Setting Aside A Cayman Islands Charge Upon Insolvency.INTRODUCTION The Companies Law (as amended) (the "Law") provides that only companies incorporated in the Cayman Islands Cayman Islands (kā`mən), British dependency (2005 est. pop. 44,300), 100 sq mi (259 sq km), comprising three islands in the West Indies. can be wound up there. There is no provision akin to Part V of the UK Insolvency insolvency Condition in which liabilities exceed assets so that creditors cannot be paid. It is a financial condition that often precedes bankruptcy. In the context of equity, insolvency is the inability to pay debts as they become due; insolvency under the balance-sheet Act 1986 (UK)under which the English court can wind up unregistered or foreign companies. The Cayman winding up regimes are found in Part V of the Law. There are three regimes: voluntary winding up; compulsory winding up; and voluntary winding up subject to Grand Court supervision. KEY FACTOR: THE DATE OF COMMENCEMENT OF A WINDING UP Voluntary winding up The date of commencement of the relevant winding up is a key factor in the setting aside of a Cayman Islands charge A voluntary winding up is taken to have commenced1 at the time when either: a special resolution (being greater than a two thirds majority or such greater number as may be specified in the articles) is passed by the company in general meeting; or when the period fixed for its duration expires or the event specified in the company's articles occurs and the company in general meeting passes an ordinary resolution (being by way of asimple majority) requiring its voluntary winding up; or in the context of a Limited Duration Company) when2: (a)the period fixed for the duration of the company expires; (b)if the members pass a special resolution that the company be wound up voluntarily; (c)subject to any contrary provision in the memorandum or articles of the company, on the expiry of a period of 90 days or starting on: the death, insanity insanity, mental disorder of such severity as to render its victim incapable of managing his affairs or of conforming to social standards. Today, the term insanity is used chiefly in criminal law, to denote mental aberrations or defects that may relieve a person from , bankruptcy, dissolution, withdrawal, retirement or resignation of a member of the company; the redemption, repurchase re·pur·chase tr.v. re·pur·chased, re·pur·chas·ing, re·pur·chas·es To buy (something) again. n. The act of buying something that one previously sold or owned. Noun 1. or cancellation of all the shares of a member of the company; or the occurrence of any event which, under the memorandum or articles of the company, terminates the membership of a member of the company, unless there remain at least two members of the company and the company is continued in existence by the unanimous written resolution of those members pursuant toamended articles of association adopted during that 90 day period. Compulsory winding-up When a compulsory winding-up order is made, the liquidation The collection of assets belonging to a debtor to be applied to the discharge of his or her outstanding debts. A type of proceeding pursuant to federal Bankruptcy is deemed to have commenced at the date of presentation of the petition3. Any disposition of the company's property, effects and things in action, orany transfer of shares or alteration in the status of members of the company during the period between presentation of the petition and the making of the winding up order is void, unless the Grand Court orders otherwise4. SUSPECT TRANSACTIONS Should a secured lender execute a security after the commencement of the winding-up, that security isliable to be set aside by the Grand Court. Therefore, prior to taking any security, a secured lender shouldmake certain that no winding up petition has been issued at the Grand Court, that an appropriate special resolution has not been passed by the members in general meeting, and, in respect of an LDC LDC See: Less developed countries LDC See less developed country (LDC). , that a triggering event Triggering Event A certain milestone or event that a participant in a qualified plan must experience in order to be eligible to receive a distribution from a qualified plan. has not occurred. FRAUDULENT The description of a willful act commenced with the Specific Intent to deceive or cheat, in order to cause some financial detriment to another and to engender personal financial gain. PREFERENCES Both Official and Voluntary Liquidators have the power to apply to the Grand Court for an order that any security be set aside on the basis that its intention was fraudulently to prefer that creditor over others5. Any security granted by the debtor company within six months prior to the commencement of the winding-upmay be challenged if the liquidator Liquidator Person appointed by an unsecured creditor in the United Kingdom to oversee the sale of an insolvent firm's assets and the repayment of its debts. can prove that the dominant intention of the company was to givethat creditor a preference for his debt over others. Case law suggests that the burden of proof, which falls upon the liquidator, is a heavy one. It is unlikely that a bank in consideration of it agreeing to continue to support a company financially wouldbe held to have fraudulently preferred itself if, in consideration for providing that further support, the bankhad obtained security for its historic lending. TRANSACTIONS AT AN UNDERVALUE Under the Fraudulent Dispositions Law (as amended) any disposition of a company's property at an undervalue with an intent to defraud To make a Misrepresentation of an existing material fact, knowing it to be false or making it recklessly without regard to whether it is true or false, intending for someone to rely on the misrepresentation and under circumstances in which such person does rely on it to his or a creditor is voidable That which is not absolutely void, but may be avoided. In contracts, voidable is a term typically used with respect to a contract that is valid and binding unless avoided or declared void by a party to the contract who is legitimately exercising a power to avoid the at the instance of a creditor thereby prejudiced. "Undervalue" is defined as: provision of no consideration for the deposition; or a consideration for the disposition the value of which in money or money's worth is significantly lessthan the value of the property the subject of the disposition. "Disposition" is defined by reference to the Trusts Law (as amended) as "every form of conveyance The transfer of ownership or interest in real property from one person to another by a document, such as a deed, lease, or mortgage. conveyance n. , transfer,assignment, lease, mortgage, pledge or other transaction by which any legal or equitable interest An equitable interest is right in equity subject to satisfaction by an equitable remedy should the equitable interest suffer a harm. This concept only exists in the common law. in property is created, transferred or extinguished ex·tin·guish tr.v. ex·tin·guished, ex·tin·guish·ing, ex·tin·guish·es 1. To put out (a fire, for example); quench. 2. To put an end to (hopes, for example); destroy. See Synonyms at abolish. 3. "6. If a court finds that there has been a disposition of the company's property at an undervalue with an intention to defraud creditors it will set aside that disposition only to the extent necessary to satisfy the obligation to a creditor at whose instance the disposition has been set aside together with such costs asthe Court may allow. Accordingly, a lender must make sure that he is providing good consideration for the security interest. If it does not, it risks its security coming under attack at the instance of other creditors.Before a disposition will be set aside the Grand Court must be satisfied that there was an element of bad faith in the transaction. Any application under the Fraudulent Dispositions Law must be commenced within six years of the date of the relevant disposition. CONCLUSION The onset of a winding-up will affect a company's ability to grant a valid security interest over its assets andthe cautious lender should make sure that no formal steps have been taken by the company or any third party to commence the company's winding up. In respect of a compulsory winding-up petition or apetition to place a company in voluntary liquidation Voluntary liquidation Liquidation proceedings that are supported by a company's shareholders. subject to the supervision of the Grand Court, a search of the court records will show whether there is a pending petition. In respect of a voluntary liquidation warranties from the directors and examination of the directors' and shareholders' minute booksshould show whether the company has commenced a voluntary winding up. Security will not be set aside either as a fraudulent preference or as a fraudulent disposition unless it can be shown that the company acted in bad faith in granting the security to the lender. > Footnotes 1 s.132 Companies Law 2 s.200 Companies Law 3 s.98 Companies Law 4 s.156 Companies Law 5 s.168 Companies Law 6 s.87 Trusts Law 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. Walkers PO Box 265GT Walker House George Town George Town, town (1989 pop. 12,921), capital of the Cayman Islands, in the West Indies. It is a major offshore banking and business center, and many companies have subsidiaries there because of the tax advantages. Grand Cayman Grand Cayman See Cayman Islands. 265GT CAYMAN ISLANDS Tel: 9490100 Fax: 9497886 E-mail: info@walkersglobal.com URL URL in full Uniform Resource Locator Address of a resource on the Internet. The resource can be any type of file stored on a server, such as a Web page, a text file, a graphics file, or an application program. : www.walkersglobal.com Click Here for related articles (c) Mondaq Ltd, 2008 - Tel. +44 (0)20 8544 8300 - http://www.mondaq.com |
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