The Outlook from Offshore – Recent Developments and Looking Ahead
2023 was certainly a tumultuous and difficult year by any standard. Leaving aside geopolitical conflicts, high interest rates, rampant inflation, and slowing growth, the lingering effects of the COVID-19 pandemic and high-profile bankruptcies made their mark on many businesses. From an offshore point of view, 2023 saw significant reform of company legislation in the British Virgin Islands (“BVI”), as well as extensive efforts by regulators and other market participants in the BVI and the Cayman Islands to address perceived shortfalls in combating money laundering and tax evasion.
While dealmakers generally anticipate that transactional activity will improve in 2024 owing to downward pressure on inflation and stabilising interest rates, many questions remain with geopolitical tensions and economic uncertainty worldwide. From an offshore perspective, it is possible to make several interesting forward-looking observations. Firstly, the longstanding debate around publicly accessible beneficial ownership registers will continue. In fact, the Beneficial Ownership Transparency Act, 2023 of the Cayman Islands incorporates a clause which will enable the Cayman Islands Cabinet to make Regulations that permit public access of certain company information by third parties. The changes are not as draconian, however, as they may seem. Secondly, interest in the virtual asset service provider (“VASP”) regimes of the BVI and the Cayman Islands is expected to grow owing to a consensus that VASPs need to demonstrate credibility through reputable regulation. Thus far, the BVI and the Cayman Islands have enjoyed a high degree of success in regulating digital assets businesses owing to the commerciality and balanced nature of the legislative framework. Thirdly, additional case law with respect to restructuring officers (“RO”) in the Cayman Islands is likely to develop given prevailing market conditions and the liquidity issues which many businesses continue to face. To date, there have only been two cases in the Cayman Islands courts with respect to ROs since the regime was introduced in 2022 and more will inevitably therefore follow. Finally, lenders and other financiers are likely to continue to take a cautious approach to refinancing and restructuring secured debt by requesting new security and/or security confirmations even when these are not strictly necessary from an offshore point of view. This is of interest as refinancing activity is expected to be relatively strong in 2024 as interest rates are cut.
Recent key developments in the BVI and the Cayman Islands
1. What are the key recent changes to the BVI Business Companies Act, 2004?
Whilst the BVI Business Companies, Act 2004 was amended pursuant to the BVI Business Companies (Amendment) Act in 2022, the changes only came into effect in 2023. Consistent with the BVI’s ongoing drive to ensure compliance with international best practices and the standards imposed by the Financial Action Task Force, the legislative amendments are principally intended to make the BVI more transparent as an offshore international financial centre. For example:
- Bearer shares have been phased out.
- Directors’ names are now publicly accessible.
- A framework has been developed pursuant to which a publicly accessible register of beneficial ownership may be introduced in due course.
- Most BVI companies are now required to file an annual financial return with its registered agent within nine months of the end of its financial year.
- A BVI company that is struck off from the Register of Companies is dissolved on the date that the BVI Registrar of Corporate Affairs publishes a notice of striking-off in the BVI Gazette. Accordingly, the seven-year period within which a BVI company was previously struck-off but not dissolved has been abolished.
- A dissolved entity may now only apply to the BVI Registrar of Corporate Affairs for restoration if it carries on business or is in operation at the date of its striking-off and dissolution. Of course, it remains possible to apply to the BVI courts for restoration on other grounds.
- A BVI resident voluntary liquidator must now be appointed in every BVI voluntary liquidation.
Although detailed consideration of these rules is outside the scope of this note, it is worth noting that they now apply to all BVI companies as the transitional periods contained in the BVI Business Companies (Amendment) Act have expired. While the changes are broad in scope and have wide-ranging consequences, structuring can be deployed to lessen their impact. For example, appointing a corporate entity as a director of a BVI company may safeguard the personal identities of the underlying directors.
2. BVI is removed from EU List of Non-Cooperative Jurisdictions for Tax Purposes
On 17 October 2023, the BVI was finally successful in its efforts to secure removal from the European Union’s (“EU”) list of non-cooperative jurisdictions for tax purposes (Annex I) (the “EU List”). It is notable that this was the very first time that the BVI had been included on the EU List and the speed at which it was removed following a supplementary review that was requested by the BVI Government. In fact, the BVI’s inclusion on the EU List on 14 February 2023 was unfortunate as it did not take into account certain key legislative amendments which had been implemented pursuant to the BVI Business Companies (Amendment) Act that showcase the BVI’s commitment to combatting tax evasion.
The removal of the BVI from the EU List is of course very welcome and underscores the jurisdiction’s commitment to exchange information where appropriate. In particular, this development will be looked upon favourably by entities that seek to resume channeling funds from certain EU instruments through the BVI, including pursuant to the general framework for securitisation. BVI companies are highly popular for securitisation and other structured finance transactions as they can offer bankruptcy remoteness and off-balance sheet treatment and removal from the EU List will cement the jurisdiction’s reputation as a leader in this space.
3. Cayman Islands is removed from FATF Grey List and UK AML List
On 27 October 2023, in line with its initial determination on 23 June 2023 that the Cayman Islands had substantively fulfilled its action plan to: (i) apply sanctions that are effective, proportionate and dissuasive, and impose administrative penalties and take enforcement action against relevant entities (including service providers) to facilitate the prompt and effective remediation of breaches, (ii) impose adequate and effective sanctions where relevant parties do not file accurate, adequate and up to date beneficial ownership information, and (iii) demonstrate that all money laundering is being prosecuted and resulting in the application of dissuasive, effective and proportionate sanctions, the Financial Action Task Force (“FATF”) removed the Cayman Islands from its list of “jurisdictions under increased monitoring” (the “FATF Grey List”). The inclusion of the Cayman Islands on the FATF Grey List painted an unfairly negative image of the jurisdiction which is otherwise now widely seen as being effective in its fight against money laundering, tax evasion and other criminal activity and its removal is therefore very welcome.
In line with the EU’s longstanding position that it does not require any further measures to be taken by the Cayman Islands as a condition to delisting from the European Commission’s list of “high risk third countries” (the “EU AML List”) beyond removal from the FATF Grey List, the EU published Commission Delegated Regulation (EU) 2024/163 on 18 January 2024 pursuant to which the Cayman Islands will be removed from the EU AML List on 7 February 2024. This is welcome news as inclusion on the EU AML List necessitates EU financial institutions to apply enhanced due diligence measures to relationships or transactions involving the Cayman Islands and prevents such institutions from establishing new tranched securitisation vehicles in the Cayman Islands. In fact, the United Kingdom has already removed the Cayman Islands from its list of high-risk third countries for anti-money laundering purposes (the “UK AML List”) as of 5 December 2023.
Looking forward – change is on the horizon
Owing in large part to the fact that the legal framework in the BVI and the Cayman Islands is tried and tested, robust and flexible, it is widely expected that the popularity of these jurisdictions will steadily grow. Importantly, the regulatory landscape in each of the BVI and the Cayman Islands will continue to evolve to meet international expectations and best practices, and to ensure that the jurisdictions remain central to dealmaking worldwide.
1. There will be a limited form of public disclosure of beneficial ownership information in the Cayman Islands
As is widely known, the Cayman Islands Government made a commitment in 2019 to introduce publicly accessible registers of beneficial ownership subject to this becoming a global standard. This undertaking was made in response to international pressure and also because an Order in Council drafted by the UK Government under the UK Sanctions and Anti Money Laundering Act 2018 would have imposed publicly accessible registers of beneficial ownership on companies in the UK Overseas Territories (including the BVI and the Cayman Islands) had they not implemented them by December 2023. Of course, this Order in Council was never ultimately enacted. On 22 November 2022, the European Court of Justice issued a judgment in which it held that unfettered public access to beneficial ownership information is contrary to the right to privacy and data protection under the European Charter of Fundamental Rights (the “ECJ Judgment”). The ECJ Judgment was reviewed in full by the Ministry of Financial Services of the Cayman Islands, which concluded that the introduction of a publicly accessible register of beneficial ownership by the end of 2023 is not only unfeasible, but constitutionally unsound.
To nevertheless try to meet international expectations and best practices, the Cayman Islands Parliament passed the Beneficial Ownership Transparency Bill on 23 November 2023. This helpfully codifies the beneficial ownership rules of each of the Companies Act, the Limited Liability Companies Act, and the Limited Liability Partnership Act in a single piece of legislation, as well as making certain other updates and amendments. Crucially, section 22(6) of the Beneficial Ownership Transparency Act 2023 expressly permits the Cayman Islands Cabinet, subject to affirmative resolution in the Cayman Islands Parliament, to make Regulations to provide members of the public with access to certain prescribed beneficial ownership information. This appears to be consistent with the ECJ Judgment, which leaves room for a limited form of public access to certain parties who meet a legitimate interest test.
While it remains to be seen whether the Cayman Islands Cabinet will exercise these powers in 2024 and beyond, it is not difficult to envisage certain limited circumstances where public disclosure might outweigh a party’s right to privacy and data protection. Overall, though, it is not expected that these changes will disincentivise the use of Cayman Islands vehicles. To the contrary, the changes are to be welcomed as a means of striking a sensible balance between promoting transparency and protecting confidential information.
2. The approach to digital assets and VASPs in the BVI and the Cayman Islands will continue to evolve to meet international standards and requirements
Although virtual assets services have traditionally not been regulated separately to mainstream financial services in the BVI and/or the Cayman Islands, this has changed in the last few years owing to the popularity of cryptocurrencies and other digital assets. Various high-profile scandals and bankruptcies (including with respect to FTX) and a perception that VASPs need to demonstrate credibility through reputable regulation have also arguably contributed to this trend. It is therefore no surprise that legislation to govern VASPs was introduced in the Cayman Islands in 2020 and in the BVI in 2023.
While there are still certain jurisdictions where it is possible to operate a virtual assets business without any significant regulatory scrutiny, the number of such jurisdictions is shrinking owing to international pressure and calls for risk mitigation. Overall, the BVI and the Cayman Islands appear to have benefitted from taking a commercial and balanced approach to regulation and have continued to attract high-quality market participants in the digital assets space.
The latest edition of the Guidance on Regulation of Virtual Assets in the BVI (the “Guidance on VASPs”) is illustrative of the balanced approach that has been taken. For example, the Guidance on VASPs states that the issuance of utility tokens is highly likely to fall outside the ambit of the financial services legislation that is currently in place in the BVI, whereas the issuance of securities tokens on the other hand is not. Other jurisdictions do not make this distinction. This clarity and commerciality has continued to make the BVI a jurisdiction of choice for issuers of utility tokens, whilst also remaining attractive to market participants who understand the need to regulate securities offerings and other higher risk activities. It is anticipated that the rules and regulations pertaining to VASPs will continue to evolve in the BVI and the Cayman Islands in 2024 in a commercial yet risk-based manner to align with international standards and requirements and the macroeconomic environment in which such businesses operate. This approach to regulation will continue to drive virtual assets businesses to the BVI and the Cayman Islands.
3. The case law with respect to restructuring officers will continue to evolve
The difficult economic conditions under which many businesses have continued to operate throughout 2023 has manifested itself in a variety of ways that is visible offshore. For example, the jurisprudence with respect to ROs under section 91B of the Companies Act (As Revised) of the Cayman Islands (the “Companies Act”) has continued to evolve. As a reminder, under section 91(B)(1) of the Companies Act, a company may present a petition to the Grand Court of the Cayman Islands (the “Court”) for the appointment of a RO on the grounds that the company: (i) is, or is likely to become, unable to pay its debts within the meaning of section 93 of the Companies Act, and (ii) intends to present a compromise or arrangement to its creditors either pursuant to Cayman Islands law or the law of a foreign court or by way of a consensual restructuring.
In Re Aubit International (Unreported, 4 October 2023), the Court dismissed a petition to appoint ROs and found that it did not have jurisdiction to grant the relief requested on the basis that there was no credible evidence of a rational restructuring proposal with a reasonable prospect of success. Although a detailed analysis of this judgment is beyond the scope of this note, it is only the second judgment to consider the RO regime and provides helpful clarification on the considerations that the Court will take into account when adjudicating on the appointment of ROs. Importantly, the Court will not exercise its discretion to appoint ROs unless the petitioner can satisfy the Court that each of the statutory limbs in section 91B(1) of the Companies Act are satisfied.
Additional jurisprudence is likely to emerge in 2024 to clarify the circumstances under which ROs may be appointed. In the meantime, a careful analysis will need to be conducted on the likelihood of the Court exercising its discretion to approve ROs favourably in any given situation.
4. Financiers will continue to take a cautious approach to refinancing and restructuring secured debt offshore
2023 was heavily dominated by refinancing activity relative to new money transactions and this trend is expected to continue in 2024 as interest rates are cut. It is noticeable that lenders and other financiers are continuing to take a cautious approach to refinancing and restructuring secured debt by requesting new security and/or security confirmations even when these are not strictly necessary from an offshore point of view. Of course, the risk appetite of the relevant lender(s) and the financial performance of the obligor(s) will ultimately dictate the approach that is taken, but the practice is clearly widespread even where the definition of “secured obligations” (or equivalent definition) is sufficiently broad to capture any amended obligations and the relevant changes are expressly contemplated by the original finance documents. This conservative approach is likely to prevail in 2024 given current market conditions and it is anticipated that an increasing volume of finance parties will seek high-level advice to understand how local law security may be enforced in the event of a default by the borrower group.
From an offshore law perspective, borrowers and security providers should ensure that the giving of any new security is duly authorised and does not breach the terms of any existing finance documents. Lenders will also want to ensure that applicable security registrations and annotations are properly completed to protect the priority of the relevant underlying security interests and to put third parties on notice of them.
If you want to know more about the content of this article, please contact:
Peter Vas, Partner in Banking & Banking and Corporate
Telephone: +852 5225 4920
Peter is a Partner in Spencer West’s Banking & Finance and Corporate Groups and advises on matters of British Virgin Islands and Cayman Islands law. He has acted for clients on offshore transactional matters for around a decade and has previously worked as an attorney in the London office of a US law firm and the Channel Islands and Hong Kong offices of an international offshore law firm. More recently, he has led and co-ordinated the banking & finance and corporate groups of a Cayman Islands headquartered offshore law firm in Hong Kong. As well as having an established client base in Asia, Peter has strong client relationships in North America, Europe and the Middle East. He has also been consistently ranked as one of the top offshore lawyers in the Asian Legal Business Offshore Client Choice List and in Asia Business Law Journal’s A-List of top offshore lawyers and has advised on various matters which have been recognised as landmark transactions by leading directories and publications.
Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication. This article was last updated on 18 January 2024.