The Cayman Islands has long established itself as one of the leading offshore financial centres by offering an internationally recognised corporate and financial services regime, a robust regulatory framework that is in line with international standards and flexible restructuring options by which to implement cross-border restructurings. With a common law legal system based on English law (with ultimate recourse to the Judicial Committee of the Privy Council in the United Kingdom) thereby providing certainty and predictability, a dedicated financial services division of the Grand Court of the Cayman Islands (the "Grand Court") and an experienced network of judges, practitioners and advisors in the insolvency and restructuring sector, the jurisdiction has a proven track record for delivering solutions to complex situations in order to achieve successful corporate restructurings.
The unprecedented financial volatility and operational uncertainty brought about by the COVID-19 pandemic has forced many companies to consider a range of restructuring options in a variety of jurisdictions, either on a proactive basis or as a reaction to creditor pressure. Where it is not possible to achieve a restructuring with the unanimous consent of a company's creditor base, companies are required to carefully consider the most suitable restructuring regime and jurisdiction that will best serve their objectives and those of their stakeholders.
Given the flexibility of the Cayman Islands restructuring regime and the prevalence of Cayman Islands incorporated entities in corporate structures, there has been an increase in the number of cross-border restructurings involving the use of Cayman Islands incorporated entities as a restructuring vehicle.
The deployment of the provisional liquidation regime includes instances where there is an existing Cayman Islands incorporated entity in the structure (such as, an investment holding company and/or debt issuer) or where one is purposely inserted into the group structure in order to make use of the restructuring options that the Cayman Islands has on offer to facilitate a cross-border restructuring.
Cayman Islands - flexible restructuring options available
In the Cayman Islands, there is presently no formal rehabilitation process for companies in financial distress which is similar to US Chapter 11 proceedings or the English administration regime. Where a Cayman Islands company intends to effect a financial restructuring, provisional liquidators are often appointed in order to take advantage of the statutory automatic moratorium which protects the company from creditor enforcement action and/ or proceedings being commenced or continued without the leave of the Grand Court.
This automatic moratorium is key because it provides breathing space for a debtor to negotiate with its stakeholders and to then propose and implement a restructuring without the risk of the process being derailed by the actions of one or more dissenting creditors.1
Pursuant to section 104(3) of the Cayman Islands Companies Act (2021 Revision) (the "Companies Act"), following the presentation of a winding up petition, a company may at the same time make an application seeking the appointment of provisional liquidators where: (a) the company is, or is likely to become unable to pay its debts; and (b) the company intends to present a compromise or arrangement to its creditors. A compromise or arrangement can be implemented by way of a Cayman Islands' scheme of arrangement, a US Chapter 11 plan of restructuring or a foreign scheme of arrangement.
A Cayman Islands scheme of arrangement is a statutory procedure under the Companies Act and the provisions are similar to those set out for an English scheme under the English Companies Act; it is a court-approved compromise or arrangement between a company and its creditors or shareholders (or classes thereof).
A scheme of arrangement is frequently used to implement a financial restructuring by varying or cramming down the rights of the relevant creditors and/or shareholders of a company in appropriate circumstances but may also be used to complete corporate transactions such as group restructurings, reorganisations, acquisitions, mergers and take-private transactions. Accordingly, a scheme of arrangement offers a flexible mechanism that is not a formal insolvency process. The directors of the company would remain in control of the company whilst formulating the terms of and promoting a scheme outside of a liquidation.
However, a scheme of arrangement implemented outside of a Cayman Islands liquidation would not have the benefit of the automatic moratorium from unsecured claims that a provisional or official liquidation can offer.
The presentation of a winding-up petition against a company is a necessary pre-requisite to the application to commence provisional liquidation proceedings in the Cayman Islands. However, whilst that winding up petition is the gateway to accessing the Cayman Islands provisional liquidation regime, provisional liquidation does not necessarily result in the formal winding up and liquidation of the debtor. Rather, where provisional liquidation is used to support a successful financial restructuring where the debtor company is intended to survive, the end result is typically that the winding up petition is dismissed and the newly restructured company continues as a going concern.
Provisional liquidators are officers of the Grand Court and agents of the company, to which they owe fiduciary duties to act in good faith and in the interests of the company as a whole. The powers of the provisional liquidator are not circumscribed by statute and instead are expressly set out in the court order appointing the provisional liquidator.
The court order will often limit the powers of a provisional liquidator to monitoring the progress of the restructuring and reporting to the Grand Court and the company's stakeholders, and will typically also set out the powers which may be retained by the directors and existing management of the company. It is typical for provisional liquidators' powers to not completely displace the powers of the company's directors or existing management. Accordingly, there is scope for the provisional liquidation regime to be used with real flexibility in the context of a restructuring, depending upon how much control over the process the provisional liquidator is intended to have. This flexibility has developed a practice in the Cayman Islands known as a "light-touch" provisional liquidation.
It is open to "light-touch" provisional liquidators to apply for further powers as necessary, but it is clear that the provisional liquidation proceeding can be structured as a quasi-debtor in possession process or can be utilised as an ancillary proceeding in order to support a debtor in possession process already underway in another jurisdiction, such as Chapter 11 of the US Bankruptcy Code. This would ensure that the restructuring plan that is agreed between the company and its creditors is effective as a matter of Cayman Islands law (that is, binding on the Cayman entity and its creditors).
Once the restructuring plan or compromise has been implemented and given effect in the Cayman Islands, the company can seamlessly and simultaneously emerge from both the foreign proceeding and the Cayman Islands provisional liquidation and continue as a going concern post-restructuring.
Cayman Islands vehicles
Section 104 of the Companies Act provides that, at any time after the presentation of a winding-up petition but before the making of a winding-up order, the Grand Court may appoint a provisional liquidator. Since provisional liquidation requires, as a pre-requisite, the presentation of a winding-up petition, it follows that provisional liquidation is available to any company which is liable to be wound up by the Grand Court under the Companies Act. Whilst that includes a company incorporated and registered in the Cayman Islands under the Companies Act, a foreign company may also be wound up under the Companies Act if it has property located in the Cayman Islands, is carrying on business in the Cayman Islands, is the general partner of a Cayman Islands limited partnership or is registered as an overseas company under Part IX of the Companies Act.
It is not uncommon for global corporate groups to include a Cayman Islands incorporated entity in their structure, whether an ultimate or intermediate holding company. The two main types of Cayman vehicles used in these circumstances are: (i) a Cayman Islands exempted limited company ("ELC"), which is governed by the Companies Act; and (ii) a limited liability company ("LLC"), which is governed principally by the Limited Liability Companies Act (as amended)2 (the "LLC Act").
Both vehicles are body corporates with separate legal personality that provide flexibility in terms of control and corporate governance. Importantly, both vehicles also provide limited liability to their owners (being the shareholders of an ELC and the members of an LLC).
The business of an ELC is managed by the directors, who owe various fiduciary duties to the ELC, and shareholders do not generally participate in the management of the ELC's business, although their approval is required for certain actions of the ELC.
Compared to an ELC, an LLC (which is very similar to a Delaware limited liability company) provides significantly more flexibility in terms of corporate governance and membership control, which are agreed contractually in a limited liability company agreement (the "LLC Agreement"). By way of example, the types of mechanisms that can be agreed (which are helpful in a restructuring context where the emerging parent company of the group is a Cayman entity), can include:
- a mechanism by which those who held certain claims against the company in provisional liquidation can be admitted to the LLC as members pursuant to the plan filed pursuant to Chapter 11 proceedings and the confirmation order received pursuant to the Chapter 11 process - in a debt-for-equity restructuring context;
- designations of certain classes of membership interests in the LLC;
- providing for certain rights and obligations of holders of membership interests in the LLC, including controls on voting rights;
- governance mechanisms dealing with the appointment and removal of managers and observers;
- limitations and restrictions on transfers of membership interests; and
- drag-along and tag-along rights.
Cayman Islands' entities also provide great flexibility for the ultimate exit of the owners, for example, by trade sale, merger or amalgamation or listing on any recognised stock exchange.
Pacific Drilling restructuring
Walkers recently advised an ad hoc group of noteholders in connection with the balancesheet debt-for-equity restructuring of the Pacific Drilling group, an international offshore drilling company that specialises in ultra-deepwater drilling and well construction services.
The restructuring, which was achieved by way of a concurrent US Chapter 11 proceeding and Cayman Islands provisional liquidation process, resulted in the Pacific Drilling group emerging with a de-levered capital structure (with in excess of US$1bn of debt obligations being eliminated) and with a healthy liquidity position to support its operations as a world-class provider of drilling services.
To facilitate the restructuring, a Cayman Islands holding company (initially an ELC which was subsequently converted to an LLC (as noted below)) was inserted into the group structure between Pacific Drilling S.A., the Luxembourg parent company ("Lux Parent") and Pacific Drilling Holding (Gibraltar) Limited, the Lux Parent's immediate subsidiary at the time (that is, pre-restructuring).
The insertion of the Cayman Islands company occurred prior to the US Chapter 11 filing, which enabled the group to avail itself of the Cayman Islands provisional liquidation regime and the benefits it provides (as noted above). This Cayman Islands entity, Pacific Drilling Company LLC ("PDCL"), was the parent company of the restructured Pacific Drilling group on exit and was owned by the group's pre-restructuring creditors and certain of the group's debtor affiliates.
In order to provide PDCL's members (that is, the pre-restructuring creditors) with the various benefits and flexibility of an LLC (as noted above), PDCL was converted from an ELC to an LLC whilst in provisional liquidation with the approval of the Grand Court. We understand that this is the first such occasion of an ELC converting to an LLC whilst in provisional liquidation and is therefore a successful test case for future restructurings and an example of the sophistication and flexibility of the jurisdiction.
The Grand Court was comfortable approving this corporate conversion, particularly in circumstances where the conversion did not break the chain of existence of the entity or interfere with any proceedings that were underway in respect of the entity in other jurisdictions.3
With the successful implementation of high-profile cross-border restructurings such as Pacific Drilling, Ocean Rig, CHC Helicopters, Mongolian Mining (to name just a few) together with the sophisticated restructuring options available, the Cayman Islands restructuring regime has demonstrated that it has the flexibility to overcome the various issues that arise in the course of successfully completing a complex multi-jurisdictional restructuring.
In addition, the restructuring and insolvency expertise and experience (both onshore and offshore) that are prevalent amongst the Cayman Islands judiciary and professionals, underpin the prevalence of the Cayman Islands as a jurisdiction of choice for corporate groups that are seeking to restructure their financial indebtedness.
To maintain and further strengthen the Cayman Islands' standing as a primary jurisdiction for the implementation of complex and high-value cross-border restructurings, the legislature is currently considering a bill that will, when implemented, allow for the appointment of restructuring officers and a global automatic moratorium on unsecured claims upon the filing of an application for the appointment of restructuring officers (separate from the Cayman Islands winding up regime).
The proposed regime would provide an additional avenue by which to benefit from an automatic stay on claims whilst pursuing a restructuring, allowing the Cayman Islands to remain as one of the leading jurisdictions of choice to implement complex cross-border restructurings.
1. It should be noted that such moratorium does not extend to restrict the rights of secured creditors who may enforce their security notwithstanding the appointment of a liquidator and accordingly, standstill or restructuring support agreements with secured creditors or the seeking of supporting relief in other jurisdictions may be necessary in certain circumstances. Section 142(1) of the Companies Act permits secured creditors to enforce their security interests without leave of the Grand Court or without reference to the liquidator.
2. In 2016, the Limited Liability Companies Act (2016) of the Cayman Islands introduced a new type of Cayman Islands vehicle which is very similar to a Delaware LLC.
3. For completeness, only companies registered as an ELC under section 164 of the Companies Act or companies registered as a limited duration company under section 179 of the Companies Act may be converted into an LLC. It should also be noted that once an LLC has been registered upon conversion, it cannot be converted into a Cayman Islands ELC. In circumstances where a conversion applicant is in provisional liquidation, the matter of the proposed conversion will need to be declared and submitted to the Grand Court for consideration pursuant to a validation application under section 99 of the Companies Act. Once the validation order has been granted by the Grand Court, the conversion applicant can then proceed to register its conversion application with the Cayman Islands Registrar of Companies.
Originally published in the International Insolvency & Restructuring Report 2021/22.
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