1. MARKET TRENDS AND DEVELOPMENTS
1.1 The State of the Restructuring Market
In 2017, a total of 17 restructuring petitions were filed in the Grand Court of the Cayman Islands. Of these, nine related to share capital reductions and eight related to schemes of arrangement. This compares to a total of 24 restructuring petitions filed in 2016.
In addition, 40 insolvency petitions were also filed in 2017, of which 22 sought winding-up orders and the other 18 sought orders bringing voluntary liquidations under the supervision of the court. This compares to a total of 46 insolvency petitions filed in 2016.
Ten of the insolvency petitions filed in 2017 did not proceed, whilst winding-up/supervision orders were made on 30 of the 40 petitions filed.
Full data is not yet available for 2018, but so far, no distinct trends are discernible in terms of specific industry sectors or economic cycles.
Legislative reforms have been proposed with a view to making it easier for directors of distressed Cayman companies to Commence restructuring proceedings, under the protection of a statutory moratorium, without first having to obtain shareholder approval. If and when those changes are enacted, it is generally anticipated that there will be an uptick in the number of court restructurings in Cayman, particularly in respect of groups with operating subsidiaries in China (the PRC).
1.2 Changes to the Restructuring and Insolvency Market
There have been no notable changes or new trends in this market over the last 12 months.
2. STATUTORY REGIMES GOVERNING RESTRUCTURINGS, REORGANISATIONS, INSOLVENCIES AND LIQUIDATIONS
2.1 Overview of the Laws and Statutory Regimes
Corporate insolvency in the Cayman Islands is governed by Part V of the Companies Law (2018 Revision – the Companies Law) and the Companies Winding-up Rules 2018 (the CWR). Those provisions apply both to the winding-up of companies – including certain foreign companies – as defined by the Companies Law and, pursuant to Section 36 of the Exempted Limited Partnership Law (2018 Revision), to the winding-up of exempted limited partnerships in the Cayman Islands.
The Cayman Islands insolvency regime is based on many of the same underlying principles as the corresponding regime in England and Wales (and other Commonwealth countries), although there are some fundamental differences. These include the test for insolvency, which is assessed, on a winding-up petition, solely by reference to cash flow insolvency.
The principal tool used for financial restructurings is the scheme of arrangement under Part IV of the Companies Law. Schemes procedure is governed by Grand Court Practice Direction No 2 of 2010.
The doctrine of judicial precedent applies in the Cayman Islands, so case law is also relevant and important. Cayman Islands case law is developing but remains comparatively small in scope, however. Where there is no applicable Cayman Islands case law, the Cayman courts will look to English authorities. The latter's decisions are not binding, but as a general rule they will be followed to the extent that they are not inconsistent with either Cayman statutory provisions or authorities, and to the extent that they do not relate to English statutory provisions which have no equivalent in Cayman. Decisions from courts in other Commonwealth jurisdictions are similarly of persuasive, but not binding, authority.
2.2 Types of Voluntary and Involuntary Financial Restructuring, Reorganisation, Insolvency and Receivership
The key insolvency and restructuring procedures available in respect of corporate entities in the Cayman Islands are:
- voluntary liquidation;
- provisional liquidation;
- official liquidation; and
- schemes of arrangement.
It is also possible for receivers to be appointed over Cayman Islands companies (either by the Grand Court or by a creditor of the company with suitable security).
2.3 Obligation to Commence Formal Insolvency Proceedings
Directors of a company have fiduciary duties in relation to the interests of the company's creditors if the company is insolvent or of doubtful solvency. In such circumstances they must, therefore, have regard to whether it is appropriate for insolvency proceedings to be instigated.
Furthermore, if a company goes into voluntary liquidation then, unless all the directors have sworn declarations to the company's solvency within 28 days, the voluntary liquidators are required to petition the Grand Court within 35 days of the commencement of the voluntary liquidation to bring the liquidation under the court's supervision.
2.4 Procedural Options
As noted in 2.3 Obligation to Commence Formal Insolvency Proceedings above, the only statutory obligation to Commence insolvency proceedings arises when voluntary liquidators are required to petition the Grand Court to bring the voluntary liquidation under the court's supervision. The effect of a supervision order is to place the company into official liquidation with retrospective effect from the commencement of its voluntary liquidation.
If the directors' fiduciary duties require them to instigate insolvency proceedings, the appropriate type of process will depend on all the facts and circumstances, including whether they believe that the company should be restructured or wound up.
In restructuring cases, the principal option open to directors is a scheme of arrangement. This can be coupled with provisional liquidation proceedings if a moratorium on creditor claims is needed during the restructuring process, although as noted below there may be issues regarding the power of the directors to Commence the provisional liquidation process.
In winding-up cases, directors do not have the power to petition for a winding-up order in their own names. They may be able to do so in the name of the company, but only if authorised to do so by a shareholders' resolution or (in certain cases) by the articles of association. The same problem can arise when provisional liquidation proceedings are required in connection with a restructuring. This can create difficulties in practice, and legislative reform has been proposed to resolve this issue.
Other procedural options may include inviting the shareholders to resolve to wind up the company voluntarily, or inviting a "friendly" creditor to present a winding-up petition.
2.5 Liabilities, Penalties or Other Implications for Failing to Commence Proceedings
No statutory penalties are imposed on a company or its management or owners for trading while insolvent, but if the directors' failure to Commence insolvency proceedings amounts to a breach of their fiduciary duties to the company, then they may be liable at common law for damages caused by the breach.
Nor are there any statutory penalties imposed on voluntary liquidators for failing to apply to bring a voluntary liquidation under the court's supervision within the prescribed period. However, if their failure to do so causes the company loss, then the voluntary liquidators could also be liable to the company in damages at common law. As noted in 2.3 Obligation to Commence Formal Insolvency Proceedings above, voluntary liquidators must file a supervision application unless all of the directors swear a declaration of solvency within 28 days of the commencement of a voluntary liquidation, and the Companies Law does impose statutory penalties on directors for knowingly swearing a false solvency declaration, namely, imprisonment for two years and a fine of KYD10,000 (approximately USD12,000) on conviction. Furthermore, voluntary liquidators (or, in their absence, directors) are liable to a fine of KYD10,000 if they fail to file various prescribed documents with the Registrar of Companies and comply with various notice requirements, following the commencement of a voluntary liquidation.
2.6 Ability of Creditors to Commence Insolvency Proceedings
Initiation – provisional liquidation is available to companies liable to be wound up under the Companies Law, following the presentation of a winding-up petition. Winding-up petitions and provisional liquidation applications may be presented against:
- companies incorporated and registered under the Companies Law (or which existed prior to the enactment of the Companies Law);
- bodies incorporated under any other law; and
- foreign companies which, firstly, carry on business or have property located in the Cayman Islands; secondly, are the general partner of a limited partnership registered in the Cayman Islands; or, thirdly, are registered as foreign companies under Part IX of the Companies Law.
A creditor, shareholder, the company itself or (in respect of regulated businesses) the Cayman Islands Monetary Authority (CIMA) can apply for the appointment of provisional liquidators between the presentation and the hearing of the winding-up petition.
Substantive Test – a creditor, shareholder or (in respect of a regulated business) CIMA may apply (usually ex parte) on the grounds that there is a prima facie case for making a winding-up order, and the appointment of a provisional liquidator is necessary to prevent:
- the dissipation or misuse of the company's assets;
- the oppression of minority shareholders; or
- mismanagement or misconduct on the part of the company's directors.
Furthermore, the company may, if properly authorised, apply for the appointment of provisional liquidators 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.
Initiation – official liquidation is available in respect of all the types of company identified above. The company (if properly authorised), any creditor (including a contingent or prospective creditor), any shareholder or (in respect of a regulated business) CIMA may present a winding-up petition to the Grand Court at any time.
The right of creditors and shareholders to present a winding-up petition is, however, subject to any contractually binding non-petition clauses. In addition, shareholders must be registered as such in the company's register of members and have either inherited or been allotted the shares, or been registered as their holder for at least six months.
Substantive Test – a company may be wound up by the Grand Court if:
- the company passes a special resolution requiring it to be wound up by the court;
- the company does not Commence business within a year of incorporation;
- the company suspends its business for a whole year;
- the period (if any) fixed by the company's articles for the company's duration expires, or an event occurs which, under the articles, triggers the company's winding-up;
- the company is unable to pay its debts (see 2.7 Requirement for Insolvency to CCommence Proceedings below):
- the Grand Court decides that it is just and equitable for the company to be wound up; or
- the company is carrying on a regulated business in the Cayman Islands and it is not duly licensed or registered to do so, or for any other reason provided under the regulatory or other laws.
2.7 Requirement for Insolvency to Commence Proceedings
Insolvency is not required to Commence voluntary/involuntary proceedings. A voluntary liquidation is commenced simply by the passing of a shareholders' resolution. A winding-up order can be made on any of the (non-insolvency) grounds set out in 2.6 Ability of Creditors to CCommence Insolvency Proceedings above.
If a winding-up petition is presented on the grounds of insolvency, the petitioner must demonstrate that the company is unable to pay its debts.
A company is deemed to be unable to pay its debts if:
- a creditor serves a valid statutory demand and the company fails to pay the debt or settle with the creditor within 21 days;
- the execution of any judgment or order by the court, made in favour of a creditor against the company, is unsatisfied in whole or in part; or
- the creditor proves to the court that the company is unable to pay its debts. This is a cash-flow test of insolvency.
In Conway and Walker (as joint official liquidators of Weavering Macro Fixed Income Fund Limited) v SEB (2016 (2) CILR 514), the Court of Appeal stated that "the cash flow test in the Cayman Islands is not confined to consideration of debts that are immediately due and payable. It permits consideration also of debts that will become due in the reasonably near future." Although the Court of Appeal's comments were technically obiter, they are very likely to be followed by the Grand Court, such that a company may be liable to be wound up if it is unable to pay its debts which are immediately due and payable or its debts which will become due and payable in the "reasonably near future". What constitutes the "reasonably near future" will be fact-specific in each case. If a creditor's claim is disputed by the company in good faith and on substantial grounds, however, then it cannot be relied on to demonstrate insolvency. A winding-up petition based on non-payment of such a claim is liable to be struck out as an abuse of process.
2.8 Specific Statutory Restructuring and Insolvency Regimes
Although there are no specific statutory restructuring and insolvency regimes applicable to banks and other credit institutions, or insurance undertakings, CIMA does have the power to appoint controllers over banks, trust companies, regulated mutual funds and licensed fund administrators. Controllers are granted wide powers, including the power to terminate the business, and CIMA can exercise various powers on receipt of a controller's report, including the power to apply for the entity to be wound up, or the power to require the entity to reorganise its affairs.
Furthermore, in a liquidation of a bank, eligible depositors enjoy a (limited) priority over other unsecured creditors
Originally published in Chambers Global Practice Guide
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