Summary: A recent amendment to the Companies Law of the Cayman Islands will repeal and replace the existing provisions dealing with the winding-up of companies, simplifying and updating the law in line with modern international standards, whilst maintaining its ‘creditor-friendly’ character. An Insolvency Rules Committee has been established, with the task of drafting specific insolvency rules for the Cayman Islands, in place of the United Kingdom’s Insolvency Rules 1986. It is not expected that the main provisions effecting the amendments will be brought into force until the local rules are in place.
The recently-passed Companies (Amendment) Law 2007 went from gazetted Bill to the statute book in a matter of days, but was several years in the making. It results from extensive work since 2002 by a committee of experienced Cayman Islands insolvency specialists and from a 2006 report of the country’s Law Reform Commission. The Commission’s recommendations can be reduced to three: first, that the existing law on corporate insolvency was overly complex and out of date and should be repealed and replaced; secondly, that insolvency rules tailored to the needs of the jurisdiction were required; and thirdly that the considerable existing judicial co-operation in cross-border cases should be codified – though a lock, stock and barrel adoption of the UNCITRAL Model Law was not proposed.
Key changes in brief
Foreign companies: it will become possible to wind up local branches of foreign companies under the legislation.
Shadow directors: this concept is introduced into Cayman Islands law, by the adoption of the definition contained in s. 741 of the English Companies Act 1985 – essentially a person in accordance with whose instructions the directors are accustomed to act.
Automatic liquidation: one of the more technical provisions is designed to resolve an ongoing debate as to whether a provision in a company’s articles of association that it should automatically be wound up after a given time was effective, clearly establishing that it is.
Standing to petition: at present contingent and prospective creditors have no standing to present a winding-up petition. The new section 94 will reverse this rule. Additionally, for companies incorporated after the commencement of the new law, and where the articles specifically provide, directors will be empowered to present a petition without the sanction of a resolution passed at a meeting of the shareholders. Finally, the Cayman Islands Monetary Authority, which already has power to petition to wind up any entity licensed or regulated under the Islands’ financial services regulatory laws, will be given a new corresponding power in relation to companies unlawfully carrying on business without being licensed.
Interest on debts: section 149 (which is based on s. 189 of the English Insolvency Act 1986) provides for the payment, after debts proved in the liquidation but in priority to shareholder claims, of interest at either the prescribed rate or any applicable contractual rate, whichever is the higher.
Fraudulent trading: this concept is introduced into Cayman Islands law, by means of provisions equivalent to s. 213 of the English Insolvency Act 1986.
Local procedural rules: provision is made for the adoption of rules in place of those imported from the UK, which were designed for a somewhat different legislative framework and a very different economic environment.
A new Part XVI of the Companies Law will be added, codifying the Grand Court’s power to make orders in aid of foreign insolvency proceedings. On the application of a foreign trustee, liquidator or other representative, the Court may make orders recognising that person’s right to take actions on behalf of the debtor in the Cayman Islands, staying proceedings against the debtor, requiring the production of information or ordering the turnover of assets to the foreign representative.
All such orders will be discretionary rather than mandatory and will not require an assessment of whether the foreign representative was appointed in the jurisdiction where the debtor had its ‘Centre of Main Interests.’ Instead, a simpler test is adopted, whereby the foreign bankruptcy proceeding must be taking place in the country in which the debtor is ‘incorporated or established.’
Specific provision is made as to the matters that the court must take into account in exercising its discretion under these sections. These include the just treatment of all creditors, wherever domiciled – preserving the universalist approach traditionally followed in the Cayman Islands. However, as to procedure rather than substantive rights, the court is directed to consider the protection of claim holders in the Islands against the prejudice and inconvenience in the processing of claims in the foreign proceeding. This of course corresponds with similar provisions found in the cross-border co-operation provisions of many other countries. Other factors to be taken into account include the recognition of security interests created by the debtor, and the distribution of assets substantially in accordance with the order prescribed by Cayman Law. The latter raises the possibility of declining relief in circumstances where the order of distribution is significantly different in the foreign jurisdiction (which was the situation addressed by the English court in the HIH case). This of course has to be balanced with the last of the listed factors: comity.
These provisions bear some resemblance to, and were apparently in large part based upon, the corresponding provisions of the US Bankruptcy Code, though it appears that they have more in common with the old s. 304 than the new Chapter 15. It is to be hoped, however, that they will be implemented in a fashion more in keeping with the long-established tradition in the Cayman Islands of international co-operation in cross-border insolvency matters than with the restrictive attitude adopted by the US Bankruptcy Court in its recent Chapter 15 decision in the Bear Stearns case towards the recognition of proceedings in other jurisdictions (in that instance the Cayman Islands). Time, as ever, will tell.
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.