This country-specific Q&A provides an overview of the legal framework and key issues surrounding restructuring and insolvency in Cayman Islands.
This Q&A is part of the global guide to Restructuring & Insolvency.
For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/restructuring-insolvency/
What forms of security can be granted over immovable and movable property? What formalities are required and what is the impact if such formalities are not complied with?
The following security rights may be granted over immovable and movable property in the Cayman Islands:
- Mortgage. A mortgage arises when a creditor lends money at interest in exchange for a transfer of an interest in the debtor's property. The conveyance of title will become void upon the payment of the debt. An equitable mortgage will be created where the property subject to the mortgage is not transferred to the lender. An equitable mortgage is capable of being defeated by a third party buyer with no notice of the lender's interest.
- Charge. Unlike a mortgage, title to the property will not be transferred to the lender pursuant to a charge, with the chargee merely being granted rights over the property as security for a debt. A charge may be fixed or floating, with a fixed charge attaching to specific assets which cannot then be sold by the borrower. Under a floating charge, a borrower is free to deal with the various assets subject to the charge until such time as a default occurs. Upon an event of default, the charge will crystallise over the property held by the borrower at the time of default. The charge then becomes a fixed charge, with the lender having the power to sell the assets in order to satisfy the outstanding debt.
- Lien. A lien arises by operation of law based on lawful possession and may be used when a creditor is in possession of an asset and monies are due to it for services provided. A lien will not create any rights in the property in the creditor's favour and a creditor has no power to sell the property to allow payment of the debt.
- Pledge. Under a contract to pledge, the property is deposited with the creditor as security for a debt. The right to the property vests in the creditor to the extent necessary to secure the debt. The creditor has the power to sell the property in the event of a default by the borrower.
The relevant formalities to be observed in circumstances in which a borrower entity incorporated in the Cayman Islands grants security over its assets will largely be prescribed by the relevant entity's articles of association. However, it is likely that a directors' resolution will be required prior to the granting of any security interest over the company's assets.
The Cayman Islands has centrally maintained ownership registers for land, ships, aircraft and motor vehicles on which creditors' mortgages or charges can be registered. Any third-party purchaser will be deemed to have notice of any interest registered at the time of the purchase of the relevant encumbered asset and will acquire the asset subject to a creditor's interest as the holder of a registered mortgage or charge.
Although a Cayman Islands incorporated company is required to maintain an internal register of mortgages and charges, no central register exists for other types of immovable property. A creditor must therefore take adequate steps to ensure that it has sufficient control over an asset to prevent a third party from purchasing it. Any creditor should review a company’s register of mortgages and charges prior to making a loan, in addition to ensuring that the register is updated following the date upon which the loan is made.
Failure to comply with the relevant formalities will not automatically render the security void, although there is a risk that the security will not be binding on the debtor company. In addition, a third party purchaser could acquire the asset free of the creditor's security interest or acquire a higher ranking security interest over the asset.
What practical issues do secured creditors face in enforcing their security (e.g. timing issues, requirement for court involvement)?
A debtor company may seek to frustrate a secured creditor's attempts to secure the repayment of its debts by dissipating assets prior to enforcement. In such circumstances, a creditor may be required to issue proceedings to recover the debt, whilst at the same time issuing an application for an injunction for the purpose of freezing a company's assets pending the outcome of such proceedings. In order to obtain such relief, a secured creditor would be required to demonstrate to the Grand Court of the Cayman Islands (the "Cayman Court") that there was a substantial risk of dissipation of assets on the part of the company.
The legal rights of a secured creditor will be unaffected by the commencement of winding up proceedings in respect of a debtor company. Accordingly, a secured creditor will retain the ability to enforce its security and sell the charged property to obtain payment of the debt. If the sale proceeds of the charged asset are insufficient to discharge the debt, a secured creditor can rank as an unsecured creditor in the liquidation in respect of the balance of the debt.
A secured creditor may appoint a receiver over a charged asset for the purpose of enforcing their security rights under the relevant security document. A receiver is not subject to supervision by the Cayman Court and their primary duty will be to the secured creditor, as opposed to the general body of creditors.
What is the test for insolvency? Is there any obligation on directors or officers of the debtor to open insolvency procedures upon the debtor becoming distressed or insolvent? Are there any consequences for failure to do so?
A company may be wound up on the ground of insolvency if it is unable to pay its debts (i.e. the cash flow insolvency test). A company will be deemed to be unable to pay its debts if:
- it fails to satisfy a statutory demand (provided that the debt claimed in the demand is not disputed by the debtor company in good faith and on substantial grounds);
- execution of a judgment is returned wholly or partly unsatisfied; or
- it is proved to the satisfaction of the Cayman Court that the company is unable to pay its debts.
There is no statutory obligation on a company's directors to commence liquidation proceedings. However, in circumstances in which the company is insolvent or of doubtful solvency, the directors' duty to act in the best interests of the company requires them to have regard to the interests of its creditors. Directors may incur personal liability to the company for any losses which they cause to the company if they act in breach of that duty, for example, by causing the company to incur further obligations when they knew or should have known that there was no reasonable prospect of the company avoiding an insolvent liquidation.
What insolvency procedures are available in the jurisdiction? Does management continue to operate the business and/or is the debtor subject to supervision? What roles do the court and other stakeholders play? How long does the process usually take to complete?
Insolvency proceedings in the Cayman Islands are generally subject to the supervision of the Cayman Court. The main processes are as follows:
- Liquidation (Official and Voluntary);
- Provisional Liquidation (see section 8 below); or
- Scheme of arrangement (see section 8 below). (Although not an insolvency proceeding per se, schemes may be used within or outside an insolvency proceeding for the purpose of achieving a compromise with creditors or shareholders.)
A company is placed into official liquidation upon the making of a court order for the appointment of liquidators. Official liquidators will act as officers of the court and their primary duty will be to collect in the company's assets and distribute them pari passu to the company's creditors in accordance with the statutory waterfall of payments, with any surplus assets available for distribution to the company's shareholders.
The powers of directors will cease upon the appointment of official liquidators, who will control the company's affairs, subject to the Cayman Court's supervision.
On the making of a winding-up order, an automatic stay is imposed prohibiting any suit, action or other proceeding from being proceeded with or commenced against the company without the leave of the Cayman Court and any rights of action against the company are converted into claims in the liquidation proceedings. Notwithstanding the making of a winding up order, a secured creditor is not prohibited from enforcing any valid security interest.
The length of the liquidation process varies on a case by case basis and will largely depend on the nature and complexity of the company's business and the issues required to be dealt with in order to allow a liquidator to wind up a company's affairs. There is no timeframe within which a liquidation must be completed.
Although not technically an insolvency procedure, the Cayman Islands Companies Law (2018 Revision) (the "Companies Law") also provides a mechanism by which a company incorporated in the Cayman Islands may be wound up voluntarily by an ordinary resolution of its members if it is unable to pay its debts as they fall due.
The voluntary liquidator must apply to the Cayman Court for an order bringing the voluntary liquidation under the Cayman Court's supervision unless within 28 days of the commencement of the voluntary liquidation, the directors swear a declaration of solvency stating that the company will be able to pay its debts in full (with interest) within a period not exceeding 12 months after the commencement of the liquidation. If a supervision order is made, the liquidation will thereafter proceed in the same manner as an official liquidation.
How do creditors and other stakeholders rank on an insolvency of a debtor? Do any stakeholders enjoy particular priority (e.g. employees, pension liabilities)? Could the claims of any class of creditor be subordinated (e.g. equitable subordination)?
The legal rights of secured creditors are unaffected by the liquidation of a company and will be permitted to enforce their security by, for example, selling any charged asset in order to secure repayment of the sum owed (notwithstanding the automatic moratorium in place on the commencement of an official or provisional liquidation - see section 7 below). However, whilst secured creditors rarely participate in the liquidation process, in the event that the sale proceeds realised for a charged asset are insufficient to discharge the outstanding debt, a secured creditor may rank as an unsecured creditor in the liquidation for the balance of the debt.
Cayman Islands law provides for a very limited class of preferential creditors. Such preferred debts include wages accrued during the four months immediately preceding the commencement of the liquidation, payments due in respect of any medical health insurance premium and any taxes due to the Cayman Islands Government. Under the Companies Law, preferred creditors rank ahead of both unsecured and secured creditors, where the secured creditor's security is in the form of a floating charge but behind the liquidation expenses (including the liquidator's own remuneration and legal expenses).
The general body of unsecured creditors will rank pari passu in respect of their claims in the liquidation and the quantum of any distribution made to such creditors will be determined by the value of any realisations achieved by a liquidator in the liquidation.
Rights of set off and subordination are recognised under Cayman Islands law, although a creditor which extended credit to a company at a time when it had notice of a winding up petition cannot offset such a debt against the debtor company. Netting agreements relating to financial contracts (including multilateral netting) will prevail over the statutory set-off provisions.
Can a debtor’s pre-insolvency transactions be challenged? If so, by whom, when and on what grounds? What is the effect of a successful challenge and how are the rights of third parties impacted?
Under Cayman Islands law, there are certain pre-insolvency or antecedent transactions that may be challenged by the liquidator of a company pursuant to:
- Section 145 of the Companies Law (voidable preferences);
- Section 146 of the Companies Law (avoidance of dispositions at an undervalue); and
- Section 147 of the Companies Law (fraudulent trading); and
- Section 99 of the Companies Law (avoidance of property dispositions and transfers of shares);
Where a debtor has entered into a transaction prior to the commencement of its liquidation, such transaction may be at risk of challenge by a liquidator as either a voidable preference or a transaction at an undervalue in the event that the debtor was unable to pay its debts at the time of or as a result of the relevant transaction.
A transaction will constitute a voidable preference where a company has made a transfer of property or payment to a creditor while insolvent with the 'dominant intention to prefer' that creditor over other creditors and such transfer or payment was made within the six months immediately preceding the commencement of liquidation of the company. Where a preferred party is related, there is a presumed intention to prefer. A liquidator may seek an order from the Cayman Court to declare the payment or transaction void and to order that the property be returned to the company or the payment refunded.
Transactions at an undervalue
A transaction will constitute a disposition at an undervalue where a company has disposed of property at an undervalue with the intent to defraud its creditors (that is, an intention to willfully defeat an obligation or liability owed to a creditor which existed on or prior to the date of the disposition). Any disposition at an undervalue made by the company in the six year period prior to the commencement of the liquidation with an intent to defraud its creditors shall be voidable at the instance of the liquidator. A liquidator may seek an order from the Cayman Court to declare such transaction void and apply for an order for restitution. A creditor prejudiced by such a disposition at an undervalue may also seek such relief under the Fraudulent Dispositions Law (1996 Revision) regardless of whether or not insolvency proceedings have been commenced.
If the transferee can satisfy the Cayman Court that it had not acted in bad faith in respect of a preference or disposition at an undervalue, the transferee will be able to obtain a first ranking charge over the property of an amount equal to the costs reasonably and properly incurred by the transferee in defending any proceedings challenging the relevant disposition which will be set aside subject to the costs, pre-existing rights, claims and interests of the transferee.
Any persons who were knowingly parties to the carrying on of the company's business with the intention to defraud its creditors or for any fraudulent purpose may be held liable to contribute to the company's assets. A liquidator may seek an order requiring any persons who were knowingly parties to such conduct to make such contributions as the Cayman Court thinks proper.
Avoidance of property dispositions and transfers of shares
Section 99 of the Companies Law provides that when a winding up order has been made, any disposition of the company's property and any transfer of shares made after the commencement of the winding up is void, unless the Cayman Court orders otherwise. In the event of a successful challenge by a liquidator, the liquidator will be entitled to seek appropriate relief for the property to be returned.
Under Cayman Islands law, the winding up of a company is deemed to commence at the time of the presentation of the winding up petition for an official liquidation or the passing of the members' resolution in the event that a Cayman Court supervised liquidation commenced as a voluntary liquidation.
What form of stay or moratorium applies in insolvency proceedings against the continuation of legal proceedings or the enforcement of creditors’ claims? Does that stay or moratorium have extraterritorial effect? In what circumstances may creditors benefit from any exceptions to such stay or moratorium?
Once the Cayman Court has made a winding up order or made an order for the appointment of provisional liquidators, an automatic stay is imposed prohibiting any suit, action or other legal proceedings from being commenced or continued against the company without the leave of the Cayman Court and any rights of action against the company are converted into claims in the liquidation proceedings.
It is also possible that, in the period between the presentation of the winding up petition and the making of a winding up order, a creditor, member or the company itself may apply for an order staying any legal proceedings being pursued against the company before the Cayman Court or restraining further proceedings from being pursued before a foreign Court.
Notwithstanding the making of a winding up order, a secured creditor is not prohibited from enforcing any valid security interest. In addition, there is no prohibition against the continuation of legal proceedings or the enforcement of creditors' claims in a voluntary liquidation or in a restructuring by way of scheme of arrangement. However, it is often the case that the appointment of provisional liquidators is sought in conjunction with promoting a scheme of arrangement so that the company can take advantage of the statutory moratorium on claims and proceedings while the scheme is being implemented.
The Cayman Islands liquidation and provisional liquidation regimes are capable of recognition in other jurisdictions. As such, notwithstanding that the automatic moratorium on claims does purport to have automatic extraterritorial effect, as a matter of practicality it will be a matter of foreign law as to whether or not the moratorium would apply extraterritorially (e.g. whether or not a particular foreign Court would recognize the moratorium without question, whether it would require the claimant to obtain leave from the Cayman Court before proceeding or some other approach). Such matters may well be fact sensitive. Accordingly, it is generally prudent to obtain recognition and supporting relief in other relevant jurisdictions, especially in circumstances where, as a matter of Cayman Islands law, the automatic stay does not apply to secured creditors in any event.
What restructuring and rescue procedures are available in the jurisdiction, what are the entry requirements and how is a restructuring plan approved and implemented? Does management continue to operate the business and/or is the debtor subject to supervision? What roles do the court and other stakeholders play?
There are two main statutory proceedings allowing for a rescue / restructuring of a company's operations and debts:
- Scheme of Arrangement; and
- Provisional Liquidation.
Scheme of Arrangement
A scheme will allow a debtor company to enter into an agreement with its shareholders / or creditors (or any class of them) pursuant to section 86 of the Companies Law for the purpose of either:
- restructuring its affairs to allow the company to continue to trade and avoid a winding up; or
- reaching a compromise or arrangement with creditors (or any class) following the commencement of liquidation proceedings.
A scheme will be subject to the supervision of the Cayman Court and can be implemented by the company, any creditor or shareholder or a provisional liquidator applying to the Cayman Court for an order convening a meeting of creditors, shareholders or any class of them as directed by the Cayman Court.
In order for a scheme to be implemented, a majority constituting at least 50% in number and 75% in value of the creditors, shareholders or each class of them present and voting at the meeting must agree to the compromise or arrangement. Subject to obtaining the requisite approvals, the party proposing the scheme must then apply to the Cayman Court for an order sanctioning the scheme. Once the Cayman Court sanctions the proposed scheme, it will become effective and binding on all creditors and/or shareholders (including those who voted against it or who did not vote at all) when a copy of the sanction order is filed with the Cayman Islands Registrar of Companies.
In the event that a scheme is proposed outside of liquidation, the directors will maintain control of the company's affairs and no moratorium would be available. If the scheme is implemented in a provisional liquidation scenario, the provisional liquidator will control the company's affairs, subject to the supervision of the Cayman Court and the company would benefit from an automatic stay on claims against the company.
The purpose of a provisional liquidation is usually to preserve and protect a company's assets pending the hearing of a winding up petition in respect of the company.
However, the 'soft touch' provisional liquidation regime may be implemented by a company for the purpose of appointing Court appointed provisional liquidators to protect itself from creditors and restructure its business whilst effecting a compromise or scheme of arrangement with a company's stakeholders. The use of this procedure is comparable to the UK administration procedure and the Chapter 11 process in the United States.
Any creditor, shareholder or the company itself can apply for the appointment of provisional liquidators in the period following the presentation of a winding up petition and prior to the hearing of the petition.
Upon appointment, the provisional liquidators will be subject to the Cayman Court's supervision and may only carry out the functions set out in the order appointing them. In the event that a company restructuring is proposed, existing management may be permitted to retain control of the company subject to the supervision of the Cayman Court and the provisional liquidators.
The issue of whether a company's directors have the power to present a winding up petition in the absence of a resolution of its shareholders has been the subject of judicial debate in the jurisdiction, with the decision of Justice Mangatal In Re China Shanshui Cement Group Limited (Grand Cayman Court, Mangatal J, 25 November 2015), laying down a restrictive interpretation of directors' powers to present a winding up petition in the name of the company without the approval of the company in general meeting or the power to present such a petition in the company's articles of association.
However, in a recent first instance decision In Re CHC Group Ltd (Grand Cayman Court, McMillan J, 17 January 2017), Justice McMillan held that in circumstances in which a creditor's winding up petition has been presented against a company, its directors could then seek the appointment of provisional liquidators, notwithstanding the absence of an express power in the company's articles of association or a resolution of the company's shareholders.
As discussed at section 21 below, it is anticipated that this area of the law will be subject to legislative reform in the near future, thereby bringing section 94 of the Companies Law in line with section 124 of the UK Insolvency Act, in addition to introducing a new statutory regime allowing a company to petition for the appointment of restructuring officers to obtain a stand-alone restructuring moratorium.
Can a debtor in restructuring proceedings obtain new financing and are any special priorities afforded to such financing (if available)?
Both official liquidators and provisional liquidators may obtain third party financing and grant security over the company's assets, subject to obtaining the prior approval of the Cayman Court.
In the absence of any security interest being granted to a lender, such lending will rank as an expense of the liquidation, with the lender enjoying a statutory priority over the company's unsecured creditors.
Can a restructuring proceeding release claims against non-debtor parties (e.g. guarantees granted by parent entities, claims against directors of the debtor), and, if so, in what circumstances?
A scheme of arrangement is a very flexible and useful tool for implementing debt restructurings where the unanimous consent from stakeholders of a company cannot be achieved. A scheme can be used to release claims against non-debtor parties provided there is a sufficiently close connection between the subject matter of the scheme and the relationship between the company and its creditors and/or members.
It is common in creditors' schemes of arrangement for the scheme creditors to grant a broad release of claims against the scheme company itself and also against the directors, officers, employees and advisors of the company in connection with the scheme and any broader restructuring of which the scheme forms part. It is also possible that a scheme may be used to release a guarantee granted by a parent entity which is not itself party to the proposed scheme.
Is it common for creditor committees to be formed in restructuring proceedings and what powers or responsibilities to they have? Are they permitted to retain advisers and, if so, how are they funded?
A creditors' committee may (but will not always) be established in a provisional liquidation. If the Cayman Court orders that a liquidation committee be appointed in a provisional liquidation, the composition, function and powers of the committee will be the same as a committee established in the context of an official liquidation (see below).
Under Cayman Islands law, a liquidation committee must be established in respect of every company which is being wound up by the Cayman Court unless the Cayman Court directs otherwise. The composition of that committee will be determined according to the solvency of the company. If the liquidators have determined that the company is insolvent, the committee should comprise of not less than three and no more than five creditors. If the liquidators have determined that the company is solvent, the committee should comprise of not less than three and no more than five shareholders. If the liquidators determine that the company is of doubtful solvency, the committee must comprise of not less than three and no more than six members of whom a majority must be creditors and at least one must be a shareholder. Committee members are elected at meetings of creditors and/or shareholders (as appropriate).
Liquidators are under a duty to report to the liquidation committee on matters that are of concern to it with respect to the liquidation. The committee's role is to act as a sounding board for the liquidators on issues arising in the liquidation and to also scrutinise the liquidators' fees and expenses. As such, the committee plays a key role in the conduct of the liquidation of the company.
The committee will often be asked to approve certain matters by resolution (either by majority vote at a meeting or unanimously in writing) on which the liquidators propose to seek the Cayman Court’s permission such as, for example, the disposing of company assets, obtaining litigation funding, engaging legal counsel or other professionals and payment of the liquidators’ fees and expenses. Liquidation committees have standing to make 'sanction applications' pursuant to which they would be able to apply to the Cayman Court for orders and/or directions with regard to the exercise or proposed exercise of a liquidator's powers.
The committee is entitled to engage a legal adviser, and the legal fees and expenses that the committee reasonably and properly incurs in obtaining legal advice will be paid out of the assets of the company as an expense of the liquidation.
Where a restructuring is being implemented by way of a scheme of arrangement and outside of a liquidation, it is typical for an informal ad hoc committee of creditors to be established to represent the interests of the key stakeholders in negotiations with the debtor.
How are existing contracts treated in restructuring and insolvency processes? Are the parties obliged to continue to perform their obligations? Will termination, retention of title and set-off provisions in these contracts remain enforceable? Is there any an ability for either party to disclaim the contract?
Other than employment contracts (see below), a winding up process will have no effect on contracts unless there is a specific contractual provision to that effect. Under Cayman Islands law, a liquidator has no right to disclaim either onerous property or unprofitable contracts, which will therefore continue to bind a company in liquidation, although the commencement of insolvency proceedings may constitute an event of default allowing a counter-party to terminate an existing contract in accordance with its terms. Therefore, the parties must perform their outstanding obligations, although in practice a liquidator may repudiate the contract and instead adjudicate whatever claim the contractual counterparty seeks to prove in the liquidation as a result of the repudiation.
Under common law, a winding up order serves to terminate all employment contracts of the company in official liquidation. The commencement of a voluntary or provisional liquidation will have no legal effect on employees' rights, except as for provided for in the relevant employment agreement.
Employees' rights will only be affected by a scheme of arrangement in the event that the scheme purports to compromise their rights as creditors under their employment agreements. Similarly, the impact of a scheme of arrangement on existing contracts and the parties' ongoing obligations under those contracts will depend on the terms of the scheme (in particular, the extent to which the scheme purports to compromise rights under the contracts) and the terms of the contracts.
Termination, retention of title and set-off provisions contained in the contracts to which the company was party prior to its winding up will remain enforceable by the contracting counter-party on any winding up. In the absence of any set-off provision, account must be taken of what is due from each party to the other in respect of their mutual dealings, and a set-off is applied in relation to those amounts.
What conditions apply to the sale of assets/the entire business in a restructuring or insolvency process? Does the purchaser acquire the assets “free and clear” of claims and liabilities? Can security be released without creditor consent? Is credit bidding permitted? Are pre-packaged sales possible?
The principal of caveat emptor will apply to any purchaser of a company's assets / business by a liquidator (whether a provisional liquidator or an official liquidator). Only very limited representations and warranties will be given by the liquidators who will act as agents of the company without personal liability. The purchaser will therefore take the assets subject to existing claims and security interests, although the company will remain liable for any existing creditor claims.
Liquidators have no power to release security without creditor consent.
Whilst rarely seen in practice, there is no prohibition on credit bidding pursuant to Cayman Islands law. Although, there are no specific rules that would apply to credit bidding, it should be noted that if the restructuring was taking place within a provisional liquidation context, the provisional liquidators would be required to seek sanction of the proposed sale from the Cayman Court. In exercising its discretion as to whether to sanction the proposed sale, the Cayman Court would take into account the details of the sales process and whether the creditor's bid was the best deal available for the company in the circumstances. Pre-packaged sales of assets are also possible and have been implemented under Cayman Islands law but would also require approval from the Cayman Court in circumstances where they are being proposed in a liquidation context.
What duties and liabilities should directors and officers be mindful of when managing a distressed debtor? What are the consequences of breach of duty? Is there any scope for other parties (e.g. director, partner, shareholder, lender) to incur liability for the debts of an insolvent debtor?
See section 3 above.
Do restructuring or insolvency proceedings have the effect of releasing directors and other stakeholders from liability for previous actions and decisions?
No, to the extent they exist, such liabilities will continue until the date of dissolution of the company.
Will a local court recognise concurrent foreign restructuring or insolvency proceedings over a local debtor? What is the process and test for achieving such recognition? Has the UNCITRAL Model Law on Cross Border Insolvency been adopted or is it under consideration in your country?
The Cayman Court is willing to co-operate with foreign courts and foreign representatives in cross-border restructurings and insolvency proceedings based on the principle of comity.
Section 241 of the Companies Law also allows a foreign representative (defined as a trustee, liquidator or other official appointed for the purposes of a foreign bankruptcy proceeding) to apply to the Cayman Court to make orders ancillary to the foreign bankruptcy proceeding for the purposes of:
- recognising the right of a foreign representative to act in the Cayman Islands on behalf of or in the name of a debtor;
- enjoining the commencement or staying the continuation of legal proceedings against a debtor;
- staying the enforcement of any judgment against a debtor;
- requiring certain persons in possession of information relating to the business or affairs of a debtor to be examined by and/or produce documents to a foreign representative; or
- ordering the turnover to a foreign representative of any property belonging to the debtor.
In exercising its discretion, the Cayman Court will look to ensure an economic and expeditious administration of the debtor's estate consistent with:-
- the just treatment of all holders of claims against or interests in a debtor’s estate wherever they may be domiciled;
- the protection of claim holders in the Cayman Islands against prejudice and inconvenience in the processing of claims in the foreign proceedings;
- the prevention of preferential or fraudulent dispositions of property comprised in the debtor’s estate;
- the distribution of the debtor’s estate amongst creditors substantially in accordance with the statutory order of priority;
- the recognition and enforcement of security interests created by the debtor;
- the non-enforcement of foreign taxes, fines and penalties; and
In addition, the Companies Winding Up Rules 2018 provide for a Cayman Islands appointed liquidator to enter into protocols with foreign officeholders appointed by a foreign court for the purpose of promoting the orderly winding up of the company's affairs and avoiding duplication or conflicts between the competing proceedings in the Cayman Islands and the foreign jurisdiction. Any international protocol agreed between a Cayman liquidator and foreign officeholder will not take effect and become binding until it has been approved by the Cayman Court and the foreign court or relevant authority.
It is a requirement under Cayman Islands law that where a Cayman company is the subject of a foreign bankruptcy proceeding, notice of this fact is required to be filed by the company with the Registrar of Companies in the Cayman Islands and also published in the Cayman Islands Gazette.
While the Cayman Islands has elected not to adopt the UNCITRAL Model Law on Cross Border Insolvency, the Cayman Court is willing to exercise its powers in aid of foreign insolvency proceedings based on comity. Such powers and the basis upon which they will be exercised follow many of the principles enshrined in the UNCITRAL Model Law.
Can debtors incorporated elsewhere enter into restructuring or insolvency proceedings in the jurisdiction?
Yes. A foreign company may be the subject of a Cayman Islands scheme of arrangement or be wound up in the jurisdiction in the event that it has property located in, or has been carrying on business in the Cayman Islands, acts as a general partner of an ordinary or exempted Cayman Islands limited partnership, or is registered as a foreign company under the Companies Law.
How are groups of companies treated on the restructuring or insolvency of one of more members of that group? Is there scope for cooperation between office holders?
This will largely depend on where the insolvent company sits within the group. However, generally speaking, liquidators of a holding company will have the ability to take control of and sell the company's subsidiaries.
Consolidated proceedings are not recognised by Cayman Islands law and the Cayman Court will generally recognise the separate legal personality of each company within the group. However, if multiple companies within the group are the subject of winding up proceedings, the Cayman Court may take a pragmatic approach to the management of the proceedings and may permit the proceedings to be dealt with together in certain cases. Further, the Cayman Court may appoint the same or common liquidators if it is satisfied that it is appropriate to do so (and having regard to the facts of the case and the risk of any conflicts of interest arising).
No statutory provisions exist in order to govern co-operation between liquidators of different group companies, although liquidators appointed over different group companies may co-operate informally if it is in the best interests of both estates. In exceptional circumstances, the Cayman Court may also permit to allow the pooling of assets and liabilities between members of the same corporate group, for example, to allow the liquidators to achieve a compromise in relation to cross-claims between the group entities.
Is it a debtor or creditor friendly jurisdiction?
The Cayman Islands has traditionally been, and continues to be, regarded as a creditor friendly jurisdiction, with creditors being treated equally irrespective of the jurisdiction in which they are domiciled.
Do sociopolitical factors give additional influence to certain stakeholders in restructurings or insolvencies in the jurisdiction (e.g. pressure around employees or pensions)? What role does the state play in relation to a distressed business (e.g. availability of state support)?
There is no state support available to distressed businesses in the Cayman Islands. As noted above at section 19, given the importance of the funds industry in the jurisdiction, the Cayman Islands have been careful to maintain their reputation as a creditor friendly jurisdiction.
What are the greatest barriers to efficient and effective restructurings and insolvencies in the jurisdiction? Are there any proposals for reform to counter any such barriers?
As noted in section 8 above, the present uncertainty regarding the ability of the directors of a Cayman Islands company to unilaterally access the provisional liquidation regime for the purpose of effecting a restructuring without shareholder support has been the subject of criticism from practitioners.
However, as noted above, it is anticipated that section 94 of the Companies Law will be subject to legislative reform, such that directors of a Cayman Islands incorporated company will have the ability to petition for the company's winding up and apply for the appointment of provisional liquidators without the sanction of a resolution passed at a general meeting. This legislative reform will increase the ability of a company to restructure its debts under the supervision of provisional liquidators with the protection of an automatic moratorium on claims.
In addition, another area of potential legislative reform is the proposed introduction of a court supervised restructuring moratorium. The proposed regime would allow a company to petition for the appointment of restructuring officers to obtain a stand-alone restructuring moratorium. It is proposed that such restructuring moratorium proceeding would be separate from the winding up regime given that it would not require the presentation of a winding up petition as a pre-requisite. These proposed legislative reforms would offer companies with more avenues by which to benefit from an automatic stay on claims thereby providing companies with the necessary breathing space they need to plan a rescue or restructuring without having to deal with constant creditor pressure. However, whilst the legislative draftsman considers the proposed amendments to bring in effect the reforms, companies undergoing restructurings will need to continue to utilise the provisional liquidation process to take advantage of an automatic stay on claims under Cayman Islands law.