I OVERVIEW OF RESTRUCTURING AND INSOLVENCY ACTIVITY
Eight years after the financial crisis, the global economic recovery remains disappointingly weak, with global GDP growth projected to be 3 per cent in 2016, unchanged from last year, with only a moderate improvement expected in 2017.2 Fears of another international recession continue as global trade growth remains depressed and emerging market economies lose momentum, with sharp downturns in some emerging economies, especially those that are heavily reliant commodity producers. The trials and tribulations of China’s economy continue to cause many governments and economists sleepless nights as economic growth is set to head further south, from 6.5 per cent in 2016 to 6.2 per cent by the end of 2017.
While these worries saw a rise in winding-up petitions being filed in the Cayman Islands during 2015, compared with a year earlier, the Cayman Islands Monetary Authority (CIMA) continues to combat these uncertain times by introducing robust but market-flexible regulatory, monetary and cooperative initiatives to enhance market confidence and to maintain its reputation as a leading international financial centre.
These initiatives have seen the Cayman Islands maintain its reputation as the domicile of choice for funds. The Cayman Islands’ funds industry continues to lead the global pack with 11,061 funds authorised as at 30 June 2015, compared with 11,296 as at 30 June 2014, 11,209 as at 30 June 2013 and 10,871 in June 2012. Of the 11,061 funds authorised as at 30 June 2015, 7,795 are registered funds, 2,773 are in relation to master funds, 390 are administered funds and 103 are licensed funds.3
The Cayman Islands’ banking sector continues to play a major part in the Cayman’s financial services sector, with 184 banks licensed as of the end of June 2015, with total international (cross-border positions in all currency and domestic positions in foreign currency) assets and liabilities of US$1.39 trillion and US$1.44 trillion, respectively, in June 2015.4 While the majority of these banks are subsidiaries, affiliates and branches of global financial institutions conducting business in the international markets, it is testament to the Islands’ recognised and robust banking sector that 40 of the world’s top 50 banks hold licences in the Cayman Islands.
The 184 banks licensed in the Cayman Islands are categorised into A and B classes, with the former licensed to carry out local as well as international business. There are presently 12 Class A licensed banks in the Cayman Islands, six of which carry out retail services. The remaining banks hold Class B licences and are broadly restricted to offshore transactions with non-residents. We submit that the robustness and relatively regulator-friendly nature of the Cayman banking sector will see an increase in the use of Class B banks. Its flexibility will likely prove to be an attractive alternative structure to sophisticated high net worth individuals as well as global corporations looking for a tax-efficient method to structure their intra-group financing.
Of the 184 banks licensed in the Cayman Islands, 44 are from Europe, 35 are from the US, 23 are from the Caribbean and Central America, 23 are from Asia and Australia, 18 are from Canada and Mexico, 36 are from South America, and five are from the Middle East and Africa. The volume of cross-border assets and liabilities held by Cayman banks has seen a gradual decline since June 2009, despite a slight increase in 2013. The decline is considered to be attributable to the hangover of the financial crisis on international credit markets and the contraction of the global economy, in particular in the eurozone, and most notably the emerging European markets that conduct transactions through the UK and the US, who in turn make up the rump of the international banking sector in the Cayman Islands. There has also been a healthy shift from the banking sector to the debt securities and investment funds market because of the relative high performance of stocks and bonds.
Other parts of the Cayman Islands financial services industry are demonstrating resilience in the face of the new global order of international standards, transparency and heightened regulation. The Cayman Islands continues to be a leading jurisdiction for the incorporation of special purpose vehicles (SPVs) for the global structured finance market, given its tax-neutral status; buyers of debt issued by the SPVs can participate in the knowledge that they will only be taxed in their home jurisdictions. The vast majority of these SPVs are used to purchase loans issued by Wall Street and the European banks that are subsequently traded to other institutional investors.
The success of the Cayman Islands financial services industry is, therefore, the result of a number of factors, including its freedom of investment decisions for hedge fund managers, its tax-neutral status and the knowledge of experienced professional service providers in the Islands. The Cayman Islands’ globally renowned legal system has also provided a robust framework to effectively address restructuring or liquidity issues arising from the lingering effects of the credit crisis. The Cayman Islands has a globally recognised and comprehensive, creditor-friendly regime to facilitate domestic and cross-border insolvencies and restructurings, with effective procedural rules in place both for insolvency practitioners and the courts.
‘Light-touch’ restructurings by way of the appointment of provisional liquidators in the Cayman Islands continues to be a prominent feature for consideration by interested stakeholders, and we see no immediate signs of this trend abating given the propensity of Asian clients to use companies incorporated in the Cayman Islands as their listing vehicle.
In this regard, investors and opportunistic funds continue to keenly examine the PRC debt burden and the far-reaching impact any market correction is likely to have on the global economy. It is widely believed that PRC banks saw a trend of deteriorating credit quality throughout 2015. With overdue and non-performing loans rising as economic growth moderates, it remains to be seen if China can restructure and reform its financial system without a prolonged drag on the economy. This deterioration in credit quality is the fallout from an epic credit boom since the global financial crisis. PRC banks are still by far the largest source of funding, despite the growth of shadow banking (bank loans represented just over half of all outstanding credit at the end of 2014). The PRC corporate sector is undoubtedly the largest borrower of debt at 61 per cent. Heavy industry and real estate account for more than half of all corporate borrowing (at 34 per cent and 18 per cent, respectively), with marine-related borrowing standing at approximately 10 per cent.5
II GENERAL INTRODUCTION TO THE RESTRUCTURING AND INSOLVENCY LEGAL FRAMEWORK
i Formal insolvency and restructuring procedures
The Cayman Islands legislative framework does not contain an equivalent regime to the United States Chapter 11 Bankruptcy Code or the United Kingdom’s administration restructuring tools to facilitate the rescue of an insolvent company. As a result, and in order to obtain the benefit of a moratorium against any proceedings continuing or being commenced against a company without leave of the Grand Court, companies tend to utilise the ‘light-touch restructuring’ tool by seeking to appoint provisional liquidators pursuant to Part V of the Companies Law (2013 Revision) (the Companies Law), specifically Section 104(3), to assist the company in promoting a compromise or arrangement with its creditors or members. An application under Section 104(3) is usually made by the company on an ex parte basis on the grounds that the company is or is likely to become unable to pay its debts as they fall due and, as mentioned above, the company intends to present a compromise or arrangement to its creditors and investors, most commonly by the promotion of a scheme of arrangement pursuant to Section 86 of the Companies Law. On the appointment of provisional liquidators, the Grand Court will determine which corporate powers will remain with the directors and which will be vested in the provisional liquidators.
The benefit of the ‘light-touch restructuring’ process is that the appointment of provisional liquidators invokes the statutory moratorium on any proceedings, including winding-up proceedings by a disgruntled creditor, being brought against the company.
Somewhat surprisingly, the Companies Law in its current state does not specifically provide for a creditor, a contributory or the CIMA (in the case of regulated entities) to seek the appointment of provisional liquidators to promote a ‘light-touch restructuring’ similar to Section 104(3). Instead, to have provisional liquidators appointed, these parties must first demonstrate that there are prima facie grounds to wind up the company, and that the appointment of provisional liquidators is necessary to prevent the actual or threatened dissipation of assets or mismanagement by the company’s directors.6 Such an application will ordinarily be inter partes; however, it can be made ex parte if exceptional circumstances can be shown. Given that there is no statutory fetter on the Grand Court’s discretion in respect of the functions and powers that may be given to the provisional liquidators, in appropriate circumstances, a ‘traditional’ dissipation of assets provisional liquidator should be able to promote a scheme of arrangement or other compromise or arrangement with the company’s creditors or members by virtue of the powers extended to official liquidators (which includes provisional liquidators, pursuant to Section 89 of the Companies Law) under Section 110(2) of the Companies Law. This proposition is supported by a number of recent Hong Kong decisions, most notably by the Hong Kong Court of Appeal in the case of Re Legend International Resorts Ltd, where it was held:
The law on the appointment of provisional liquidators at present is contained in section 192 [equivalent to s.104(1) of the Companies Law] and the following sections and it is clear in the wording of those sections that the appointment of a provisional liquidator must be for the purposes of the winding-up. Provided that those purposes exist there is no objection to extra powers being given to the provisional liquidator(s), for example those that would enable the presentation of an application under section 166 [equivalent to s.86 of the Companies Law dealing with schemes of arrangement.7
The decision in Re Legend International Resorts Ltd was followed in the subsequent Hong Kong decision in Re Plus Holdings Ltd,8 where the court empowered the provisional liquidators to promote a scheme of arrangement when the company had failed to find a ‘white knight’ for a period of two years and it was considered not to be futile for independent professionals to explore viable methods of restructuring.
Given that the primary purpose of a scheme or compromise between a company and its creditors is to return the company to solvency and allow it to carry on business for the benefit of its stakeholders, it is counterintuitive for those stakeholders to have no entitlement to appoint provisional liquidators to achieve that purpose. When the question comes before the Grand Court for adjudication, it is expected that the Court will take a pragmatic approach consistent with the Hong Kong position and allow stakeholders to utilise a ‘light-touch restructuring’ remedy.
It should also be borne in mind that a company may seek to promote a scheme of arrangement outside of provisional liquidation to make a compromise or arrangement with its members or creditors (or any class of them). An application may be brought by the company itself, any creditor or member of the company or, where the company is being wound up, by the liquidator, and the Grand Court may order a meeting of the company’s creditors or members. If a majority representing 75 per cent in value of creditors or members present, either in person or by proxy and entitled to vote at the meeting, agree to the terms of the proposed compromise or arrangement, then, subject to the Grand Court’s sanction, the scheme will be binding on all of the creditors or members of the company and against the company itself and, if the company is in liquidation, against the liquidator and contributories of the company. The scheme becomes effective only once a copy has been delivered to the Registrar of Companies for filing.
Where a scheme is being promoted outside of provisional liquidation, the directors of the company will remain in control of the company and will formulate the terms of the proposed compromise to be put to its creditors or members (practically, this will almost always be done with the assistance of qualified insolvency practitioners that will become the scheme supervisors upon the company’s creditors or members and the Grand Court approving the scheme). The promotion of a scheme of arrangement outside of provisional liquidation therefore does not afford the company the benefit of the moratorium. The company remains at risk of aggressive creditor action unless it can persuade the Grand Court to use its extensive discretionary powers to stay any proceedings or suspend the enforcement of any judgment order for a period of time.9
There are broadly two winding-up procedures in the Cayman Islands: compulsory liquidations by order of the Grand Court and voluntary liquidations. The Grand Court has jurisdiction to make a winding-up order in respect of any company incorporated or registered in the Cayman Islands or a foreign company that:
- a has property located in the Islands;
- b is carrying on business in the Islands;
- c is the general partner of a limited partnership; or
- d is registered under Part IX of the Companies Law (overseas companies).
An application to the Grand Court to wind up a company is by petition and served either by the company itself, any creditor (including any contingent or prospective creditor), any contributory of the company, or the CIMA in the case of regulated entities. The most common grounds upon which the Grand Court will order the winding up of a company is on the basis that it is unable to pay its debts as they fall due, or that it is just and equitable to do so.10 In respect of a winding up on the insolvency ground, the test for solvency is a cash-flow test.
At any time after the presentation of a winding-up petition but before the making of a winding-up order, upon an application by the company, a creditor or contributory, the Grand Court may stay or restrain any proceedings against the company on such terms as it deems fit.11 Once a winding-up order is made or a provisional liquidator is appointed, the statutory moratorium is invoked and no suit, action or other proceedings, including criminal proceedings, may be proceeded with or commenced against the company except with the leave of the Grand Court.12 Section 99 of the Companies Law also provides that once a winding-up order has been made, any disposition of the company’s property and any transfer of shares made after the commencement of the winding up is, unless the Court otherwise orders, void.13
Once a winding-up order has been made and official liquidators are appointed, the powers of the directors are automatically terminated. Where the liquidation is of a cross-border nature, it is now common for there to be more than one liquidator appointed over the undertaking, assets and property of the company, with an overseas qualified liquidator dealing with the assets and investigations outside of the Cayman Islands. The Insolvency Practitioner’s Regulations 2008 require that, in such circumstances, there must be at least one qualified insolvency practitioner resident in the Cayman Islands appointed over the company.
The official liquidators will take control of the company’s affairs and will seek to realise its assets for the benefit of its stakeholders (which in the case of an insolvent company will be its creditors) as a whole and make a distribution in accordance with the statutory priorities under the Companies Law, having first paid all the costs and expenses in the liquidation. The appointment of official liquidators does not prohibit secured creditors from enforcing their security; however, the secured creditor may request the liquidator to realise the assets subject to its security. If the liquidator does so, he or she will be entitled to deduct his or her reasonable costs for realising the assets before distributing the balance of the proceeds to the secured creditor.
After considering secured creditors and paying all costs and expenses in the liquidation, realisations will first be applied to pay all preferential debts, which broadly comprise certain debts due to employees and the Cayman Islands government, subject to a maximum amount prescribed by the Companies Law. Any remaining unsecured creditors will receive a distribution according to the level of their debt, with any surplus after satisfying all creditor claims being paid to the members of the company. In the event that there are insufficient assets in the liquidation to satisfy the claims of all unsecured creditors, then debts and liabilities of the company (other than any due to members in their character as such) will be paid on a pari passu basis. Member claims rank lower in priority than claims of ordinary creditors.14
A voluntary liquidation is commenced by passing a members’ resolution, upon the expiry of a fixed period or upon the occurrence of a specified event stated in the company’s memorandum and articles of association. A company can be wound up by passing an ordinary resolution if it is deemed unable to pay its debts as they fall due. If the company is deemed to be solvent, it must pass a special resolution of its members to wind up voluntarily.15 The voluntary liquidation of the company commences upon the passing of the resolution, the expiry of the fixed period or the occurrence of the specified event.16
A liquidator appointed to conduct a voluntary liquidation does not require the Grand Court’s authorisation to exercise his or her powers; however, the liquidator can apply to the Court to determine any question that arises during the winding-up process. A voluntary liquidator is required to apply to the Grand Court for an order that the liquidation continues under the Grand Court’s supervision unless, within 28 days of the 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 the commencement of the liquidation. The making of a supervision order effectively converts a voluntary liquidation to an official liquidation, and the provisions of Part V of the Companies Law will apply.
Even after the directors make such a declaration, the liquidators or any creditor or member can apply to bring the liquidation under the Grand Court’s supervision if the company is or is likely to become insolvent, or court supervision will facilitate a more effective, less expensive or quicker liquidation of the company that is in the interests of the creditors and members. The liquidation will then continue as a compulsory liquidation.
In certain circumstances where directors of the company determine that the company is insolvent and cannot trade out of its difficulties or find new funding, it might be appropriate to pass an ordinary resolution of its members to place the company into voluntary liquidation followed by confirmation that the directors are not able to sign the declaration of solvency. The voluntary liquidator can then apply to the Grand Court for a supervision order and seek their appointment as official liquidators.
The appointment of liquidators in these circumstances may help circumvent any challenges or concerns as to whether directors are entitled to present a winding-up petition in the company’s name.
In the case of Re China Shanshui Cement Group Limited,17 Justice Mangatal parted company with a previous decision of the Grand Court by declining to follow the first instance judgment of Re China Milk Products Group Limited18 and struck out a winding-up petition filed by the directors of China Shanshui Cement Group Limited, a Cayman Islands company listed on the Hong Kong Stock Exchange, for lack of standing.
Justice Mangatal felt unable to endorse the Court’s strained construction of Section 94 of the Companies Law in China Milk, which for the last four years has relieved directors of insolvent Cayman Islands companies of the obligation to seek a resolution of the company’s shareholders in a general meeting before filing a winding up petition (and, by extension, applications for appointment of provisional liquidators) in the Cayman courts.
The decision re-establishes the principles set out in the English case of Re Emmadart Ltd 19 as good law in the Cayman Islands. The effect of the judgment, in combination with the wording of section 94 of the Law, is that only companies incorporated after 1 March 2009 and with appropriately worded articles of association are excused from seeking a resolution of their shareholders before petitioning for their own winding up.
It should be stressed that new companies are largely unaffected by the decision, since they are expressly permitted by the Companies Law to deal with the issue in the drafting of their articles. That said, the resulting status quo is likely to cause some difficulties for directors of existing, insolvent companies who feel that the interests of the company’s creditors are best served by appointing provisional liquidators to propose a restructuring plan. In such cases, shareholders with arguably no legitimate interest in the future of a company will still have a say in whether a restructuring is permitted to take place. At a time when many companies are looking to explore restructuring opportunities to preserve value, it is to be hoped that the Cayman Islands Legislature can take this opportunity to introduce new provisions into the Companies Law to provide assistance to directors in their duty to have proper regard for the interests of creditors, and act without resolutions from its members.
ii Taking of enforcement of security
The most common forms of security in the Cayman Islands are mortgages and fixed and floating charges over a company’s property, undertaking and assets. Secured creditors can therefore appoint receivers over charged assets to enforce their security interests; the security instrument will ordinarily detail the assets that the receiver will be appointed over and the extent of the receivers’ powers. Receivers are not supervised by the court, and usually owe their duties to the secured creditor appointing them and not the company.
The security instrument may detail enforcement provisions other than the appointment of receivers, and may include the right for the secured creditor to take possession of and vote in relation to the charged assets, sell the charged assets to a third party, or effect any contractual right of set-off or otherwise.
iii Duties of directors of companies in financial difficulty
While there is no statutory obligation on a company or its directors to commence winding-up proceedings, the Companies Law and the common law do impose various duties and responsibilities on directors to the company. If a company is insolvent or it is likely to become insolvent, the duties and responsibilities of its directors also extend to the interests of the company’s creditors. Directors and officers of a company also include shadow directors.
A shadow director is defined as any person in accordance with whose directions or instructions the directors of a company are accustomed to act, provided that a person is not deemed to be a shadow director by reason only that the directors act on advice given by him or her in a professional capacity. Therefore, an investment manager of a company making recommendations as to the purchase or sale of investments should not, for example, ordinarily constitute a shadow director. Importantly, however, unlike in other common law jurisdictions, the Companies Law does not expressly subject shadow directors to the common law or equitable duties imposed on de jure directors.20 Rather, shadow directors are only subject to penalties for fraudulent trading, misconduct in the course of a winding up and making a material omission in any statement relating to the company’s affairs.
The Companies Law contains numerous provisions relating to the duties of directors and prescribes penalties for any breach. The most serious of these involve dishonesty or the authorising of illegal payments and carry both criminal and civil penalties. The insolvency provisions of the Companies Law also include certain offences against directors, such as fraud in anticipation of winding up,21 transactions in fraud of creditors,22 misconduct in the winding-up23 and fraudulent trading.24 These proceedings are commenced by the official liquidator and, if proven, the Grand Court will order the director to contribute to the losses suffered by the company as a result of his or her actions.
The memorandum and articles of association will also detail the general duties that directors owe to the company. In addition, given that there is no statutory codification of the general duties and liabilities owed by directors to its company in the Cayman Islands, principles have developed that derive from English common law. At common law, a director owes two types of duty to the company: fiduciary duties, and duties of skill, care and diligence. Directors’ fiduciary duties to their company can broadly be described as their duty to act in good faith in their dealings with or on behalf of the company, and to exercise the powers and fulfil the duties of the office honestly.25 In recent years, English and Commonwealth authorities have moved from the traditional purely subjective test referencing the individual director whose conduct is being judged, towards an objective test for the applicable standard of skill and care that a director will be required to have. Following these cases, it is likely that the applicable skill and care test will be that of:
A reasonable diligent person having both – (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and (b) the general knowledge, skill and experience that that director has.26
Therefore, there is a minimum objective standard based upon the functions given to the director in question, but the standard can be raised where the director in question has more knowledge, skill and experience than would normally be expected (e.g., if he or she has been recruited as an expert in a particular business of the company). Breaches of these duties may result in the director being held personally liable, and a subsequently appointed liquidator can bring an action to recover losses on behalf of the company that derived from the director’s breach of duty.
iv Clawback actions
The Companies Law provides for a number of clawback actions to enable a subsequently appointed liquidator to recover assets belonging to the company and thereby maximise returns for stakeholders. For example, when a company is being wound up or falls under the supervision of the Grand Court, all dispositions of the company’s property and any transfer of shares of the company made between the date of the presentation of the petition and the making of the winding-up order are void, unless the Grand Court orders otherwise.27
Clawback claims can be divided into claims against members of the company to recover redemption payments, and claims against other third parties to recover company assets.
A payment out of capital to a member made at a time when the company is insolvent, or that has the effect of rendering the company insolvent, is void.28 In the event of such an unlawful payment, it is arguable that the effect of the illegality is to render the payment subject to a claim in restitution by the liquidators.
A clawback of redemption payments may also be available where members have been overpaid as a result of a misstated net asset value attributed to the company’s property. In the case of a solvent company that has issued redeemable shares at prices based upon its net asset value from time to time, the liquidator shall have power to settle and, if necessary, rectify the company’s register of members.29 This power of rectification may be exercised where the misstated net asset value is not binding upon the company and its members by reason of fraud or default.30 This statutory restatement procedure does not expressly provide for repayment by former investors of any sums that they have been overpaid; nor does it provide for any procedure to be invoked by the liquidators to make such recoveries. It would, therefore, seem to logically follow that on a restatement of the net asset value of the company, and consequent rectification of the register of members, economic consequences, should follow.
In relation to third-party recipients of company assets, any transactions in which property of the company is disposed of at an undervalue with the intention of defrauding the company’s creditors are void upon an application by the official liquidator.31 The official liquidator must commence such proceedings within six years of the disposition, and the burden of proof will be upon the liquidator to demonstrate that there was an intention to defraud.
A transaction can also be set aside on the basis that it constitutes a voidable preference.32 The Companies Law does not specify who can bring proceedings to set aside a transaction as a voidable preference; however, it is widely considered that only an official liquidator would have the capacity to do so. A transaction with a creditor will constitute a voidable preference if it can be shown that the company executed the transaction in the six months prior to commencement of the company’s liquidation, and at a time when it is unable to pay its debts as they fall due; and the principal or dominant intention of the company’s directors in executing the transaction is to give that creditor a preference over other creditors.33 If the party that receives the benefit of the payment, transfer or charge is a related party, such that it has the ability to control the company or exercise significant influence over it in making financial and operational decisions, that party will be regarded as being preferred over other creditors of the company.34 Where a transaction is set aside as being a preference, it is void, and the creditor will be required to return the payment or asset and claim in the liquidation for the amount of its claim.
III RECENT LEGAL DEVELOPMENTS
The provision of services of independent directors to funds and companies alike is a growing facet of the Cayman Islands’ financial services industry. It became apparent during the credit crisis that independent directors played a key role when hedge funds were faced with difficult decisions, as they ensured compliance with the fund documents and that shareholders were treated fairly as far as possible. Institutional investors are now, in the majority of cases, requesting that all new hedge funds have a majority of independent directors appointed to the board as part of their investment criteria.
To provide statutory weight and robustness to this growing sector, the government approved the Directors Registration and Licensing Law 2014, which came into effect on 4 June 2014. The new legislation requires all directors of mutual funds regulated by the Mutual Funds Law (2013 Revision) and directors of companies who are registered as ‘excluded persons’ under the Securities and Investment Business Law (2011 Revision) to register with the CIMA. The new Law provides for the registration and licensing of individuals or companies that are appointed as directors of mutual funds and entities carrying on securities investment business in the Cayman Islands. The new regime also requires individuals acting as a director in 20 or more companies to apply for a professional director’s licence unless they meet the limited exceptions. Professional directors are now required to have professional insurance coverage with a minimum aggregate cover of US$1 million, including a minimum cover of US$1 million for each and every claim.
Furthermore, the highly anticipated Limited Liability Companies Law, 2016 (LLC Law) was published in the Cayman Islands on 8 June 2016 and is expected to come into force by a separate commencement order in late June.
The introduction of the new Cayman Islands limited liability company (an LLC) satisfies the demands of stakeholders, in particular in North America and Asia, for a more flexible corporate offshore structure, and provides a welcome addition to the existing range of corporate vehicles available in the Cayman Islands. The LLC is closely aligned with the Delaware limited liability company and is expected to be popular as a vehicle of choice for investment fund and private equity structures, as well as corporate transactions, including joint ventures, special purpose vehicles and holding companies, where the LLC structure can be tailored to suit the particular transaction.
The LLC Law provides for the formation and operation of an LLC in the Cayman Islands, as a body corporate with limited liability and separate legal personality from its members. The LLC Law also provides for the conversion or merger of existing Cayman Islands exempted companies into LLCs and the continuation into the Cayman Islands as an LLC of entities established in another jurisdiction. In relation to the insolvency or restructuring of an LLC, the LLC Law incorporates by reference, and largely reflects Part V of the Companies Law, containing provisions which mirror those in the Companies Law dealing with arrangements and reconstructions. As such, for all intents and purposes, the insolvency or reconstruction of an LLC will be subject to the same rules as are applicable to exempted limited companies.
IV SIGNIFICANT TRANSACTIONS, KEY DEVELOPMENTS AND MOST ACTIVE INDUSTRIES
The restructuring of Kaisa Group Holdings Ltd’s US$2.5 billion of offshore claims provides a useful and recent example of parallel schemes of arrangement being successfully implemented in multiple jurisdictions, and is regarded as one of the headline restructurings of 2016. The Kaisa group is regarded as one of the largest property developers in China, focused historically on the Pearl River Delta in Guangdong Province and listed on the Stock Exchange of Hong Kong. The restructuring of the Kaisa group is arguably the largest-ever judicially approved, multi-jurisdictional debt restructuring of a China-based group, with schemes of arrangement sanctioned by the Grand Court of the Cayman Islands and the High Court of Hong Kong, together with an application under Chapter 15 of the US Bankruptcy Code for recognition of the Hong Kong scheme. The Kaisa restructuring is perhaps even more remarkable given that the schemes of arrangement were promoted by the company without the assistance of provisional liquidators in office (and therefore had no benefit of the statutory moratorium).
The successful recognition of a scheme of arrangement in a number of jurisdictions can be of significant importance to ensure that creditors cannot take unilateral action against a debtor’s assets in those jurisdictions. A recent Bermudian case suggests that recognition of schemes of arrangement relating to a local company but sanctioned by a foreign court are comparatively rare in the offshore world. Indeed, In the Matter of Contel Corporation Limited appeared to be the first time the Supreme Court of Bermuda had been asked to recognise a scheme of arrangement in respect of a local company in circumstances where a parallel scheme had not been implemented.35 The Bermuda court was asked on an ex parte application to recognise a scheme of arrangement in respect of a Bermudian-incorporated company listed on the Singapore Stock Exchange that had been sanctioned by the Singapore courts. The Bermuda court recognised the scheme, relying upon the ‘extremely wide’ common law discretionary power to recognise foreign restructuring orders made in respect of local companies (citing Lord Hoffmann in Cambridge Gas Transportation Corpn v. Official Committee of Unsecured Creditors of Navigator Holdings plc  1 AC 508).36 The Contel case suggests, however, that the home jurisdiction court will not merely ‘rubber stamp’ a scheme sanctioned by a foreign court. Rather, Kawaley CJ considered whether the compromise was permitted under Bermuda law (a debt-for-equity swap) and noted that the requisite statutory majorities were the same in Singapore and Bermuda. He also appeared to be influenced by the fact that although there was no parallel scheme, it did not appear to be a deliberate attempt to avoid any consequences of Bermudian law that might be more favourable to the creditors concerned.
If it is considered, in light of the dichotomy in England between Cambridge Gas on the one hand and Ruben/Singularis on the other, that the risk of a local court recognising a scheme of arrangement relating to a local company sanctioned by a foreign court or not is too great, the company and its creditors or members may instead decide to bring parallel schemes in the jurisdiction of incorporation and in the jurisdiction that governs the obligations that are to be varied or discharged (typically contained in finance and security documents). This was the case in Kaisa, as well as the LDK Solar restructuring,37 where parallel schemes were successfully promoted in the Cayman Islands and in Hong Kong, each scheme being linked and inter-conditional insofar as it only took effect if the other schemes were also sanctioned by the courts.
In cases such as Kaisa, parallel schemes of arrangement may be regarded as the more prudent path to tread, rather than seeking any recognition of a scheme court order, as a result of, in part, the Hong Kong courts’ deeming that a foreign compromise does not discharge a debt unless it is discharged under the law governing that debt (in the case of Kaisa, Hong Kong law). In a scheme that seeks to alter contractual rights, the effectiveness or ‘efficacy’ of the scheme internationally may require that the debtor seek not only the sanction of the court in its country of incorporation, but also of the court in the country whose law governs the contractual obligations, to ensure that dissenting creditors cannot enforce their claims against the debtor’s assets in countries other than that of its incorporation.
The Hong Kong courts in Kaisa were also satisfied that it had jurisdiction to sanction the scheme of arrangement in respect of the foreign company (the Cayman Islands incorporated Kaisa Group Holdings Ltd), and that there was ‘sufficient connection’ with Hong Kong.38 No single criterion, however, is to be considered an essential precondition for meeting the requirement of sufficient connection. Rather, it is a matter of judgment to be made in light of the evidence presented to the court and in light of the object and purposes of the jurisdiction invoked. ‘Sufficient connection’ for these purposes has been found where key finance documents were governed by English law.39 The Hong Kong courts also considered other factors, such as whether it is likely that the schemes will achieve its purpose. The courts had to be satisfied that the schemes will be effective in practice to bind creditors opposing a variation of their rights, and whether the scheme will have ‘substantial effect’.40 In considering whether the scheme will serve its purpose, the courts will also consider whether the scheme will be recognised in those jurisdictions, for example, in which substantial assets of the company are located. A further consideration is whether sanctioning the scheme will foster comity.
Therefore, the use of parallel schemes provided Kaisa and its creditors with a number of advantages: there could be no question about whether the variation of debt obligations approved by the Hong Kong courts are valid and enforceable; the debtor company obtained comfort that its domestic legislation had been followed such that the Cayman scheme will bind any creditors seeking to take unilateral action against it in its jurisdiction of incorporation; and the use of parallel schemes will provide further evidence to the Grand Court and the Hong Kong courts that the schemes will likely be effective and serve their purpose in each jurisdiction.
The Kaisa restructuring is also noted for its innovation in pricing its scheme consideration and the use of contingent value rights (CVRs) and mandatorily exchangeable bonds forming part of the scheme consideration. The schemes provided scheme creditors, if they so elected, to share in any potential upside in the future performance of the company. This being achieved, first, through the CVRs, which represent the contingent right to receive cash or (at the company’s option) shares with an aggregate notational value of the new notes, triggered when the implied market capitalisation of the common shares of the company reached certain targets. Second, it is achieved by the automatic exchange of new bonds into exchange-convertible bonds on certain events, with those exchange-convertible bonds providing for a conversion price into equity below that provided for by the bonds.
The Cayman Islands has elected not to adopt the UNCITRAL Model Law on Cross-Border Insolvency per se. However, in 2009 the Cayman Islands comprehensively revamped its cross-border insolvency legislation, inserting international cooperation provisions, in the form of Part XVII of the Companies Law,41 that are not dissimilar to the provisions of the Model Law. In addition, the Cayman Islands Grand Court applies Model Law principles in a manner that means the Model Law is strictly unnecessary.42
In some ways, Part XVII is more liberal (or universalist) than the Model Law:
By implementing through its Courts a public policy model on a par with international codes of conduct, the territory has vouchsafed its ability to render the kind of international judicial assistance that is critical to the fulfilment of the tenets of the UNCITRAL Model Law and to the principles of universality of bankruptcy that the Law embraces.43
Part XVII of the Companies Law codifies the Grand Court’s powers to make orders in aid of foreign insolvency proceedings, and does so in terms substantially similar to the key tenets of the Model Law.
Section 240 of the Companies Law provides definitions for the international cooperation provisions of Part XVII. ‘Debtor’ means a foreign corporation or other foreign legal entity subject to a foreign bankruptcy proceeding in the country in which it is incorporated or established. The definition of ‘debtor’ in Section 240 draws upon the Model Law language of ‘non-main proceedings’ by use of the word ‘established’, but also confers jurisdiction on an application under Part XVII based merely on the debtor’s incorporation in the country of the foreign bankruptcy proceeding court.44 The reference to incorporation as a qualifying test for a foreign representative’s standing to apply for ancillary relief under Part XVII is a lower (more universalist) threshold than that which applies in the Model Law.
Consistent with this liberal approach, Part XVII does not require a determination of a debtor’s centre of main interest45 or any determination as to whether particular foreign proceedings are main or non-main. Further, in order to seek ancillary orders pursuant to Section 241, there is no requirement for a foreign bankruptcy proceeding to be subject to the control of or supervision by the foreign court.46
Foreign office holders or representatives (meaning a trustee, liquidator or other official appointed for the purposes of a foreign bankruptcy proceeding) have been recognised in the Cayman Islands in two noteworthy decisions in Re Bernard L Madoff Investment Securities LLC (BLMIS) (5 February 2010) and Re Reserve International Liquidity Fund (16 April 2010) in reliance upon the dicta in Cambridge Gas Transport Corporation v The Official Committee of Unsecured Creditors47 holding that the purpose of common law (i.e., non-Model Law) recognition is to give a foreign office holder or creditors the remedies to which they would have been entitled if the equivalent proceedings had taken place locally, without the need to commence parallel insolvency proceedings locally.
Article 13 of the Model Law (parity of treatment for foreign and local creditors) is enshrined in Section 242(1)(a) of Part XVII of the Companies Law, which provides that all creditors should be treated equally and fairly, regardless of their domicile.
Articles 15 and 16 of the Model Law set out the procedure for the recognition of foreign insolvency proceedings. ‘In the Cayman Islands, as a matter of established practice, it is likely that a foreign representative of a company will be recognised where it is appointed by a court in the country of the company’s incorporation.’48 The criteria for the Grand Court in deciding whether to make an ancillary order for recognition pursuant to Part XVII of the Companies Law are ‘[…] matters which will best assure an economic and expeditious administration of the debtor’s estate’, consistent with the principles of the Model Law. Article 21 of the Model Law provides for the relief that may be granted to a foreign representative upon recognition. Both Article 21 and Section 241(1) provide for the recognition of foreign representatives, stays of proceedings and enforcement against the debtor’s property, examination of parties with relevant information and assumption of control of assets by the foreign representative.
In Re Trident Microsystems (Far East) Limited 49 is another example of the purposive approach towards international cooperation taken by the Grand Court. Trident was a company incorporated in the Cayman Islands, and its parent company was incorporated in Delaware. Both entities applied to the Delaware Bankruptcy Court for relief seeking, inter alia, the Court’s sanction for the sale of certain assets. In the Grand Court, pending the determination of Trident’s winding-up petition, joint provisional liquidators were appointed, and it was ordered that any sale of the company’s assets be subject to court approval. The Grand Court subsequently adjourned the winding-up petition to allow for a consideration of a potential restructuring of the companies’ TV business after the proposed sale of its set-top box business. In accordance with The Companies Winding Up Rules 2008, Order 21, Rule 2(3), the Delaware Court and the Grand Court approved a cross-border insolvency protocol agreement entered into between the parties that provided a framework for the Courts’ cooperation; in particular, it provided that the liquidators would seek approval of the procedures for the sale of material assets and authority to sell first from the Delaware Court, and thereafter from the Grand Court, and would not complete any sales unless the necessary approvals were received from both Courts.
VI FUTURE DEVELOPMENTS
The Companies Law in the Cayman Islands is substantially derived from the UK Companies Act 1948, and although Part V was revised considerably in 2009, it has not enjoyed the same developments as its English counterpart and those of many other offshore jurisdictions. For example, Part V contains 67 sections, whereas the BVI Insolvency Act comprehensively comprises 505 sections. To fill the various lacunae in the Companies Law, the Grand Court has adopted a purposive approach to its interpretation and developed a cohesive set of principles that largely complement the contemporary common law position.
Notwithstanding the status of the Companies Law, the Cayman Islands Law Reform Commission can and does make recommendations on a regular basis in respect of proposed changes to the Companies Law. In 2014, the Commission circulated a consultation paper examining the position of directors in the Cayman Islands and discussing whether there is a need for codification of directors’ duties. Underpinning the role of the Law Reform Commission is the Insolvency Rules Committee, which is constantly reviewing the Companies Winding Up Rules. It is expected that the monitoring of the Companies Law by the Law Reform Commission and the Insolvency Rules Committee will be a continuing venture to ensure that the legislation meets the needs of the Cayman Islands financial services industry.
1 Ian Mann and Jayson Wood are partners and Chai Ridgers is counsel at Harney Westwood & Riegels.
2 OECD Economic Outlook, Volume 2016 Issue 1, page 12.
3 CIMA website.
5 Goldman Sachs Economic Research, ‘Untangling China’s Credit Conundrum’, 26 January 2015.
6 Section 104(2) of the Companies Law.
7  2 HKLRD 192 per Hon Rogers VP at Section 35; see also Re Luen Cheong Tai International Holdings Ltd  2 HKLRD 719.
8  2 HKLRD 725 per Kwan J at Section 18.4
9 Although untested in the Cayman Islands, English case law suggests this is possible. See Bluecrest Mercantile BV and another v. Vietnam Shipbuilding Industry Group and others  EWHC 1146 (Comm) (22 April 2013).
10 Sections 92(d) and 92(e) of the Companies Law.
11 Section 96 of the Companies Law.
12 Section 97 of the Companies Law.
13 A winding up is deemed to commence at the time of the presentation of the petition (Section 100(2) of the Companies Law).
14 Section 37(7) of the Companies Law.
15 Section 116 of the Companies Law.
16 Section 117 of the Companies Law.
17 Re China Shanshui Cement Group Limited (unreported, 25 November 2015).
18 Re China Milk Products Group Limited [2011 (2) CILR 61].
19 Re Emmadart Ltd .
20 It may be possible in given circumstances for a shadow director to be in breach of fiduciary duties as a director: see Yukong Line Ltd v. Rendsburg Investments Corporation (No. 2)  1 WLR 294, 311.
21 Section 134 of the Companies Law.
22 Section 135 of the Companies Law.
23 Section 136 of the Companies Law.
24 Section 147 of the Companies Law.
25 Fiduciary duties covered by the general obligation include duties to act in good faith; to exercise powers in the company’s interests; to exercise unfettered discretion; not to make a secret profit; to avoid any conflict of interests; and to make disclosure where appropriate.
26 Re D’Jan of London Limited  1BCLC 561. See also the Grand Court decision in Weavering Macro Fixed Income Fund Limited (in liquidation) v. Peteson and Ekstrom (Jones J, 26 August 2011).
27 Section 99 of the Companies Law.
28 Section 37(6)(a) of the Companies Law: ‘A payment out of capital by a company for the redemption or purchase of its own shares is not lawful unless immediately following the date on which the payment out of capital is proposed to be made the company shall be able to pay its debts as they fall due in the ordinary course of business.’
29 Section 112(2) of the Companies Law.
30 Order 12, Rule 2(1) of the Companies Winding Up Rules 2008.
31 Section 146 of the Companies Law.
32 Section 145 of the Companies Law.
33 See RMF Market Neutral Strategies (Master) Limited v. DD Growth Premium 2X Fund [2014 (2) CILR 316].
34 Section 145(2) of the Companies Law.
35 In the Matter of Contel Corporation Limited  SC (Bda) 14 Com.
36 However, note the decision of the Supreme Court in Rubin & Anor v. Eurofinance et al  UKSC 46, which considered that Cambridge Gas had been wrongly decided on the question of whether the Manx court had jurisdiction to order recognition of a plan sanctioned under Chapter 11 of the US Bankruptcy Code. Note also the more recent decision of the Privy Council in Singularis Holdings Limited v. PricewaterhouseCoopers  UKPC 36, in which a majority upheld in theory the principle of ‘modified universalism’ propounded by Lord Hoffmann in Cambridge Gas, confirming it was part of the common law, although subject to local law and public policy, and that the court may only ever act within its own statutory and common law powers.
37 LDK Solar Co, Ltd (in provisional liquidation), HCMP 2215/2014.
38 See the English case of Rodenstock GmbH  EWHC 104 (CH).
39 Re Drax Holdings Ltd  EWHC 2743.
40 See Re Rodenstock GmbH  EWHC 104 (CH) and Re Magyar Telecom BV  EWHC 3800 (Ch).
41 Look Chan Ho, A Commentary on the UNCITRAL Model Law, Third Edition, 2012 (see in particular the chapter written by Tony Heaver-Wren and Jeremy Walton on the Cayman Islands, at page 101).
42 Save that, of course, the certainty of having the same Model Law apply in Cayman as it does in other places creates a common currency (see Guide to the Enactment of the UNCITRAL Model Law on Public Procurement (Guide to the Enactment of the Model Law)).
43 Anthony Smellie, ‘Cayman Islands Judiciary, Grand Cayman, Cayman Islands’, Beijing Law Review, 2011, 2, pages 145–154.
44 Stutts v. Premier Benefit Capital Trust [1992–1993] CILR 605.
45 Look Chan Ho, A Commentary on the UNCITRAL Model Law, Third Edition, 2012 (see in particular the chapter written by Tony Heaver-Wren and Jeremy Walton on the Cayman Islands, at page 105).
46 Consistent with the Model Law, Article 2(a) and (e), and the Guide to the Enactment of the Model Law.
47 Cambridge Gas Transport Corporation v. The Official Committee of Unsecured Creditors ( 3 WLR 689).
48 Look Chan Ho, A Commentary on the UNCITRAL Model Law, Third Edition, 2012 (see in particular the chapter written by Tony Heaver-Wren and Jeremy Walton on the Cayman Islands, at page 110).
49 In the matter of Trident Microsystems (Far East) Limited [2012 (1) CILR 424].