CAYMAN ISLANDS Trends and Developments Contributed by: Simon Raftopoulos and Benjamin Woolf, Appleby
In respect of a Cayman Islands share mortgage or a charge over interests in a limited partnership or limited liability company, these security interests are equita- ble in nature. The shareholder or limited partner grants the security in favour of the lender but remains the legal title holder of record until the lender enforces the security following an event of default under the finance documents. While a legal mortgage or charge is possible under Cayman Islands law and would avoid the risk of being defeated by a bona fide third-party purchaser for val- ue, many lenders prefer to take the equitable inter- est. This is because the legal interest would require the lender to hold legal title to the shares or interest throughout the security period and this often holds tax, regulatory and practical consequences. Subject to certain exceptions, there are generally no perfection requirements in the Cayman Islands and a security document does not need to be filed, regis- tered or recorded in the Cayman Islands, as there is no public or central register of security; priority of security is broadly determined by the “first in time” principle. Cayman Islands companies and limited liability com- panies are required to maintain a register of mortgag- es and charges in respect of securities granted by the entities. However, entry on such a register is not a perfection step but it does provide priority to a lender or security agent based on the order of registration. Security interests granted over certain assets such as land, intellectual property rights, ships and aircraft do need to be registered at the relevant registry in the Cayman Islands for the asset in question. Whenever a security interest is created by way of an assignment of contractual rights under a Cayman Islands law-governed agreement (such as an assign- ment of call rights in connection with security over capital contributions on a capital call financing) or is granted over limited partnership interests or limited liability company interests, then service of notice on certain third parties is required to perfect the interest and establish priority. A security interest over cash deposits is generally cre- ated by way of fixed or floating charge. In accordance
with Cayman Islands conflict-of-law rules, the appro- priate 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 the bank branch in which the deposit is made). Stamp duty No stamp duty will be payable unless the applicable security document is executed in or brought into the Cayman Islands. The amount of stamp duty will vary depending upon the type of security document and the identity of the assets subject to the security inter- est. Enforcement With the exception of certain limited circumstances in connection with foreclosure in respect of specific assets, such as ships and aircraft, a secured party can enforce its security pursuant to a Cayman Islands security agreement without a court order or any gov- ernment consent. The applicable Cayman Islands law security agreement will set out the rights of the secured party upon enforcement. It will typically con- tain a power of sale and the right to appoint a receiver and will otherwise set out various self-help remedies, often specific to the type of security being taken. In the case of security over shares, limited partner- ship interests or limited liability company interests, the charger will have granted (among other rights) a right to the secured party (or its nominee) to be entered in the relevant register of shareholders, limited partners or members, as applicable, in place of the charger. The registration of the secured party on the relevant register converts the lender’s security from an equita- ble to a legal interest and places the secured party in the position of “mortgagee in possession”, enabling it to exercise control rights attaching to the interests (ie, to vote and receive dividends) and to sell the interests to realise their value and discharge the secured obli- gations under the finance documents. The rights of a secured party are protected by stat- ute upon the insolvency of a Cayman Islands entity, ensuring the priority of any secured creditor. How- ever, any disposition of property or transfer of shares made while a Cayman Islands company is subject to a winding-up order or liquidation will be void without
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