I INSOLVENCY LAW, POLICY AND PROCEDURE
i Statutory framework and substantive law
The Cayman Islands is an overseas territory of the United Kingdom and the legal system is an English-style common law system, which comprises statute law and binding case precedents.2
The principal statute governing corporate insolvencies and restructurings is the Companies Law (2013 Revision)(as amended) (the Companies Law). This is supplemented and supported by the regulations set out in the Companies Winding Up Rules (2008 Revision) (as amended) (CWR).
The fundamental principle underlying Cayman Islands insolvency law is the pari passu treatment of unsecured creditors. Generally,3 unsecured creditors share equally in those assets of an insolvent company that are available for distribution.
The Companies Law provides for a range of avoidance or clawback provisions designed to give effect to the pari passu principle and protect company property, including the ability to avoid preferential payments to creditors.4
The Cayman Islands is a leading jurisdiction for the formation of investment funds (hedge and private equity funds), structured finance vehicles and Cayman Islands companies, partnerships and trusts. The Cayman Islands legal system is creditor and investor-friendly and has a strong court system, including a separate division within the Grand Court to hear commercial disputes. The Cayman Islands also has a stable political and economic environment, in addition to an established professional infrastructure that is known for its responsiveness and efficiency.
The Cayman Islands is a tax-neutral jurisdiction. Each investor in a Cayman Islands fund or company is responsible for paying tax in his or her home country, a process with which the Cayman Islands government assists by cooperating with tax authorities from other nations and promoting transparent banking. Such structures, however, do not impose material costs in the Cayman Islands on investors at the company or fund level.
Key policy considerations for assisting the Cayman Islands’ financial services industry include the protection of creditors’ rights and certainty as to the enforceability of contractual rights on insolvency. By way of example, the Companies Law specifically recognises and protects the rights of secured creditors to enforce their security in accordance with its terms, despite the debtor’s insolvency, and secured creditors can realise their security outside any Cayman Islands insolvency process commenced in relation to the debtor.
In addition, the Companies Law specifically recognises that bilateral and multilateral arrangements regarding set-off or netting between a company and any person or persons are enforceable on the company’s insolvency,5 and that non-petition covenants given by creditors will be enforceable.6
iii Insolvency procedures
The insolvency and rescue procedures available under Cayman Islands law are:7
- a liquidation under the supervision of the court;
- b official liquidation;
- c provisional liquidation for the purpose of restructuring; and
- d schemes of arrangement.
Liquidation under the supervision of the court
Cayman Islands companies may only be wound up outside a court process if they are solvent. Accordingly, where the shareholders of an insolvent company pass a resolution to wind up the company, the liquidators must apply to bring the liquidation under the supervision of the court.
The process is typically as follows:
- a The shareholders pass resolutions requiring the company to be wound up voluntarily and appointing liquidators.
- b If the liquidators are unable to obtain declarations of solvency within 28 days from each of the company’s directors that the company will be able to pay its debts in full within 12 months, the liquidators must apply to the court for a supervision order.8
- c Liquidators appointed by the court pursuant to a supervision order must be independent and meet certain professional requirements.9
Once a supervision order is made, the liquidators are considered to be official liquidators and are officers of the court. The liquidation then proceeds in the same manner as an official liquidation.
This is a court process commenced by filing a petition seeking to wind up the company and appoint liquidators. A winding-up petition may be made by the company itself, a creditor (including a contingent or prospective creditor) or a shareholder of the company.10 The Cayman Islands Monetary Authority (the financial services regulator), can apply for winding-up orders against companies not duly licensed or registered, or for certain other regulatory reasons.
A company can only file a winding-up petition provided that the directors of the company have obtained a shareholder resolution authorising them to do so,11 or are duly authorised to do so in the company’s articles of association and the company was incorporated after 9 July 2007.12
A creditor will normally seek a winding-up order on the basis that the company is unable to pay its debts; this is a cash-flow test of insolvency.13 Where a creditor has made a statutory demand for payment that remains unsatisfied after 21 days, the company is deemed unable to pay its debts.14
A shareholder will normally seek a winding-up order on the basis that it is just and equitable for the company to be wound up. There is no legislation in the Cayman Islands dealing with minority oppression or unfair prejudice, therefore dissatisfied shareholders often use the winding-up regime to obtain relief. In general, a shareholder cannot bring a winding-up petition on the grounds of insolvency because it will have no remaining economic interest in the company.
The hearing of the petition will usually occur at least six to eight weeks after filing. This period can be longer depending on the complexity of the case and the evidence to be exchanged. A provisional liquidator can be appointed to protect company property and maintain the status quo pending the hearing.15
At the hearing of the petition, any party with an economic interest in the company can attend and be heard. The company can oppose a creditor’s petition on the basis that the debt is disputed or that the creditor has more appropriate remedies available to it and by demonstrating solvency.
When a winding-up order is made, proceedings may not be commenced or continued against the company except with the express permission of the court.16 Dispositions of property, transfers of shares and alterations in the status of shareholders between the date of the filing of the petition and the date of the winding-up order are void unless the court orders otherwise.17
On the appointment of official liquidators, the powers of the directors cease. However, the directors are required to assist the liquidator and can be ordered to provide information and deliver up assets or records in their hands to the liquidator.
Official liquidators are responsible for realising and distributing the assets of the company to the unsecured creditors. The court plays an active supervisory role and the majority of substantive tasks, including the sale of assets, engaging in litigation, compromising claims and the sanction of the remuneration and expense of the liquidators require express court approval.18 Liquidators and stakeholders can also apply to the court for directions in respect of difficult issues that may arise.
When the liquidation process is complete, and the company’s assets have been distributed, the court will order the dissolution of the company. The length of the liquidation will depend on the complexity of the issues and the time it takes to realise and distribute all the assets.
Provisional liquidation for restructuring purposes
Section 104(3) of the Companies Law allows a company to present a winding-up petition and make an application to the court to appoint provisional liquidators where: the company is or is likely to become unable to pay its debts; and the company intends to restructure. This provision is often used in support of foreign restructuring proceedings, such as Chapter 11 in the United States.
The process is commenced by the company filing a winding-up petition coupled with an application for the appointment of provisional liquidators. The court will normally require that creditors be put on notice of the application and will hear the application as urgently as the circumstances require.
If the court appoints provisional liquidators it will adjourn the final hearing of the winding-up petition. If the restructuring is successful, then the winding-up petition will be withdrawn. If not, the court will likely appoint official liquidators to wind up the company.
On appointment of provisional liquidators, no proceedings may be commenced or continued against the company without leave of the court.19 This gives the company time to implement a restructuring without being at risk of litigation from creditors.
The powers of the provisional liquidators are set out in the court order appointing them. The court can tailor the provisional liquidators’ powers to suit the circumstances of the relevant case. Provisional liquidators will often be given the power to implement a scheme of arrangement to restructure the company and compromise creditor claims (see below).
The court order appointing the provisional liquidators can also set out a division of powers between the provisional liquidators and the company’s directors and take into account any parallel foreign insolvency proceedings. The court will usually put in place a cross-border protocol with the foreign court in those circumstances to ensure the efficient administration of the restructuring.
Schemes of arrangement
A scheme of arrangement is a court-sanctioned arrangement between a company and its members or creditors (or classes thereof).20 A scheme can be used to restructure a company by varying or cramming down the rights of stakeholders. A scheme can be carried out within a provisional or official liquidation. A company can also seek to carry out a scheme outside a liquidation process, but, in those circumstances, it will not have the benefit of the automatic stay from unsecured claims.
The scheme process involves a meeting of each of the relevant classes of stakeholder whose rights are to be subject to the scheme. Those meetings are convened by the court. The scheme must be approved by over 50 per cent by number and over 75 per cent by value of those attending and voting at each meeting and then sanctioned by the court.
If the necessary majorities are obtained, and the court approves the scheme, then its terms become binding on all the members of the relevant classes, regardless of whether they voted to support the scheme.
The process is commenced by the company filing a petition for approval of the scheme, together with an application to convene the meetings of stakeholders (court meeting).
At the first hearing, the court is asked to convene the court meeting and give directions as to the timeline and information to be sent to stakeholders. Stakeholders must be given all information reasonably necessary to allow them to make an informed decision in relation to the merits of the proposed scheme.
If the necessary majorities are obtained at the court meeting then the scheme can proceed to the sanction hearing.
At the sanction hearing, the court will be keen to ensure that the prescribed procedure has been followed; however, once the requisite majorities are achieved at the meetings, the court will usually consider that the members are the best judge of their own commercial interests and, provided there has been due process, will sanction the scheme.
In the absence of any complications, from the date on which the papers are first filed with the court to the date on which the scheme is sanctioned, the process takes approximately six to eight weeks.
iv Special regimes
Other than some modifications of the provisions of the CWR for deposit-taking banks, there are no special regimes applicable to different types or groups of Cayman Islands companies.
v Cross-border issues
The majority of companies incorporated in the Cayman Islands conduct their business and hold their assets outside the jurisdiction. To protect a company’s assets and the interests of its creditors, insolvency proceedings may be necessary not just in the Cayman Islands, but also in the jurisdictions where the company carries on business or holds significant assets.
Accordingly, the court is keen to facilitate cooperation in cross-border insolvency proceedings to ensure the efficient administration of the estate. Cross-border cooperation is expressly endorsed in the Companies Law and the CWR both in respect of Cayman Islands companies who may be the subject of a parallel foreign proceeding and in respect of foreign companies that may need the assistance of the insolvency regime in the Cayman Islands.
In the context of a Cayman Islands company that is in a parallel foreign insolvency proceeding, the CWR21 makes it the duty of an official liquidator to consider whether he or she should enter into an international protocol with any foreign officeholder.
The court also has jurisdiction to appoint foreign practitioners jointly with Cayman insolvency practitioners as official liquidators.22 In practice, this is a highly effective method of ensuring that a cooperative and unified approach is adopted in multi-jurisdictional insolvencies.
The court also has statutory powers to give assistance to foreign officeholders of foreign entities pursuant to the Companies Law,23 and the Foreign Bankruptcy Proceedings (International Co-operation) Rules 2008. The court can make orders recognising the right of a foreign officeholder to act in the Cayman Islands on behalf of the foreign company and can make limited ancillary orders in support of the foreign proceedings, for example, granting a stay of proceedings or requiring any person in possession of information relating to the foreign company to be examined by, and produce documents to, the foreign officeholder.
II INSOLVENCY METRICS
Because of the very small local economy of the Cayman Islands, and its position as an international financial centre, the status of the economy as it affects corporate insolvency in the jurisdiction very much reflects the wider world economy.
There has been a marked increase in new insolvency proceedings this year compared with last year. Many of these proceedings are either as a result of the challenges in the oil and gas sector or the Chinese economy. There have also been some complex cross-border restructurings in these areas, most notably the restructuring of the Vantage Drilling Group, an NYSE listed holding company and the restructuring of Kaisa Group Holdings Ltd, a Hong Kong listed company. Vantage Drilling Group was restructured through a Chapter 11 plan in the United States and an official liquidation in the Cayman Islands. Kaisa Group Holdings Ltd was restructured through inter-conditional Cayman Islands and Hong Kong schemes of arrangements coupled with Chapter 15 relief under the US Bankruptcy Code. There has also been an increase in filings made by investors in the investment funds space driven by dissatisfaction with management performance.
During the 2015 calendar year, 55 winding-up petitions were filed (up from 37 in 2014), 24 of which were in respect of investment funds. There were 34 petitions on the grounds of insolvency, including 20 supervision petitions, and 29 of these companies were wound up. There were 17 shareholder petitions on just and equitable grounds (nine of these companies were wound up) and four petitions brought by the Cayman Islands Monetary Authority for breaches of the regulatory laws (all of these companies were wound up).
III PLENARY INSOLVENCY PROCEEDINGS
The following is a summary of some of the most significant decisions from the Grand Court and the Cayman Islands Court of Appeal (CICA) over the past 12 months.
i Weavering Macro Fixed Income Fund Limited24
The Grand Court held that, on the specific facts, where one member had been paid out their redemption proceeds in full, but other members who had redeemed had not been paid out in full (or at all), that the payments to the member in full were preferences pursuant to Section 145 of the Companies Law.
In this case, the Weavering fund had been put into liquidation as a result of fraud. Prior to the liquidation, it had been controlled by a single individual who had perpetrated the fraud. This individual caused one redeeming investor, a Swedish incorporated entity, to be paid in full at a time when the fund was insolvent and other redeeming investors remained unpaid. The Court found that that the payment was made with the dominant intention to prefer the Swedish investor over other redeeming investors and was therefore void. The Court reached this conclusion based on an email from the controlling individual, which stated that the Swedish investor needed to be paid the redemption proceeds because it was switching into another fund controlled by the same investment manager. The Court considered that this email demonstrated a conscious and dominant intention to prefer the Swedish investor over other creditors.
The decision confirms the orthodox position that in order to establish a preference, a liquidator must demonstrate that the dominant and subjective intention of the payer was to prefer the creditor over the others. The decision also clarifies that common law defences (such as change of position) are not available to the recipient of a payment that is found to be a preference pursuant to Section 145. The Court was very clear that whether there was a preference in any given case was extremely fact-specific.
ii China Shanshui Cement Group Limited (CSCG)25
In this case, a winding-up petition was filed by CSCG in order to then apply for the appointment of a provisional liquidator for restructuring purposes under Section 104(3) of the Companies Law.
The Grand Court (Mangatal J) held that, on a true interpretation of Section 94 of the Companies Law, a company did not have standing to present a winding-up petition without either: a resolution of the shareholders sanctioning the presentation of the petition; or an express provision in the articles of association authorising the directors to present a winding-up petition on behalf of the company.
In doing so, the Grand Court confirmed that the decision of the English court in Re Emmadart Ltd26 remains good law and that the decision of the Grand Court in Re China Milk Products Group Ltd27 was wrongly decided. In that case, Jones J held that directors of an insolvent company could present a winding-up petition on behalf of and in the name of the company without reference to the shareholders and irrespective of the terms of the articles of association. China Milk was an effort to meet the desirable commercial objective that insolvent companies should be able to seek the assistance of the court to restructure without needing shareholder approval. In China Shanshui, however, Mangatal J considered that the legislature had had the opportunity to reverse Emmadart by statute when the Companies Law was amended in 2007 and had declined to do so. As such, it was not for the judiciary to step in at a later date even to achieve a commercially desirable result.
iii In the matter of Rhone Holdings28
Limited partners had applied to the court to wind up the exempted limited partnership on just and equitable grounds. The limited partnership agreement, however, contained non-petition covenants. The general partner therefore sought to strike out the petition. The Grand Court found that covenants in limited partnership agreements providing that limited partners would not seek to wind up the partnership (non-petition clauses) are effective. Previously the accepted view among practitioners was that non-petition clauses as between shareholders and the company or limited partners and the partnership would likely be considered void for public policy reasons. It was only creditor non-petition clauses that would be enforceable.
The CICA refused an application to extend time for obtaining leave to appeal and in doing so stated that the effect of Section 95(2) of the Companies Law29 was that an agreement not to present a winding-up petition could not possibly be contrary to Cayman Islands public policy.30
iv SPhinX Group of Companies (in official liquidation)31
The CICA held that the power of official liquidators to estimate the quantum of potential future liquidation expenses in order to set reserves to facilitate distributions, can be limited by the existence of a binding arbitration agreement. Therefore, where the reduction in the level of reserves set would require the court to address the merits of a disputed claim that was subject to an arbitration agreement, an official liquidator’s statutory power to set or reduce reserves did not override the arbitration agreement – the disputed claim would need to be arbitrated before the level of reserves could be set. The interplay between arbitration and insolvency proceedings had previously been considered by the Grand Court in Re Cybernaut.32 In that case, the Court had declined to strike out a just and equitable winding-up petition on the basis that the parties had agreed to refer disputes under a limited partnership agreement to arbitration. The Court held that a petition for the winding up of a Cayman Islands fund was a non-arbitrable matter. In SPhinX, the CICA was asked to overrule the decision in Cybernaut but declined to do so. The question of how (what are essentially) two matters of public policy (respecting the parties’ decision to submit disputes to arbitration and the collective insolvency process) interrelate, is one that is likely to remain an open issue until firm principles emerge from Cayman Islands case law.
v Pearson v. Primeo Fund (in official liquidation) 33
The CICA confirmed that where redeemable shares have been redeemed in accordance with the articles of association, but the redemption proceeds are unpaid on the date that liquidation proceedings are commenced, the redeemed investors are creditors of the company, ranking behind unsecured creditors but ahead of non-redeeming investors in the liquidation waterfall. The opening of liquidation proceedings cannot unwind the redemption and a redeemed investor remains a creditor.
IV ANCILLARY INSOLVENCY PROCEEDINGS
The court has jurisdiction to wind up or appoint provisional liquidators to any foreign company that has property located in the Cayman Islands, is carrying on business in the Cayman Islands or is the general partner of a limited partnership or is a registered foreign company under Part IX of the Companies Law.34 As previously described, the court also has jurisdiction to make ancillary orders in support of foreign proceedings under Part XVII of the Companies Law and at common law.
Ancillary insolvency proceedings in the Cayman Islands for foreign companies are, however, unusual. The principal reason for this is that foreign companies will rarely have assets or directors in the Cayman Islands. If they do, those assets are likely to be in the form of shares in Cayman Islands companies, and the assets of those companies themselves will almost invariably be outside the Cayman Islands; and in the case of a group insolvency, there may very well be a formal insolvency of the Cayman Islands company in the structure in any event.
For as long as the global economy remains volatile, complex liquidations and restructurings with cross-border elements can be expected to continue to come before the Cayman Islands courts. It is also expected that more work will come out of China and the oil and gas sector. In the investment funds sector, investor-led litigation and winding-up petitions appear to be on the increase although they are not yet close to 2009 levels.
The courts continue to stress the importance of certainty of investors’ rights both in relation to statutory clawback actions and contractual agreements. The courts are also veering away from taking a purposive approach to statutory interpretation and making clear that legislative reform, rather than judicial activism, may be necessary to achieve commercial objectives.
1 Aristos Galatopoulos and Caroline Moran are partners at Maples and Calder.
2 English case law is highly persuasive in the Cayman Islands in the absence of any Cayman Islands authority. Decisions of other Commonwealth jurisdictions are also persuasive.
3 Certain amounts due to employees, bank depositors (in the case of the insolvency of a licensed bank) and the Cayman Islands government have preferential status. Contractual rights of set-off and netting of claims are also respected.
4 Section 145 of the Companies Law.
5 Section 140(2) of the Companies Law.
6 Section 95(2) of the Companies Law.
7 Solvent, voluntary liquidations are beyond the scope of this chapter.
8 Section 124 of the Companies Law.
9 Insolvency Practitioners Regulations 2008 (as amended).
10 Section 94 of the Companies Law.
11 Re Emmadart  1 All ER 599 recently affirmed in China Shanshui Cement Group, Grand Court unrep. 25 November 2015.
12 Section 94(2) of the Companies Law.
13 Cayman Islands law contains no ‘balance sheet test’ for these purposes but the company’s general financial position may be relevant to the question of whether it is just and equitable to wind up a company.
14 Section 93(a) of the Companies Law.
15 Section 104(2) of the Companies Law.
16 Section 97 of the Companies Law.
17 Section 99 of the Companies Law.
18 Section 110(2) of the Companies Law.
19 As discussed above, this moratorium does not affect secured creditor rights.
20 Section 86 of the Companies Law.
21 Order 21.
22 Section 108(1) of the Companies Law.
23 Part XVII, Section 242.
24 4 December 2015.
25 Grand Court unrep. 25 November 2015.
26  1 Chapter 540 and applied by the Grand Court in Banco Economico SA v. Allied Leasing and Finance Corporation  CILR 102.
27  (2) CILR.
28 Grand Court, unrep., 18 August 2015.
29 This section provides that ‘The Court shall dismiss a winding up petition or adjourn the hearing of a winding up petition on the ground that the petitioner is contractually bound not to present a petition against the company.’
30 Cayman Islands Court of Appeal, unrep., 3 February 2016.
31 Cayman Islands Court of Appeal, unrep., 2 February 2016.
32 In re Cybernaut Growth Fund, LP  (2) CILR 414.
33 Grand Court, unrep., 19 July 2016. It is understood that an appeal to the Privy Council is likely.
34 Section 91 of the Companies Law.