Fund managers considering terminating a Cayman vehicle as part of a strategic change in direction should think carefully about the best legal solution to achieve their aims. They should also act sooner rather than later, to avoid paying unnecessary fees in 2022.
Geoff Ruddick, Partner, Paradigm Governance Partners, notes that the year-end deadline is looming for implementing such plans and encourages managers to act now.
“There are a few different ways to terminate a vehicle. However, the process can take time. If it drags into 2022, the vehicle will again incur annual government registration and registered office fees. Our advice is: get good advice, but also act quickly,” he said.
There are several options to choose from when terminating a vehicle.
Arguably the neatest and most final option from an administrative perspective is a voluntary liquidation. This is usually the recommendation where a legal entity has operated or traded in a way that involves third parties and/or commercial transactions.
The upside is that once the vehicle has been dissolved by voluntary liquidation, it cannot be legally re-.
It will need a competent and experienced voluntary liquidator, due to the number of statutory obligations involved, and the process can take time, however, as Ruddick notes, if the process is not completed by December 31, the vehicle will again incur annual government registration and registered office fees.
The second option, which is also the quickest way of terminating a vehicle, is known as a Strike Off. This is the better option for vehicles that have never traded. It is a quick and cost-effective way of terminating a vehicle.
But there are also risks. The biggest is that it lacks the finality of voluntary liquidation. Any interested party can apply to have the entity re-instated for a decade after the strike-off date. This could also enable action against a former director, carrying the risk of personal liability for that director for any unsatisfied claims. For this reason, if an entity has had external investors, this option is not recommended.
For funds registered with the Cayman Islands Monetary Authority (CIMA), there are some additional considerations. Regulated mutual or private funds can reduce or avoid their 2022 CIMA license fees if trading ceased before December 31 – and if they provide CIMA with certain filings proving this. This evidence would need to include a final audit and the related Fund Annual Return (FAR) filed with CIMA.
They will also need to complete an affidavit to CIMA, confirming that all investors have received their full and final share of the termination proceeds.
There is more nuance to this. Where a fund ceased to trade in 2021 but has not yet returned proceeds to investors, nor completed a final audit, 2022 CIMA fees will be payable but at a discounted rate of 50 percent. For this to happen, however, the fund must have also taken active steps to file the license under termination application with CIMA prior to December 31, 2021 and the application has been accepted by CIMA.
With CIMA now able and willing to issue fines for missing deadlines and regulatory filings, here at Paradigm Governance Partners, we are keen to help. We have developed a series of handy guides and other advice around upcoming deadlines to help our clients and partners stay on top of things.