Taking Debentures from BVI and Cayman Islands Companies: Points to Consider
Often financiers will insist that a borrower or guarantor grant a debenture over its assets. This will typically include fixed security over current and future assets such as shares, intellectual property, debts, real property and certain specified contracts with a floating charge over all the other assets. In this article, we have set out a few general issues to bear in mind when considering taking a debenture from a Cayman Islands or British Virgin Islands ("BVI") company (the "Grantor").
Other than shares in another Cayman or BVI company, or a partnership interest in a Cayman exempted partnership, it is very unlikely that the Grantor will own assets that are situated in Cayman and/or BVI or governed by the laws of those jurisdictions. This means that, while it is tempting to choose the governing law of the place of the Grantor's incorporation as the governing law of the debenture, one should seriously consider using the governing law of the main transaction documents or the place where the Grantor carries on business instead.
It is possible to create both fixed and floating security over future acquired assets provided that:
(a) the debenture clearly states that the security interest is to attach to assets acquired in the future without any further acts being carried out by any party; and
(b) the relevant assets are adequately described in the debenture so as to enable a court to identify that the asset acquired falls within the terms of the security.
On the basis that none of the assets which are subject to the relevant debenture are items such as real property, ships or aircrafts situated or registered in BVI or Cayman, then the relevant filing regimes are as follows:
(a) If the Grantor is a Cayman company then it must make an entry in its register of mortgages and charges in respect of the security interests created by the debenture in order to comply with section 54 of the Companies Law (2012 Revision) of the Cayman Islands. Failure by the Grantor to do so does not operate to invalidate any security interest, though it may be in the interests of the secured parties that the Grantor complies with the statutory requirements.
(b) If the Grantor is a BVI company:
(i) the Grantor is required keep a register of all relevant charges created by it either at the Grantor's registered office, or at the office of the Grantor's registered agent;
(ii) an application should be made to the British Virgin Islands Registrar of Corporate Affairs for the purposes of priority to register the security interests created by the debenture at the Registry of Corporate Affairs; and
(iii) subject to registration noted in (b)(ii), the security interests created by the debenture will, as a matter of BVI law, have priority over any claims by third parties (other than those preferred by law). This is inclusive of any liquidator or a creditor of the Grantor, subject in the case of a winding up of the Grantor in a jurisdiction other than BVI to any provisions of the laws of that jurisdiction as to priority of claims in a winding up. It should be noted that a floating charge will rank behind a subsequently registered fixed charge unless the floating charge contains a prohibition or restriction on the power of the Grantor to create any future security interest ranking ahead in priority to or equally with the floating charge. The existence of such prohibition is filed with the Registry of Corporate Affairs.
Shares in BVI or Cayman Entities
This is one of the most commonly encountered asset classes in both BVI and Cayman. While it is possible to take legal security (which involves shares being transferred into the name of the security holder) or equitable security (whereby the shares remain registered in the name of the Grantor), the latter is by far the most common.
It should be remembered that both BVI and Cayman allow the register of members of certain companies incorporated there to be held outside those jurisdictions. This means that the lex situs of the shares may be outside those jurisdictions and additional legal steps may need to be taken in order to obtain effective security. Consideration should be given to including covenants in the debenture that the relevant registers will be maintained in the appropriate jurisdiction.
In addition, it would be usual to make amendments to the constitutional documents of the entity whose shares are being charged so as to disapply: (i) any restrictions on transfers of the shares on enforcement of security; (ii) rights of forfeiture; and (iii) liens; again, consideration should be given to including appropriate covenants in the debenture.
Finally, the debenture should include a requirement to deliver items. Such items include director's resignation letters, blank executed but undated share transfer forms and share certificates and undertakings from the registered agent/registered office provider to update the register of members on enforcement.
Limited Partnership Interest
If the Grantor owns an interest in a Cayman Islands exempted limited partnership ("ELP") and the security taker wants that to be subject to a fixed security, then it will need to ensure that the interests are freely transferable (in respect of both taking and enforcing security), and that the security complies with section 7(7) of the Exempted Limited Partnership Law (2012 Revision). Section 7(7) requires that the Grantor serve notice of the creation of the security at the registered office of the ELP and that such notice must be accompanied by a copy of mortgage (which must be executed by mortgagor and mortgagee). It should be noted that priority between competing security over a limited partnership interest is decided by date of service of the notice.
In both BVI and Cayman, the list of preferential creditors is short and many are often irrelevant if the Grantor does not have employees in the relevant jurisdiction.
In Cayman, the position is that on winding up the Grantor:
(a) claims by employees working in the Cayman Islands in respect of severance pay (subject to a maximum of 12 weeks final basic wage) are paid in priority to all other debts, whether unsecured or secured (and whether that security is fixed or floating).
(b) the following debts are paid in priority to all unsecured debts or debts secured by a floating charge:
(i) any sum due by the Grantor to an employee, whether employed in the Cayman Islands or elsewhere in respect of salaries, wages and gratuities accrued during the four months immediately preceding the liquidation;
(ii) any sum due and payable by the Company Grantor on behalf of an employee in respect of medical health insurance or pension fund contributions;
(iii) any sum due in respect of severance pay and earned vacation leave where the employee's contract has been terminated as a result of the winding up;
(iv) any compensation payable to a workman in respect of injuries incurred at work pursuant to the Workmen's Compensation Law (1996 Revision); and
(v) certain taxes due to the Cayman Islands Government comprising customs duties, stamp duty, licence fees, sums payable under the Companies Law (2012 Revision) such as annual return fees, sums payable under the Tourist Accommodation (Taxation) Law (2003 Revision).
In BVI, preferential creditors are limited to certain wages and salary, accrued holiday pay, amounts due to the BVI Social Security Board, unpaid pension contributions, taxes due to the BVI government and penalties due to the Financial Services Commission of the BVI. Such creditors only have priority in respect of floating charges.
The granting of debentures by BVI and Cayman entities is not problematic but some thought should be given as to the appropriate governing law of the security. This should be, in our view, driven by where the assets which are to be subject to fixed security are most likely to be situated or located.