Enforceability of Secured Loans from Unlicensed Lenders in the Cayman Islands

The Cayman Islands Court of Appeal (“CICA”) provided clarity on the enforceability of secured loan agreements from unlicensed lenders. The ruling underscores the Court’s commitment to uphold contractual obligations while balancing legal requirements and financial regulations.

Facts

In the matter of Rogelio Antonio Hawkins v Abarbanel Limited (Unreported, the Hon. Ramsey-Hale C.J., 16 December 2022), Abarbanel Limited (the “Lender”), a resident Cayman Islands company incorporated for the express purpose of making loans and holding security (the “Lender”), agreed to advance to Mr. Hawkins (the “Borrower”) sums totalling of US$407,000 from February to April 2014, to be repaid together with interest thereon, including compound interest in the event of default (the “Loan”).

The Loan was secured by legal charges over the Borrower’s residential home and other rental properties owned by him.

The Borrower defaulted on the terms of the Loan and the Lender demanded repayment of the outstanding balance. The Borrower issued a claim for a Declaration that the Loan was illegal and void on the grounds that the Lender was carrying on the business of a moneylender in the Cayman Islands without possessing an appropriate licence under the Trade and Business Licensing Act (2007 Revision) (“TBLA”) and the Local Companies Control Act (2007 Revision) (“LCCA”). The Borrower also argued that the Loan was an unconscionable bargain as the applicable interest rate was exorbitant.

The Grand Court’s Decision

Whilst it was accepted that the loan had been advanced to the Borrower in the Cayman Islands, the Lender argued it was not in fact “carrying on business” as a moneylender as it had had no employees, no business premises, no advertisement of its services, and the lending activity was limited to a handful of transactions.

The Hon. Ramsay-Hale, C.J. summarised that in order to be deemed to be carrying on business:

“the conduct in issue must occur on a repeated or continuous basis. The cases do not establish a threshold as to how many activities – here the making of loans – would constitute a sufficient “repetition of acts” or for how long a period the activity must go one for it to be characterised as continuous.” “That is a question to be determined on the facts of each case.”

The learned Judge found that the Lender was carrying on business as a moneylender in the Islands without being licensed to do so as the facts established the “degree and continuity that the decided cases say must be present.”

Nevertheless, the Hon, Ramsey-Hale, C.J. held that the Lender’s breach of the LCCA and TBLA did not in itself render the Loan and security unenforceable, noting that:

“The purpose of the licensing regime in the LCCA was to control the level of participation in business …Given the provisions of section 23 of the LCCA there is little to sustain the argument that a breach of section 4 renders the loan agreement void, and even less with respect to a breach of the TBLA, the only purpose of which is to raise revenue.”

The Court of Appeal’s Decision

The Borrower appealed to the CICA on the basis that the Hon. Chief Justice erred in law.

In delivering judgment (Rogelio Antonio Hawkins v Abarbanel Limited (Unreported, CICA, 11 January 2024), the CICA held that the Chief Justice did not err in law in concluding that the TBLA and LCCA do not prohibit contracts made in breach of local licensing requirements. Further, the Loan was not unenforceable as a matter of common law.

CICA agreed with the Hon. Chief Justice’s reasonings on section 23 of the LCCA which states “For the avoidance of doubt it is hereby declared that no business transaction shall be void or voidable by reason only that, at the relevant time, any party thereto is in breach of this Law.”

CICA added that the Courts have been reluctant to hold the position that non-compliance with statutory requirements impliedly renders contracts made by a party in breach void or unenforceable. To hold otherwise could lead to opening floodgates that may undermine commercial certainty, impede legitimate transactions, or prejudice innocent parties.

In light of the above, the CICA dismissed the appeal.

Key Takeaways

• Carrying on business of any kind within the Cayman Islands will most likely require an appropriate licence under the TBLA or LCCA.
• Any form of lending to third parties may be considered as carrying on the business of moneylending.
• While the absence of a licence under the TBLA or LCCA may raise questions regarding compliance, it does not automatically render loan agreements and associated securities unenforceable in the Cayman Islands.
• The ruling is specific to the circumstances of the present case and should not be regarded as a blanket judgment for all moneylenders as each case will be assessed individually.