The Cayman Islands ("Cayman") is recognised as a leading international financial centre and well regarded as a creditor-friendly jurisdiction (with the absence of debtor-friendly insolvency such as Chapter XI in the United States) making it attractive to lenders considering secured financing transactions. Cayman does not have a statutory security regime and as a result the grant, perfection and enforcement of security over shares are largely based on English common law principles applicable in Cayman.
This article gives a brief overview of taking security over the shares of a Cayman exempted company (a "Cayman company") which is a feature of many secured financing transactions.
Types of Security Interests
Security over shares of a Cayman company can be created in three primary forms: a legal mortgage, an equitable mortgage, or a charge. It is important to note that it is not possible to "pledge" a registered share under Cayman law, as a pledge necessarily requires legal title to be transferred by delivery which, in the case of shares in a Cayman company, is not possible as the transfer of legal title to shares in a Cayman company is by instrument of transfer. It is likely that a 'pledge' will, by its terms, have the effect of creating a charge over shares of a Cayman company; however, in some cases it may be ineffective in doing so.
A legal mortgage over shares in a Cayman company (i.e. where there is a transfer of legal title to such shares) is an uncommon occurrence for several reasons. One of the main reasons for this is that the secured party may be required under applicable accounting rules to consolidate the Cayman company, which is often undesirable. As a result, security over shares of a Cayman company is typically taken in the form of an equitable mortgage of the shares, with a fixed charge over the rights with respect to such shares.
Equitable Mortgage and Charge
A Cayman law governed equitable mortgage and charge over shares and related rights (a "Cayman Equitable Mortgage") will typically include a provision requiring the register of members of the Cayman company to be maintained in Cayman as the situs of the shares issued by the Cayman company is determined under Cayman conflict of law principles by the location of the register of members.
A Cayman Equitable Mortgage is similar in form and substance to an English law-governed share charge, but the Cayman market has developed such that it is common to require certain additional deliverables to those ordinarily required by an English law governed share charge to facilitate enforcement and improve the quality of the security.
In addition to the standard delivery of an undated signed share transfer form and the share certificates (if any) representing the shares subject to the security, a Cayman Equitable Mortgage will typically require the delivery of the following documents:
- An irrevocable proxy allowing the secured party to attend and vote the shares at general meetings of the company following the security becoming enforceable in accordance with its terms. However, it is important to note that the effectiveness of such a proxy is contingent on it being provided for in the Cayman company's articles of association.
- An undated resignation letter from each director of the Cayman company along with a letter of authority addressed to the secured party authorising it to date the resignation letter upon enforcement of the security.
- A deed of undertaking given by the Cayman company whose shares are subject to the security to the secured party acknowledging the security and undertaking to register or procure the registration of all share transfers delivered to the Cayman company by the secured party pursuant to the Cayman Equitable Mortgage.
- A letter of direction from the Cayman company to its registered office service provider, instructing it to enter any share transfers delivered by the secured party into the Cayman company's register of members.
These additional 'self-help remedies' are designed to facilitate the enforcement of the security and to improve the secured party's control over the shares in the event of default.
Perfection of Security and Registration of Security Interests
Under Cayman law, the perfection of security interests depends on the type of security interest created. Legal mortgages and legal assignments are the only types of security interest that can be perfected under Cayman law.
Perfection of a legal mortgage involves the transfer of legal title to the secured asset to the secured party (or its nominee), while perfection of a legal assignment requires written notice to be given to the counterparty to the underlying contract. There are also special statutory regimes for securing interests in real estate situated in Cayman or ships and aircraft registered in Cayman, which involve the entry of prescribed details in certain public registers.
Importantly, Cayman law does not provide for the perfection of equitable security interests, and there are no public registers in which such interests can be recorded.
The Importance of Taking Security Over Shares in a Cayman Company
As Cayman companies are often used as holding companies within a borrower group, a Cayman Equitable Mortgage over the shares of a Cayman company can be particularly important to lenders as it may provide a single point of enforcement, allowing the secured party to effectively sell the entire group on enforcement without having to coordinate the enforcement of multiple share charges in multiple jurisdictions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.