Cayman Islands Welcomes Amendments To The Companies Act To Streamline The Capital Reduction Process For Listed Companies

• Published date: 28 March 2024
• Subject Matter: Corporate/Commercial Law, Corporate and Company Law, Shareholders
• Law Firm: Ogier
• Author: Gemma Bellfield, Dunzelle Daker and Oliver Payne

A Court-approved reduction of capital is one of the corporate reorganisation tools that has been successfully deployed by listed companies domiciled in the Cayman Islands in order to manage debt and liquidity.

Following recent amendments to the Companies Act (2023 Revision), which are discussed in further detail by Bradley Kruger and Ridhiima Kapoor here, the straightforward process is set to be further streamlined for companies able to establish their solvency, obviating the need for a court hearing altogether.

Capital reduction applications

The Companies Act provides that, upon application by petition, the Court, subject to being satisfied the interests of creditors will not be prejudiced (or where there is no diminution of any liability in respect of unpaid share capital or the payment to any shareholder of any paid-up share capital) may make an order confirming the reduction on such terms and conditions as it thinks fit.

The Court has identified five well-established criteria that it will apply in determining whether or not to confirm a capital reduction:¹

• whether the shareholders will be treated equitably by the capital reduction;
• whether proper information has been provided to shareholders;
• whether the interests of creditors have been safeguarded;
• the court being satisfied that the capital reduction was for a "discernible purpose" (which requires more than demonstrating a company had some actual objective in mind; the Court should be given a proper understanding of the commercial rationale for the overall transaction of which the capital reduction formed part); and
• that the resolution reducing capital must be a validly passed special resolution.

Amendments to the capital reduction process

The Companies (Amendment) Bill 2024² seeks to ease the obligations on companies who wish to reduce their capital as part of a corporate reorganisation by removing the requirement for Court approval altogether, in appropriate circumstances.

The most significant amendment means that, pursuant to a new section 14A, a company, if so authorised by its articles, may reduce its share capital by special resolution supported by a solvency statement and without the need for a confirmation hearing before the Grand Court.

Section 14A will require that (i) the solvency statement be made by the directors no more than thirty days before the date on which the special resolution for reducing the share capital was passed; and (ii) a director must not knowingly make a solvency...