Voluntary liquidation or striking off? Dissolution of a Cayman company may be achieved by striking off instead of voluntary liquidation
Once a Cayman Islands company has ceased trading there are two main routes to voluntary dissolution: (i) voluntary liquidation or (ii) striking off. Either removes the company from the register kept by the Cayman Islands Registrar of Companies and it eventually ceases to exist. Where the company has entered into agreements or carried on transactions since incorporation, formal liquidation by solvent voluntary liquidation is the more usual and more appropriate course; where it has not, the simpler striking-off procedure may be considered. Striking off is cheaper and quicker, but creditors and shareholders may apply to restore the company for two years afterwards.
7 October 2020
Once a company has ceased trading there are two main routes to voluntary dissolution of a Cayman Islands company: dissolution may be achieved by (i) voluntary liquidation or (ii) striking off. Dissolution means that the company is removed from the register kept by the Cayman Islands Registrar of Companies and eventually ceases to exist. Where the company has since incorporation entered into any agreements and/or carried on any transactions or trade with investors, customers, clients and suppliers, the more common and more appropriate option is to wind the company up formally by a shareholders' voluntary liquidation. Where the company has entered into no agreements and/or carried on no transactions or trade since incorporation, the simpler striking-off procedure may be considered.
Advantages of striking off
The main advantages of dissolving a company by the simplified striking-off route are: (1) it is a simpler legal process, although not necessarily simpler for the company's directors, who must settle all debts and distribute any surplus assets of the company before it is struck off, than voluntary liquidation; (2) the cost of striking off is lower than that of voluntary liquidation; (3) it is generally carried out by resolution of the board; and (4) it is faster than voluntary liquidation.
Risks of striking off
There are a number of risks in achieving dissolution by the striking-off route, including the following:
The striking-off procedure is better suited to a company that has never traded, because it does not deal with the company's debts to creditors, and it is not suited to a company with extensive trading operations or valuable assets;
Where a creditor or shareholder of the company is dissatisfied, that person may at any time within two (2) years after the striking off apply to the Cayman Islands court, and the Governor of the Cayman Islands may extend that period, running from the date of striking off, to a maximum of 10 years, to have the company restored to the Cayman register. If the court considers that the company was carrying on business or operating at the time it was struck off, that will be a "good" reason for restoration. Where, for example, the court considers that a creditor should be allowed to sue to recover the company's assets, it will order restoration at once in order to protect the creditor's lawful rights.
Unless the company distributed all its remaining assets before being struck off, any assets it holds at the time of striking off pass to the Financial Secretary of the Cayman Islands Government, and will be disposed of by the Government, the Cayman Islands Government having the ultimate right to make them revenue of the Cayman Islands.
The striking-off procedure therefore does not cut off the later rights of creditors as completely as a properly conducted voluntary liquidation does. A creditor may, for example, challenge before the court assets distributed to shareholders before the company was struck off, and may then apply to the court to restore the company and bring a claim.
Unlike the simplified striking-off procedure, once a voluntary liquidation has been carried out in full, creditors and former shareholders have no ability to apply to the court to restore the company.
Conclusion
In deciding whether (i) to carry out a voluntary liquidation or (ii) to strike off, the directors of a Cayman Islands company should assess the company's overall position, including:
the nature and extent of the company's assets and liabilities, and dealing with them accordingly, that is, discharging all creditors and transferring all assets;
whether, if the company is dissolved by striking off, there is a real risk that shareholders or creditors will seek restoration of the company in future.
This publication is not intended to be a substitute for specific legal advice or a legal opinion. For specific advice on voluntary liquidation or winding up, please contact us: