 October 2015.
Understanding the foregoing will enable managers of Cayman funds to better plan the winding up of their Cayman funds which intend to cease business during 2015.
Complacency with the rule
Notwithstanding the importance of the above, one might be tempted to dismiss the application of the new rule. The reasoning for such a chancy approach is that, in the past, CIMA has been very kind by granting audit waivers to many Cayman funds, leading some stakeholders to believe that there exists a “right” to an audit waiver. In fact, there is no such “right” and the discretion to grant audit waivers lies squarely in the hands of CIMA under the Mutual Funds Law.
Ultimately, any failure to properly plan a Cayman fund’s winding up or simply ignoring the rule (i.e. taking the “laid back approach”) may lead to a Cayman fund being hit with large audit fees. In particular, this will be significant for all Cayman fund deregistration applications submitted to CIMA on and after 1 October 2015 where an audit waiver is not granted by CIMA.
If you are a manager of a Cayman fund seeking assistance with the termination of your Cayman fund by this important deadline, please contact Alric Lindsay at email@example.com.
About the Author:
Alric Lindsay is a corporate lawyer, an independent fund director approved by the Cayman Islands Monetary Authority and licensed as a professional director under The Directors’ Registration and Licensing Law. Alric also acts as voluntary liquidator to Cayman Islands entities. Alric can be contacted at firstname.lastname@example.org