Jul 2023
Insurers rarely consider that funds injected into them by a shareholder could potentially be clawed back in certain scenarios, but in circumstances where capital contributions are made to a company without receiving a formal allocation of shares in return or where the cash injection is not properly characterised in writing, that is exactly the risk taken!
Our practice regularly encounters scenarios where shareholders in Cayman Islands companies have made capital contributions in the absence of any formal issuance of shares or otherwise documenting the terms of the cash injection. In this note we highlight the steps that should be taken to avoid any potential pitfalls inherent in this approach.
Capital Contributions – the View of the Courts
In the absence of Cayman Islands authorities on the point as to how capital contributions should be categorised where there is no formal issuance of shares or entry into of loan documentation subsequent to such capital contribution, the Turks & Caicos Islands case of Kellar v Williams1. is of persuasive authority. Kellar v Williams was a decision of the Privy Council and would therefore likely be followed by a Cayman Islands court.
The case centred on the treatment that should be accorded to funds contributed by the appellant (Kellar), to a company incorporated in the Turks and Caicos called Sunrise Agency Ltd (“Sunrise”), in respect of which he was a shareholder, that had entered liquidation. Kellar sought the direction of the court as to whether the contributions to Sunrise were to be treated by the official liquidator as loans and therefore repayable to him, or as capital contributions to be divided between the shareholders of Sunrise.
The respondent (Williams), who was also a shareholder in Sunrise, contended that the funds were paid to Sunrise as capital contributions and, after the payment of debts, were divisible among shareholders pro-rata. Unfortunately for Kellar, at the time he contributed the funds there was no clear indication or documentary evidence as to whether or not the funds were contributed by way of a loan or capital contribution.
In dismissing the case brought by Kellar seeking repayment of his contribution, the Privy Council stated that:
“If the shareholders of a company agree to increase its capital without a formal allocation of shares that capital will become like share premium part of the owners equity and there is nothing in the company law of the Turks & Caicos Islands or in the company law of England on which that law is based to render their agreement ineffective”.
The key take away for clients here is that, where a shareholder of a company agrees to increase its capital without a formal allocation of shares, the capital will become, like share premium, part of the owner’s equity. From the court’s perspective, if cash contributions are not recorded in company records as loans from the shareholder, such funds were, after payment of debts, not repayable to the shareholder who had provided such funds and instead to be divided among shareholders in proportion to the nominal amount of shares issued by the company with respect to their shareholding.
Conyers Recommendations
Where a cash injection from a shareholder to a Cayman company/insurer is proposed, care should be taken to identify at the outset how the funds are to be treated at the level of the recipient. Ideally, shares should be issued at a premium in consideration for such injection to clearly identify such contribution as equity. Alternatively, if the proceeds are to be repayable then the injection should be documented as a loan and if not proposed to be repayable (invariably the case) then at the very least a letter should be entered into documenting that the contribution does not constitute either share capital or share premium, is unrelated to any share issue, is for no consideration, does not constitute a loan, does not comprise consideration for goods or services and is not repayable.
Please reach out to your usual Conyers contact who would be happy to assist with the matters described above.
[2000] 2 B.C.L.C. 390 (07 February 2000)