Insolvency law in the Cayman Islands is principally regulated by the Companies Law (2013 Revision) and the Companies Winding Up Rules 2008, and they are supplemented by a wide body of case law. The following guidance is summary only.
- Under Cayman Islands law a company may be wound up on the basis of insolvency if it is unable to pay its debts as they fall due. A company is treated as unable to pay its debts if it fails to satisfy a valid statutory demand, execution on a judgment is returned wholly or partly unsatisfied, or it is otherwise proved to the satisfaction of the Court that the company is unable to pay its debt. The Courts are also prepared to wind up a company on the just and equitable ground if it is shown that the value of company's liabilities is greater than the value of its assets.
- Upon making an order for the appointment of a liquidator, the commencement of the winding up is deemed to relate back to the time of the presentation of the petition, and all dispositions of the company's property between the date of the petition and order are void unless the Court otherwise orders.
- Establishing insolvency will enable a creditor to petition the court for the appointment of a liquidator, and may also have other consequences (for example, when a company is insolvent, directors must exercise their powers in the best interests of the company having regard to the interests of its creditors rather than its members). The members of a company can also voluntarily appoint a liquidator by passing an special resolution (or an ordinary resolution if the company is insolvent), and if the company is unable to pay its debts as they fall due then the voluntary winding up will be conducted subject to the supervision of the Court. "Non-petition" clauses have statutory force in the Cayman Islands.
- Liquidation is a class right under Cayman Islands law. Once appointed, the liquidator's primary duty is to collect in all of the company's assets and then distribute them pari passu to the company's creditors in accordance with the statutory scheme of distribution, and the legislation confers upon the liquidator wide powers to enable him to do so. Once a liquidator is appointed, unsecured creditors cannot commence legal proceedings against the company in the Cayman Islands without the permission of the Court; rights of action against the company are converted into claims in the liquidation process. Secured creditors generally do not participate in the liquidation process, and may continue to proceed with any enforcement action directly against their collateral pursuant to a valid security interest. Cayman Islands law only provides for a very small class of preferential creditors, and these are rarely commercially significant in insolvent liquidations.
- A liquidator has no right to disclaim either onerous property or unprofitable contracts under Cayman Islands law.
- When a company goes into winding up, any mutual debts between the company and a creditor will be setoff. Any creditor who extended credit to the company at a time when it had notice of the winding up petition cannot set-off. The Companies Law also includes provisions which provide that any netting agreement relating to financial contracts (including multi-lateral netting) will prevail over the statutory insolvency set-off provisions.
- A liquidator may challenge transactions entered into in the twilight period prior to insolvency where such transactions constitute either a preference or a disposition at an undervalue. There is no separate avoidance regime for floating charges. In each case the company must have been unable to pay its debts at the relevant time, or the transaction caused it to become unable to pay its debts. The relevant vulnerability period is six months prior to the commencement of winding up in the case of preferences, and six years in the case of dispositions at an undervalue. In relation to preferences it is necessary to show an "intention to prefer" on the part of the insolvent company to challenge a transaction as a preference, but if the preferred party is a related party there is presumed to be an intention to prefer.
- A liquidator can also pursue former directors (including shadow or de facto directors) and officers of the company for either misfeasance or fraudulent trading. If it appears that any person has been carrying on the business of the company to defraud creditors or for any fraudulent purpose the liquidator may apply to the Court for an order that such persons make a contribution to the company's assets.
- It is also possible for an insolvent company to enter into a scheme of arrangement to try and restructure its debts. Companies proposing to try and implement a scheme of arrangement will often apply to the Court for the appointment of a provisional liquidator to stay claims by any unsecured creditors whilst they try to implement the scheme, however, this does not affect the rights of secured creditors. Any scheme of arrangement must be approved by each class of creditors by three quarters of creditors by value and a majority in number.
- In order to act as a liquidator winding up an insolvent company a person must be a licensed insolvency practitioner. A practitioner must be resident in the Cayman Islands to obtain a licence. However, it is possible for a foreign insolvency practitioner to be appointed jointly with the Cayman Islands resident licensed insolvency practitioner.
- The Companies Winding Up Rules 2008 make provision for the liquidator of a company to enter into protocols with a foreign officeholder appointed by a foreign court in another jurisdiction to promote the orderly winding up of the company's affairs and to avoid conflict between the winding up proceedings the Cayman Islands and the foreign jurisdiction.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.