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 (2016 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 the Cayman Islands government assists with 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:
- a liquidation under the supervision of the court;
- b official liquidation;
- c provisional liquidation for the purpose of restructuring; and
- d schemes of arrangement.7
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.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. Many of the winding-up proceedings filed in 2016 were as a result of the challenges in the energy sector or the Chinese economy. There have also been some notable restructuring proceedings relating to companies impacted by the depressed energy sector, including CHC Group Ltd, a provisional liquidation proceeding in aid of a Chapter 11 where approximately US$25 million worth of debt was restructured; Mongolian Mining Corporation, a provisional liquidation with joint Hong Kong and Cayman Islands schemes of arrangement where more than US$760 million of debt was restructured, and Ocean Rig UDW Inc, a provisional liquidation proceeding coupled with four interlinked Cayman Islands schemes of arrangement to restructure approximately US$4 billion worth of debt.
During the 2016 calendar year, 44 winding-up petitions were filed (down from 55 in 2015). There were 35 petitions on the grounds of insolvency, including 15 supervision petitions, and 23 of these companies were wound up. There were seven petitions on just and equitable grounds.
III PLENARY INSOLVENCY PROCEEDINGS
The following is a summary of some of the most significant decisions from the Grand Court, the Cayman Islands Court of Appeal (CICA) and the Privy Council over the past 12 months.
i Pearson (as liquidator of Herald) v. Primeo Fund  UKPCC 19
In Pearson v. Primeo Fund (in official liquidation), the Privy Council has confirmed that: (1) where redeemable shares have been redeemed in accordance with the articles of association; but (2) 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 shareholders in the liquidation waterfall. Herald was a Madoff feeder fund with broadly standard constitutional documents for an open-ended mutual fund. Primeo was a shareholder of Herald and had submitted redemption requests that had matured for a ‘redemption day’ on 1 December 2008. After that date, but before Primeo was paid, the Madoff fraud was uncovered. Herald suspended redemptions on 12 December 2008 and subsequently went into official liquidation. Primeo made a claim in the liquidation for NAV as at 1 December 2008. As is common, Herald’s articles were to the effect that shares are redeemed on the ‘redemption day’ and the shareholder had no further rights after that point (other than to receive payment). Herald, however, contended that Primeo had not been redeemed and was actually still a shareholder because redemption in Section 37(7)(a) of the Companies Law (which deals with the redemption and purchase of a company’s shares where a company is being wound up) had a different meaning than in the company’s articles. Herald argued that ‘redemption’ in Section 37 ‘must be understood as embracing a whole process including payment of proceeds’. This was rejected by the Privy Council. The Privy Council rejected Herald’s argument that ‘redemption’ has a special meaning in Section 37 and that ‘payment is, as a matter of general principle, clearly not an inherent element of the redemption or repurchase by the company of its own shares’. This decision is a strong judicial endorsement of the primacy of a fund’s constitutional documents when determining the status and rights of redeemers and the importance of certainty when it comes to the position of redeemers.
ii In the Matter of CHC Group Ltd (Unreported, Grand Court, 17 January 2017)
In CHC Group Ltd, the Grand Court (McMillan J) confirmed that where a creditor has filed a winding-up petition in respect of a company, that company’s directors may apply for the appointment of restructuring joint provisional liquidators even without a shareholder resolution or authorisation in the company’s articles of association. In reaching his decision, McMillan J ruled that the decisions of In re China Milk Products Group Ltd (where it was held that directors of an insolvent company would be allowed present winding-up petitions without shareholder approval) and In re China Shanshiu Group Limited (that conversely held that directors of a company do not have standing to present a winding-up petition nor apply for the appointment of joint provisional liquidators unless expressly authorised to do so by the company’s articles of association) had no bearing on the situation where there was an extant separate creditor winding-up petition and where there is an application by the company through its directors for the appointment of joint provisional liquidators.
iii In the Matter of Primeo Fund (in liquidation) (CICA, 18 November 2016)
The CICA in Primeo Fund held that the statutory powers of investigation available to a Cayman Islands liquidator pursuant to Sections 103 and 138 of the Companies Law cannot be utilised in order to obtain discovery of documents for the purpose of litigation. Defendants to an action commenced in the name of the company by Cayman Islands liquidators applied to the court for an order that the liquidators be compelled to utilise their statutory powers of investigation to obtain documents from the Bank of Austria (a prior service provider to Primeo). It was alleged that the Bank of Austria was in the possession of documents belonging to Primeo that would assist their defence. Effectively the defendants were seeking third party discovery via the liquidators’ statutory powers of investigation. The liquidators’ view was that the documents sought from the Bank of Austria were not necessary for any aspect of the conduct of the liquidation. Accordingly, the liquidators’ standpoint was that it was not appropriate to use their statutory powers of investigation in this manner. The CICA agreed. The CICA held that the statutory powers of investigation can only be exercised for their statutory purpose – namely to allow liquidators to exercise their statutory functions in relation to the company that is being wound up. These statutory purposes do not include giving a liquidator litigant or a defendant to an action commenced by a liquidator a special advantage over an ordinary litigant or defendant. The liquidators’ statutory powers are not available for the benefit of a party to an action to enforce for its benefit where the purpose of the liquidation will not be served.
iv Skandinaviska Enskilda Banken AB v. Conway and Walker (CICA, 18 November 2016)
The CICA held that certain redemption payments made shortly before the collapse of Weavering Macro Fixed Income Fund (the Fund) constituted voidable preferences that had to be repaid. The Fund collapsed in 2009 after it was revealed as a fraud perpetrated by its investment manager. The liquidators subsequently issued recovery actions, including against the appellant (SEB), which had received over US$8 million in redemption payments in late 2008 and early 2009. The liquidators claimed that such payments constituted voidable preferences under Section 145(1) of the Companies Law. The Grand Court agreed and on 5 January 2016 ordered SEB to repay the US$8 million to the estate with interest. The Grand Court decision was appealed. One of SEB’s defences was that the Fund was not insolvent at the time it made certain of the redemption payments to SEB during December 2008. As the Fund was permitted to make redemption payments up to 30 days after 1 December 2008, SEB argued that the redemption debts only became payable at the end of the period, such that the Fund was not insolvent on a strict cash-flow basis before the end of the period. The CICA held that the cash-flow test of insolvency applicable as a matter of Cayman Islands law is not strictly confined to consideration of debts that are immediately due and payable, but also permits consideration of debts that will become due in the reasonably near future. SEB’s other major defence was that the Fund did not have the requisite dominant intention to prefer SEB when making the redemption payments. The CICA confirmed that the court could draw the inference of an intention to prefer from all the facts of the case, provided that it could be inferred from the evidence that the principal or dominant intention of the party making the payment was to give one or more creditors a preference over the other creditors. However, the CICA rejected the submission that an intention to prefer must carry a ‘taint of dishonesty’. In this case, the CICA held that the Fund’s policy of paying 25 per cent of all December redemptions initially and the balance later was designed to allow certain creditors to be paid before others and, when combined with the fact that the Fund had no prospect of paying the January and February 2009 redeemers, this was sufficient to justify the inference of a dominant intention to prefer. This case is being appealed to the Privy Council and is a test case for 24 further similar cases with respect to the Fund.
v In the matter of Caledonian Securities Limited (in Official Liquidation) (Unreported, Grand Court, 5 May 2016)
In Caledonian Securities, the Grand Court (Chief Justice Smellie) provides instructive guidance to liquidators appointed over trust companies or companies holding trust assets by confirming that liquidators are entitled to be paid by recourse to trust assets where there are no (or a shortfall of) estate assets. Liquidators were appointed to Caledonian Securities Ltd (CSL), a provider of custodial services in respect of assets held on trust for numerous customers. The contractual arrangements between CSL and its customers varied across the board and so a substantial amount of work was carried out (and cost incurred) by the liquidators analysing the positions of individual customers to ensure the return of assets to customers. The Grand Court had previously made an order for the creation of a cash reserve account into which each customer contributed 1 per cent of the value of his or her trust assets. The liquidators sought directions from the Grand Court as to the manner in which the liquidators were authorised to apply the reserve sum (which constituted trust assets) towards payment of costs incurred in the liquidation of CSL. The Chief Justice found that the Court has an inherent equitable jurisdiction to permit liquidators to recover their fees and expenses qua liquidators from trust assets held on behalf of customers where there were no, or a shortfall of, estate assets. This was on the basis that liquidators, as officers of the court and ‘not mere officious inter-meddlers’, were not expected to undertake work that was necessarily required and that had added value to the customers’ assets at their own expense.
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.24 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 work will continue to come out of China and the oil and gas sector.
The courts continue to stress the importance of certainty of investors’ rights both in relation to statutory clawback actions and contractual agreements.
1 Caroline Moran is a partner and Gemma Freeman is an associate 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  (2) CILR 255.
12 Section 94(2) of the Companies Law and China Shanshui Cement Group  (2) CILR 255.
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 Section 91 of the Companies Law.