Introduction
2024 has been a record year for the Cayman Islands, with the Cayman Islands Monetary Authority announcing that as of 15 August 2024, the Cayman Islands had a record-breaking total of 30,038 registered investment funds (including 17,080 private funds and 12,958 mutual funds).
This continues the Cayman Islands' dominance as a leading investment fund domicile (second to the United States). The Cayman Islands is also recognised as a leading jurisdiction for insurance companies with 700 insurance companies and the second-largest jurisdiction for captive insurance.
According to Cayman Finance, in the digital asset space, the Cayman Islands is home to about 50% of the world's crypto hedge funds and home to some of the largest (by treasury size) decentralised autonomous organisations (DAOs).
Given the vast number of companies domiciled in the Cayman Islands and the fact that the Cayman Islands is a leading international finance centre, our insolvency professionals and courts grapple with many complex and important issues.
There have been several important decisions in the insolvency and restructuring context in 2024 in the Cayman Islands. We outline several of the key cases addressing important and novel developments in the jurisdiction in this guide, as well as an important decision from the Judicial Committee of the Privy Council in Sian Participation Corp v Halimeda International Ltd [2024] UKPC 16 on appeal from the British Virgin Islands which will have an impact across many offshore jurisdictions including the Cayman Islands.
The Rule in Houldsworth
The most notable case involves impending appeal(s) resulting from the decision in Direct Lending Income Feeder Fund, Ltd (in official liquidation) (FSD 108 of 2019 (Segal J) (Unreported, 13 March 2024) (the "Direct Lending case") and from the decision in HQP Corporation (in official liquidation) (FSD 190 of 2021 (Doyle J)) (Unreported, 7 July 2023) (the "HQP case").
The appeal of these two decisions will be of significance because the outcome could result in a departure from the well-settled rule in Houldsworth v City of Glasgow Bank (1880) 5 App Cas 317) (the "Houldsworth case") and resolve complex issues in relation to the subscription for shares as a result of fraudulent misrepresentations.
Interestingly, the first instance decisions in the two cases were heard one week apart but both had to determine:
- whether claims for damage against a company by a shareholder who was induced by a fraudulent misrepresentation to subscribe for shares in a company are provable in a liquidation; and
- if misrepresentation claims are provable, how those claims would be ranked in the order of priorities. Additionally, in the Direct Lending case, the court was asked what rank would be given to shareholders who redeemed their shares and were accordingly owed a debt by the company.
Despite the similarities between the cases, different approaches were adopted by the judges in the HQP case and the Direct Lending case regarding admissibility and the characterisation of the misrepresentation claims.
Departing from the rule in the Houldsworth case, the judge in the HQP case held that claims for misrepresentation or fraud against a company by a preferred shareholder may be provable in the liquidation of the company and rank as unsecured debts, ahead of redemption creditors and the claims of other members of the company.
However, in the Direct Lending case, the judge held that such claims are admissible as proof and if admitted, are subordinated to unsecured debts and rank pari passu with other subordinated claims such as redemption creditor claims.
The conflicting decisions have created uncertainty regarding the treatment of a shareholder's claim for damages in these circumstances in liquidations in the Cayman Islands. The two cases are listed to be heard by the Court of Appeal in November 2024 with a ruling anticipated in 2025.
Provisional Liquidation vs Restructuring Officer Regime
When the restructuring officer regime (the RO Regime) was introduced in the Companies Act in August 2022, it was generally assumed that the prior restructuring regime with the appointment of light touch provisional liquidators was abandoned and replaced with the new RO Regime.
However, the decision in Kingkey Financial International (Holdings) Limited FSD 56 of 2024 (Asif J) (Unreported, 12 April 2024) (the "Kingkey Financial case") suggests that in circumstances where the appointment of a restructuring officer under Section 91B of the Companies Act would be inadequate to address the issues within the company, the court may appoint light touch provisional liquidators under Section 104(3) of the Companies Act to develop, present, and facilitate a restructuring of the company.
The court accepted that a restructuring would provide a better outcome than an insolvent liquidation for the company's stakeholders. The evidence showed that there was a breakdown in the company's corporate governance and the company was unable to raise capital because prior (seemingly feasible) attempts had been frustrated by certain members of its board.
The court accepted that the tenuous situation amongst the company's management made it expedient that provisional liquidators be appointed to manage the situation and provide stability to the company and its wider group while the issues were resolved. It was also necessary to appoint provisional liquidators as a matter of urgency to enable the company to have the benefit of the statutory moratorium given the company's cash flow issues and so that the provisional liquidators could manage an imminent extraordinary general meeting.
In contrast, the court presumed from the language of Section 91B of the Companies Act that when a restructuring officer is appointed the board of directors of the company would retain some powers and control over the company which would have been unrealistic in a situation where the board of directors disagree and are therefore unable to continue managing the day-to-day operations of the company. The language of Section 91B could, however, be easily interpreted more broadly to provide the court with the power to completely remove the power of the board and give full powers to the restructuring officer.
The Kingkey Financial case shows that in special circumstances, the RO regime may not be the only option available to distressed companies. However, this matter was an unopposed application and the court did not have the benefit of a full argument.
A First for SPCs: Appointing Restructuring Officers to Some of a Company's Segregated Portfolios
In the first case of its kind, In the Matter of Holt Fund SPC (FSD 309 of 2023, Kawaley J) (Unreported, 29 January 2024) (the "Holt Fund SPC case"), the court was asked to determine whether it is possible for restructuring officers to be appointed to a segregated portfolio company (SPC).
The court considered the applicability of the restructuring officer provisions introduced into Part V of the Companies Act to segregated portfolio companies (SPCs). Kawaley J was satisfied that an SPC would be liable to be wound up where one or more of its portfolios was unable to pay its debts within the meaning of Section 93 of the Companies Act and that restructuring officers could be appointed to the company on the same basis.
The court also held that when appointing restructuring officers to an SPC their powers and authority to act as agents of the company could be limited to the particular portfolios in respect of which a restructuring was to be developed and proposed.
The court's starting assumption was that the policy purpose of the SPC regime was to protect a SPC from being liable to be wound up on insolvency grounds unless the company itself was insolvent having regard to its general assets and liabilities. However, the court was persuaded that the statutory SPC regime did not preclude the liquidity of individual portfolios determining the insolvency of the SPC. This was noted to contrast with the regulatory framework applicable to segregated account companies in Bermuda which contained an express proscription against the assets and liabilities of individual portfolios being taken into account when assessing the insolvency of the company itself.
The court, referring to the decision of Parker J in In the Matter of Performance Insurance Company SPC (in Official Liquidation) (FSD 70 of 2021 (RPJ)) (Unreported, 6 April 2022), accepted that:
- the insolvency of one or more of several segregated portfolios could be attributed to an SPC for the purposes of exercising the court's winding-up jurisdiction under the Act; and
- that official liquidators could be appointed to deal with assets and liabilities of specific segregated portfolios.
The existing jurisprudence on SPCs is limited but has been developing in recent years. Decisions like in the Holt Fund SPC case are of particular importance to the growing body of cases in this area.
Staying Winding Up Proceedings – Permanently
In World Properties Ltd (FSD 49 of 2018, Kawaley J) (Unreported, 28 March 2024), the court granted a permanent stay of a court supervision order under Section 111(1) of the Companies Act.
Permanent stays of winding up proceedings are rare, and this may be the first instance where the court was asked to exercise its jurisdiction conferred by Section 111(1) of the Companies Act. The court found it appropriate to grant the stay sought because there was no identifiable public interest and any difficulties facing the company had been resolved by the joint official liquidators.
The stay was found to be in the best interests of those who may have been affected by it (being the company and its contributories in this case), the application was supported by all interested stakeholders (the contributories and the liquidators in this case), and the company was solvent and had never been insolvent.
The Interplay Between Arbitration Agreements and Winding Up Proceedings
In a landmark decision of the Judicial Committee of the Privy Council (the "Privy Council") in Sian Participation Corp v Halimeda International Ltd [2024] UKPC 16 on appeal from the British Virgin Islands, the Privy Council held that "the correct test for the court to apply to the exercise of its discretion to make an order for the liquidation of a company where the debt on which the application is based is subject to an arbitration agreement or an exclusive jurisdiction clause and is said to be disputed is whether the debt is disputed on genuine and substantial grounds".
If the debt is not disputed on genuine and substantial grounds, the court will not grant a stay in favour of the arbitration agreement or exclusive jurisdiction clause.
Although the matter was on appeal from the British Virgin Islands, the Privy Council made a Willers v Joyce direction that the ruling now represents the law of England and Wales, reversing years of settled jurisprudence in England and Wales with respect to the treatment of winding-up petitions in circumstances where there is an underlying disputed debt that is subject to an agreement to arbitrate.
The Privy Council's ruling will also have an impact on other offshore jurisdictions, including the Cayman Islands.
That said, the Cayman Islands has already departed from the English position in Salford Estates (No 2) Ltd v Altomart Ltd (No 2) [2014] EWCA Civ 1575, with the position in the Cayman Islands being that where a debt is bona fide disputed on substantial grounds, the court will stay a winding up petition leaving a creditor to prove its claim in the trial of an action or in arbitration.
If an unpaid debt is not disputed on genuine and substantial grounds, a creditor is generally entitled to a winding up order ex debito justitiae (In the matter of BPGIC Holdings Limited (FSD 248 of 2023 (MRHJC)) (Unreported, 26 January 2024)).
Originally published by Chambers & Partners Insolvency Guide 2024, 14 November 2024
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.
