Cayman Islands: ‘What Say Ye?': The Importance Of Creditors' Views In Restructurings – An Offshore Perspective

Introduction

In two relatively recent offshore cases, the differing views of creditors and shareholders (and management) have been considered in the context of winding up pro- ceedings, including the criteria for the appointment of a restructuring officer under the regime in the Cayman Islands ('Restructuring Officer') which commenced operation on 31 August 2022. In the Cayman Islands, Walkers acted as company counsel in the first of these applications before the Grand Court of the Cayman Is- lands (In re Oriente Group Limited¹) where the need for reasonable prospects of success and creditor support has been confirmed. In Bermuda, Walkers has acted for a creditor seeking a winding up order and opposing the continuing appointment of light touch provisional liquidators for restructuring purposes appointed upon an application by the company, and ultimately ob- tained a winding up order on behalf of a creditor from the Court of Appeal in Bermuda (In re NewOcean Energy Holdings Limited²).

The approach in these cases highlights the impor- tance of the views of the creditors, and the need to consider each case where a restructuring is being con- templated on its merits – and in particular, whether any restructuring process is likely to preserve value and result in a better outcome for creditors, or whether a winding up order should be made, which is analysis which should be undertaken by the professional advi- sors involved in consultation with the directors on an ongoing basis.

The cases from the Cayman Islands and Bermuda should give comfort as to the approach of the offshore Courts going forward and the weight that will be given to the views, and interests, of creditors; a restructuring process will be permitted to proceed only where a re- structuring is contemplated, the process has sufficient creditor support, and there are real and reasonable prospects of a successful restructuring process being implemented.

While directors have a duty to consider the interests of creditors in a restructuring scenario, it is not always easy for directors to discharge this duty in practice. This is particularly so where, for example, they have an interest in the equity of the business and/or have founded the business and there are reputational and emotional ties. Where a business is experiencing a cash flow shortage (but is balance sheet solvent) directors may see equity value in a future restructured business but creditors may not share this view.

From a creditor perspective, the starting point is that an unpaid creditor is entitled to a winding up order ex debtito justitiae – virtually as of right. Where there is a difference of views amongst creditors as to whether a winding up order should be made upon the application of a creditor, it is then a balancing act by the relevant court in the exercise of its discretion whether to make the order, dismiss or adjourn the petition, or make some other order.

Light Touch provisional liquidation

In the absence of a formal rescue mechanism offshore (noting that the Cayman Islands has introduced a Re- structuring Officer regime which commenced on 31 August 2022), historically a common strategy offshore has been to seek the appointment of provisional liqui- dators on a 'light touch' basis for the purposes of re- structuring ('Light Touch PL') which, in both Bermuda and the Cayman Islands, resulted in a moratorium, giving the company some necessary breathing space to formulate and (ideally) implement a restructuring plan.

In this process, which is still utilised in Bermuda (and has been done at least once in the British Virgin Islands), the directors work together with independent profes- sional liquidators, with the power of management shared. Usually the directors retain responsibility for the day to day management of the company, with the Light Touch PLs empowered to work with management to formulate and implement a restructuring plan. The necessary winding up petition filed to commence that process is periodically adjourned, if the restructuring is progressing well and creditors are satisfied. Ultimately the winding up petition is dismissed upon the return of the company to solvency on the restructuring effective date.

It is notable that the new Cayman Islands restructur- ing regime no longer requires the filing of a winding up petition, but the process will be largely analogous, save that under the new Cayman Islands restructuring regime the moratorium takes effect upon the filing of the petition seeking the appointment of Restructuring Officers.

At its most basic formulation, the criteria for such an appointment for Light Touch PLs is (and this remains the case for the appointment of a Restructuring Officer in Cayman), that the company is or is about to be insolvent, and that it intends to present a compromise or arrangement to its creditors.

Cayman Islands – Restructuring Officer

That the Restructuring Officer appointment criteria is substantially similar to the prior Light Touch PL regime in the Cayman Islands, and that the Grand Court has broad discretion in this regard, was recently confirmed in the recent (and first decision) from the Grand Court of the Cayman Islands in In re Oriente Group Limited (Unreported, 8 December 2022, Kawaley J) [8], refer- ring to Smellie CJ (as he then was) in In re Sun Cheong Holdings [2020] (2) CILR 942 and Segal J in In re Mid- way Resources International (Unreported, 30 March 2021, Segal J).

As with many remedies which are largely dependent on the discretion of the Courts, whether the offshore Courts would make such an order, and the criteria for doing so, will depend upon the facts of each case. The key questions are: (a) how far advanced is the proposed restructuring plan and whether it has been put to cred- itors; and (b) the level of creditor support, if known.

In Oriente, Kawaley J held that in construing the terms of Section 91B of the Cayman Islands Companies Act (2022 Revision) (as amended) (the 'Cayman Com- panies Act') in light of previous cases dealing with the appointment of 'light-touch' provisional liquidators, '... it may confidently be stated that the jurisdiction to appoint restructuring officers is a broad discretionary jurisdiction ...' to be exercised where the Grand Court of the Cayman Islands is satisfied that the following three criteria are met at [11], namely:

Prior to the introduction of the Restructuring Officer regime, Walkers also acted for the company in the mat- ter of Midway Resources Limited in which Segal J con- firmed that (referring to Fruit of the Loom3) apart from the criteria in the former Section 104(3) of the Cayman Companies Act for the appointment of a Light Touch PL (and by analogy therefore now in Section 91B(1) of the Cayman Companies Act for the appointment of a Restructuring Officer), the applicant must show inter alia that the restructuring has good prospects of suc- cess before an order will be made.

The requirement for reasonable prospects of success and creditor support has been reiterated by the Grand Court in Oriente. Indeed, in the MIE Holdings Corpora- tion case in which Walkers acted for the company, the company: (a) had a restructuring plan; (b) obtained overwhelming support from creditors who had signed restructuring support agreements; and (c) was well ad- vanced in formulating its restructuring proposal before the appointment of the Light Touch PLs (as was the process then) was sought in early 2021. In that case, out of courtesy to the Hong Kong Court given that in- solvency practitioners located in Hong Kong had been appointed as Light Touch PLs by the Grand Court of the Cayman Islands, and the company was listed there, a recognition application was made in Hong Kong. This application was ultimately adjourned sine die and the restructuring successfully completed.

Bermuda – Light Touch PLs

In Bermuda, while the power to appoint Light Touch PLs has not been codified, the jurisdiction to appoint Light Touch PLs has existed since the decision of the Court in In re ICO Global Communications Limited [1999] Bda LR 69, and has been used frequently.

Walkers recently acted for the petitioning credi- tor in the recent case In re NewOcean Energy Holdings Limited [2022] CA (Bda) 16 Civ. In what had perhaps become usual practice, in response to the winding up petition the company filed an application for Light Touch PLs. The petitioner opposed the making of the Light Touch PL order, including on the grounds that 63.6% of the company's bank creditors opposed the appointment of Light Touch PLs and any restructur- ing. It requested that a winding up order be made. Notwithstanding the views of the creditors, the wind- ing up petition was adjourned and Light Touch PLs (albeit the petitioner's nominees) were appointed. At the adjourned hearing of the winding up peti- tion, the petitioner again sought a winding up order on the same grounds as above, but also on the basis of material breaches of the Light Touch PL order by the company. Again, the winding up petition was ad- journed and the Light Touch PLs continued in office. The petitioner appealed the discretionary order of the Court to adjourn the petition to the Bermuda Court of Appeal, and the Court of Appeal upheld that appeal and made a winding up order.

The Court of Appeal held that the learned judge had failed to take into account a number of material factors. These factors included the size of the major- ity of creditors needed for a restructuring to occur and the size of the majority of bank creditors seeking a winding up order (and opposing an adjournment), the fact that what was actually proposed was an adjourn- ment to enable an asset sale, and the conduct of the company's management. [113]. The Court of Appeal confirmed that it is the creditors who are generally the best judges of what is in their interests, and noted in particular the absence of a majority opposing a wind- ing up order. While the Court of Appeal confirmed that a majority supporting a winding up is not definitive, the majority in the case was substantial, and that 'in a case such as this I would accept that it should be wholly exceptional, particularly having regard to its history, that the wishes of the majority should not be followed.'

In an interesting postscript to the judgment, the Court of Appeal noted:

'... that the Hong Kong Court may well take a differ- ent view as to the appropriateness of a light touch order to that taken in Bermuda, and may not neces- sarily recognise provisional liquidators appointed in Bermuda ... It is, however material to observe that a light touch order may, in practice, not involve much decision making by the JPLs as to what steps shall be taken in the disposal of the company property in order to satisfy its debts. That is a good reason why creditors may genuinely wish to have a winding up order with liquidators appointed on a permanent ba- sis to safeguard their interests, rather than be left in the hands of a company over which the JPLs have, in practice, very limited control, and such wishes should be given significant weight.'

In effect, the Court of Appeal in Bermuda has adopted a similar approach in Bermuda to that of the Cayman Islands, namely that the wishes of the creditors should be given significant weight, which should be a welcome development generally.

Hong Kong

There have been a number of recent cases where wind- ing up proceedings have been commenced offshore (or in Hong Kong) and orders for Light Touch PLs then made by the offshore courts in relation to offshore in- corporated, Hong Kong listed companies.

Until early 2021, there was a relatively well-trodden path for an offshore company listed in Hong Kong in fi- nancial distress. In this approach, either before or after winding up proceedings had been commenced either offshore or in Hong Kong, the company would go to the place of incorporation seeking the appointment of a Light Touch PL and the issuance of a letter of request to the Hong Kong Court to recognise that appointment. In the usual case, the Hong Kong Court would make an order recognising the Light Touch PL, and would also replicate the offshore moratorium in Hong Kong. This meant that no winding up proceedings could be com- menced or continued either offshore or in Hong Kong without leave, giving the necessary breathing space for the company to formulate and implement its restruc- turing plan.

From early 2021, there appears to have been a shift in approach, with concerns raised by the Hong Kong Court as to: (a) the effectiveness of the Light Touch PL process; (b) the costs of the process; (c) the potential for abuse by companies seeking the appointment of the Light Touch PLs offshore; and (d) the overall need for greater scrutiny of this approach given the need to pro- tect creditor interests.

Generally, seeking recognition of the offshore ap- pointment is unnecessary in most cases involving a Light Touch PL or Restructuring Officer since the company will continue to have a functioning Board and any action required by the company can be done by its Board (subject to the requisite supervision and oversight in accordance with the relevant appointment order). 'Recognition' was sought along with the mora- torium as referred to above which was helpful to the offshore process. Going forward, it remains to be seen whether the Hong Kong Court will adjourn winding up proceedings presented by a creditor in Hong Kong against a company undergoing a restructuring process offshore. Presumably the usual principles will apply which should largely mirror the criteria for the ap- pointment of a Light Touch PL or Restructuring Officer, and continuation of, the restructuring process offshore in any event.

Parallel proceedings

In the cases of In re Ping An Securities Group (Holdings) Limited and NewOcean, winding up orders were ultim- ately made by both the Bermuda and Hong Kong courts following a Light Touch PL appointment in Bermuda. While both Courts may have jurisdiction to do so, there is an open question as to whether they should, noting the practical difficulties which arise as a result as to the conduct of the parallel liquidation processes generally – for example the date of commencement of the liqui- dation proceedings will usually be different, which will impact the relation back day for voidable transactions, and the voidable transaction regimes themselves may differ.

Similarly, the waterfall for payment of claims in- cluding priority claims, the priority claims themselves, the calculation of interest claims and the reporting requirements may differ, which may result in consid- erable uncertainty and the duplication of professional fees (and therefore less money available for distribution to creditors). While the UNCITRAL Model Law on Cross Border Insolvency intended to resolve these issues, none of Bermuda, the Cayman Islands or Hong Kong has adopted the same, which means that there is scope for significant uncertainty in circumstances where it might not be possible to comply with the law of both jurisdictions at the same time. This puts insolvency practitioners appointed by both Courts, particularly if they are the same (to avoid duplication of work by the liquidators), in the somewhat invidious position of potentially being in breach of the laws of one juris- diction, while complying with the laws of the other, and directions from both Courts would presumably be required.

The way forward

The question remains as to what comes next with cross- border cases involving the balancing exercise between jurisdiction being exercised by different Courts, bear- ing in mind the need to protect creditor interests, the obligations of comity and common law principles of the place of incorporation taking primacy in any wind- ing up (at least in non-Model law countries), differing views as to the prospects of success of any restructur- ing, the costs being expended for some protracted Light Touch PL cases, and the potential for value preserva- tion by enabling a company some time to restructure. Added to this are the practical issues of parallel wind- ing up proceedings as outlined above which highlight the need for co-ordination.

Despite some of the changes in approach in recent times, the fact remains that some, but not all, compa- nies which are insolvent (or in the zone of insolvency) can and should be rescued. In the right case, and where there are good and reasonable prospects of a successful restructuring, it makes sense to give the company some time to attempt to restructure with a view to preserving stakeholder value.

What is apparent from the recent decisions is there is similar messaging from the Courts in each of the Cay- man Islands, Bermuda and Hong Kong that the views of creditors are to be considered in any restructuring (or potential restructuring) process.

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Footnotes

1. Unreported, 8 December 2022, Kawaley J.

2. [2022] CA (Bda) 16 Civ.

Originally Published by Chase Cambria Company (Publishing) Ltd

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