Cayman Islands Liquidations: End-of-Life Options for Solvent Entities

Solvent entities reaching the end of their commercial life is a normal and necessary stage in the business cycle. A key question that then arises when managing this process is whether the dissolution of the legal entity should happen by way of a voluntary liquidation or a simple strike-off.

Although a strike-off may seem like an economical and fast solution, a voluntary liquidation offers significant advantages, including certainty and finality, and, in many cases, may represent the more appropriate option from a risk management perspective.

How does entity restorability differ between liquidations and strike-offs?

A voluntary liquidation generally provides more certainty regarding an entity’s dissolution, with certain statutory steps designed to locate creditors and provide a transparent final accounting of the closure of the entity.

Importantly, following a strike-off, the entity can be restored to the register and notably, with the same directors and members as it had previously. These parties are then, once again, responsible for the entity and can be exposed to any contingent liabilities, including litigation. Accordingly, a strike-off provides less finality and therefore, more uncertainty. The entity can come back to life as if it had never been struck off. Voluntary liquidation, in contrast, can provide for greater finality in some jurisdictions. There either can be restricted periods or no set time designated at all, in which an interested party can restore an entity to the register. For example, in Hong Kong, Ireland and Singapore, a liquidated entity can only be restored to the register for a period of two years from when it was dissolved. This is compared with 20 years from where an entity has been struck off. Furthermore, in the Cayman Islands, a liquidated entity cannot be restored to the register at all, which is a significant advantage in terms of clarity of position. Because a voluntary liquidation results in greater certainty in respect of restoration and therefore a clearer position on contingent liabilities, transaction parties often view it, for this reason alone, as more suitable from a risk management perspective.

How does treatment of contingent assets differ between liquidations and strike-offs?

Another consideration is the ownership of assets discovered post-dissolution. The law in a number of these jurisdictions is silent when it comes to dealing with assets of struck-off entities. In those jurisdictions that expressly address this scenario – Bermuda, the British Virgin Islands (“BVI”), the Cayman Islands, Dubai, Hong Kong and the UK – such assets may ultimately vest to the state.

In most jurisdictions, this is different from a voluntary liquidation scenario, where there are generally tried-and-tested procedures for the former voluntary liquidator to follow in situations in which they are unable to distribute assets to their rightful, ultimate beneficiaries or any further assets revealed post-dissolution. For instance, Bermuda, the Cayman Islands, Hong Kong and Singapore all allow the former liquidator to deal with the assets for a period post-dissolution. After this period has passed, the assets generally are remitted to a specific local government department to hold on trust, with the ultimate beneficiaries having the right for a specified period to submit a claim to these assets. In general, this results in a reduced risk of assets ultimately passing to the state rather than to stakeholders.

What are the costs and procedures involved with strike-offs and voluntary liquidations?

Generally, strike-off procedures are simple and involve the submission of certain filings and certifications. While the voluntary liquidation process is more involved, it is also relatively straightforward across most jurisdictions. It is important to understand that it is not a court-supervised liquidation but a statutory process.

It starts with the appointment of a voluntary liquidator, usually either following a meeting or resolution of the board or members. While the time involved from start to finish can vary and will depend on the complexity and amount of the remaining assets, it typically takes approximately four to five months to dissolve a no-asset, no liability Cayman company, with a similar timeframe in Bermuda, Hong Kong, Ireland, Singapore and the UK. The process takes approximately three months in the Netherlands and can be significantly quicker in BVI, Dubai, Jersey and Luxembourg.

Costs for a strike-off are relatively low; usually a few thousand dollars. The costs involved with a liquidation are higher but should rarely exceed US$10,000 for a straightforward liquidation. In the context of the size of the transactions undertaken by structured finance and investment fund vehicles, the overall costs of a voluntary liquidation are considered minor.

Strike-offs or Voluntary Liquidation?

Ultimately, while a little more costly; a voluntary liquidation is often the most beneficial route to take. It is important for officers, managers and members of an entity to consider carefully the implications of not taking the voluntary liquidation route to dissolve an entity. This decision has the potential to affect all stakeholders for several years post-dissolution. Strike offs may be the best course of action when a vehicle has been dormant and not undertaken any activities. In our experience, however, most market participants would seek a voluntary liquidation if a transaction had been undertaken.

The Maples Group has unparalleled and trusted experience in key financial centres spanning time zones and is able to manage the voluntary liquidation of all types of entities. We can assist clients with voluntary liquidations and end-of-life solutions in the jurisdictions in which we incorporate entities, either as voluntary liquidator or if relevant, assisting with a third-party referral to provide a bespoke client experience.