Legislative reforms to Part V of the Cayman Islands Companies Act will shortly be coming into force which will, amongst other things, introduce a new restructuring officer regime available to certain debtors1 in financial distress. This new tool in the Cayman Islands' restructuring arsenal will provide debtors with a global moratorium which will automatically arise upon the filing of the application seeking the appointment of restructuring officers (without the need for any Court hearing) within which a restructuring may be proposed and implemented by way of a Cayman Islands scheme of arrangement, a restructuring process in a foreign jurisdiction or consensually with all stakeholders.
The restructuring officer regime is a standalone rehabilitation process which does not require a winding up petition to be first presented in order to obtain the protection of a moratorium.2 Accordingly, such regime provides an alternative route by which to restructure the financial liabilities of distressed companies, akin to English administration or Chapter 11 proceedings in the United States, and ensures that the Cayman Islands remains at the forefront as one of the preeminent jurisdictions of choice to continually deliver successful cross-border debt restructurings.
Key features of the new restructuring officer regime
The new restructuring officer regime will provide that:
- Companies may present a petition to the Cayman Islands Grand
Court (the "Cayman Court") for the appointment of
restructuring officers on the grounds that the company:
- is or is likely to become unable to pay its debts; and
- intends to present a compromise or arrangement to its creditors (or classes thereof), either pursuant to the Companies Act or a foreign law or by way of a consensual restructuring.
- The petition seeking the appointment of a restructuring officer may be presented by the directors of a company without a resolution of its members and without an express power to present a petition in its articles of association (and outside of winding up proceedings).
- A restructuring officer must be a qualified insolvency practitioner although provision is made for the Cayman Court to appoint a foreign practitioner to act together with the Cayman Islands insolvency practitioner
- A restructuring officer's functions and powers will be expressly set out and specified in the terms of the appointment order.
- A restructuring officer may also be appointed on an interim basis (pending the hearing of the company's petition to appoint a restructuring officer) on such terms and conditions as the Cayman Court thinks fit.
- The standalone restructuring moratorium will automatically arise on filing the petition seeking the appointment of restructuring officers such that no suit, action or other proceedings, whether domestic or foreign, may be proceeded with or commenced against the company and no resolution can be passed for the company to be wound up, except with leave of the Cayman Court.
- The restructuring moratorium will have extraterritorial effect, as a matter of Cayman Islands law.
- Secured creditors with security over the whole or part of the assets of the company will continue to be entitled to enforce their security without the leave of the Cayman Court and without reference to any restructuring officer appointed.
The restructuring officer regime will replace the existing provisional liquidation regime under section 104(3) of the Companies Act as the mechanic by which a company may seek to effect a restructuring with the protection of a moratorium on unsecured creditor action. The provisional liquidation regime will otherwise remain in place and provisional liquidators will continue to be appointed in appropriate circumstances (that is, to prevent the dissipation or misuse of a company's assets; to prevent the oppression of minority shareholders and/or to prevent mismanagement or misconduct on the part of a company's directors).3
Practical effects of the Cayman Islands restructuring officer regime
Stand-alone rehabilitation process
In the Cayman Islands, there is currently no statutory provision for a stand-alone rehabilitation process equivalent to English administration proceedings or US Chapter 11 proceedings. The introduction of the proposed restructuring officer regime will address this lacuna in Cayman Islands insolvency law.
The proposed restructuring officer regime will permit a company (including, in certain circumstances, a foreign company) to restructure its debt in the Cayman Islands, with the protection of a moratorium (or stay) on unsecured creditor action, without the need to present a winding up petition and/ or to appoint provisional liquidators. This will enable companies to restructure free of the stigma and other negative consequences flowing from the commencement of liquidation proceedings.
Global and automatic moratorium
A moratorium on creditor action will take effect immediately upon the presentation of the petition seeking the appointment of a restructuring officer(s), without any need for a hearing before the Cayman Court - that is, no suit, action or other proceeding may be commenced or proceeded with against the company (or an exempted limited partnership), and no resolution to wind up the company or petition to wind up the company may be presented, except with the leave of the Cayman Court. This moratorium is intended to have an automatic extraterritorial effect, subject to recognition and enforcement in the relevant local territories.
Flexible tool to pursue a restructuring
The manner in which a restructuring may be implemented is highly flexible - it may involve a consensual deal or other informal work-out with creditors of the company, a Cayman Islands scheme of arrangement, or a restructuring proceeding in a foreign jurisdiction (for example, by way of an English scheme of arrangement or via Chapter 11 proceedings in the United States). The restructuring officer regime is therefore not territorial as to the jurisdiction in which a restructuring proceeding is pursued and enables a company to pursue the best outcome for stakeholders.
The proposed restructuring officer regime is also available to a broad range of entities (including those not incorporated in the Cayman Islands). It is available to any company liable to be wound up in the Cayman Islands, including any company that has property, carries on business or is registered in the Cayman Islands, as well as exempted limited partnerships.
A company incorporated in a foreign jurisdiction which does not have a restructuring regime (either at all or that will work in respect of the proposed restructuring) may seek to take advantage of the restructuring officer regime, either by registering as a foreign company in the Cayman Islands and/or by seeking to change its centre of main interests to the Cayman Islands (that is, by moving its management to the Cayman Islands), in order to fall within the jurisdiction of the Cayman Court
Recognition of schemes of arrangement promoted by restructuring officers
The proposed restructuring officer regime effectively replicates the current Cayman Islands legislation in respect of schemes of arrangement, save for one material difference - the availability of a moratorium on creditor action in respect of a scheme of arrangement promoted by a restructuring officer within the restructuring officer regime.
Although untested, an advantage of the scheme of arrangement promoted by a restructuring officer is that it may be capable of compromising English law governed debt, which is currently not possible as a result of the so-called Rule in Gibbs. 4 It is expected that the Cayman Islands scheme of arrangement promoted by a restructuring officer would be analogous to an insolvency proceeding under the English Insolvency Act 1986 (the "English Insolvency Act"), as a result of which such scheme may potentially be recognised and enforced pursuant to Section 426 of the English Insolvency Act, which would likely supersede the application of the Rule in Gibbs thereby effecting a successful compromise and/or discharge of the English law governed debt obligations.
Creditor rights and protections maintained
Important creditor protections available under Cayman Islands insolvency law will not be affected, ensuring that the Cayman Islands remains a creditor friendly jurisdiction.
- The presentation of a petition for the appointment of a restructuring officer will not prevent secured creditors from enforcing their security in accordance with its terms. A secured creditor will be able to take steps to enforce valid security interests and can do so without the leave of the Cayman Court and/or the approval of the restructuring officer (if appointed).
- Any petition to appoint a restructuring officer(s) must be advertised in the Cayman Islands and internationally (as applicable), and therefore will be made 'on notice' to creditors. Creditors will have the ability to appear (through counsel) at any hearing of a petition to appoint a restructuring officer(s) and may, if desired, propose the appointment of alternative restructuring officer(s) (i.e. if the creditor has any concerns regarding the independence or qualification of the restructuring officer(s) nominated by the company).
- Creditors (secured and/or unsecured) will be able to enforce contractual rights (e.g. netting and set off), provided that legal proceedings are not required to enforce such rights.
- Creditors may: (i) make an application to the Cayman Court to lift the moratorium either in whole or in part (i.e. to commence legal proceedings against the company); and/or (ii) make an application to the Cayman Court to remove and/or replace the restructuring officer(s) (once appointed) and/or to vary or modify the order appointing the restructuring officer(s) (i.e. to vary the powers conferred on such restructuring officer(s)).
- Creditors may seek leave of the Cayman Court to present a petition for the winding up of the company (for example, in circumstances where the creditor is of the opinion that the restructuring will not be effective and there is no benefit in delaying the commencement of liquidation proceedings, either from a time or cost perspective). Ordinarily, the Cayman Court will give the company an opportunity to effect a restructuring – liquidation being the 'last resort'.
- For the avoidance of doubt, shareholders have similar protections and/or rights. However, the weight afforded to their views by the Cayman Court will vary depending on whether they have an economic interest in the outcome (that is, if the Cayman Court will consider if they are 'in' or 'out' of the money).
1 The proposed legislation provides the Cayman Court with the broad jurisdiction to appoint a restructuring officer in respect of any company (including foreign companies) liable to be wound up in the Cayman Islands, including if it has property, carries on business or is registered in the Cayman Islands (section 91 of the Companies Act).
2 Under the current regime in the Cayman Islands, debtor companies seeking the protection of a moratorium from unsecured creditor action in order to have the benefit of 'breathing space' to negotiate and/or implement a restructuring are required to commence provisional liquidation proceedings. A statutory prerequisite to an application for the appointment of provisional liquidators (regardless of whether or not a restructuring is proposed) is the presentation of a winding up petition (section 104 of the Companies Act).
3 See Section 104(2) of the Companies Act.
4 The 'Rule in Gibbs' is an English common law principle that a debt governed by English law cannot be discharged or compromised by a foreign insolvency proceeding and is derived from the Court of Appeal case: Antony Gibbs and sons v La Société Industrielle et Commerciale des Métaux (1890) 25 QBD 399.
Article first published in the International Insolvency & Restructuring Report 2022/23.
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