Cayman Islands Underwhelms with New LLC Legislation

Lawyers on the firm’s team have contributed to LLC legislation in a number of U.S. states and offshore jurisdictions, including Delaware, Ohio, North Carolina, Wyoming, the Cook Islands, Nevis, and Belize. The firm offers an unvarnished view whenever a jurisdiction implements or amends LLC legislation. The immediate reaction to the Cayman bill: the drafters appear to have little experience with LLC law, and the resulting statute offers very little reason to organize an LLC under it.

1. Creditors become members by default. Most limited-liability statutes provide that an assignee cannot be admitted as a member absent the consent of the others. Section 12(1) of the Cayman bill seems to follow that rule, but § 11(3)(d) provides that a creditor holding a security interest in a membership interest automatically becomes a member. No conditions are attached — not even default on the underlying obligation.
2. Absence of certification law. The bill permits LLC interests to be held in certificated form, but the Cayman Islands lacks a comprehensive commercial law governing certificated interests, and the LLC bill supplies no rules of its own. What it means to hold a certificated interest, and how its rights differ from any other interest, is left for the reader to imagine.
3. Absence of restrictions on creditors. The bill offers no restraint on creditor remedies. There is no sunset on charging orders, and no other safeguard extended to members vis-à-vis their individual creditors. Section 11(3)(a) permits a member to assign all rights to allocations and distributions — readily imagined as the outcome of a contempt order.
4. Foreclosure on the entity. Section 11(3)(c) provides that an assignment of all of a member’s interest constitutes an automatic cessation of membership rights. Applied to a single-member LLC, that provision would permit a creditor to foreclose on the LLC itself — a result the body of LLC law has spent three decades preventing.
5. No internal-affairs doctrine. Virtually every LLC jurisdiction codifies some form of the internal-affairs doctrine for foreign LLCs: the internal affairs of a foreign LLC are governed by the law of its jurisdiction of organization, while the local LLC law governs interactions with creditors and third parties. The Cayman bill contains no such provision. The conventional fallback — organize in a sound jurisdiction and qualify locally — is not even available.

The Cayman LLC legislation is, in the firm’s view, a dud. One could understand a bill drafted intentionally to favor creditors over debtor-members; some of the provisions here defy any coherent legislative intent at all. The absence of an internal-affairs doctrine alone is enough to prompt the question whether the drafters had any prior experience with the subject.