Answer ... Corporate insolvency in the Cayman Islands is governed by Part V of the Companies Law (2018 Revision) and the Companies Winding-up Rules 2018. Those provisions apply both to the winding up of companies – including certain foreign companies – as defined by the law, and (pursuant to Section 36 of the Exempted Limited Partnership Law (2018 Revision)) to the winding up of Cayman Islands exempted limited partnerships.

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 solely by reference to cash-flow insolvency.

The principal tool used for financial restructurings is the scheme of arrangement under Part IV of the law. Schemes procedure is governed by Grand Court Practice Direction 2/2010.

The doctrine of judicial precedent applies in the Cayman Islands. The structure of the court system is hierarchical, with the courts being bound by the rationes decidendi of decisions of the courts above. The rationes decidendi of decisions of the Privy Council are therefore binding on the Court of Appeal and the Grand Court. The rationes decidendi of decisions of the Court of Appeal are similarly binding on the Grand Court. The Grand Court will generally follow the rationes decidendi of its previous decisions, unless the judge is convinced that the earlier judgment is plainly wrong.

There is a comparatively small body of reported case law in the Cayman Islands, contained in the Cayman Islands Law Reports. In the absence of binding Cayman Islands case law, the Cayman Islands courts will look to English authorities, which are highly persuasive, but not binding. As a general rule, the Cayman Islands courts follow English authorities to the extent that they are not inconsistent with either Cayman Islands statutory provisions or Cayman Islands authorities, and to the extent that they do not relate to English statutory provisions which have no equivalent in the Cayman Islands. Decisions of courts in other Commonwealth jurisdictions are also of persuasive, but not binding authority.

Answer ... The Cayman Islands is not a signatory to any international treaties relating to bankruptcy or insolvency. However, there are two main sets of guidelines for court-to-court communications and cooperation, which may be used and adopted in cases pending before the Grand Court where the insolvency or restructuring proceedings are being supervised by, or involve related applications to, courts in more than one jurisdiction:

• the American Law Institute/International Institute Guidelines Applicable to Court-to-Court Communications in Cross-Border Cases; and
• the Judicial Insolvency Network (“JIN”) Guidelines for Communication and Cooperation between Courts in Courts in Cross-Border Insolvency Matters. JIN adopted the Modalities of Court-to-Court Communications on 25 July 2019 and the Financial Services Division of the Grand Court adopted them by was of a Practice Direction with effect from 1 August 2019.

The guidelines cover:

• communications and mechanics for communications between the courts involved;
• the appearance of counsel in each court;
• notification to parties in parallel proceedings;
• the acceptance as authentic of official documents or orders made in the foreign jurisdiction or court; and
• joint hearings.

The guidelines are to be applied either through incorporation in a protocol between the respective office holders, which is then approved by the Grand Court and the applicable foreign court or authority, or by a separate order of the Grand Court and the applicable foreign court without a protocol.

Answer ... Generally no, but the Cayman Islands Monetary Authority (CIMA) does have certain powers in respect of companies carrying on licensed and regulated business. The extent of those powers will depend on the regulated sector, factual circumstances, and include the right to present a winding-up petition or to appoint a person to assume control of the licensee’s affairs.

Answer ... The Cayman Islands has traditionally been regarded as a creditor-friendly jurisdiction and that remains the case. Creditors of the same class are treated equally irrespective of where they are domiciled.

Answer ... The Cayman Islands has a globally recognised and comprehensive regime which governs domestic and cross-border insolvencies and restructurings. The Companies Law and the Companies Winding-up Rules are regularly updated and amended, and the jurisdiction has a globally renowned legal system and insolvency framework.

The Financial Services Division (FSD) of the Grand Court was created in 2009, recognising the need for special procedures and skills in dealing with the more complex civil cases that arise from the financial sector in the Cayman Islands.

The procedures of the FSD reflect the need for urgent action to be taken in some cases, and are designed to balance the need for justice to be administered in public with the potential harm to businesses if sensitive information is publicly available at too early a stage. The jurisdiction is constantly adapting; video conferencing is now widely used (with the leave of the court) in response to the global spread of parties doing business in the Cayman Islands and to allow litigation to be conducted in the most cost-efficient way.

The FSD is served by seven judges, including the chief justice, who together bring a high level of practical experience and judicial expertise.

Answer ... The most common types of security are as follows.

Mortgage: A mortgage is a transfer of an interest in a property subject to redemption rights. Historically, a mortgage required a transfer of the property that was subject to the mortgage. Today, however, a transfer is not always required. Where property is the subject of a mortgage but is not transferred to the lender, an equitable mortgage is created which can be defeated by a third-party buyer with no notice of the lender’s interest.

Charge: A charge conveys nothing and merely gives the person entitled to the charge certain rights over the property as security for debt. A charge given by a company over its assets is generally created by debenture. It is also possible to take fixed or floating charges over assets held by a company borrower:

• Fixed charges. These are attached to specified assets which then cannot be disposed of by the borrower.
• Floating charges. These can be used when the borrower holds a number of assets which it needs to be able to deal with freely (eg, shares in a portfolio and trading stock). The borrower can deal with those assets despite the charge. On default, the charge crystallises over the assets that are held by the borrower at the time of default. The charge then becomes a fixed charge, entitling the creditor to sell the assets to recover the amount owed.

Lien: A lien can be used when a creditor has lawful possession of an asset and moneys are due to the creditor for services provided. For example, where a repairer has possession of property to repair it, he or she is automatically entitled to keep possession until the account is paid. A lien arises by operation of law based on lawful possession. If possession is relinquished, so is the lien. No rights in the property are created in the creditor’s favour. Therefore, the retained property cannot be sold to obtain funds for payment of the debt.

Pledge: In a contract to pawn or pledge, goods are deposited as security for the debt and the right to the property vests in the creditor to the extent necessary to secure the debt. The creditor can sell the goods if the borrower defaults on its obligations.

Answer ... A legal mortgage can be enforced by the appointment of a receiver, exercise of the power of sale, foreclosure or enforcement of an immediate right to possession. An equitable mortgage does not confer a right to possession, so an application to court will normally be required. A pledge can be enforced by exercising the power of sale.

Creditors must ensure that the company granting security undertakes appropriate formalities. This generally requires a directors’ resolution approving the granting of the security, subject to any special requirements in the company’s articles of association. Creditors should obtain legal advice to ensure adequate protection.

There are central ownership registers for land, ships, aircraft and motor vehicles. Creditors’ mortgages or charges over the asset can be noted on the relevant register. A third-party buyer is deemed to have notice of any interest that is registered at the time of purchase and acquires the asset subject to the creditor’s interest as the holder of the registered mortgage or charge. In practice, transfers of these assets cannot be registered without the creditor’s consent.

There is no central register for other types of immovable property or for charges over company assets (other than the company’s internal register of mortgages and charges). Therefore, the creditor must ensure it has sufficient control over the asset to prevent a third party from buying it. A creditor should review the company’s register of mortgages and charges before making a loan, and ensure the company updates this register after the loan is made.

Failure to comply with the requisite formalities does not automatically render the security void. However, there is a risk that both:

• the security will not be binding on the company; and/or
• a third party will acquire the asset free of the creditor’s security interest or acquire a higher-ranking security interest over the asset.

Answer ... Due to the nature of the Cayman Islands as an offshore jurisdiction, restructuring marketing participants, company management and lenders are almost invariably based onshore. As such, their views and preferences on consensual workouts and restructurings tend to reflect the prevailing market views and preferences in the onshore jurisdiction(s) where they are based. Those vary from case to case, but the most common jurisdictions (in no particular order) are London, New York and Hong Kong.

Cayman insolvency and creditors’ rights laws do not interact to a significant extent with the viability, desirability or choice of informal/consensual out-of-court restructuring and workout strategies. In particular, the Cayman legislation is silent on consensual restructuring negotiations and therefore does not require that they take place before the commencement of a formal statutory process. That said, if a company requires a stay while it negotiates a scheme of arrangement or other form of compromise, it will need to apply for the appointment of provisional liquidators. The Financial Services Division Guide states that, on such an application, the Grand Court will expect to see evidence from the chief executive or chairman which includes the reasons why the directors believe that the company’s affairs are capable of being restructured such that it can continue as a going concern. Although the conduct of consensual restructuring negotiations is not necessarily a prerequisite to the directors forming any such view, positive restructuring negotiations can obviously help to underpin their belief (particularly if they have led to substantial creditors signing restructuring support agreements), whereas the absence of any such negotiations (or unsuccessful negotiations) might undermine the directors’ evidence.

If a company is insolvent, then its directors have a fiduciary duty to act with regard to the interests of its creditors. Whether that duty can be discharged by commencing or attempting an informal/consensual restructuring process rather than a statutory insolvency process will depend on all facts and circumstances of the particular case.

Answer ... The principal restructuring tool in the Cayman Islands is the scheme of arrangement under Section 86 of the Law. Cayman schemes are substantively very similar to schemes in England and Wales, although there are certain procedural differences.

A scheme is a statutory form of compromise or arrangement between a company and its creditors (or any class thereof) or its shareholders (or any class thereof). There is no statutory definition of the terms ‘compromise’ or ‘arrangement’. The Grand Court will construe them broadly, but they must involve some element of accommodation or ‘give and take’ between the company and the scheme creditors or shareholders.

The principal uses of Cayman schemes are:

• to reorganise the company’s share capital;
• to enable a company to restructure its liabilities and avoid an insolvent liquidation; or
• to alter the distribution rights of creditors and/or shareholders in the company’s liquidation.

Answer ... Scheme proceedings can be commenced by the company, by any creditor or shareholder of the company or (where the company is being wound up) by a liquidator. Scheme proceedings commenced by a creditor or shareholder will, however, require the company’s support.

If the scheme is supported by more than 50% by number and 75% by value of those attending and voting in each scheme class, and is subsequently approved by the Grand Court, it will bind all scheme creditors/shareholders (including those that did not vote or that voted against the scheme) in accordance with its terms.

Answer ... The commencement of a scheme outside a provisional liquidation will have no formal effect on the company or its creditors. The company can and will continue to operate its business during the restructuring process. If the company is not in provisional liquidation, then incumbent management will continue to manage the company.

Answer ... No moratorium is available if the scheme is initiated when the company is not in liquidation.

If a moratorium is required during the scheme process, then the company will need to present a winding-up petition and apply for an order appointing provisional liquidators prior to filing the scheme petition. If the scheme is initiated during a provisional liquidation, then an automatic stay prohibits the commencement or continuance of any suit, action or other proceeding against the company without the Grand Court’s leave.

Answer ... In general, a Cayman scheme will usually take between 10 and 12 weeks from the date on which the scheme petition and summons for directions are filed to the date on which an order approving the scheme is made. The Grand Court requires that the entire timetable be established at the outset, which ensures a swift resolution of the scheme process.

However, prior to the filing of the scheme petition, there may and likely will be a lengthy period in which the scheme terms are negotiated with key creditors, funding is raised and the scheme document, detailed explanatory memorandum, evidence and other documentation are all prepared.

Order 102, Rule 20 of the Grand Court Rules and Practice Direction 2/2010 govern the procedure for obtaining approval of a scheme of arrangement. After the filing of a scheme petition, there is a three-stage process for schemes:

• First, there must be an application to the Grand Court for an order that a meeting or meetings be convened of creditors (or a class of creditors) or members (or a class of members) for the purpose of approving the scheme – this is known as the convening hearing.
• Second, the scheme proposals are put to the meeting or meetings held in accordance with the order that has been made, and are approved or not by the requisite majority in number and value of those present and voting in person or by proxy – these are known as the scheme meetings.
• Third, if approved at the meeting or meetings, there must be a further application to the court to obtain sanction to the compromise or arrangement – this is known as the sanction hearing.

Each of the three stages serves a distinct purpose:

• At the first stage, the Grand Court directs how the meeting or meetings are to be convened. It is concerned primarily with class composition, the adequacy of the scheme documentation and ensuring that those who are to be affected by the proposed compromise or arrangement have a proper opportunity to be present (in person or by proxy) at the scheme meetings.
• The second stage ensures that the proposals are acceptable to at least 50% in number, representing 75% in value, of those that take the opportunity to be present (in person or by proxy) at the meeting or meetings.
• At the third stage, the court is concerned to ensure that:
• • the meeting or meetings have been convened and held in accordance with the previous order;
  • the proposals have been approved by the requisite majorities; and
  • the scheme is fair.

Answer ... The directors remain in control of the company if the scheme is proposed outside of liquidation. Assuming that they are to be included in the scheme, employees will be treated in the same way as other creditors for determining whether they form part of a separate class.

If the scheme is promoted within a provisional liquidation, then the management of the scheme process will depend on the terms of the order appointing the provisional liquidators. In some cases, the provisional liquidators will be given only the powers necessary to supervise the directors’ promotion and implementation of the scheme. In other cases, the provisional liquidators will displace the directors entirely for the duration of the restructuring. In either case, the provisional liquidators will be subject to the court’s supervision, and the court’s involvement in the scheme process will be the same irrespective of whether the company is in provisional liquidation.

The court takes an active role in administering, supervising and managing a scheme. It will order the convening of the scheme meetings and ultimately sanction the scheme.

Answer ... The Grand Court will consider class composition at the scheme convening hearing. The basic test is whether the members in each class have rights which are not so dissimilar as to make it impossible for them to consult together with a view to their common interest.

If the company is not in liquidation, there are no statutory provisions regarding creditor committees, although in practice ad hoc committees may be formed. If the company is in provisional liquidation, the Grand Court will decide whether a committee should be established and if so, how that should be done. If a committee is established, its role will be to act as a sounding board for the provisional liquidators and to review their fees. The committee may be authorised to retain counsel at the company’s expense.

At the scheme convening hearing, the Grand Court will need to be satisfied that the scheme document and supporting explanatory statement contain all information reasonably necessary to enable the scheme creditors (and/or shareholders, as applicable) to make an informed decision about the merits of the proposed scheme. If the company is in provisional liquidation, it is likely that the Grand Court will also require the provisional liquidators to report to the court and the creditors periodically.

If the scheme is supported by more than 50% by number and 75% by value of those attending and voting in each scheme class, and is subsequently approved by the Grand Court, it will bind all scheme creditors/shareholders (including those who did not vote or who voted against the scheme) in accordance with its terms.

Dissenting creditors’ rights will be ‘crammed down’ in accordance with the terms of the scheme if the statutory majorities are obtained in each class and the scheme is sanctioned by the Grand Court.

Answer ... In principle, secured creditors are capable of being bound by a scheme as it is the underlying debt rather than the security interest which is compromised by the scheme. In reality, secured creditors will be left out of a scheme or will have a significant influence on its terms, either because of their ability to enforce their security prior to the scheme becoming effective or because their security interest puts them into their own scheme class and therefore gives them a blocking position.

Answer ... The impact of a scheme on existing contracts, and whether the parties will be obliged to perform outstanding obligations under those contracts or whether they will be terminated, will depend on the terms of the scheme (in particular, the extent to which it purports to compromise rights under those contracts) and the terms of the contracts. If the scheme takes place in the context of a provisional liquidation, the appointment of provisional liquidators will not in and of itself affect existing contracts, other than as might be provided within the contracts themselves.

Answer ... In certain circumstances, a statutory procedure can release non-debtor parties from liabilities, provided that there is a sufficiently close connection between the subject matter of the scheme and the relationship between the company and its creditors/members (see The Sphinx Group Of Companies [2010 (1) CILR 452).

Answer ... The company can borrow money during a scheme process, but this will require Grand Court approval if the company is in provisional liquidation. New money can be given priority by the company granting security to the lender or by subordinating the claims of scheme creditors through the scheme itself. Pre-existing security over an asset will take priority over any new security which was granted to the lender.

Answer ... Once the Grand Court has approved the proposed scheme, a copy of the order approving the scheme must be filed with the Registrar of Companies. The scheme will then be binding on all creditors and/or shareholders, as applicable.

Answer ... Provisional liquidation: Provisional liquidation is available to companies liable to be wound up under the Companies Law, following the presentation of a winding-up petition.

A creditor or shareholder can apply on the grounds that there is a prima facie case for making a winding-up order and the appointment of provisional liquidators is necessary to prevent:

• dissipation or misuse of the company’s assets;
• oppression of minority shareholders; or
• mismanagement or misconduct by the directors.

Applications by creditors, shareholders or theCIMA are therefore made for the purpose of preserving and protecting the company’s assets until the hearing of a winding-up petition and the appointment of official liquidators.

A company (if properly authorised) can also petition for its own winding up and apply for the appointment of provisional liquidators in order to present a compromise or arrangement to creditors with the protection of an automatic stay. The purpose of appointing a provisional liquidator in this situation is similar to the UK administration process or the US Chapter 11 procedure, albeit there are significant legal and procedural differences.

Official liquidation: The purpose of official liquidation is to wind up the company and distribute its assets to its creditors and shareholders in accordance with the statutory order of priorities. It also allows the company’s affairs and the cause of its failure to be investigated by an independent, court-appointed liquidator, and for any claims that the company may have arising from the same to be pursued for the benefit of its stakeholders.

Official liquidation is available to:

• companies incorporated and registered under the Companies Law;
• bodies incorporated under any other law; and
• foreign companies which:
• • carry on business or have property located in the Cayman Islands;
  • are the general partner of a limited partnership registered in the Cayman Islands; or
  • are registered as foreign companies under the law.

Winding-up petitions may be presented by the company (if properly authorised) or by any creditor (including a contingent or prospective creditor) or shareholder of the company. A creditor or shareholder’s right to present a winding up petition is, however, subject to any contractually binding non-petition clauses and, in the case of a shareholder, to the shareholder having either inherited or been allotted its shares, or having been registered as their holder for at least six months. CIMA may also present a petition in relation to a company which is carrying on a regulated business in the Cayman Islands.

Voluntary liquidation: Voluntary liquidation can be used by companies incorporated and registered under the Companies Law, in order to wind up a solvent company’s business and affairs (and ultimately dissolve the company) without the cost and expense of court supervision. It is commenced by shareholder resolution or on the expiry of a period or the occurrence of an event (see below). However, an application must be made to bring a voluntary liquidation under the supervision of the court (at which point it proceeds as an official liquidation) if any of the directors is unable or unwilling to swear the requisite statutory declaration of solvency or in certain other circumstances.

Answer ... Provisional liquidation: A creditor, shareholder, the company itself or (in respect of regulated businesses) CIMA can apply for the appointment of provisional liquidators between the presentation and the hearing of the winding up petition.

As mentioned above, the company, if properly authorised, can 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.

An application to appoint provisional liquidators can be made only following the presentation of a winding-up petition.

Official liquidation: A company may be wound up by the Grand Court if any of the following apply:

• 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 of association triggers the company’s winding up;
• The company is unable to pay its debts;
• The court decides that it is just and equitable for the company to be wound up;
• The company is carrying on a regulated business in the Cayman Islands and is not duly licensed or registered to do so; or
• Certain other grounds specified in regulatory and other laws.

The test of inability to pay debts for this purpose is a cash-flow test. The company’s balance sheet is irrelevant in this context. Based on earlier authorities, the cash-flow test in the Cayman Islands was generally regarded as being confined to debts which were presently due and payable. However, in Re Weavering Macro Fixed Income Fund Ltd. (in liquidation) [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’s comments were technically obiter, they are very likely to be followed by the Grand court, such that a Cayman company may be liable to be wound up if it is presently unable to pay its debts or if it will become so in the reasonably near future. What will constitute the ‘reasonably near future for the purposes of the test will be fact specific in each case.

If the debt claimed in the demand is disputed by the company in good faith and on substantial grounds, then it cannot form the basis of a winding-up petition.

Voluntary liquidation: A company can be wound up voluntarily in the following cases:

• The fixed period, if any, for the duration of the company in its memorandum or articles of association expires;
• An event occurs which the memorandum or articles of association provide is to trigger the company’s winding up;
• The company resolves by special resolution that it be wound up voluntarily; or
• The company resolves by ordinary resolution that it be wound up voluntarily because it is unable to pay its debts as they fall due.

Answer ... Provisional liquidation: A provisional liquidation will commence on the making of the appointment order; however, if a winding-up order is subsequently made, the winding-up will be deemed to have commenced at the time of presentation of the winding-up petition.

The effects of a provisional liquidation will depend on the terms of the appointment order, as provisional liquidators have only the powers granted to them in the appointment order. The scope of those powers will depend on the reason for their appointment. If a restructuring is proposed, then in some cases existing management will be allowed to remain in control of the company (subject to the supervision of the provisional liquidators and the Grand Court), in what are known as ‘light touch’ provisional liquidations. In other restructuring cases, the directors’ powers may be displaced entirely by the powers given to the provisional liquidators for the duration of the provisional liquidation.

Provisional liquidators are appointed and supervised by the Grand Court. The consent of stakeholders is not required, but their views on whether an appointment should be made and who should be appointed will or may (depending on the circumstances) be given weight by the Grand Court in the exercise of its discretion.

Official liquidation: Pursuant to Section 100 of the Companies Law, the winding-up of a company is deemed to commence at the time of the presentation of the winding-up petition, unless:

• a resolution has been passed by the company for voluntary winding up;
• the period, if any, fixed for the duration of the company by the articles of association has expired; or
• the event upon the occurrence of which it is provided by the articles of association that the company is to be wound up has occurred.

In the above cases, the winding up is deemed to have commenced at the time of passing of the resolution, the expiry of the relevant period or the occurrence of the relevant event.

The deemed commencement of a company’s winding up is relevant for calculating the relevant time periods for claims under brought pursuant to Section 99 and Section 145 of the Companies Law.

Voluntary liquidation: Pursuant to Section 117 of the Companies Law, a voluntary winding up is deemed to commence:

• at the time of passing of the resolution for winding up; or
• on the expiry of the period or the occurrence of the event specified in the company’s memorandum or articles of association.

(This notwithstanding, a supervision order may subsequently be made by the court.)

The directors are displaced by the voluntary liquidator on the commencement of a voluntary liquidation, except to the extent (if any) that the company (through a general meeting) or the voluntary liquidator sanctions the continuance of the directors’ powers. The directors may, however, be appointed as the voluntary liquidators, as there are no qualification requirements for the role.

A voluntary liquidator must apply to the Grand Court for an order that the liquidation continue under the court’s supervision unless, within 28 days of the voluntary liquidation commencing, the directors sign a declaration that the company will be able to pay its debts in full (with interest) within a period not exceeding 12 months after commencement of the voluntary liquidation. Even if such a declaration is made, the liquidator or any creditor or shareholder can apply to bring the liquidation under the Grand Court’s supervision in certain circumstances. If a voluntary liquidation is brought under the supervision of the Grand Court, it continues as an official liquidation which is deemed to have commenced on the commencement of the voluntary liquidation.

Answer ... Provisional liquidation: On the appointment of provisional liquidators, a statutory stay takes effect automatically pursuant to Section 97 of the Companies Law. No suit, action or other proceeding may be proceeded with or commenced against the company without the leave of the Grand Court. The stay does not prohibit secured creditors from enforcing their security.

Official liquidation: At any time between the presentation of a winding-up petition and the making of a winding-up order, the company or any creditor or shareholder may apply for an injunction to restrain further proceedings in any action or proceeding pending against the company in a foreign court. The application can be made to either:

• any Cayman Islands court in which proceedings are pending against the company; or
• the Grand Court.

On the making of a winding-up order, an automatic stay is imposed prohibiting any suit, action or other proceeding from being proceeded with, or commenced against, the company without the leave of the Grand Court. These stays and injunctions do not prohibit secured creditors from enforcing their security.

Voluntary liquidation: No protection from the company’s creditors is available during a voluntary liquidation. Voluntary liquidators are required to pay debts owed to creditors as they fall due. If they fail to do so, there is nothing to stop a secured creditor from enforcing its security or to prevent any creditor from commencing ordinary litigation or winding-up proceedings against the company.

Answer ... Provisional liquidation: If the purpose of the provisional liquidation is to protect the assets pending the hearing of a winding-up petition, the provisional liquidation is likely to be brief. The Grand Court aims to hear creditors’ winding-up petitions within six to eight weeks of the petition being filed.

If the purpose is to enable a restructuring, it is typical for the winding-up petition to be listed for hearing within one to three months, so as to allow time for an initial assessment of whether a restructuring is viable. If it does not appear to be viable, the company will typically be wound up at that first hearing. If it appears that a restructuring may be viable, the Grand Court will typically adjourn the petition for one or more fixed periods to allow the restructuring to proceed. The length of the provisional liquidation will vary in these circumstances, but it could last for up to a year (or longer) in more complex cases.

Official liquidation: The duration of official liquidation proceedings depends on the nature of the assets and the complexity of the issues. There is no maximum period within which liquidation must be completed.

Voluntary liquidation: The duration of a voluntary liquidation depends on how complicated the winding-up process is, but it will typically be substantially shorter than an official liquidation. The statute contemplates that all creditors in a voluntary liquidation will be paid in full within 12 months by imposing an obligation to apply to bring the liquidation under the Grand Court’s supervision unless all directors swear a statutory declaration of their belief that the company will be able to do so.

Answer ... Provisional liquidation: Provisional liquidators are appointed and supervised by the Grand Court. The consent of stakeholders is not required, but their views on whether an appointment should be made and who should be appointed will or may (depending on the circumstances) be given weight by the Grand Court in the exercise of its discretion.

Provisional liquidators have only the powers granted to them in the appointment order. The scope of those powers will depend on the reason for their appointment. If a restructuring is proposed, then in some cases existing management will be allowed to remain in control of the company (subject to the supervision of the provisional liquidators and the Grand Court) in what are known as ‘light touch’ provisional liquidations. In other restructuring cases, the directors’ powers may be displaced entirely by the powers given to the provisional liquidators for the duration of the provisional liquidation.

The Grand Court may (or may not) direct that a provisional liquidation committee be established. The principal functions of a committee are to act as a sounding board for the provisional liquidators and to review their fees.

Official liquidation: Under the common law, a winding-up order serves to terminate all contracts of employment of the company in official liquidation. It also has the effect of terminating agencies and dismissing the company’s directors. It puts an end to the directors’ powers of management; thus, they cannot make calls.

Official liquidators must be qualified insolvency practitioners resident in the Cayman Islands or foreign practitioners appointed jointly with a resident qualified insolvency practitioner. They displace the company’s directors and control the company’s affairs, subject to the Grand Court’s supervision. Certain of their powers are exercisable without the sanction of the court, whereas others cannot be exercised without court sanction.

A liquidation committee is required to be established in every official liquidation, unless the Grand Court orders otherwise. The principal functions of a committee are to act as a sounding board for the official liquidators and to review their fees. A liquidation committee will consist of creditors (in an insolvent liquidation), contributories (in a solvent liquidation) or a mixture of both (in a liquidation of doubtful solvency).

Secured creditors: Section 142 of the Companies Law and Companies Winding-up Rules Order 17 specifically provide that a creditor with security over the whole or part of the assets of a company is entitled to enforce its security without the leave of the Grand Court and without reference to the company’s liquidator.

There is therefore no stay of any kind against secured creditors in any type of liquidation, although the secured creditor’s exercise of its rights will be subject to the applicable terms of any inter-creditor agreement entered into by the secured creditor.

A secured creditor’s remedies will depend principally on the terms of its security document, but typically this might include the right to appoint a receiver over a charged asset.

Answer ... Provisional liquidation: There is no statutory mechanism for dealing with the submission and/or adjudication of creditors’ claims during a provisional liquidation or for setting or netting off claims. If the provisional liquidation is being used to preserve assets pending a winding up, then claims will be submitted and adjudicated in the official liquidation (as to which, see below). If the provisional liquidation has been commenced for the purpose of a restructuring, the scheme of arrangement (or other form of compromise or arrangement) will address the process for submitting and adjudicating claims. In either case, claims may be traded during the provisional liquidation, subject to any contractual restrictions.

Official liquidation: Where a solvent company is being wound up by the court, the official liquidator must pay its creditors in the ordinary course and in the currency of the obligation as if the company were still carrying on business.

Where a company which is insolvent or of doubtful solvency is being wound up by the court, a person claiming to be a creditor of the company (including contingent creditors) claim by submitting a ‘proof of debt’ for review by the liquidator. In reviewing such proofs, the liquidator acts in a quasi-judicial capacity. The proof of debt contains details of the amount owed, including the basis for the debt and any interest owed. The liquidator may require further evidence to be submitted by the creditor before accepting (either in full or in part) or rejecting the claim. A creditor has a right of appeal in relation to any decision taken by a liquidator in relation to its proof of debt (including in relation to questions of priority). In addition, other creditors (or the liquidator himself) may, in certain circumstances, apply to expunge a proof which has been admitted by the liquidator.

All debts payable on a contingency and all claims against the company, whether present or future, certain or contingent, ascertained or sounding only in damages, are admissible to proof against the company. Official liquidators are required to make a just estimate, so far as is possible, of the value of all such debts or claims as may be subject to any contingency or sound only in damages or which for some other reason do not bear a certain value.

There is no prohibition on the trading or assignment of creditor claims within an official liquidation, subject to any contractual restrictions. Shareholders, however, require the leave of the court and the consent of the liquidator before they can transfer their shares to third parties.

Voluntary liquidation: The voluntary liquidator is required to pay claims in full and, as noted above, there is no moratorium preventing a creditor from commencing ordinary litigation or winding-up proceedings in respect of its claim. In the event of a dispute in respect of an actual or contingent claim, this would need to be determined by whichever court or arbitral tribunal has jurisdiction over the claim. Claims may be traded during a voluntary liquidation, subject to any contractual restrictions.

There is no statutory set-off or netting off which applies during a voluntary liquidation; nor is there any procedure for adjudicating creditors’ actual or contingent claims.

Answer ... The basic statutory order of priorities in a liquidation is as follows:

• liquidation expenses;
• preferential debts, comprising:
• • certain sums due to or payable on behalf of employees;
  • certain taxes due to the Cayman Islands government; and
  • for certain Cayman Islands banks, certain sums due to depositors;
• unsecured debts which are not subject to subordination or deferral agreements (with contractually subordinated/deferred debts being paid in accordance with the subordination agreement);
• amounts due to preferred shareholders under the company’s articles of association, provided that the rights of those shares are preferred to the rights of the shares referred to below;
• debts incurred by the company in respect of the redemption or purchase of its own shares (although it remains an open question whether such claims arising where the redemption or purchase took place before the liquidation commenced rank ahead of or pari passu with such claims where the shares were due to be redeemed before the liquidation commenced, but were not redeemed due to the company’s default); and
• any surplus remaining after payment of the above amounts is returned to the shareholders of the company in accordance with its articles of association or any shareholders’ agreement.

Pursuant to Section 140 of the Companies Law, the collection and distribution of the company’s assets is without prejudice to, and after taking into account and giving effect to, the rights of preferred and secured creditors, and to any agreement between the company and any creditors that the claims of such creditors shall be subordinated or otherwise deferred to the claims of any other creditors and to any contractual rights of set-off or netting of claims between the company and any person or persons (including, without limitation, any bilateral or multilateral set-off or netting arrangements between the company and any person or persons), and subject to any agreement between the company and any person or persons to waive or limit the same. In the absence of any contractual right of set-off or non-set-off, an account is taken of what is due from each party to the other in respect of their mutual dealings, and the sums due from one party shall be offset against the sums due from the other.

Answer ... Liquidators have no statutory power to disclaim onerous contracts under Cayman law. The parties are therefore obliged to perform their outstanding obligations, although in practice a liquidator might elect not to do so and instead to adjudicate whatever claim the contractual counterparty seeks to prove in the liquidation as a result of the breach. Liquidators are required to give effect to any contractual rights of set-off or netting of claims between the company and any persons, subject to any agreement to waive or limit such rights. In the absence of any set-off provision, account must be taken of what is due from each party to the other in respect of their mutual dealings and set-off is applied in relation to those amounts.

Answer ... The principal applicable statutory provisions are Sections 99 (avoidance of property dispositions), 145 (voidable preference), 146 (avoidance of dispositions at an undervalue) and 147 (fraudulent trading) of the Companies Law.

Section 99 provides that any dispositions of a company’s property (or transfers of its shares) made after the deemed commencement of the winding up will be void in the event that a winding-up order is subsequently made, unless validated by the court. The liquidator is entitled to apply for appropriate relief to require the repayment of the funds or the return of the asset.

Pursuant to Section 145, any payment or disposal of property to a creditor constitutes a voidable preference if:

• it occurs in the six months before the deemed commencement of the company’s liquidation and at a time when it is unable to pay its debts; and
• the dominant intention of the company’s directors was to give the applicable creditor a preference over other creditors.

A payment or disposition is deemed to have been made to give the creditor a preference where the creditor has the ability to control the company or exercise significant influence over it in making financial and operating decisions.

If a payment or disposition is set aside as a preference, then it is void and the creditor will be required, on application by the liquidator, to return the payment or asset and prove (claim) in the liquidation for the amount of its claim.

Section 146 provides that transactions in which property is disposed of at an undervalue with the intention of wilfully defrauding a company’s creditors are voidable on the application of the liquidator. This is subject to the application being brought within six years of the disposal. If a transferee has not acted in bad faith, then although the disposition will be set aside, the transferee’s pre-existing rights and claims will be preserved, and it will be entitled to a charge over the property securing the amount of costs which it properly incurs defending the proceedings.

If the business of a company was carried on with intent to defraud creditors or for any fraudulent purpose, then pursuant to Section 147, a liquidator may apply for an order requiring any persons that were knowingly parties to such conduct to make such contributions to the company’s assets as the court thinks proper.

Lastly, transactions made by a company in financial difficulty and in breach of the directors’ fiduciary duties may also be vulnerable to claims based on dishonest assistance or knowing receipt.

Answer ... Provisional liquidation: Provisional liquidation is ended by court order. This is usually as a result of either:

• a winding-up order being made (in which case the company is dissolved on conclusion of the liquidation); or
• an order dismissing or withdrawing the winding-up petition (in which case the company continues to exist).

The court can also order an earlier termination of the provisional liquidator’s appointment either:

• on application by the provisional liquidator, the petitioner, the company, a creditor or a shareholder; or
• if an appeal against the provisional liquidator’s appointment succeeds.

Official liquidation: When the affairs of a company in official liquidation have been fully wound up, the Grand Court makes an order, on the liquidators’ application, that the company be dissolved from the date specified in the order.

Voluntary liquidation: As soon as the affairs of a company in voluntary liquidation have been fully wound up, the liquidators must call a general meeting of the company to present their account of the voluntary liquidation. They must then file a return with the registrar and the company is deemed to have been dissolved three months after the return’s registration date.

Once a company has been dissolved following a voluntary or official liquidation, none of its liabilities will survive. A company that has been dissolved following a voluntary or official liquidation cannot be restored as a matter of Cayman Islands law (see Schramm and Hiscox Syndicate 33 v Financial Secretary [2004–05 CILR 39]).

Answer ... Winding-up petitions and provisional liquidation applications may be presented against foreign companies which:

• carry on business or have property located in the Cayman Islands;
• are the general partner of a limited partnership registered in the Cayman Islands; or
• are registered as foreign companies under Part IX of the Companies Law.

In addition, the Grand Court has jurisdiction to sanction a scheme in respect of a company that is liable to be wound up by the Cayman Islands court. The recent restructuring of four companies in the Ocean Rig group shows that the Grand Court has jurisdiction to scheme foreign incorporated companies and that it will do so in appropriate circumstances. The Ocean Rig restructuring is particularly notable as it also involved a pre-filing shift of the scheme companies’ centre of main interests from the Marshall Islands to the Cayman Islands (where the companies had no longstanding connections) in order to ensure that recognition of the scheme and the associated Cayman provisional liquidations was obtained in the United States Bankruptcy Court).

Answer ... Pursuant to Part XVII of the Companies Law, on an application by a foreign representative (defined as a trustee, liquidator or other official appointed for the purposes of a foreign bankruptcy proceeding), the Grand Court can make orders ancillary to the foreign bankruptcy proceedings to:

• recognise the foreign representative’s right to act in the Cayman Islands on behalf, or in the name, of the debtor;
• grant a stay of proceedings or the enforcement of a judgment against the debtor;
• require certain persons with information concerning the debtor’s business or affairs to be examined by, and produce documents to, the foreign representative; and
• order the turnover of the debtor’s property to the foreign representative.

In determining whether to make these orders, the Grand Court must look to assure an economic and expeditious administration of the debtor’s estate, consistent with:

• the just treatment of all holders of claims wherever they are domiciled, in accordance with established principles of natural justice;
• the protection of claims holders in the Cayman Islands against prejudice and inconvenience in the processing of claims in foreign proceedings;
• the prevention of preferential or fraudulent dispositions of property in the debtor’s estate;
• the distribution of the estate among creditors substantially in accordance with the statutory order of priority;
• the recognition and enforcement of security interests created by the debtor;
• the non-enforcement of foreign taxes, fines and penalties; and
• comity (mutual recognition and cooperation concerning legal decisions).

It is common for international bankruptcies and liquidations to involve the Cayman Islands.

Answer ... Protocols between the Grand Court and foreign courts (as opposed to their respective officers) are very rare in practice and are not expressly provided for in Cayman Islands legislation.

Answer ... A restructuring procedure may be utilised to reorganise a corporate group on a combined basis for administrative efficiency. A separate scheme will be required for each scheme company, but the procedure can be coordinated and streamlined by the Grand Court to minimise inefficiencies.

Concurrent liquidation proceedings in respect of several group companies can be coordinated by the Grand Court to avoid duplication and improve efficiency and cost effectiveness. In certain circumstances, the Grand Court may order the pooling of assets and liabilities of group companies; but this is rare in practice.

Answer ... The Cayman Islands has elected not to adopt the United Nations Commission on International Trade Law Model Law on Cross-Border Insolvency, which uses the concept of ‘centre of main interests’. As such, the question of centre of main interests is not directly relevant in the Cayman Islands. Under Part XVII of the Law, the Grand Court has a statutory jurisdiction to recognise and assist foreign representatives appointed in the place of a company’s incorporation. In addition, the Grand Court has a common law power to recognise and assist foreign court-appointed representatives.

Answer ... There are no alternative procedures that apply to foreign creditors. All creditors are treated equally regardless of where they are domiciled.

Answer ... As a general principle of Cayman Islands law, directors’ duties are owed to the company, rather than directly to shareholders or creditors. A number of duties might be engaged in circumstances of financial difficulty, but the fiduciary duty to act in the best interests of the company will always be relevant. What is meant by the best interests of the company in times of financial difficulty was considered in Prospect Properties v McNeill [1990-91 CILR 171]. In Prospect Properties the Grand Court, following the well-known line of English authorities, held that where a company is insolvent or of doubtful solvency, the directors’ duty to act in the best interests of the company requires them to have regard to the interests of its creditors. It is in the interests of the creditors to be paid and it is in the interests of the company to be safeguarded against being put in a position where it is unable to pay. Although there is no point prescribed by statute at which a company must enter into a restructuring or insolvency process, directors can be made personally liable to the company for any losses which they cause to the company if they act in breach of that duty. An example of this might be incurring additional liabilities when they knew or should have known that there was no reasonable prospect of the company avoiding insolvent liquidation.

Answer ... Guarantees: Where a director has provided a guarantee to a creditor in relation to the company’s debts, that creditor can enforce the guarantee against the guarantor personally.

Fraudulent trading: This can apply where it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose. On the liquidator’s application, the court can declare any persons who were knowingly party to the carrying on of the business in that manner to be liable to make such contributions to the company’s assets as the court thinks proper.

Common law or equitable duties: A fiduciary obligation arises as a result of the relationship between the company and its director. As a result, a director has a duty to act in the best interests of the company at all times. If a director acts in breach of these fiduciary duties to the company, he or she is liable to the company for damages in relation to that breach. Damages are assessed by reference to the loss that the company has suffered as a result of the breach.

Directors can also be liable in damages to the company for negligence if they breach their common law duties of skill and care to the company.

Misfeasance proceedings: Various offences in connection with the management, operation and liquidation of a company are punishable by a fine and/or imprisonment for up to five years, including:

• where a director (including a shadow director), in the 12 months before the liquidation (and with the intention of defrauding the company’s creditors or shareholders):
• • concealed or removed any part of the company’s property worth over CI$10,000;
  • concealed any debt due to or from the company;
  • concealed, destroyed, mutilated, falsified, made any false entry in, parted with, altered or made any omission in any documents affecting or relating to the company’s property or affairs; or
  • pawned, pledged or disposed of any property of the company which was obtained on credit and was not paid for (unless done in the ordinary course of business); or
• where a company is being wound up and a director, at any time (and with the intention of defrauding the company’s creditors or shareholders), either:
• • made or caused to be made any gift of, transfer of or charge on, or took part in the levying of any execution against, the company’s property; or
  • concealed or removed any part of the company’s property.

There are various other offences for which a director (including a shadow director) is liable if he or she commits a prescribed act or omission during the course of the winding-up with the intention of defrauding the company’s creditors or shareholders.

A creditor can bring a claim directly against the directors only if the directors had voluntarily assumed a direct duty to the creditor. Once the company has entered into official liquidation, claims against directors for breach of their fiduciary duty to the company will be pursued by the liquidator in the name of the company. It is common for the articles of association of Cayman Islands companies to indemnify and hold harmless directors in respect of liability for non-intentional wrongdoing.

Answer ... A Cayman company is a legal entity that is separate and distinct from the individual members of the company. The court will pierce the corporate veil only in exceptional circumstances, where it is shown that it is a mere facade concealing the true facts. The doctrine of piercing the corporate veil will generally be invoked only where a person is under an existing legal obligation or liability or subject to an existing legal restriction which he or she deliberately evades or whose enforcement he or she deliberately frustrates by interposing a company under his or her control (eg, see Prest v Petrodel Resources Ltd [2013] UKSC 34 at [35]).

However, a ‘shadow director’ is defined under the Companies Law as “any person in accordance with whose directions or instructions the directors of the company are accustomed to act, but the person is not deemed to be a shadow director by reason only that the directors act on advice given by that person in a professional capacity”. Certain provisions of the Companies Law are expressly stated to apply to shadow directors, including those sections which deal with fraud committed prior to the commencement of a company’s liquidation, misconduct in the course of the winding-up and the production of the company’s statement of affairs.

If the debtor entity is a partnership, then its partners may be liable for the partnership’s debts. Further, parties (eg, other group entities) may be liable for the debtor’s debts pursuant to any contractual agreements that have been entered into.

Answer ... It is possible to effectuate pre-negotiated sales transactions following the commencement of a statutory procedure, but Grand Court approval will be required in a provisional or official liquidation.

Scheme: If a scheme is implemented when the company is not in provisional liquidation, the sale will be executed by the duly authorised representatives of the company – that is, typically, its directors. If the scheme is implemented when the company is in provisional liquidation, the terms of the appointment order (or subsequent orders) will determine whether and to what extent the sale is executed by the directors or by the provisional liquidators. In either case, the company will transfer only such right, title and interest as it had in the assets. In particular, any security over the assets will remain in place, unless it was compromised by the scheme.

Liquidation: Within a liquidation, the sale of a company’s assets (or the business itself) is effected by the liquidator. All contractual agreements relating to the sale will need to be executed by the company acting through its liquidator (without personal liability). In a provisional or official liquidation, the power to sell the company’s property may be exercised only with the sanction of the Grand Court.

A purchaser will obtain only such right, title and interest in any assets sold as the company itself holds, and the liquidators will be unlikely to give any representations or warranties as to the title of such assets, such that any existing proprietary claims by third parties will continue to be enforceable.

Answer ... Creditors may bid for assets and act as a stalking horse in a sale process. No specific rules apply to bids by creditors; but if the restructuring is happening in a provisional liquidation, the Grand Court will need to approve the sale. In doing so, it will consider the sales process as part of its assessment of whether the creditor’s bid represents the best deal available in the circumstances.

Answer ... In 2018 the Cayman Islands recorded 65 petition filings across all categories, compared to 57 in the previous year, with 45 converting into orders. Although the number of petition filings for schemes of arrangement and reductions of share capital fell, petitions to place a company under court-supervised liquidation or be wound up were close to their highest recorded levels.

Full data is not available for 2019, but we have not yet noticed any distinct trends 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, with 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.

Answer ... Whenever a restructuring is contemplated, it is vital to seek legal advice at the earliest possible opportunity, so as to be able to pre-emptively address any issues that are likely to arise (eg, the need for a shift in the centre of main interests). Clear and open communication with stakeholders is also crucial; this helps to ensure that a proposed scheme will actually be viable and will secure the necessary stakeholder support, and also helps to ensure that creditors take no steps which would render any potential scheme nugatory and/or generate negative publicity.