Guide to ship finance in the Cayman Islands
Article by Harneys
Due diligence
1. How does one demonstrate title to or legal ownership of a vessel registered under the laws of your jurisdiction?
A certificate of registry issued by the Registrar of Shipping (Registrar) at the Cayman Islands Shipping Registry (a Category 1 British Registry) (CISR) demonstrates title to or legal ownership of vessels registered in the Cayman Islands. Upon the transfer of a registered vessel, a bill of sale of a vessel or of shares therein shall be entered in the Register of Ships (Register) in the order of production to the Registrar, and upon the transfer being registered the Registrar shall issue a new certificate of registry.
2. How can one determine whether there are any liens recorded over a vessel?
Mortgage registration is evidenced by a certificate of registry, but because this is a document used for navigation purposes, it is more likely that a copy of the transcript of British Registry will be provided by CISR as evidence of mortgage registration over a vessel.
3. How does one determine whether there are any security agreements, liens, charges or other encumbrances granted by a vessel owner or affiliated party who might be a borrower, guarantor or other credit party in connection with a vessel finance transaction?
Where security is created by a company incorporated in the Cayman Islands and whether or not the asset is situated within the Cayman Islands, it is necessary under section 54 of the Companies Law (2016 Revision) of the Cayman Islands (Companies Law) to enter particulars of such security in the register of mortgages and charges of the company, maintained by the company’s registered office provider. Note, failure to register in this way exposes the company and directors to a financial penalty (and may technically result in the company failing to be in good standing under the Companies Law), but does not invalidate the security itself or affect the relevant chargee’s priority. Unlike some jurisdictions (eg, England and Wales) there are no statutory time limits within which the registration has to take place to avoid being void against a liquidator or creditor, although it is prudent for lenders to ensure their security is registered as soon as possible so that other potential creditors who search the Register are put on notice. Generally, there is no public registration of security in the Cayman Islands and no publicly searchable registers, so copies of the register of mortgages and charges must be obtained from the company itself or from its registered office provider (with the company’s consent). Certain assets such as aircraft, ships and intellectual property h ave statutory registration requirements for security interests granted over them – see question 2.
4. Can one determine whether an obligor registered in your jurisdiction is duly organised and in good standing from a search of a public registry?
A search at the Cayman Online Registry Information Service of the General Registry of the Cayman Islands (available to registered users only) (Companies Registry) will show whether an entity is in existence in the Cayman Islands, when it was incorporated and who is acting as the company’s registered office provider. To establish whether a Cayman entity is in good standing, a request must be made to the entity’s registered office provider to order a certificate of good standing from the Registrar of Companies in the Cayman Islands. There are two elements to good standing in the Cayman Islands:
all fees and penalties under the Companies Law must have been paid
the Registrar of Companies must have no knowledge that the company is in default under the Companies Law
5. Can the shareholders or other equity interest holders, directors and officers or other authorised signatories of an obligor organised in your jurisdiction be determined from a search of a public registry? If not, how are these parties customarily identified?
Information on shareholders, directors, officers and authorised signatories of a Cayman Islands entity is not available publicly in the Cayman Islands. To obtain this information, a request must be made to the company (or its registered office provider acting on the instructions of the company) to provide a copy of the company’s register of members and register of directors and officers. Authorised signatories are generally approved by a company in the resolutions of the board of directors approving a specific transaction.
6. What corporate or other entity action is necessary for an obligor to enter into or guarantee a debt obligation? When is action by the board of directors or other governing body required? Must shareholders approve a guarantee?
Subject to any specific requirements under the Cayman obligor’s articles of association, generally the board of directors of a Cayman entity would need to approve the obligor’s entry into a written guarantee by passing a resolution of the board of directors. There is no prohibition against a Cayman Islands company providing financial assistance under Cayman Islands law. The directors of a company providing a guarantee or a security interest must ensure that any proposed transaction is in the best interests of the company as a whole and that, in entering into the guarantee, they take due account of their other fiduciary duties. A guarantee or other security arrangement may be construed as not being in the best interests of a company if the granting company receives no commercial benefit from the underlying financing arrangements. If the transaction is not deemed by the directors of the company to be in the best interests of the company or where the guarantee or security interest is upstream (subsidiary to parent) or cross-stream (to an affiliate), secured parties may also seek the approval of the security grantor’s shareholders before entering into the transaction – this should avoid the validity of the transaction subsequently being challenged by a shareholder and gives comfort to the directors committing the company to the transaction.
7. Must foreign lenders qualify to do business in your jurisdiction to extend credit to a borrower organised in your jurisdiction? Will foreign creditors be deemed resident as a consequence of making a loan or other extension of credit to an obligor within your jurisdiction?
Under the laws of the Cayman Islands, foreign lenders will not be deemed to be resident, domiciled or carrying on any commercial activity in the Cayman Islands or subject to any tax in the Cayman Islands by reason only of the extension of credit to a borrower incorporated or formed within the Cayman Islands, nor is it necessary for a foreign lender to be authorised or qualified to carry on business in the Cayman Islands to extend credit to a borrower incorporated or formed within the Cayman Islands.
Repayment
8. Is central bank or other regulatory approval required for repayment of a loan in foreign currency?
No authorisations, consents, orders, permissions or approvals are required from any governmental, regulatory or judicial authority or agency in the Cayman Islands for repayment of a loan in foreign currency.
9. Do usury laws limit the interest payable to a lender in respect of a vessel financing?
There is no applicable usury or interest limitation law in the Cayman Islands that would restrict the recovery of interest payments to a lender in respect of a vessel financing.
10. Are withholding taxes payable on principal or interest payments to non-resident lenders?
There are no withholding taxes payable under Cayman Islands law on principal or interest payments to non-resident lenders.
Registration of vessels
11. What vessels are eligible for registration under the flag of your country? Are offshore drilling rigs or mobile offshore drilling units considered vessels under the laws of your jurisdiction? What is the effect of registration?
Vessels of all sizes and classes, from small yachts to supertankers, and including offshore drilling rigs and mobile offshore drilling units, are eligible for registration in the Cayman Islands. However, as a matter of policy, fishing vessels are not currently being registered except those owned locally and operating in Cayman waters. CISR offers five vessel registration options:
full
interim
provisional
under construction
demise (bareboat) charter
Prior to accepting any commercial vessel for registration, the CISR uses a ‘merchant ship flag-in matrix’ scoring system to ensure the vessel meets minimum safety and operational standards. The matrix examines a vessel’s port state control record, age and type of vessel, classification society and previous flag. Generally, vessels over 15 years old or vessels with a medium to high score may require a preregistration survey.
The effect of registration in the Cayman Islands with CISR is that the port of registry of the ship shall be one of the following ports: George Town, the Creek or Bloody Bay. In addition, a vessel registered in the Cayman Islands is a ‘British ship’ and is entitled to fly the red ensign flag and, as British ships, come under the protection of the British Royal Navy. Full British consular services and Royal Naval assistance and protection for Cayman-flagged vessels are available worldwide.
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