Cayman Islands: The Insolvency Review - 5th Edition (Cayman Islands)

I INSOLVENCY LAW, POLICY AND PROCEDURE

i Statutory framework and substantive law

The Cayman Islands is an overseas territory of the United Kingdom and the legal system is an English-style common law system, which comprises statute law and binding case precedents.²

The principal statute governing corporate insolvencies and restructurings is the Companies Law (2016 Revision) (as amended) (the Companies Law). This is supplemented and supported by the regulations set out in the Companies Winding Up Rules (2008 Revision) (as amended) (CWR).

The fundamental principle underlying Cayman Islands insolvency law is the pari passu treatment of unsecured creditors. Generally,³ unsecured creditors share equally in those assets of an insolvent company that are available for distribution.

The Companies Law provides for a range of avoidance or clawback provisions designed to give effect to the pari passu principle and protect company property, including the ability to avoid preferential payments to creditors.⁴

ii Policy

The Cayman Islands is a leading jurisdiction for the formation of investment funds (hedge and private equity funds), structured finance vehicles and Cayman Islands companies, partnerships and trusts. The Cayman Islands legal system is creditor and investor-friendly and has a strong court system, including a separate division within the Grand Court to hear commercial disputes. The Cayman Islands also has a stable political and economic environment, in addition to an established professional infrastructure that is known for its responsiveness and efficiency.

The Cayman Islands is a tax-neutral jurisdiction. Each investor in a Cayman Islands fund or company is responsible for paying tax in his or her home country, a process the Cayman Islands government assists with by cooperating with tax authorities from other nations and promoting transparent banking. Such structures, however, do not impose material costs in the Cayman Islands on investors at the company or fund level.

Key policy considerations for assisting the Cayman Islands' financial services industry include the protection of creditors' rights and certainty as to the enforceability of contractual rights on insolvency. By way of example, the Companies Law specifically recognises and protects the rights of secured creditors to enforce their security in accordance with its terms, despite the debtor's insolvency, and secured creditors can realise their security outside any Cayman Islands insolvency process commenced in relation to the debtor.

In addition, the Companies Law specifically recognises that bilateral and multilateral arrangements regarding set-off or netting between a company and any person or persons are enforceable on the company's insolvency,⁵ and that non-petition covenants given by creditors will be enforceable.⁶

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Footnotes

1. Caroline Moran is a partner and Gemma Freeman is an associate at Maples and Calder.

2. English case law is highly persuasive in the Cayman Islands in the absence of any Cayman Islands authority. Decisions of other Commonwealth jurisdictions are also persuasive.

3. Certain amounts due to employees, bank depositors (in the case of the insolvency of a licensed bank) and the Cayman Islands government have preferential status. Contractual rights of set-off and netting of claims are also respected.

4. Section 145 of the Companies Law.

5. Section 140(2) of the Companies Law.

6. Section 95(2) of the Companies Law.

Originally published by Law Business Research Ltd, London.

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.