The Liquidation of a Company on the Cayman Islands: the Rules and the Procedure

The liquidation of a company on the Cayman Islands is carried out when it is required to lawfully complete the business, settle with the creditors, transfer the remainder of the assets to the participants and terminate the status of the legal entity. This is a legal procedure, within the framework of which contracts and bank accounts are closed, the property is inventoried, the demands of the counterparties are considered and the debts are repaid.

The liquidation of a firm on the Cayman Islands should be distinguished from strike-off — the exclusion of the organisation from the register. The first variant is applied in the presence of assets, debts, current agreements, bank accounts, investors, shareholders, creditors, as well as regulated activity. The administrative exclusion is suitable only for a non-operating structure without property and obligations.

The procedure of the closure of a company on the Cayman Islands depends on the solvency and the presence of a licence or registration with the Monetary Authority (Cayman Islands Monetary Authority, CIMA). If the business is able to pay the debts, a voluntary procedure is used. Upon financial problems, disputed demands or the participation of the regulator, a liquidation by decision of the court may be required.

The Liquidation of a Company on the Cayman Islands: the Responsible Bodies

The closure of a Cayman legal entity passes through several departments. The Registrar of Companies performs the functions of the central body of the accounting of commercial organisations. This body accepts official notifications about the beginning of the voluntary termination of activity, the written consents of the appointed liquidators and the notarised declarations of solvency. At the final stage, the department receives the final reports, arranges the completion of the procedure and issues the final certificate of the liquidation of the firm.

The General Registry ensures the technical and normative functioning of the unified information base of the Cayman Islands. Through the said department are published the approved forms of documents, the templates of applications and the circulars regulating the abolition of commercial structures.

The Grand Court of the Cayman Islands is the highest judicial instance of the jurisdiction. It carries out the supervision over the compulsory closure of enterprises upon the applications of creditors or participants. The court is authorised to appoint independent official liquidators, to approve the plan of the distribution of the property and to transfer the voluntary termination of the activity of a Cayman organisation under judicial control in the case of the revealing of insolvency.

The Monetary Authority (Cayman Islands Monetary Authority, CIMA) is a specialised supervisory body, which coordinates the closure of investment funds, trusts, insurance and banking organisations. The financial regulator checks the absence of unfulfilled obligations before investors and revokes the previously issued licences. It is also endowed with the right of the independent application to the judicial instances for the compulsory termination of the work of accountable licensees.

The Department for International Tax Cooperation (DITC) controls the observance of the international standards of transparency upon the liquidation of a company on the Cayman Islands. The service checks the submission of reporting on the automatic exchange of information, assesses the fulfilment of the rules on economic substance and accepts the final tax notifications before the completion of the process.

The Cayman Islands Gazette (the official newspaper) is a state periodical publication, which serves as a mandatory channel for the informing of third parties about the termination of the work of a business on the Cayman Islands. In it are placed the following notices:

• official notifications about the beginning of the voluntary abolition of the legal entity;

• information about the appointment of insolvency administrators;

• publications about the convocation of the concluding meeting of shareholders;

• demands to the creditors on the presentation of the existing claims.

The Ways of the Closure of an Enterprise on the Cayman Islands

It is possible to close a company on the Cayman Islands in several ways. The choice depends on the financial condition of the organisation, the presence of creditors, a corporate conflict, the regulatory status and the goal of the owners. For a structure with assets and debts, liquidation is applied. For a legal entity without property and obligations, strike-off — the exclusion from the register — is possible.

Liquidation in a voluntary order

Voluntary liquidation is suitable for a company that is able to pay all the debts together with the interest within 12 months after the beginning of the procedure. Such a variant is used upon the closure of a holding, the completion of an investment project, the termination of operational activity or the simplification of a group.

The directors sign a declaration of solvency. In the document it is confirmed that the assets are sufficient for the full settlement with the creditors. Then the participants adopt a special resolution on the liquidation of the firm on the Cayman Islands and appoint a manager.

Liquidation under the supervision of the court

This way of the closure of an enterprise on the Cayman Islands is applied when the voluntary procedure has already begun, but requires judicial control. The ground may be the absence of a declaration of solvency, a conflict of participants, a dispute with creditors, claims to the actions of the manager or the interest of CIMA.

Upon such a variant, the company does not immediately transfer into a full-fledged judicial liquidation. The court obtains supervisory powers over the already begun process. This makes it possible to protect the creditors, to limit disputed actions and to ensure control over the distribution of the assets.

Liquidation by decision of the court

The termination of the activity of a Cayman company in a judicial order is used upon insolvency, a corporate dispute, breaches on the part of the managers, the absence of activity or the presence of circumstances upon which the court considers the closure of the business just.

The application for liquidation may be submitted by the company itself, a creditor, a participant, CIMA for a regulated business or another person to whom the law gives such a right. If the ground is a debt, then the inability to pay may be confirmed by a demand of over 100 KYD (about 120 USD) and the absence of payment after a written request.

After the consideration of the materials, the court may issue an order on the liquidation of the Cayman organisation. Then an official manager is appointed. He obtains control over the assets, considers the demands of the creditors, analyses transactions, prepares reports and acts under judicial supervision.

The exclusion from the register without liquidation

Strike-off (the exclusion from the register) does not replace a full-fledged liquidation. This is an administrative way of the termination of the accounting status for a non-operating structure without assets, debts, bank accounts, contracts, creditors and disputes.

Such a variant is suitable for a company that did not conduct business or has already completed all the settlements. For a holding with interests, money, loan demands, an investment history or a regulated status, strike-off creates a risk. The remaining property may pass to the state, and the restoration of the excluded organisation will require a separate application and additional expenses.

How to Close a Company on the Cayman Islands: a Step-by-Step Algorithm

The procedure of the liquidation of a legal entity on the Cayman Islands begins with the choice of the correct legal route. For a solvent structure, voluntary liquidation is applied; upon debts, disputes or regulatory breaches, an application to the court may be required. 

Step 1. The determination of the ground for the closure

At the first stage, it is determined by which way to close a company on the Cayman Islands. If it is able to repay the debts together with the interest within 12 months after the beginning of the procedure, voluntary liquidation is applied. Such a route is suitable for a solvent structure that is completing the business by decision of the participants, closing a holding function, terminating an investment project or is no longer needed by the group.

If the company cannot pay by its obligations, has disputes with creditors, a corporate conflict, claims of investors, regulatory breaches or a demand of a creditor for a sum of over 100 USD which has not been repaid within three weeks after a written demand, a liquidation by decision of the court is considered. The judicial order is also applied if the closure is initiated by a creditor, a participant or CIMA for a regulated business.

Step 2. The check of the status, the assets and the obligations

For any way of the closure of a business on the Cayman Islands, first the register status, the presence of unpaid annual duties, the corporate books, the bank accounts, the contracts, the assets, the debts, the judicial disputes, the demands of the creditors, the licences, the registrations of CIMA and the obligations before the DITC are checked.

Upon the voluntary liquidation of a Cayman firm, this check is needed in order to confirm the solvency and to prepare the declaration of solvency. Upon the judicial procedure, it is used for the preparation of the corresponding request, the written statement under oath (affidavit), the list of creditors, the assets and the evidence of insolvency or another ground for the application to the Grand Court.

Step 3. The choice of the initiator of the procedure

If the closure of an enterprise on the Cayman Islands is carried out voluntarily, the decision is prepared by the directors and the participants. The managers analyse the financial position, and the co-owners approve the beginning of the procedure by a special resolution.

If the judicial order of the closure of a business on the Cayman Islands is applied, the initiator may be the company, a creditor, a participant, CIMA for a regulated structure or another person to whom the law gives the right to apply to the court. In such a case, the procedure begins with the preparation of a judicial application.

Step 4. The adoption of a decision or the submission of an application to the court

Upon the voluntary liquidation of a Cayman company, the participants adopt the corresponding resolution. If the charter provides for the termination of the company upon a certain event, the fact of its occurrence is additionally fixed.

Upon the judicial liquidation of an enterprise on the Cayman Islands, the applicant submits a request to the Grand Court. Evidence of the debt and of the unfulfilled demands of the creditors, financial reporting, corporate documents, information about the dispute, the breaches or the circumstances because of which the termination of the activity is substantiated is attached.

Step 5. The appointment of the liquidator and the submission of documents

Upon the voluntary liquidation, the manager is appointed by the company. It may be a director, an official or a third-party specialist. To the Registrar of Companies are submitted the notification, the consent of the manager and the declaration of solvency. These documents must be directed within 28 days after the beginning of the procedure.

Upon the judicial termination of the activity of a Cayman firm, the applicant performs the procedural actions on the case — submits the application and the supporting materials, notifies the interested persons and participates in the judicial hearing. If the court satisfies the application, an order on liquidation is issued and an official manager is appointed. Requirements are presented to him on the qualification, the independence, the residency, the insurance and the professional suitability. After the appointment, the management of the affairs of the company passes to the liquidator, and the powers of the directors are terminated or substantially limited.

Step 6. Publications and notifications

In the case of voluntary liquidation, the notification is placed in the Cayman Islands Gazette. The publication is arranged according to the form of the notification about the voluntary closure of a business on the Cayman Islands. 

Upon the termination of the activity by decision of the court, the order depends on the applicant. If the request is submitted by a creditor, the announcement is placed once in the official newspaper. If the company conducts business beyond the limits of the jurisdiction, an additional publication is required in the country where the message will most probably be seen by the creditors.

If the application is submitted by the company itself, the announcement is also published once in the Cayman Islands Gazette. Upon foreign activity, a publication in the corresponding country is added. The message must come out at least 7 working days before the hearing.

After the issuance of the order on the liquidation of a Cayman company, the official manager directs a notification for publication in the Cayman Islands Gazette. He also sends out copies of the document to the directors and the professional providers of services of the company, if they worked with it at the moment of the submission of the application. The notification about the appointment of the official manager is published in the Gazette.

Step 7. The work with the regulated status

If the company did not have a licence or registration with CIMA, it is sufficient to confirm the absence of supervisory duties. If the structure was controlled by the Monetary Authority, the liquidation of the business on the Cayman Islands does not terminate the action of the permissive document automatically. For a fund, a bank, an insurer, an investment manager, a provider of virtual asset services or another regulated participant, a separate application is submitted for the cancellation of the licence or the removal from registration.

For a regulated fund, the package is directed through the electronic portal REEFS. Usually the decision on the closure, the licence or the certificate of registration, the confirmation of the payment of the duties and the documents on the appointment of the manager are required.

Upon the judicial procedure, the ground for CIMA is the order of the Grand Court on the liquidation or the supervision. Until the removal from the accounting, the company retains its obligations before the regulator.

Step 8. The collection and the check of the demands of the creditors

The voluntary liquidation of an organisation on the Cayman Islands provides for the acceptance of demands, the reconciliation of documents, the check of the timeframes, the sums, the interest and the presence of disputed obligations. Before the settlement with the creditors, the property is not distributed among the participants.

Upon the judicial liquidation, the demands are considered by the official manager under the control of the court. The creditors submit confirmations of their demands. The liquidator checks the substantiation of the declared sums, forms the register of claims and determines the order of priority of the payments.

Step 9. The realisation of the assets and the completion of the obligations

In the voluntary procedure, the liquidator closes contracts, collects the accounts receivable, realises the property, repays the debts and covers the expenses — the duties of the register, the services of the registered office and the remuneration of the consultants.

The powers of the official manager in the judicial liquidation of a company on the Cayman Islands are substantially wider. He establishes the assets, checks the transactions carried out, analyses the actions of the directors, contests doubtful operations, reclaims the property and reports to the court. Upon the revealing of breaches, independent applications to the former managers or affiliated parties are possible.

Step 10. The distribution of the remainder and the final report

Upon the voluntary liquidation of an organisation on the Cayman Islands, the remainder after the settlements is transferred to the participants in accordance with the charter, the class of shares and the corporate documents. In the case of a judicial process, the distribution is carried out after the approval of the demands of the creditors and the payment of the expenses of the procedure. First the expenses of the liquidation and the recognised debts are satisfied. The participants receive property only in the presence of a remainder after the settlements with the creditors.

Within the framework of the voluntary closure of an enterprise on the Cayman Islands, the manager prepares the liquidation accounts, directs the notification about the final meeting at least 21 days before its holding. Further, the liquidator holds the meeting and presents to the participants a report on the completion of the affairs of the company.

If the process passes through the Grand Court, the official manager submits reports to the court. The final stage depends on the complexity of the case, the number of creditors, the disputes, the assets and the necessity of the judicial approval of separate actions.

Step 11. The submission of the final documents and the termination of the activity

In the voluntary procedure, the liquidator submits the report to the Registrar not later than seven days after the final meeting. The company is considered to have ceased to exist three months after the registration of this document. In the judicial procedure, upon the completion of the settlements and the approval of the necessary reports, the manager applies to the court for the closure of the case. The proceedings are terminated after the execution of all the judicial orders and the settlement of the property questions. The record on the dissolution is entered following the results of these actions.

After the termination of the activity of a Cayman firm by any of the ways, it is possible to request an official confirmation. It may be required by a bank, an investor, an auditor, a foreign tax body or a parent structure.

Conclusion

The liquidation of a Cayman legal entity is a multi-level procedure, where the incorrect choice of the route entails financial and legal consequences. The erroneous application of strike-off instead of a full-fledged dissolution leaves the directors vulnerable before the claims of the creditors. The launch of the voluntary procedure without the preliminary termination of the supervisory regime of CIMA leads to the accrual of contributions and fines. The missing of the timeframe of the submission of the declaration of solvency transfers the case under judicial control and increases the expenses. The uncompleted duties under the US law on the taxation of foreign accounts (FATCA), the common standard of reporting (CRS) and the notification about economic substance (ESN) create an additional reporting load in the subsequent period.

Professional legal support solves several tasks simultaneously. The correct qualification at the start excludes the incorrect choice of the mechanism of the closure of a firm on the Cayman Islands. The parallel conduct of the corporate and the regulatory tracks, as well as the precise observance of the dates of the submission of documents, reduces the timeframes and minimises the costs.