The Companies (Amendment) Bill, 2024 (Bill) has been passed by the Cayman Islands Parliament and will come into force following royal assent on a date to be appointed by Order of Cabinet. This Bill has a bit of a history. It started out as the draft Companies (Amendment) Bill, 2023, which was circulated for consultation in June. It was industry-driven and contained an array of provisions which were widely seen as commercially beneficial. The consultation process was particularly active, with industry representatives, including Appleby, fully involved in the process of crafting the best possible version of the legislation. While these productive discussions were going on, the Bill was overtaken by the more pressing amendments to Cayman’s beneficial ownership registration regime, which took over the ‘2023’ moniker and passed as the Companies (Amendment) Act, 2023. With that important business completed, attention shifted back to the draft Bill, which came before Parliament in the session commencing 26 February 2024 under its new name.
In the period between the circulation of the consultation draft in June and the final Bill being debated in Parliament in February, a number of important changes took place. Most notably, proposed amendments to the statutory definition of “special resolution” – which would have expressly permitted written special resolutions by majority – were first included, then modified, and finally withdrawn. While the state of the law in respect of written shareholder resolutions remains unchanged at this time, we expect it will be revisited at a future date. However, the following important changes were made, which we view as positives for the jurisdiction and for our clients.
A New, Simplified, Process for Reduction of Share Capital
One of the underlying tenets of English company law is 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. Some jurisdictions have determined that the maintenance of share capital is neither necessary nor beneficial in the modern commercial context. However, the Cayman Islands continues 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, a reduction in share capital can only be undertaken through a court-sanctioned process.
A company may wish to reduce its share capital for a number of commercial or accounting reasons, e.g.:
- Where there are large accumulated losses that prevent 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
- A company may wish to reduce its capital as a part of a transaction involving a capital reorganisation, such as a scheme of arrangement
- A company may wish to clean up its balance sheet to reflect the actual capital employed in the business, particularly where capital has been lost
- A company may wish to repay its shareholders part of its paid-up capital where that capital is surplus to the company’s current or expected requirements
Having to resort to the courts to undertake a share capital reduction, when a company is sound and solvent and is simply pursuing a strategy to achieve one of those sensible commercial goals, can be time consuming and expensive, and arguably did little to actually protect creditors. There was a clear need to come up with a more streamlined approach.
Under the Bill, a solvent company will be able to reduce its share capital by filing with the Registrar of Companies a special resolution to that effect, supported by a directors’ solvency statement. The process is quick, efficient and workable. It allows a solvent company to move quickly to achieve its commercial goals. Access to the courts remains 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 into the Cayman Islands 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 provision that only companies with share capital can continue into the Cayman Islands served as nothing more than an unnecessary obstacle.
Under the Bill, 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 having an approach to share capital varying from Cayman’s approach, but, fundamentally, the foreign company will still need constitutional documents that ‘fit’ with Cayman 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 Bill, 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
Continuing with the theme of flexibility, the Bill 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
Many recent legislative amendments in the Cayman Islands have been driven by the desire to keep pace with rapidly evolving international standards. The importance of that work should be acknowledged. However, in the Companies (Amendment) Bill, 2024 we see a return to what Cayman does best: respond to feedback from stakeholders to craft legislation that offers maximum flexibility within a balanced regulatory environment. The agility demonstrated in the process leading up to this Bill, with the cooperation between government and industry on full display, is part of what makes Cayman a desirable jurisdiction for business. Appleby welcomes these positive developments and looks forward to the Bill coming into force.
