CAYMAN ISLANDS: An Introduction to Dispute Resolution

The Cayman Islands is a major international financial centre and is the world’s largest fund domicile after the US, with over 30,000 open-ended and private funds managing in excess of USD8.5 trillion. It is a world leader in structured finance and is also the second largest jurisdiction for captive insurance, with a thriving reinsurance industry. In recent years, it has emerged as the leading jurisdiction for digital asset and fintech ventures.

The Cayman Islands acts as a neutral jurisdiction to facilitate cross-border finance and trade, and investors have confidence in investing into and through Cayman Islands corporate structures because of its robust and sophisticated legal profession and impartial judiciary to resolve disputes when they arise. Similarly, foreign companies that are operating in emerging market economies and wish to access the debt and equity markets of more developed economies, such as the US, will do so through holding companies incorporated in the Cayman Islands in order to provide those investors with comfort and risk mitigation in the event that they need to enforce their legal rights. For example, Cayman Islands exempted companies have long been the vehicle of choice for listings on the Hong Kong Stock Exchange and now constitute a majority of those companies listed on the HKSE. The last decade has also seen a significant increase in the number of Cayman Islands companies being listed on the NASDAQ and the NYSE.

The wide and varied use of Cayman Islands vehicles gives rise to a wide variety of complex and high-value disputes. The prominent use of Cayman Islands companies as holding companies that raise capital through debt and equity from international investors and hold shares, directly and indirectly, in underlying operational companies invariably gives rise to investor and shareholder disputes governed by Cayman Islands law. Those disputes often involve minority shareholders seeking relief from the courts in relation to acts taken by the majority, either in breach of duties arising under contract or in equity. In the absence of a freestanding unfair prejudice remedy in the Cayman Islands, aggrieved shareholders are required to present a just and equitable winding-up petition in order to invoke the court’s equitable jurisdiction and seek an order to wind up the company or alternative relief, often in the form of an order that their shares be bought by the company or the controlling shareholders for fair value in an amount to be determined by the court.

A consequence of Cayman Islands vehicles being used to raise debt financing for underlying operational companies is that lenders will take enforcement action against the Cayman entity when the company cannot repay the debt in accordance with its terms. The Cayman Islands applies a commercial cash flow test of insolvency whereby a company is deemed to be insolvent if it cannot pay its debts as they fall due. There are a large number of highly capable insolvency practitioners in the Cayman Islands who are routinely appointed by the court as liquidators of companies to wind up a company’s affairs in an orderly manner by realising assets and ensuring that the proceeds are distributed to those so entitled in accordance with the statutory scheme. This will often require the liquidators to vote on any shares held by the Cayman company in subsidiaries to drill down and take control of the structure in order to maximise recoveries for stakeholders, and will usually involve recovery actions being taken in various jurisdictions around the world.

A very small percentage of Cayman Islands vehicles are used for fraudulent purposes but when those occasions do arise, the Cayman courts are proactive and highly responsive in appointing independent officeholders to protect the interests of investors. The Cayman Islands is seen as a pro-investor and pro-creditor jurisdiction, and the courts seek to further that policy by granting appropriate relief in a timely manner when required to do so.

Another area of active litigation in recent years has been fair value appraisal actions, where the court is required to determine the fair value of a member’s shares that are to be compulsorily acquired as part of a statutory merger, often where a listed company is being taken private. The gulf between the merger price offered by the company to minority shareholders and what the affected shareholders believe to be the true fair value of the company’s shares results in hotly contested litigation, with the courts being required to determine fair value with the benefit of extensive discovery and expert evidence. A number of institutional arbitrage investment funds are active in this space and buy into position for the sole purpose of exercising dissent rights with a view to profit.

The principle of open justice, where justice must be seen to be done in public, is enshrined in the Cayman Islands constitution. Those parties who wish to resolve their disputes in a non-public forum can agree to have their disputes resolved by arbitratio, and the popularity of arbitration continues to grow in the Cayman Islands. The Cayman Islands has established itself as a pro-arbitration jurisdiction and the courts will – as a matter of course – recognise and enforce foreign arbitral awards, including provisional awards, and grant interim relief in support of foreign arbitral proceedings where it is appropriate to do so.