Paul Scrivener considers the steps involved in moving a captive to a new jurisdiction.
In this day and age, certainly on this side of the Atlantic, there is a great deal of jurisdictional choice when it comes to captive domiciles. Onshore within the US, no fewer than 24 states now have captive insurance legislation. Clearly, the original ‘centres of excellence’—Vermont, South Carolina and Arizona—continue to flourish, but some of the more fledgling centres starting to grow market share are certainly snapping at their heels. In the offshore world and in a convenient time zone for US captive owners, Bermuda and the Cayman Islands are the dominant players.
From time to time, the prudent captive owner and its consultants will review whether the jurisdiction where the captive is established is still serving its best needs. In most cases, such a review will be conducted with the outcome being that the status quo is certainly the best option. However, circumstances do sometimes arise— generally, a gradual realisation that there is a problem—where the decision is made that a change of jurisdiction is necessary.
There could be any number of reasons why this is appropriate: taxation concerns, increasing bureaucracy, a deteriorating perception of the jurisdiction, declining quality of service providers, and so on. For the captive owner who determines that a change of jurisdictionis the best way forward, a winding-up of the existing captive in the ‘old’ jurisdiction and the establishment of a new captive in the ‘new’ jurisdiction is likely to be unattractive from both an operational and a tax perspective, and has the clear potential for ‘business dislocation’. It is for that reason that Cayman (not alone among the jurisdictions) allows an existing captive in another jurisdiction to transfer to Cayman and likewise for a Cayman captive to transfer to another jurisdiction. The technical term is ‘transfer by way of continuation’, and it has proved to be an efficient and cost-effective means to accommodate captives that wish to emigrate from their ‘jurisdiction of birth’ to a different jurisdiction with minimum disruption to their insurance programmes.
The biggest single advantage of a transfer by way of continuation, compared with a winding-up, is that the existing legal entity continues. It does not cease to exist and is not replaced by a new legal entity in the new jurisdiction. Therefore, policies, reinsurance agreements and all other contracts remain in place; the captive’s assets are unaffected; and all liabilities to third parties—in particular, to policyholders—remain intact. Therefore, neither the captive nor its insureds are prejudiced in any way by the process, and the transition should be smooth.
In Cayman, Part XII of the Companies Law sets out the transfer process in a clear and concise way, with the steps for an inward transfer into Cayman set out separately from an outward transfer from Cayman. However, the process in each case is substantially the same, with some modifications introduced to reflect certain unique aspects of each of the two processes. It is probably fair to say that, traditionally, it has been more common to see foreign captives transferring into Cayman rather than seeing Cayman captives leaving for other jurisdictions, and therefore this article will focus principally on inward transfers into Cayman rather than outward transfers.
A foreign captive wishing to transfer to Cayman would, as a starting point, need to ensure that the jurisdiction where it is currently domiciled (its home jurisdiction) permits, or at least does not prohibit, an outward transfer. The next step would be to appoint the consultants that the captive will need to ensure a smooth transition out of the home jurisdiction and into Cayman. In the home jurisdiction, they would usually be the captive’s existing manager and legal counsel who would liaise with the home jurisdiction regulator and other authorities to ensure that all legal and practical steps are taken to enable the captive to exit the home jurisdiction.
Where the captive is based onshore, its tax affairs would obviously need to be properly wrapped up. For the entry into Cayman, the captive would need to appoint a new captive manager, an auditor and legal counsel. The Cayman captive manager would attend to the licensing application with the Cayman Islands Monetary Authority (CIMA) for the captive to become a licensed insurer in the Cayman Islands. Cayman legal counsel would co-ordinate the legal process and the preparation of the various documents required by the Cayman Islands Registrar of Companies (ROC) in order to register the new captive as a Cayman company. The documentary requirements are not onerous, but it is important that they are satisfied by someone familiar with the process to ensure that the transfer is not delayed or even rejected by the ROC.
Co-ordination between the home jurisdiction consultants on the one hand and the Cayman consultants on the other is of paramount importance because each needs to understand what has to be done in the other jurisdiction so that the transfer may take place smoothly. Without such close co-ordination, potential problems include the captive being in two jurisdictions at the same time or, even worse, being in neither jurisdiction for a period of time. Both can spell disaster and clearly need to be avoided. Therefore, the correct approach is to reach ’agreement in principle’ in advance with each set of regulators and other authorities (in Cayman: the CIMA and the ROC) so that all steps are lined up and can then be implemented in such a way that the captive ceases to exist and ceases to be regulated in the home jurisdiction one moment, and the very next moment, starts its new life as a Cayman captive, subject to the regulation of the CIMA. The regulators will also liaise with each other and, in particular, the CIMA will wish to confirm the good standing of the captive with the home jurisdiction regulator.
The ROC is very much at the centre of the process because it is through the ROC that the foreign captive will lose its old ‘nationality’ (e.g. as a Vermont corporation) and take up its new ‘nationality’ as a Cayman company. The ROC will require various documentsand information, including the captive’s constitutional documents; details of its directors; notice of its proposed registered office in the Cayman Islands; a director’s declaration that the captive’s business will be conducted mainly outside the Cayman Islands; and a director’s undertaking confirming notification of the transfer to any secured creditors of the captive.
In addition, the ROC will require a director of the captive to file an affidavit or voluntary declaration swearing as to various matters, including issues relating to the solvency or financial standing of the captive (in particular, confirming that the objective of the transfer is not to defraud existing creditors); that any consents to the transfer under any contracts to which the captive is a party have been obtained or waived; that internal rules under the captive’s constitutional documents have been met, as well as legal requirements in the home jurisdiction; and that under the laws of the home jurisdiction, the captive registered there will cease to exist once registered as a Cayman company. There must be attached to the affidavit or voluntary declaration a relatively current statement of the captive’s assets and liabilities.
The ROC will not proceed with the registration until it has approval in principle from the CIMA of the captive’s insurer’s licence. Even if all the documentation and information are in order, the ROC still has an overriding discretion to refuse the registration if it considers it to be against the public interest. Subject to that discretion, the ROC will issue a certificate of registration by way of continuation, at which point, the captive becomes a Cayman company for all purposes in the same way as if it had been originally incorporated as a Cayman company.
Obviously, in many cases, the old constitutional documents of the captive will not be suitable for a Cayman company because of differences between the law of the home jurisdiction and Cayman law. Cayman law addresses this by allowing the captive a 90-day grace period from the date of its registration in the Cayman Islands to amend its constitutional documents as necessary to ensure that they comply with the requirements of the Companies Law. In most cases, this will involve the captive adopting brand new Memorandum and Articles of Association in a form consistent with those typically used by Cayman captives.
Where a Cayman captive wishes to transfer to another jurisdiction, the process will largely be a mirror image of the process outlined above, although there will be some differences. The Memorandum and Articles of Association must permit the transfer; the captive must be in good standing with the CIMA and the ROC; generally, shareholder approval will be required; and a filing fee of three times the usual annual filing fee will need to be paid to the ROC.
Transfer by way of continuation provides the ideal solution for any captive owner who has decided that the best option is to ‘emigrate’ its captive to a new jurisdiction that better suits the captive’s business objectives. In such circumstances, ‘captive emigration’ is alive and well.
Paul Scrivener is a partner and head of the insurance group at Cayman law firm Solomon Harris. He can be contacted at: PScrivener@solomonharris.com