Security over Collateral. CAYMAN ISLANDS Walkers

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1 Security over Collateral CAYMAN ISLANDS Walkers CONTACT INFORMATION Louise Groom Walkers Walkers House 87 Mary Street Grand Cayman KY Cayman Islands Can assets be charged, liened and/or encumbered in your jurisdiction? Please insert any exemptions, if any. Cayman Islands law recognises five basic forms of security interest, namely (i) legal mortgage, (ii) equitable mortgage, (iii) charge, (iv) pledge and (v) lien. A legal mortgage is the most comprehensive and secure form of security. It is the transfer by conveyance or assignment of the whole of the legal ownership of an asset by way of security. This transfer is, however, subject to an equity of redemption (which cannot be fettered) which is an express or implied obligation to re-transfer ownership of the asset to the Chargor if the Chargor discharges its debt or obligations to the Chargee. An equitable mortgage is the transfer of a beneficial interest in the relevant asset to the Chargee while the legal interest remains with the Chargor. An equitable mortgage is weaker than a legal mortgage and a pledge because a bona fide purchaser without notice of an equitable mortgage can acquire legal title in the asset free from an equitable mortgage. A charge does not transfer legal or equitable interests in the asset subject to the charge, nor does it confer a right to possession. Instead, under a charge, specific property of the Chargor is expressly or constructively appropriated to or made answerable for payment of a debt. The Chargee has a right to resort to the asset in order to realise it towards payment of its debts. Charges are always equitable and require no formalities except for an agreement creating the charge. Charges can either be fixed or floating. A pledge is a legal form of security which is created by delivery of possession of an asset to the pledgee. Such delivery can be actual or constructive. Assets which are incapable of physical delivery cannot be pledged. A lien is similar to a pledge except that with a pledge the owner delivers possession to the creditor as security, whereas in

2 the case of a lien the creditor retains possession of assets which have previously been delivered to it for some other purpose. 2. In your jurisdiction, under what circumstances may security arrangements be subjected to choice of law and/or choice of forum clauses (does it matter, whether the security itself is located abroad and/or governed by foreign law [e.g. a pledged claim])? What is the market practice in your jurisdiction? Is there a treaty on this in your jurisdiction, whether bilateral or multi-lateral? Are there any requirements for enforcement in your jurisdiction? It is market practice that where an asset is situate or located within the Cayman Islands then the choice of governing law of the security docuemnt tends to be Cayman Islands. Security over shares in a Cayman entity or over a Cayman formed limited partnership interest are nearly always governed by Cayman law security documents however, it is fairly common to see secuirty granted over other assets of a Cayman entity (such as a general asset secuirty) to be governed by the jurisidction of the underlying lending document or where the Lender is located. 3. In your jurisdiction, are floating charges or security over the overall assets of an entity accepted, and if so in what terms? Yes. You would normally take a fixed charge or assignment over specific assets and then a floating charge over all assets which are not already covered by the fixed charge/assignment. Floating charges attach to a shifting pool of assets as they are a charge on present and future assets, and are intended to allow the Chargor to continue to use assets in the ordinary course of business until the floating charge crystallises into a fixed charge. Whether a charge over a particular asset is fixed or floating is important because generally on the Chargor s insolvency the holders of fixed charges get paid out of the proceeds of sale of the assets subject to the fixed charge first. Such secured creditors will usually rank prior to the holders of floating charges. The holder of a floating charge will rank prior to unsecured creditors but there are a limited number of creditors who are preferred by law over the holder of a floating charge in the event that a Cayman Islands incorporated Chargor is wound-up. Priority in a winding-up can, therefore, depend upon the characterisation of a charge being fixed or floating. Assets subject to a floating charge can be freely dealt with without any restrictions. The floating charge will convert into a fixed charge on certain events such as if the Chargor creates or permits to subsist any encumbrance on, over or with respect to any of the charged property, if any person levies or attempts to levy any distress, attachment, execution or other legal process against any of the charged property if an event of default occurs. 4. In relation to the following types of assets, please explain in your jurisdiction the types of security that can be created or granted, if the security requires any type of registration or perfection requirements, an estimate of cost (including applicable taxes and any other duties/ costs) and timing for granting such security, and any special considerations regarding the asset type: (a) Aircraft;

3 There is no prescribed form for the taking of security over aircraft registered in the Cayman Islands but it would be necessary to register the mortgage in the Register of Aircraft Mortgages. (b) Bank Accounts; Charge (c) Animals, Crops (in ground and severed) and Timber; Pledge, Lien or Charge (d) Equipment; Charge (e) Intellectual Property; Charge (f) Inventory; Charge, Lien or Pledge (may need special requirments to create a "floating line" or floor plan lien to cover new inventory as it arrives). (g) Leases; Assignment (h) Mineral Interests, including Hydrocarbons; Assignment (i) Promissory Notes and Chattel Paper; Assignment (j) Real Estate; Legal Mortgage (k) Receivables (credit rights under contracts or invoices); Charge, Lien or Pledge. (l) Rights under Contracts (excluding Receivables); Assignment. (m) Shares (in book-entry and certificate form and other securities);

4 Equitable Mortgage and Charge. (n) Vessels; Taking security over ships registered in the Cayman Islands is achieved using a deed of covenant which is supported by a registered statutory mortgage under the Merchant Shipping Laws (as amended). (o) Vehicles; Charge, Lien or Pledge. (p) Business as an ongoing concern. Charge, Lien or Pledge over the assets. There is no public security or charge register in the Cayman Islands for security interests granted by companies (although there are registers for land, ships, aircraft mortgages and mortgages of limited partnership interests, and these are searchable). Where security has been granted by a Cayman Islands company as Chargor (or in its capacity as general partner of a partnership), an entry may be made in the Register of Mortgages and Charges of the Chargor. 5. Please explain briefly for each type of assets the procedure for enforcement (judicial and extra-judicial). Is it possible to enforce security governed by another jurisdiction? If yes, what is the procedure? Enforcement Remedies 1. A legal mortgage: (i) Appointment of a receiver; (ii) power of sale; (iii) foreclosure; or (iv) immediate right to possession. 2. An equitable mortgagee: (i) no right to possession; (i) application to the court for specific performance (this enables the mortgagee to require that his equitable mortgage be converted to a legal mortgage or to request the court that he be put in possession, before or after default); (iii) foreclosure; and (iii) in the case of an equitable mortgagee of a debt, the mortgagee will have an action for payment against the debtor in equity. 3. Equitable charge: (i) no foreclosure; and (ii) appointment of a receiver or to sell the property, either pursuant to express terms in the charge document or by application to court. 4. Pledge: power of sale. 5. Lien: (i) no power of sale; and (ii) a right to detain the property until his debt has been satisfied. 6. Can a trustee or security agent be used in your jurisdiction, or must security be granted in favour of all lenders? Yes, security can be granted via a trustee or security agent. 7. In bankruptcy or insolvency scenarios, what are the suspect periods, is clawback possible, and what other types of rights (tax debts, employees, etc.) have preference over security granted? In corporate insolvencies, there are 2 types of claw backs available. Fraudulent preferences and fraudulent dispositions. There relevant period re fraudulent preferences

5 is 6 months and claw back is possible. The relevant period re fraudulent dispositions is 6 years from the date of the disposition and claw back is also possible. Assets subject to a floating charge may lose priority if there are insufficient assets to meet the priority payments set out in section 162 of the Companies Law (2007 Revision). Priority payments include: rates, taxes, wages (limited to $100 for any clerk or servant and $50 for any workman or labourer) and certain depositors (either incoproated in the Cayman Islands or a holder of an "A" lincence issued under the Banks and Trust Companies Law (2007 Revision) with the company (all of which rank equally amongst themselves). 8. In your jurisdiction, can borrowers or guarantors subordinate their claims and if so in what terms? Yes, contractually on terms agreed pursuant to a subordination agreement. 9. What are the consequences of a transfer, assignment or novation of an underlying credit in your jurisdiction (is new security necessary, is the security automatically transferred, etc.) A novation is the only method of effectively "transferring" contractual obliogations as well as rights but requires the consent of all parties involved. Since novation replaces existing obligations with new ones, it restarts the time periods during which security might be set aside as a transcation at an undervalue or a preferred transaction. The other danger of the security being redated to the time of each novation is that it might lose its priority over other security (unless a security trustee is appointed to hold any security grenated udner the loan on trust for the banks). A legal assignment will "transfer" rights (only) under a loan agreement without requiring the Borrower's consent. Any security will usually be assigned along with the debt. The main disadvantage is that an assignment cannot transfer the assignor's obligations (the main consequence of this is that the existing bank cannot assign any undrawn commitments without the Borrower's consent). 10. Can you have on top of a security in your jurisdiction, another layer consisting of an assignment of the collateral concerned conditional upon default by the debtor? This is not usual however, if all parties to the security agree to the concept of an additional layer of an assignment then, in principle, this should be possible. 11. Are step-in rights lawful in your jurisdiction or does any action to take control require the creditors to go through a court process? Where a mortgage has been granted and the Chargee has due possession of the collateral, the collateral may be sold without a court order, assuming a power of sale is included in the security document. Where the Chargee does not have possession of the collateral, court assistance may be required to order a transfer of title to the Chargee or a third party purchaser. Real estate in the Cayman Islands is subject to different principles. Where one refers to "foreclosure" in the Cayman Islands, this refers specifically to a process involving the assumption of full legal and beneficial ownership of the collateral by the Chargee following enforcement. Such process necessarily involves the making of an order absolute for foreclosure by the court, the effect of

6 which is to extinguish the Chargor s equity of redemption. This enforcement procedure is inherently different from a sale and, owing to the formalities and court involvement, is less frequently encountered.