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Cayman Islands amend Bank & Trust Companies law

Posted: 14 August 2008

Changes to the Caymans Islands Banks and Trust Companies Law could prove useful for hedge funds according to legal firm Maples and Calder. The amendments make it possible to establish a controlled subsidiary to act as a trustee of a unit trust; this could be a useful structure for fund managers, arrangers and hedge fund promoters launching various types of investment funds and structured finance products in the Cayman Islands.

A unit trust has no separate legal personality. Although it is possible to use certain techniques to control the exposure to the trustee, such as the use of a trading subsidiary, or the inclusion of contractual limited recourse or limited payment obligation provisions, each has its limitations.
The use of a controlled subsidiary may have a number of advantages.

Once registered, a controlled subsidiary can act as the trustee of a unit trust formed to carry out structured finance transactions or to act as a hedge fund or private equity fund and may issue notes and bonds and enter into all other usual types of transaction documents. The parent company will not be the contracting party to the transaction documents. This could help the parent company's potential liability and risk analysis, particularly where a strategy of the unit trust requires trustees to enter into what could be onerous contracts.

According to Maple and Calder, the use of a controlled subsidiary may assist the analysis of rating agencies and other contracting counterparties.

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