The Act follows an active industry consultation process, with the changes being widely seen as commercially beneficial for both our clients and the Cayman Islands as a competitive financial services jurisdiction.
A New, Simplified, Process for Reduction of Share Capital
Historically, the Cayman Islands has followed one of the underlying tenets of English company law that the capital of a company should be maintained. Those who review a company’s constitutional documents should be entitled to assume in dealing with the company that the specified share capital will remain in the company and be available for use. Many jurisdictions have determined that the maintenance of share capital is neither necessary nor beneficial in the modern commercial context. However, the Cayman Islands has continued to require that a company’s share capital be specified in its memorandum of association and that any reduction must be permitted by a company’s articles of association. If permitted, the Cayman Islands Companies Act (As Revised) (Companies Act) currently provides that a reduction in share capital can only be undertaken through a court process.
A company may wish to reduce its share capital for a number of commercial or accounting reasons including:
- where there are large accumulated losses that prevent the payment of dividends, it may be possible to reduce share capital in order to write off the deficit on the profit and loss account so that money is freed up to pay dividends;
- to reduce its capital as a part of a transaction involving a capital reorganisation, such as a scheme of arrangement;
- to clean up its balance sheet to reflect the actual capital employed in the business, particularly where capital has been lost; or
- to repay its shareholders part of its paid-up capital where that capital is surplus to current or expected requirements.
In practice, needing to resort to the courts to undertake a share capital reduction for a solvent company in order to effect a commercial goal, can be time consuming and expensive, and arguably does little to protect creditors. Accordingly, there was a clear need to put in place a more streamlined approach.
Pursuant to the Act, a solvent company will be able to reduce its share capital by filing with the Registrar a special resolution to that effect, supported by a directors’ solvency statement. The process will allow a solvent company to efficiently achieve its commercial goals at a lower cost. Access to the courts will remain available to companies that are not eligible for the simplified approach.
Widening of the Scope of Eligibility to Continue Into the Cayman Islands
Section 201 of the Companies Act currently provides that a foreign company with limited liability and having a share capital may continue by way of transfer as a Cayman Islands exempted company, provided that the laws of the foreign jurisdiction where it was incorporated permit or do not prohibit such a transfer. As noted above, not all jurisdictions continue to utilise the notion of a share capital. In those cases, the statement that only companies with a share capital can continue in served as an unnecessary obstacle.
Pursuant to the Act, continuation into Cayman will be available to any foreign company “with or without share capital” so long as the other preconditions are met. This is a sensible approach, particularly given that the Companies Act otherwise requires that any entity continuing in must be constituted in a form (or substantially in a form) which could have been incorporated as an exempted company in the first place. This amendment opens the door for foreign companies in jurisdictions whose approach to share capital varies from that seen in Cayman, but the foreign company will still need constitutional documents that ‘fit’ with Cayman Islands law to be registered.
Re-Registration
Cayman Islands company law strives to provide maximum flexibility in corporate structuring, with multiple forms of entities available for different commercial situations. Under the Act, this flexibility is enhanced with new provisions that will permit an existing exempted company to apply to be re-registered as an ordinary resident company.
Conversion
The Act will also permit a limited liability company (LLC) or a foundation company to convert to an exempted company. The process is straightforward and efficient, requiring member consent, proof of good standing and a filing with the Registrar. Given that the constitutional documents of an LLC or a foundation company are likely to be very different from what is required for an exempted company, to effect conversion an entity will need to update its documents to dovetail with the requirements of the Companies Act.
Conclusion
The Companies (Amendment) Act, 2024 evidences a welcome collaboration between Government and industry in response to stakeholder feedback. It is changes such as these which help the Cayman Islands maintain its standing as a desirable jurisdiction in the international financial services market.
