Voluntary liquidation and strike-off of solvent Cayman Islands companies

Broadly, the dissolution options for a solvent Cayman Islands company are either a voluntary liquidation or a strike-off. The appropriateness of either method will depend on the business history of the particular company and its current financial position.

Preliminary steps

Before commencing the formal dissolution process, it may be necessary to take some preliminary steps, including ensuring that:

• all relevant dividends have been paid to shareholders;
• the share capital of the company is simplified as much as possible (ideally with one voting share in issue remaining, held by a single shareholder);
• all creditors have been paid in full (with secured creditors receiving priority); and
• if the company is an investment fund regulated by the Cayman Islands Monetary Authority (CIMA):
  ◦ where the fund has ceased to carry on business, all investors have been properly redeemed and paid out in accordance with the terms of their investment;
  ◦ final audited financial statements covering up to the date of the final distributions have been submitted to CIMA or an audit waiver obtained, as applicable; and
  ◦ the CIMA registration has been properly cancelled.

Voluntary liquidation

A solvent company commences voluntary liquidation:

• when the period, if any, fixed for the duration of the company in its constitutional documents expires; or
• an event occurs which a company’s constitutional documents stipulate commences voluntary liquidation; or
• by the passing of a shareholder special resolution that the company commence voluntary liquidation.

It is most common for voluntary liquidation to commence upon the passing of a shareholder special resolution, which will also name the voluntary liquidator. While Cayman Islands law does not specify any professional requirements for a voluntary liquidator, it is recommended that a professional liquidator (such as Mourant Liquidations (Cayman) Limited) is appointed, to ensure efficiency and avoid directors of the company having to perform an unfamiliar role, which attracts personal fiduciary obligations. A voluntary liquidator is an agent of the company and the directors’ powers will cease and vest with the voluntary liquidator upon their appointment.

Procedure

The Cayman Islands Companies Act (as amended, the Companies Act), sets out the procedural requirements for a valid and effective voluntary liquidation. An overview of the process is set out below.

1. The board of directors of the company consider, and subject to shareholder consent, approve the appointment of a proposed voluntary liquidator.
2. All of the directors provide a declaration of solvency (see below for details).
3. The shareholder(s) of the company pass a special resolution appointing the voluntary liquidator, and the voluntary liquidator consents to act as such.
4. Notice of the voluntary liquidation is filed with the Cayman Islands Registrar of Companies (the Registrar) within 28 days of the commencement of the voluntary liquidation.
5. The following statutory notices are published in the Cayman Islands Gazette:
   (a) notice of appointment of the voluntary liquidator (creditors of the company are given 21 days to establish any claims against the company); and
   (b) notice of the final general meeting of the company, which must be published at least 21 days before the meeting.
6. At the final general meeting, the shareholder(s) approve the voluntary liquidator’s accounts and report.
7. The voluntary liquidator executes a final return, which must be filed with the Registrar by the company’s registered office provider within seven days of the final general meeting.
8. A certificate of dissolution is issued by the Registrar and the company is officially dissolved three months from the date of the voluntary liquidator’s final return.

Declaration of solvency

The directors must confirm in the declaration of solvency that a full enquiry into the company’s affairs has been made and that, to the best of the directors’ knowledge and belief, the company will be able to pay its debts in full, together with interest, within a period not exceeding 12 months from the commencement of the liquidation.

A person who knowingly makes a declaration of solvency without having reasonable grounds for the opinion that the company will be able to pay its debts in full within the period specified commits an offence and is liable on summary conviction to a fine of US$12,195 and to imprisonment for two years.

A prospective liquidator will ask for the declaration before giving consent to act. If the declaration of solvency is not signed and filed with the Registrar within 28 days of the commencement of the voluntary liquidation, the liquidator must apply for the liquidation to continue under the supervision of the Court.

Timing of the process

With respect to timing, assuming the company had no assets or liabilities prior to commencing the voluntary liquidation, the process would usually take four to six weeks, from the appointment of the voluntary liquidator to the final general meeting and the submission of the voluntary liquidator’s final return to the Registrar.

A voluntary liquidation should be commenced by early December at the very latest, to avoid incurring annual fees with the Registrar in the following year (with the final general meeting held and final return filed by the end of January). The Registrar does not pro-rate annual fees.

Strike-off

Strike-off is the procedure of removing a company from the Register of Companies in the Cayman Islands (the Register) following which the company will cease to exist. The Registrar, upon request from the company, may strike the company from the Register where it has reasonable cause to believe the company is not carrying on business or is not in operation.

Potential drawbacks

A strike-off is appropriate where a company has never traded, or has ceased trading, and there is absolute certainty that the company has no assets or liabilities. It is important to consider the following potential risks relating to the strike-off option:

• any property vested in or belonging to the company when it is struck from the Register will automatically vest in the Cayman Islands Government;
• any shareholder or creditor of the company who feels aggrieved by the company having been struck off may petition the Grand Court of the Cayman Islands to have the company reinstated in order that a formal liquidation or collateral action may commence;
• the striking off shall not affect the liability (if any) of any director, manager, officer or shareholder of the company, and such liability shall continue and may be enforced as if the company had not been dissolved; and
• a director who signs a false confirmation, whether negligently or fraudulently, for the purpose of having the company struck off may become liable to the shareholders and/or creditors of the company should any of these persons suffer any loss or damage as a result of the company being struck off.

Procedure

The procedure to strike a company off the Register is simple. The directors pass board resolutions and sign a declaration confirming the company has no assets or liabilities and requesting that the Registrar strike the company off the Register. The company’s economic substance notification for the current year must be filed with the Registrar prior to making the application.

Once the strike-off application is submitted to the Registrar by the company’s registered office provider, the Registrar issues a certificate of strike-off, and the Company is officially struck off the Register and dissolved as of the next available strike-off date, which is generally quarterly. The Registrar advertises the strike-off of the Company by way of publication in the Cayman Islands Gazette.

Timing of the process

A strike-off is less expensive than a voluntary liquidation, and the legal steps can be effected within a few days in some instances. The strike-off application should be filed with the Registrar before 31 December to avoid incurring annual fees with the Registrar for the following year.

Voluntary liquidation or strike-off?

While a strike-off is less expensive and generally faster to effect than a voluntary liquidation, there are some important limitations to a strike-off (as detailed above in Potential drawbacks). No decision to opt for a strike-off, instead of a voluntary liquidation, should be taken without fully considering the implications.

In particular, the time period for an application to reinstate a company that has been struck off is two years from the date the company was struck off; however, this may be extended up to 10 years in certain circumstances. In most cases, a voluntary liquidation will therefore be the preferred method.

Considerations for funds 

Where the company is a Cayman Islands regulated mutual fund under the Mutual Funds Act (as amended) of the Cayman Islands or registered private fund under the Private Funds Act (as amended) of the Cayman Islands, it will need to deregister with CIMA following its cessation of business. It is advisable to complete the CIMA deregistration before commencing the formal winding up process.

It is also essential that the company be up to date in filing its audited accounts with CIMA and its economic substance notifications with the Registrar, and that all participating shares be redeemed and proceeds distributed to shareholders prior to commencing the deregistration process. Otherwise, the deregistration may become protracted and, therefore, costly.

CIMA deregistration procedure

IMA must be notified within 21 days of a fund ceasing to carry on business. Once the final audited financial statements have been filed, the deregistration application may be submitted through CIMA’s online portal, to include:

• a certified copy of a board resolution indicating the date on which the fund will cease, or has ceased, to carry on business as a fund and resolving that the company be deregistered with CIMA and dissolved;
• an affidavit of a director confirming, among other things, that all investors have been paid out in full or that the fund has never carried on business, as applicable;
• if a fund is deregistering with CIMA on the basis that it has never carried on fund business, a letter from the fund’s administrator confirming the fact that the fund never carried on business or accepted any subscriptions from investors; and
• CIMA’s deregistration fee of US$915.

An investment fund registered with CIMA must be fully deregistered by 31 December to avoid annual fees being imposed by CIMA for the following year. As such, a CIMA registered company will need to commence the process and have its final audited financial statements filed with CIMA well before year end to avoid all annual fees. CIMA does not pro-rate annual fees.

Additional requirements where a third-party independent liquidator is appointed prior to CIMA deregistration

Where a third-party voluntary liquidator has been appointed, CIMA will require the following additional documents:

• notice of voluntary winding up of the fund stamped by the Registrar;
• the voluntary liquidator’s consent to act stamped by the Registrar;
• a copy of the voluntary liquidator’s final report;
• where final audited financial statements have been filed, a supporting affidavit from a director; and
• where the fund has been granted an audit exemption, a supporting affidavit from the voluntary liquidator.

Notification deadline

The Rule on Cancellation of Licences or Certificates of Registration for Regulated Mutual Funds and Registered Private Funds¹ provides that a fund must notify CIMA when it intends to cease carrying on, or has ceased to carry on, business as a fund within 21 days from the cessation of business. Failure to do so may result in a fine being imposed on the fund. CIMA also has discretion to impose one or more continuing fines of US$6,098 each, up to a cumulative cap of US$24,390.

CIMA director deregistration

If the deregistration of a fund results in any director no longer being a director of any CIMA registered entity, following the deregistration, the director must log on to CIMA’s REEFS portal using their login details and follow the instructions to surrender their registrations in their personal capacity and pay the surrender fees of approximately US$732. This must be done by 31 December in any given year to avoid the CIMA director registration fees being imposed on the director for the following year.

Contacts

A full list of contacts specialising in the termination of Cayman companies and investment funds can be found here.