Cayman Islands fund deregistration - common pitfalls and how to avoid them

So it may come as a surprise that the Cayman Islands Monetary Authority ("CIMA") have reported that, up to 20% of all deregistration applications are returned as a result of one or more deficiencies resulting in increased approval times.

It's true that the rules and processes for deregistration have evolved. But it's also true that CIMA's Rule on Cancellation of Licences or Certificates of Registration for Regulated Mutual Funds and Registered Private Funds dated August 2022 (the "Rule") and Regulatory Procedures on Cancellation of Licences or Certificates of Registration for Regulated Mutual Funds and Registered Private Funds dated August 2022 (the "Procedures") have both been in place for now over 3 years. CIMA have also published guidance on the deregistration process and related issues available at https://www.cima.ky/investment-funds-faqs. So why does what should be a simple process continue to cause issues?

In most cases it comes down to the persons submitting the paperwork not completely complying with the Rule and the Procedures, or the fund simply not being in "good standing".

Compliance with the Rule and the Procedures and common errors 

There are a number of common errors in deregistration submissions that result in rejections by CIMA, these include:

• Failing to make payment of any outstanding fees (a common error, that is easily remedied).  
• Incomplete submission. These can range from problems with the affidavit or resolutions that are required to be submitted with the deregistration application (including failure to have the resolutions properly certified), to gaps in the information included in the paperwork which may fail to adequately track the precise requirements of the procedures, and to affidavits not being duly notarised by a Notary Public.
• Late notice of cessation of business. One common trap that managers fall into is seeking to deregister a fund on the basis of ceasing to carry on business, but failing to notify CIMA within 21 days of such cessation, as required by the Rule. 
• Mismatch between the basis upon which the fund is seeking to deregister, and the contents of the application. The Procedures include a number of bases upon which a fund can rely in seeking to be deregistered, each requiring specific documents and confirmations and having distinct requirements and failure to satisfy these can lead to rejection. To summarise the bases for deregistration include: (a) "ceasing to carry on business"; (b) that the fund "never carried on business"; (c) voluntary liquidation; or more rare circumstances like (d) a Court supervised or court appointed liquidation; (e) transfer to another jurisdiction; (f) dissolution by merger; (g) that the fund no longer meets the statutory definition of mutual fund or private fund (as may be applicable); and (h) in the case of mutual funds, a special basis of deregistration for master funds. Failure to adhere to the specific wordings in the documents that correspond to the correct basis of deregistration would lead to rejection of applications.
• Misunderstanding of specifically defined concepts. Phrases like "ceasing to carry on business", and "never [having] carried on business" have defined meanings in the Cayman law space. This can be the source of some confusion, particularly if the applicant is not very familiar with the Procedures. A misunderstanding of any of them can lead to small but significant errors.

It follows that in navigating the deregistration process, it will be important to take professional advice in a timely manner to ensure that all of the required conditions are met for the basis upon which the fund is actually deregistering within the required time frame.  

Good standing requirement 

As noted above, the other common issue noted by CIMA is that the fund is not in "good standing" when the application for deregistration is submitted. CIMA will not deregister a fund unless it is, and continues to be, in good standing on the date that the deregistration application is submitted. "Good standing" with CIMA requires that:

• The fund must have paid all prescribed fees;
• The fund must have submitted all the required audited financial statements and Fund Annual Return ("FAR") filings; and 
• There are no outstanding queries or regulatory filings with CIMA.  

The most common issue with "good standing" relates to submission of audited accounts/FAR filings, and particularly in respect of the final audit period. The final audit is required to cover the period from the date of the last financial year-end (for which audited statements have been filed) up to and including the date of either (a) the final distribution to investors; or (b) the final net asset value calculation (with a subsequent events note confirming that final distributions have been paid to investors). Issues with this audit period and miscommunications between managers, their auditors and the legal advisors often lead to delays or rejections by CIMA. 

It is also worth noting that a deregistration application cannot be submitted until after the final audited accounts and FAR have been filed and FAR filing fee paid (or, if applicable, an audit waiver has been approved by CIMA).

It is crucial that the final audit period is discussed and agreed with auditors and legal advisers at an early stage as there will often be a need to either apply for a waiver of the requirement to file financial statements or to apply for an extension of the final audit period (up to a maximum of 18 months).

Conclusion

Deregistration of a fund vehicle is never an exercise that is enjoyable. However, it needs not be overly painful. In all cases, the key will be to appoint the correct service provider to assist with the process who should have a clear understanding of the requirements of the Rule and the Procedures, understanding of common issues and an ability to spot potential issues before they become problems.