Financing and Taking Security in the Cayman Islands

Secured Lending to a Cayman Islands Exempted Company – Creating Security in the Cayman Islands

The Companies Act (as Revised) of the Cayman Islands (the “Companies Act”) provides a commercial, pragmatic and creditor friendly framework to facilitate cross-border transactions, including secured lending transactions. This framework ensures the continuation of the Cayman Islands as a leading international finance centre.

This article will outline one aspect of critical importance to cross-border secured lending arrangements, being the creation of security by a Cayman Islands exempted company (a “Cayman Company”) over its assets.

There are specific Cayman Islands statutory requirements pertaining to the registration of security created over specific types of assets, such as Cayman Islands flagged ships, aircraft or land located in the Cayman Islands. These are outside of the consideration of this article.

Companies Act Principles of Security

The Companies Act does not expressly address the creation of security over the assets of a Cayman Company. Accordingly, principles of common law govern the creation of security over the assets of a Cayman Company and a wide variety of security instruments can be utilised for such security interests. In a cross border secured lending context, the most common are equitable share mortgages, debentures, charges and assignments of accounts, among others.

The security instrument should be in writing and the governing law may be either Cayman Islands law or a foreign law jurisdiction. Secured lending transactions will often utilise Hong Kong, Singapore, England & Wales or New York law to govern a security instrument pursuant to which a Cayman Company will grant a security interest (and this will often follow the governing law of the loan documentation), however Cayman law will often be utilised where the lex situs of the secured asset is the Cayman Islands (for example, shares in another Cayman Islands company or a Cayman sited bank account).

The courts of the Cayman Islands will recognise and give effect to the choice of a foreign governing law of a security instrument provided the choice of that foreign governing law has been made in good faith and would be a valid and binding choice of governing law that would be observed as being valid and effective by the courts of the relevant jurisdiction.

Register of Mortgages and Charges

The Companies Act requires a Cayman Company to create and maintain a register of mortgages and charges (the “Register of Mortgages and Charges”). The original Register of Mortgages and Charges must be maintained at the registered office of the Cayman Company. The register must be maintained even if no security interests have been created by the Cayman Company.

The Register of Mortgages and Charges must set out the following details or particulars about each security interest which has been created by the Cayman Company over any of its assets pursuant to a security instrument:

a short description of the property secured;
the amount of the security interest created; and
the names of the mortgagees or persons entitled to such charge.

Failure to update the Register of Mortgages and Charges with the required particulars will not jeopardise the validity or enforceability of the security interest, however each director, manager or other officer of the company may be liable to a penalty to the extent the register is not properly maintained.

The Register of Mortgages and Charges will typically be updated by the registered office provider of the relevant Cayman Company. It is not necessary to file the relevant security instrument into the Register of Mortgages and Charges (particulars of the security interest outlining the elements set out above suffice), however the registered office provider who maintains that register may request a copy of the executed security instrument prior to making the necessary update.

The Register of Mortgages and Charges is not a public document, although the Companies Act provides that creditors and shareholders may inspect the register at all reasonable times.

Perfection of Security

The Companies Act, and Cayman law generally, does not impose any perfection requirements in circumstances where a Cayman Company creates security pursuant to a foreign law security instrument over its foreign assets. As noted above, this memorandum does not cover certain specific asset classes, such as yacht vessels, which have specific statutory registration requirements.

Priority

The Cayman Islands does not have a public registration or public filing authority for security interests created by a Cayman Company.

The Companies Act does not provide a statutory priority regime in respect of security interests granted over the same assets of a Cayman Company. Further, updating the Register of Charges with particulars of a security interest will not grant any priority in respect of competing security interests (although it does provide notice to a third-party chargee of an existing security over any relevant property). As a result, common law principles of priority (which include, among others, determining priority by reference to the date of the creation of a security interest) will govern such security interests.

Considerations for Chargee

The Companies Act does not impose a timeframe to update the Register of Mortgages and Charges to reflect the particulars of the security interest which have been created by a Cayman Company, however a chargee will typically request (by way of undertaking or contractual agreement) that a certified copy of the updated Register of Mortgages and Charges be provided within a specified timeframe following execution of the security instrument. This will ensure any potential third party chargee who inspects the register will be on notice of the existing security.

While it is not required by the Companies Act, it is prudent for a chargee to ensure the particulars of the security interest created by a Cayman Company expressly include the details of any negative pledge (i.e. prohibition or restriction on creating any future security interest) in respect of the relevant secured property.

Variation of Security

Where a Cayman Company has created a security interest (which has been reflected in the Register of Mortgages and Charges) and a subsequent variation to that security interest has occurred, the relevant particulars in the Register of Mortgages and Charges should be updated or amended to reflect the relevant variation.

Release of Security

To the extent a security interest created by a Cayman Company is released pursuant to a deed of release or other discharge document, the Cayman Company should update the Register of Mortgages and Charges to reflect the release or termination of the relevant security interest.

The release of a security interest granted by a Cayman Company is not dependent upon the update to the Register of Mortgages and Charges by that Cayman Company. It will be effective from the date the security interest is released under the governing law of the security instrument.