A Capital Idea? Incoming Changes To Cayman Share Capital Reduction Regime

• Published date: 26 March 2024
• Subject Matter: Corporate/Commercial Law, Corporate and Company Law, Directors and Officers, Shareholders
• Law Firm: Collas Crill
• Author: Tom Wright

Having exited the consultation stage and been heard and passed by the Cayman Islands' parliament on 23 February 2024, legislative changes to streamline the process by which Cayman companies can effect a reduction in their share capital will be brought into law.

Under the current but soon-to-be-previous regime, any reduction in share capital must be approved by special resolution and sanctioned by the Cayman Court. This is a costly process, not only due to the requirement to pay Court fees in order to file the sanction application, but also due to the requirement to file both a Summons for Directions and a Petition, and pay the attendant legal costs. The Summons for Directions, which is capable of determination without the need for a hearing, is for the purpose of setting directions (for example, the date of the hearing of the Petition and appropriate means of advertising the hearing of the Petition) up to the hearing of the Petition itself. The Petition is for the Court to determine whether to approve the reduction.

The paramount concern of the Court - which the current regime is designed to address - is that the creditors of a company looking to reduce its share capital should not be prejudiced. That concern is acute where:

1. a company is in, or foresees, financial difficulty; or
2. the reduction will result in a diminution of the company's liability in respect of unpaid share capital; or
3. the reduction entails a payment to shareholders of paid-up capital.

The proposed changes introduce the means for a company, if authorised to do so by its articles of association, to combine the passing of a special resolution with the signing of a "Solvency Statement" by the directors of the company to effect a share capital reduction, without recourse to the Court.

It is proposed that the simplified Solvency Statement-based procedure will be available, even if the reduction would result in a diminution of the company's liability in respect of unpaid share capital or it entailed a payment to shareholders of paid-up capital.

The assumed rationale is that, if the directors are prepared to sign a Solvency Statement stating that the company will be able to pay its debt as they fall due in the ordinary course of business commencing on the date of the statement, then the potential threats to the interests of creditors of a diminution of liability in respect of unpaid share capital, or a payment to shareholders of paid-up capital, are nullified.

The Solvency Statement

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