On December 18, 2015, the Cayman Islands advanced legislation providing for the formation and registration of limited liability companies. While the legislation has not yet been enacted into law, the text of the bill has been published, and our expert staff has now had a chance to review the proposal.
About Our Staff
Lawyers on our service team have contributed to LLC legislation in a number of U.S. states and offshore jurisdictions, including Delaware, Ohio, North Carolina, Wyoming, the Cook Islands, Nevis, and Belize. We know LLC law, and we offer our unvarnished opinion whenever a jurisdiction looks to implement or amend LLC legislation.
Our immediate take-away is that the drafters of this legislation have little to no experience with LLC law. There is practically no incentive for someone to use a Cayman Islands LLC, and many of the enforcement mechanisms common in LLC legislation is missing from the Cayman Islands law. More specifically, these are the deficiencies our analysts have spotted:
- Creditors Become Members By Default: Most limited liability enterprises (LLCs and limited partnerships) provide that an assignee cannot be admitted as a member/partner absent consent of all the other members/partners. While § 12(1) seems to provide a similar rule under Cayman Islands law, § 11(3)(d) says that a creditor holding a security interest in a membership interest automatically becomes a member of the LLC; no conditions are attached, such as a requirement of default on the debt to which the membership interest attaches.
- Absence of Certification Law: The Cayman Islands legislation permits LLC interests to be held in certificated form. However, the Cayman Islands lacks a comprehensive commercial law governing certificated interests, generally, and there is no provision in the LLC legislation for rules governing the exchange and delivery of certificated interests. What exactly does it mean to hold a certificated interest, and how do the rights of a certificated interest vary with any other interest? One is left to ponder this question.
- Absence of Restrictions on Creditors: The Cayman Islands LLC legislation offers no restraint on creditor remedies: There is no sunset for charging orders, and no other protections extended to LLC members vis-a-vis their individual creditors. Worse, § 11(3)(a) permits a member to assign all rights to allocations and distributions. One can easily imagine a judge ordering a debtor-member to make such an assignment under threat of contempt.
- Foreclosure: For generations, limited liability enterprise law has sought to isolate the fortunes of the enterprise from the travails of its members/partners. Cayman Islands LLC law seeks to undo this separation through § 11(3)(c), which provides that an assignment of all of a member’s interest constitutes an automatic cessation of membership rights. This raises the prospect that a creditor of a single-member LLC could foreclose on the LLC under Cayman Islands law.
- No Internal Affairs Doctrine: Virtually every LLC jurisdiction offers some codification of the common law internal affairs doctrine governing foreign LLCs. Under this rule, internal affairs of a foreign LLC (such as disputes between members and managers) are governed under the laws of the foreign LLC’s jurisdiction of organization, whereas local LLC law governs the LLC’s interactions with creditors and third parties. There is no such provision in the Cayman Islands LLC law, making us really wonder whether this is some fly-by-night piece of legislation. How could the Cayman Islands flub this one? In most cases, if you don’t like the LLC law of a particular jurisdiction, the simple solution is to organize the LLC in a premier jurisdiction such as Wyoming or Delaware, and then qualify it to do business in the local jurisdiction. Unfortunately, this is not even an option when doing business in the Cayman Islands.
In our experienced opinion, the Cayman Islands LLC legislation is a dud. We could understand if the authors intentionally drafted the legislation to favor creditors over debtor-members, but some of these provisions really leave us baffled as to legislative intent. Moreover, the complete absence of an internal affairs doctrine leads us to ask, “Did any of the drafters have previous experience drafting LLC legislation, particularly in the United States?”