This guide examines what a creditor needs to know about liquidating an insolvent Cayman company under the Companies Act (2020 Revision) (the Act) and the Companies Winding Up Rules, 2018 (the Rules).
A brief anatomy of a creditor initiated liquidation process is included at the end of this guide.
When is a company insolvent?
The Act provides a number of grounds on which a company may be wound up, including that the company is unable to pay its debts. This is typically the ground relied upon by creditors seeking to wind up an insolvent company.
A company will be deemed to be unable to pay its debts if:
- it fails to satisfy a statutory demand exceeding CI$100;
- execution of a judgment is returned unsatisfied in whole or in part; or
- it is proved to the satisfaction of the court that the company is unable to pay its debts. The court will apply a cash flow insolvency test for this purpose.
The cash flow test of solvency is not confined to consideration of debts that are immediately due and payable but also permits consideration of debts that will become due and payable 'in the reasonably near future'1.
What is a statutory demand?
A statutory demand is a formal written request for the payment of a debt given by a creditor to a debtor.
Is it essential to serve a statutory demand?
It is not essential for a creditor to serve a statutory demand before applying to appoint a liquidator because it may demonstrate by other means that a company is unable to pay its debts. In most cases however, it is advisable to serve a statutory demand first because the company will be presumed to be insolvent if it does not satisfy or compound the debt within 21 days of the date of service of the statutory demand.
If a creditor has an unsatisfied judgment against the company, it may prefer to apply to appoint a liquidator on the grounds of insolvency using the unsatisfied judgment as evidence of the company's inability to pay its debts as they fall due. However, to avoid a potential argument being raised by the judgment debtor that, notwithstanding its failure to satisfy any order or judgment for payment of a liquidated sum, it remains able to pay its debts as they fall due, it is advisable that a statutory demand for the judgment sum be issued as a preliminary step.
What must a statutory demand say?
A statutory demand must comply and be served in accordance with the Rules.
- be in the form prescribed by the Rules;
- be for a debt which is not less than the statutory minimum amount (as at the date of this guide, CI$100);
- state the amount, the date on which the debt fell due, the currency of the debt and the consideration for it;
- if the amount claimed includes any charge by way of interest not previously notified to the debtor as included in its liability, or any other charge accruing from time to time, the demand must state the grounds upon which the debtor is liable to pay such interest or charges and contain particulars of the way in which interest or charges are calculated;
- be dated and signed by (i) the creditor; or (ii) if the creditor is a firm, any partner of the firm, or if the creditor is a body corporate, any director or officer who is duly authorised to make the demand;
- contain the creditor's address (or contact details of the signatory who signs it on behalf of the creditor, as the case may be);
- state that if payment is not made within 21 days of the date of service, the company will be deemed insolvent and a winding up petition may be presented against it; and
- state information about the ways in which the company may make payment, including details of a bank account into which the amount owing may be wire transferred.
Setting aside a statutory demand
There is no statutory mechanism by which a debtor can apply to set aside a statutory demand.
Instead, the remedy available to the debtor is to apply for and obtain either an injunction or an undertaking against the creditor within 21 days from the date of service of the demand. The court is likely to grant an injunction preventing the presentation of a winding up petition if it appears that the debtor is solvent and one of the following applies:
- the debt is genuinely disputed on substantial grounds; or
- the debtor has a cross claim or right of set-off against the creditor that exceeds the amount claimed in the demand or reduces the disputed amount of the debt to less than the statutory minimum; or
- the debtor has a reasonable excuse for not paying the debt claimed.
In short, the debtor needs to demonstrate that the presentation of a winding up petition will be an abuse of process.
How may a company be put into liquidation?
The Act provides that a company may be wound up:
- compulsorily by order of the court;
- by virtue of a special resolution of its members;
- because the period, if any, fixed for the duration of the company by it articles of association has expired; or
- because the event, if any, has occurred, upon the occurrence of which its articles of association provide that the company shall be wound up; or
- under the supervision of the court.
For the purposes of this guide, we will only consider compulsory liquidations.
A company may be wound up by the court if —
- the company has passed a special resolution requiring the company to be wound up by the court;
- the company does not commence its business within a year from its incorporation, or suspends its business for a whole year;
- the period, if any, fixed for the duration of the company by its articles of association expires, or whenever the event, if any, occurs, upon the occurrence of which its articles of association provide that the company is to be wound up;
- the company is unable to pay its debts; or
- the court is of the opinion that it is just and equitable that the company should be wound up.
Provisional liquidators are typically appointed to protect the assets of a company and as an interim measure pending the hearing of the winding up petition. However, provisional liquidators may also be appointed for the purpose of presenting a compromise or arrangement to creditors. The company must be, or be likely to become, unable to pay its debts, and demonstrate reasons for why the compromise or arrangement is more advantageous for its creditors than a winding up.
Creditors and members are not able to apply for the appointment of provisional liquidators for this purpose, and instead need to demonstrate that such an appointment is necessary to prevent mismanagement or misconduct by the directors, the dissipation or misuse of assets, or the oppression of minority shareholders. However, once appointed, provisional liquidators may nevertheless consider whether a restructuring is appropriate.
Appointment of liquidator
The proposed liquidator (or provisional liquidator) must consent in writing to being appointed.
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Originally published 21 December 2020
1. As determined by the Cayman Islands Court of Appeal in Re Weavering Macro Fixed Income Fund Ltd (in Liquidation) 2016 (2) CILR 514.
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.