The mad rush
It used to be commonplace for a voluntary liquidator to receive an urgent email or telephone call from a Cayman fund manager near the end of the calendar year to terminate a Cayman entity prior to the end of the calendar year. The actual decision to terminate did not usually arise overnight, but was a result of several months of deliberation. Considerations of the fund manager normally included (i) the level of returns versus continuing costs to operate (ii) the existing track record and ability to attract new investors (iii) whether the vehicle had achieved its stated purpose or its fixed duration reaching an end under the governing documents (iv) the legal ability to continue extensions of the company’s life under the governing documents and (v) viability for other reasons. Regardless of the rationale, the manager’s instructions required the voluntary liquidator to act quickly. In most cases, the relevant deadlines were met, the company’s operations were terminated and legally ceased to exist. Times have now changed and there are many new regulations in the Cayman Islands that managers must take into account in the voluntary liquidation process.
The Beneficial Ownership Regime
An example of impacting legislation is the Cayman Islands beneficial ownership regime which requires companies subject to the Cayman Islands beneficial ownership regime to establish and maintain beneficial ownership registers in the Cayman Islands and to submit beneficial ownership information to the Cayman Islands competent authority. In particular, The Beneficial Ownership (Companies) Regulations (2019 Revision) states that:
(a) corporate services providers must deposit beneficial ownership information with the competent authority not less than once in each month and where there is no change since the prior deposit of such information, a notice that there has been no change to the information since that time
(b) notwithstanding this, the period for deposit of the beneficial ownership information and notice is every ninety days for a company that is in liquidation.
Companies subject to the Cayman Islands beneficial ownership regime and in ongoing liquidation must comply with these requirements.
Economic Substance Law
Another recent development is the Economic Substance Law (the “ES Law”) of the Cayman Islands. If a fund management company falls within the definition of a relevant entity conducting “fund management business” (managing securities in circumstances involving the exercise of discretion) under the ES Law and no restructuring options have been implemented, the relevant entity will, so long as it exists, continue to have obligations which the ES Law imposes on it (however, no notification obligation will exist under the ES Law for a fund manager (which carried on a relevant activity) which is finally dissolved or completes winding up before it is possible to comply with the notification obligations on the ES Portal).
Any liquidators (or equivalent) or other representatives of a relevant entity who were responsible for the liquidation, winding up or dissolution of the relevant entity have duties to maintain the relevant entity’s records and to respond to the Cayman Islands authority’s information requirements under the ES Law for six years after final dissolution (the final dissolution date is evidenced by the certificate of dissolution). These records may be held by a service provider if located in the Cayman Islands.
When an Entity that has been an Investment Entity is closed (i.e. there are no remaining participating investors, or equivalent, in the Investment Entity, and the Investment Entity is not open to further investors), or a liquidator has been formally appointed, but there remain residual assets and debtors, and realisation or recovery actions are being pursued, the Investment Entity will not be an Investment Entity for the purposes of the relevant FATCA agreements. Where any Investment Entity was closed, or in liquidation before 30 June 2014, it will have no registration or reporting obligations in relation to that business. However, when the Entity is no longer considered an Investment Entity after 1 July 2014, a final return should be made in accordance with the reporting requirements if applicable by or before the next reporting deadline.
Liquidators (or equivalent) must ensure that the Cayman Financial Institution continues to satisfy all its obligations under Part 2 of the CRS Regulations. In addition, the liquidators (or equivalent) must ensure that the Cayman Financial Institution notifies the Cayman Islands Tax Information Authority of such final dissolution or winding up on or after such final return.
Unlike the position regarding FATCA, an Investment Entity does not cease to be classified as such for the purposes of the CRS Regulations if it is either:
*closed (i.e. there are no remaining participating investors, or equivalent, in the Investment Entity, and the Investment Entity is not open to further investors), or
*is in liquidation (i.e. a Liquidator has been formally appointed, but there remain residual assets and debtors, and realisation or recovery actions are being pursued.
In the case of a Cayman Reporting Financial Institution, the liquidators (or equivalent) must ensure that it has complied with its reporting obligations in respect of (i) the previous calendar year and (ii) the current calendar year. A return in respect of any Reportable Account for the current calendar year when such final dissolution or winding up occurs should report all information specified in the relevant schedule to the CRS Regulations.
Any liquidators (or equivalent) or other representatives of a Cayman Financial Institution who were responsible for the final liquidation or dissolution of a Cayman Financial Institution have duties to maintain the Cayman Financial Institution’s records and to respond to the Cayman Islands Tax Information Authority’s information requirements under regulation 12 of the CRS Regulations for six years after filing such CRS return, as outlined above. These records may be held by a delegate.
Securities Investment Business (Amendment) Law, 2019
The latest change affecting the decision to terminate is the Securities Investment Business (Amendment) Law, 2019, which amended the Securities Investment Business Law (2019 Revision) on 18 June 2019 (taken together, the “New SIBL Regime”).
According to the New SIBL Regime, any person who was registered with the Cayman Islands Monetary Authority as an “Excluded Person” the day immediately before the commencement of the New SIBL Regime must re-register with the Cayman Islands Monetary Authority as a registered person by 15 January, 2020 if that person wishes to continue carrying on securities investment business. Such re-registration will be met with new filing requirements and continuing obligations and, as such, some “Excluded Persons” may wish to terminate prior to 15 January, 2020 (these requirements were summarised in a previous guide).
What you should do now
If the company documents do not designate a specific party as a voluntary liquidator, you should start considering who to appoint as a voluntary liquidator (voluntary liquidation is the preferred route where a company has previously traded). The voluntary liquidator will need to consider the implications of various legislation and regulations, along with mandatory notices of liquidations required to be published in the Cayman Islands Gazette and filings with the registrar in the Cayman Islands. As a client, you should also bear in mind the estimated cost of such termination as accruals must be made or reserves set aside to meet the expenses, all of which may reduce the amount available to redeeming investors. In any event, the advice is to start planning now, rather than waiting until the year end.
About the Author
Alric Lindsay is a Cayman Islands corporate/funds lawyer and acts as a voluntary liquidator to Cayman Islands fund structures. Alric is also an independent fund director approved by the Cayman Islands Monetary Authority and licensed under The Directors’ Registration and Licensing Law, acting as a director to Cayman funds and Cayman management companies. Alric can be contacted at firstname.lastname@example.org