1. Market Trends and Developments
1.1 The State of the Restructuring Market
In 2019, a total of six restructuring petitions were filed in the Grand Court of the Cayman Islands. Of these, three related to share capital reductions and two related to schemes of arrangement. In addition, one petition related to both a share capital reduction and a scheme of arrangement. This compares to a total of nine restructuring petitions filed in 2018 and 17 restructuring petitions filed in 2017, which demonstrates a significant slow-down in financial restructurings over that period.
In addition, 33 insolvency petitions were filed in 2019, of which 24 sought winding-up orders and the other nine sought orders bringing voluntary liquidations under the supervision of the court. This compares to a total of 56 insolvency petitions filed in 2018.
The impact of COVID-19 on the restructuring market in Cayman has yet to be seen and is something that will probably only become apparent over the course of the next 12-18 months. However, in one recent case (re Obelisk Capital Management Limited –unreported), a petitioner presented a winding-up petition on the basis of an unpaid statutory demand presented in February 2020. The company argued that the restrictions on its business implemented as a result of COVID-19 represented an exceptional circumstance which justified its inability to pay the statutory demand. However, the Petitioner was able to show that the relevant restrictions post-dated the date on which payment was in fact due and, accordingly, the court determined that it was appropriate to make a winding-up order.
2. Statutory Regimes Governing Restructurings, Reorganisations, Insolvencies and Liquidations
2.1 Overview of Laws and Statutory Regimes
Corporate insolvency in the Cayman Islands is governed by Part V of the Companies Law (2020 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 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. Where there is no applicable Cayman Islands case law, the Cayman courts will look to English authorities. Decisions of English courts are not binding, but as a general rule they will be followed to the extent that they are not inconsistent with 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 Restructurings, Reorganisations, Insolvencies 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
If a Cayman company is insolvent or of doubtful solvency, its directors have a fiduciary duty to act with regard to the interests of its creditors. Therefore, in these circumstances they must have regard to whether it is in creditors' interests for insolvency proceedings to be instigated.
Directors also have a duty to commence insolvency proceedings if directed to do so by a resolution of the shareholders or a provision within the company's articles. Failure to commence insolvency proceedings could expose the directors to a liability in damages for losses suffered by the company as a result of their breach of duty
The only statutory obligation to commence insolvency proceedings arises when a company goes into voluntary liquidation and directors have not unanimously sworn declarations to the company's solvency within 28 days. In these circumstances, 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
While the Companies Law does not impose a penalty on a voluntary liquidator for failure to file a petition, it does impose a penalty of up to KYD10,000 (approximately USD12,200) and imprisonment for up to two years on directors who make a declaration of solvency without reasonable grounds.
2.4 Commencing Involuntary Proceedings 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. 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 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.
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 windingup petition.
A creditor, shareholder or (in respect of a regulated business) the CIMA may apply (usually ex parte) if 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 if the company is, or is likely to become, unable to pay its debts and intends to present a compromise or arrangement to its creditors.
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) the 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 nonpetition clauses. In addition, shareholders must be registered in the company's register of members and have either inherited, been allotted the shares, or been registered as their holder for at least six months.
A company may be wound up by the Grand Court under any of the grounds set out in section 92 of the Companies Law. Most commonly, companies are wound up on the grounds that:
- the company is unable to pay its debts (see 2.5 Requirement for Insolvency); and
- it is just and equitable for the company to be wound up
2.5 Requirement for Insolvency
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 in2.4 Commencing Involuntary Proceedings.
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". What constitutes the "reasonably near future" will be specific to each case.
2.6 Specific Statutory Restructuring and Insolvency Regimes
Although there are no statutory restructuring and insolvency regimes applicable to specific types of entity or business, the CIMA does have the power to appoint controllers (with a wide range of powers) over banks, trust companies, regulated mutual funds and licensed fund administrators.
Originally Published by Chambers & Partners.
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