The Cayman Islands is a well-established insolvency jurisdiction under which all unsecured creditors in an insolvency proceeding must be treated pari passu; that is they share equally in the available assets of the company in liquidation in proportion to the debts due to each creditor regardless of their domicile or nationality, subject only to certain limited exceptions.
Laws Relating to Liquidations in the Cayman Islands
The laws of the Cayman Islands relating to corporate insolvency are governed by the Companies Law (2018 Revision) (the "Companies Law") and the Companies Winding Up Rules 2018 (the "CWR").
PARI PASSU Principle And Order Of Distribution
In a winding-up under Cayman Islands law, the property of the company must be applied in satisfaction of its liabilities pari passu (as mentioned above, the principle that all unsecured creditors must share equally in the assets or proceeds of the company in the proportion the debts are due) and thereafter will be distributed to the members according to their rights and interests.
This fundamental principle of Cayman Islands winding up proceedings is set out in Section 140(1) of the Companies Law, which provides:
"Subject to subsection (2), the property of the company shall be applied in satisfaction of its liabilities pari passu and subject thereto shall be distributed amongst the members according to their rights and interests in the company."
The satisfaction of the company's liabilities on the pari passu basis is subject to certain limited exceptions, which are set out in Section 140(2) of the Companies Law, which provides:
"The collection in and application of the property of the company referred to in subsection (1) 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 any multi-lateral 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."
The specific rights of secured and preferred creditors, as well as creditors with rights of subordination, set-off or netting arrangements are addressed below.
An asset subject to a valid security interest falls outside of the liquidation (i.e. it is not an asset that will be realised by the liquidator unless consent is given by the secured creditor to do so) and the secured creditor can enforce its security at any time. The granting of an order for the winding-up of a company does not affect a secured creditor's rights. This is set out in Section 142(1) of the Companies Law, which provides:
"Notwithstanding that a winding up order has been made, a creditor who has security over the whole or part of the assets of a company is entitled to enforce his security without the leave of the Court and without reference to the liquidator."
Preferential claims are set out in Schedule 2 to the Companies Law, and broadly encompass employee's claims (for example, certain salaries due to employees, payment in respect of medical health insurance premiums, severance pay and workman compensation), sums due to governmental or quasi-governmental bodies in the Cayman Islands, and sums due to small depositors in a bank. Preferential debts shall be paid in priority to the claims of any unsecured creditors. This is reflected in Section 141(1) of the Companies Law, which provides:
"In the case of an insolvent company, the debts described in Schedule 2 shall be paid in priority to all other debts."
Specifically, the list of categories of preferred debts, as set out in Schedule 2 of the Companies Law, is as follows:
Category 1: Debts due to employees
This includes (i) any sum due by the company to an employee, whether employed in the Cayman Islands or elsewhere, in respect of salaries, wages and gratuities accrued during the four months immediately preceding the liquidation; (ii) any sum due and payable by the company on behalf of an employee in respect of medical health insurance premiums or pension funds contributions; (iii) severance pay and earned vacation leave as a result of the company going into liquidation; (iv) any compensation arising out of the Workmen's Compensation Law (1996 Revision); and (v) any other sums due to the employee arising from the breach of his contract or any tortious claim against the company.
Category 2: Debts due to bank depositors
This includes any sum due to eligible depositors who have deposits with a company which is incorporated in the Cayman Islands and held an "A" licence issued under the Banks and Trust Companies Law (2018 Revision) and which does not exceed the deposit limit of twenty thousand dollars or its equivalent in any foreign exchange rate. The depositors who are not eligible include, inter alia, those who in the opinion of the Court may profit from the winding up, directors, controllers, managers and corporations which are a parent or subsidiary of the bank in question.
Category 3: Taxes due to the Government
This includes sums due in respect of (i) duty and penalties payable under the Customs Law (2017 Revision); (ii) fees payable under the Companies Law; (iii) duty and penalties payable under the Stamp Duty Law (2013 Revision); (iv) license fees payable under the regulatory laws; and (v) taxes payable under the Tourist Accommodation (Taxation) Law (2013 Revision).
Preferential debts shall rank equally amongst themselves and be paid in full unless the assets available, having exercised any rights of set-off or netting of claims are insufficient to meet them, in which case they shall abate in equal proportions. This is reflected in Section 141(2)(a) of the Companies Law, which provides:
"The preferential debts shall-
(a) rank equally amongst themselves and be paid in full unless the assets available, after having exercised any rights of set-off or netting of claims, are insufficient to meet them in which case they shall abate in equal proportions;..."
If there are insufficient assets to make payment of preferential debts, the preferential debts shall have priority over the claims of holders of debentures secured by, or holders of, any floating charge issued by the company. This is reflected in Section 141(2)(b) of the Companies Law, which provides:
"The preferential debts shall-
(b) so far as the assets of the company available for payment of general creditors are insufficient to meet them, have priority over the claims of holders of debentures secured by, or holders of any floating charge created by the company, and be paid accordingly out of any property comprised in or subject to that charge." (Emphasis added).
Subordinated and Deferred Claims
Any agreement made between the company and a creditor prior to the commencement of the winding up that the claims of such creditor be subordinated or otherwise deferred to the claims of other creditors are binding on the company in liquidation and shall be enforced by the liquidator. 1
Set-Off and Netting Arrangements
Any contractual right of set-off or non set-off or netting arrangement agreed between the company and creditor prior to the commencement of the liquidation are binding on the company in liquidation and shall be enforced by the liquidator.2
Notwithstanding this position, even if before the commencement of the liquidation the company has not concluded any set-off, non set-off or netting agreement with the creditor, provided that there have been mutual credits, mutual debts or other mutual dealings between the company and the creditor, the liquidator is able to take an account of what is due from each party to the other in respect of those mutual dealings and apply a set off of the sum due from one party against the sums due from the other.3
The only exception to this is if the other party had actual notice at the time the sums became due that a winding up petition had been presented and was pending against the company.4
These principles are also set out in Sections 140(3)-(4) of the Companies Law, which provide:
Section 140(3) of the Companies Law
"In the absence of any contractual right of set-off or non set-off, an account shall be 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 set-off against the sums due from the other."
Section 140(4) of the Companies Law
"Sums due from the company to another party shall not be included in the account taken under subsection (3) if that other party had notice at the time they became due that a petition for the winding up of the company was pending."
Once the set off is applied, if there is a balance in favour of the creditor, then that amount is provable in the liquidation. Alternatively, if there is a balance in favour of the company, then that amount shall be paid to the liquidator. 5 This is also reflected in Section 140(5) of the Companies
Law, which provides:
"Only the balance, if any, of the account taken under subsection (3) shall be provable in the liquidation or, as the case may be, payable to the liquidator as part of the assets."
Interest on debts in Cayman Islands insolvency proceedings is dealt with at Section 149 of the Companies Law. Any surplus remaining after the payment of debts proved in a winding up shall be applied in paying interest on those debts; and all interest ranks equally, whether or not the debts on which it is payable ranked equally. This is set out in Sections 149(2)-(3) of the Companies Law, which provides:
Section 149(2) of the Companies Law
"Any surplus remaining after the payment of the debts proved in a winding up shall, before being applied for any other purpose, be applied in paying interest on those debts in respect of the period during which they have been outstanding since the company went into liquidation."
Section 149(3) of the Companies Law
"All interest under this section ranks equally, whether or not the debts on which it is payable ranked equally."
Summary of Order of Distribution
In summary, the assets of a company will be distributed according to the following order of priority:
(a) First, in satisfaction of the rights of fixed charge creditors (although such assets are, strictly speaking, outside of the liquidation) (Section 140(2) of the Companies Law);
(b) Secondly, in satisfaction of the claims of preferred creditors (to the extent that there are insufficient assets to make payment of all preferential debts) (Section 140(2) of the Companies Law);
(c) Thirdly, in satisfaction of the claims of floating charge creditors (Section 140(2), Section 141(1) of the Companies Law);
(d) Fourthly, in satisfaction of the provable debts of the unsecured creditors of the company (but having regard to priority where a creditor is subordinated to other creditors) (Section 140(1) of the Companies Law);
(e) Fifthly, in paying statutory interest on the proved debts (Section 149(2) of the Companies Law); and
(f) Sixthly, distribution of surplus assets to shareholders in accordance with their rights and interests.
Adjudication of Proof of Debt and Right of Appeal
Adjudication of Proof of Debt
A person claiming to be a creditor of a company and wishing to recover his debt must submit his claim in writing to the liquidator. The document by which this is achieved is referred to as a "Proof of Debt." 6 It is the duty of the official liquidator to adjudicate the creditors' claims, for which purpose he acts in a quasi-judicial capacity.7
The following matters must be stated in a creditor's proof of debt:
(a) the creditor's name and address;
(b) the total amount of his claim as at the date on which the company went into liquidation;
(c) whether or not the claim includes interest and, if so, the basis upon which the creditor claims to be entitled to interest;
(d) particulars of how and when the debt was incurred by the company; and
(e) particulars of the security held by the creditor, the value which he puts on the security and the basis of his valuation.8
A foreign creditor may submit a proof of debt just like any domestic creditor, and will not be discriminated against according to their domicile or nationality, save that debts relating to foreign taxes, fines or penalties, or any other debts the enforcement of which might offend Cayman Islands public policy will not be provable in a Cayman Islands liquidation.
Copies of all the documents evidencing the existence and amount of the debt must be annexed to the proof of debt.9 If the liquidator requires any further information and/or supporting documents he may request this from the creditor.10 The liquidator may also require that a proof of debt be verified by affidavit.11
A proof of debt may be varied or withdrawn at any time, provided there is an agreement between the creditor and the liquidator to that effect.12
The liquidator may either (i) admit the proof of debt in full or part; or (ii) reject the proof of debt. If the proof of debt is rejected either in full or part, the liquidator must provide a statement of his reasons, and must also notify the creditor of his right to apply to the Court for the decision to be reversed or varied.13
Appeal of Decision by Liquidator to Reject Proof of Debt
Creditors have 21 days within which to appeal to the Court against a rejected proof of debt.
The relevant procedure for appealing is set out in Order 16, Rule 18 of the CWR as follows:
"(1) An appeal to the Court under Rule 17 shall be made within 21 days of the date upon which he received the official liquidator's notification under Rule 6.
(2) Every appeal under this Rule shall be made by summons in CWR Form No 30 and shall be served on the official liquidator.
(3) Every appeal under this Rule shall be supported by an affidavit...
(5) An appeal under this Rule shall be treated as a de novo adjudication of the creditor's proof and the creditor may rely upon additional evidence in support of his claim, notwithstanding that he failed to make such evidence available to the official liquidator."
If the creditor is dissatisfied with the Court's determination of its claim pursuant to the above process, it may appeal to the Cayman Islands Court of Appeal as a matter of right.14 Thereafter, a final appeal may be made to the Judicial Committee of the Privy Council in England, which is the final appellate court for the Cayman Islands.
1 O. 16, r.9(1) CWR.
2 O. 16, r.9(2) CWR
3 O. 16, r.10(2) CWR and Section 140(3) of the Companies Law.
4 O. 16, r.10(3) CWR and Section 140(4) of the Companies Law.
5 O. 16, r.10(4) CWR
6 The liquidators must advertise in appropriate newspapers for creditors to submit proofs of debt in the liquidation. The advertisement will usually specify a time period by which they must do this, although that deadline is not binding and therefore generally does not act as a limitation period.
7 O. 16, r.1(4) CWR.
8 O. 16, r.2(3) CWR.
9 O. 16, r.2(4) CWR.
10 O. 16, r.2(5) CWR.
11 O. 16, r.2(7) CWR.
12 O. 16, r.5 CWR.
13 O. 16, r.6 CWR
14 Section 6(f)(v) of the Court of Appeal Law (2011 Revision).
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.