CAYMAN ISLANDS VOLUNTARY LIQUIDATION AND STRIKE-OFF
There are steps you can take prior to year-end which can enable you to reduce or avoid certain annual fees and costs which are due by 31 January of each year. Broadly speaking, a solvent Cayman Islands company which is no longer required for one reason or another, has two options for its termination - voluntary liquidation or strike-off. The method chosen generally depends on the history of the company’s operations and its current financial position. It is best that the company has no assets or liabilities before either is commenced.
Therefore, before beginning either process, it is generally necessary to ensure the following have been completed prior to year-end in order to remove certain fees and costs:
all dividends have been paid to shareholders/partners/members (either in cash or in kind);
the capital of the company is simplified as much as possible to make the passing of resolutions is more straightforward (e.g. for a company a single shareholder is preferred);
all creditors have been paid in full; and
if the company is a fund regulated by the Cayman Islands Monetary Authority, in order to avoid CIMA fees for the next year, the fund must have completed all required steps before submitting its application for de-registration, which include full redeeming all investors and completing the final audit (among other things), prior to year-end to avoid CIMA fees for the next year. Contact us for assistance in this regard.
SAVING ON STUB AUDIT FEES
In accordance with section 8(1) of the Mutual Funds Act (as revised), regulated funds are mandated to secure an annual audit. However, there exists an enticing alternative for funds, particularly those already in good standing with CIMA, which have the option to apply for an audit exemption under regulatory policies dealing with exemptions from audit requirements; such funds have the option to furnish a comprehensive voluntary liquidator's report per the regulatory policies in lieu of a stub audit report. This report will cover the period subsequent to the last financial year end for which an audit has been submitted. Please note that CIMA may consider extending the fund’s final audit period to a maximum period of 18 months from the last financial year end for which an audit has been filed on a case-by-case basis.
This innovative avenue proves particularly advantageous for funds obliged to conduct a final stub audit before initiating the filing of deregistration documents. This provision aligns with the recent regulatory enhancements for the deregistration of Cayman Islands funds governed by the revised Mutual Funds Act (as revised) and Private Funds Act (as revised), which came into effect on 17 August 2022.
Contact our liquidations specialist, Carlos Bourgy, at the details located below to find out more on how to avoid paying stub audit fees, seeking an audit waiver upon commencing a voluntary liquidation and how the submission of the comprehensive voluntary liquidator’s report can help get the fund back into good standing for deregistration purposes.
While a strike-off is less expensive and generally faster to effect than a voluntary liquidation, there are limitations to a strike-off (explained below).
It should be noted that a company which has been struck off can in some circumstances be reinstated for up to 10 years, whereas with a voluntary liquidation, there is further protection and provides finality, as all matters are to be dealt with in an appropriate manner to mitigate the risk of future claims being pursued against the company or its directors. Once dissolved through a voluntary liquidation process, the company cannot be reinstated.
THE VOLUNTARY LIQUIDATION PROCESS
There are a few methods of commencing a voluntary liquidation, but the most common method is by the passing of a shareholder special resolution that the company commences voluntary liquidation, which also names the liquidator. Whilst are no specific qualifications required to act as voluntary liquidator, we recommend that a professional liquidator (such as IMS Liquidations Limited) be appointed, to ensure efficiency. Our appointment also means the directors of the company will not have to perform unfamiliar duties. On the appointment of a voluntary liquidator, the directors' powers cease and vest with the voluntary liquidator.
The Cayman Islands Companies Act (as revised) sets out the process for a voluntary liquidation, which is broadly as follows:
the directors consider, and subject to shareholder consent, approve the appointment of a proposed voluntary liquidator;
the directors provide a declaration of solvency (see below for the requirements);
the shareholder(s) pass a special resolution appointing the voluntary liquidator;
the voluntary liquidator consents to act;
notice of the voluntary liquidation is filed with the Registrar of Companies;
statutory notices are published in the Cayman Islands Gazette regarding notice of appointment of the voluntary liquidator and giving creditors of the company at least 21 days to provide the voluntary liquidator with details of any claims against the company; and notice of the final shareholder(s) general meeting of the company;
at the final shareholder(s) general meeting, the shareholder(s) vote on the voluntary liquidator's accounts and report;
within 7 days of the final shareholder(s) general meeting, the voluntary liquidator files its final return with the Registrar of Companies and a certificate of dissolution is issued by the Registrar; and
three months after submission of the voluntary liquidator's final return, the company is deemed dissolved.
Declaration of Solvency
In the declaration of solvency, the directors must declare that a full enquiry into the company's affairs has been made and that, to the best of their 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 opinions set out therein commits an offence and is liable on summary conviction to a fine and to imprisonment for up to two years.
The declaration is required before a voluntary liquidator will give consent to act, and if the declaration is not signed and filed within 28 days of the commencement of the liquidation, the liquidator must apply for the liquidation to continue under the supervision of the Court.
Timing of the Voluntary Liquidation Process
Assuming the company had no assets and no liabilities prior to commencing the voluntary liquidation, the process will generally take anywhere between 4 and 8 weeks from the appointment of the liquidator to the final meeting of the shareholder(s) and the submission of the voluntary liquidator's final return to the Registrar.
We recommend commencing the voluntary liquidation process before the end of November at the very latest (but preferably sooner) to avoid incurring fees with the Registrar of Companies in the following year (with the final general meeting held and all of the requisite documents filed prior to the end of 31 January).
A strike off is where a company is removed from the Companies Register, after which the company ceases to exist. The Registrar of Companies may, following a request from the company, strike the company from the Companies Register where it has reasonable cause to believe the company is not carrying on business or is not in operation.
A strike-off is most appropriate where a company has never traded or has ceased trading and the directors are certain that the company has no assets or liabilities for the following reasons:
any property belonging to the company when it is struck from the Companies Register will vest in the Cayman Islands Government;
any shareholder or creditor of the company who is aggrieved by the company having been struck off can petition the Court in the Cayman Islands to have the company reinstated so that formal liquidation or other actions can be commenced;
a strike-off does not affect the liability (if any) of the directors, managers, officers or shareholders of the company, and any such liability continue and may be enforced as if the company had not been Struck-off; and
a director who signs a false confirmation, either negligently or fraudulently, for the purpose of the strike-off off may become liable to the shareholders and/or creditors of the company should they suffer any loss or damage as a result of the company being struck off.
A strike off is very straightforward and is less expensive than a voluntary liquidation, and the legal steps can generally be effected within a couple of weeks in some instances, with the Registrar dissolving the company within three to six months. As a safety measure, all relevant documents should be filed via its registered office prior to 1 November of the current year in order for an effective Strike-Off date of 31 December of the current year to avoid incurring fees with the Registrar in the following year. The next available effective strike-off date is 31 March of the following year, therefore, annual fees and expenses for the next year may be payable, so accruals for such expenses should be considered prior to filing the Strike-Off application.
Email our liquidations specialist, Carlos Bourgy at CBourgy@ims.ky, or get in touch with your usual IMS contact for assistance with Voluntary Liquidations or Strike-off.