I OVERVIEW OF RESTRUCTURING AND INSOLVENCY ACTIVITY
Ten years after the financial crisis, the global economic recovery is somewhat more optimistic than last year, with global GDP growth projected to be 3.9 per cent in both 2018 and 2019 following a better than expected 2017. However new tensions and key vulnerabilities, including high public debt and private debt created risks, could derail the process. The developments in China's economy cloud the stability of the overall global upturn as economic growth is set to head further south, from 6.9 per cent in 2017 to 6.7 and 6.4 per cent by the end of 2018 and 2019 respectively, as well as the euro area of Germany, France and Italy predicted to fall from 2.5 per cent in 2017 to 2.1 per cent in 2019.
Nevertheless, 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.
The US is the largest source of foreign direct investment (US$260 billion, equal to 47 per cent) followed by Hong Kong (US$56 billion), the Netherlands (US$53 billion) and Brazil (US$52 billion). Outward direct investment from the Cayman Islands goes to Luxembourg, the US, Hong Kong, Singapore, the Netherlands and China. The Cayman Islands is the largest holder of US securities in the world (excluding long-term debt held by Chinese and Japanese central banks). There has been a massive increase in Japanese portfolio investment in the Cayman Islands, from US$574 billion in mid-2015 to nearly US$713 billion a year later. This is double the portfolio investment from Hong Kong, which stands at US$337 billion and is largely because of special legislation enacted to attract investment funds specifically targeted at Japanese investors.
The Cayman Islands' banking sector continues to play a major part in the Cayman Islands' financial services sector, with 149 banks licensed as of 31 March 2018 with the financial and insurance services comprising approximately one-third of GDP. 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 a majority of the world's largest 50 banks by assets, operate in the Cayman Islands.
The 149 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 11 Class A licensed banks in the Cayman Islands, approximately six of which carry out retail services. The remaining banks hold Class B licences and are broadly restricted to offshore transactions with non-residents.
Of the 149 banks licensed in the Cayman Islands, 31 are from Europe, 24 are from the US, 20 are from the Caribbean and Central America, 21 are from Asia and Australia, 15 are from Canada and Mexico, 34 are from South America and four are from the Middle East and Africa. At the end of 2016, banks held US$1.041 trillion assets and US$1.042 trillion liabilities, of which US$1.021 trillion assets and US$985 trillion liabilities were booked by banks as cross-border.
The figures reflect a decline of US$134 billion in assets and US$180 billion in liabilities from the 2015 calendar year end.2 The CIMA attributed the decrease to the exit of Class A banks from the Cayman Islands (banks that operate in both domestic and international markets to provide services to residents and non-residents of the Cayman Islands).3 The decline is also considered to be attributable to the hangover from the financial crisis impacting 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 relatively 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 preference by 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 Chinese debt burden and the far-reaching impact any market correction is likely to have on the global economy. Chinese regulators and banks have been on the offensive in reining in credit creation in light of the trend seen in 2016 of deteriorating credit quality. With overdue and non-performing loans rising as economic growth moderates, it remains to be seen if China can rein in credit creation without jeopardising its goal of sustaining GDP growth rates at above 6 per cent. Chinese banks are still by far the largest source of funding, facilitating massive lending for investment projects that are driven by the need to generate economic activity and employment.
II GENERAL INTRODUCTION TO THE RESTRUCTURING AND INSOLVENCY LEGAL FRAMEWORK
i Formal insolvency and restructuring procedures
Corporate insolvency and restructuring law in the Cayman Islands is principally regulated by the Companies Law (2018 Revision) (the Companies Law) and the Companies Winding Up Rules 2018 (the Winding Up Rules). The statutory provisions applicable to individuals are contained in the Bankruptcy Law 1997 and the Grand Court (Bankruptcy) Rules 1997. This chapter concerns corporate insolvency and restructuring.
The principal insolvency processes in the Cayman Islands are (1) liquidation (compulsory and voluntary); and (2) receivership. The key restructuring tools available in the Cayman Islands are (1) provisional liquidations; and (2) schemes of arrangement.
It is noteworthy that in the Cayman Islands, there is no formal debtor-in-possession rehabilitation regime for distressed companies akin to Chapter 11 of the US Bankruptcy Act, nor an administration regime akin to English insolvency law that provides a blanket moratorium pending corporate rescue. The Cayman Islands, however, has a positive approach to business rescue, and this is demonstrated by the Grand Court's willingness to implement 'light-touch restructuring' through the use of two separate regimes under the Companies Law – appointment of provisional liquidators coupled with the scheme of arrangement process. In short, a 'light-touch restructuring' utilises Section 104(3) in Part V of the Companies Law to appoint provisional liquidators to assist the company in promoting a compromise or arrangement with its creditors under Section 86 of the Companies Law.
The benefit of the 'light-touch restructuring' process is that the appointment of provisional liquidators invokes the statutory moratorium against any proceedings continuing or being commenced against the company, giving the company the necessary time to implement a successful restructuring.
Section 104 of the Companies Law governs the appointment and powers of a provisional liquidator, who may be appointed by the Grand Court of the Cayman Islands (the Grand Court) at any time after the presentation of a winding up petition but before the making of a winding up order.4
Creditors, contributories and the CIMA can apply for the appointment of provisional liquidators,5 but they must satisfy the Grand Court not only that there is a prima facie case to wind up the company but also that the appointment is necessary to prevent dissipation of assets, oppression of minority shareholders or misconduct by the company's directors. Such an application will ordinarily be inter partes; however, it can be made ex parte if exceptional circumstances can be shown. An application to appoint provisional liquidations comprises an originating application (in this case, a winding-up petition), a summons together with a supporting affidavit.
Section 104(3) of the Companies Law provides that an application for the appointment of a provisional liquidator may be made ex parte by the company on the grounds that 'the company intends to present a compromise or arrangement to its creditors'. In order for a company to make an application under Section 104(3) of the Companies Law, the company must establish that it is, or is likely to become, insolvent within the meaning of Section 93. The test for insolvency in the Cayman Islands is a cash-flow based test, which is explored further below.
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; and
- the company benefits from the statutory moratorium on proceedings being continued or commenced against it.6
The powers of a provisional liquidator are limited to those that are set out in the Court order appointing the provisional liquidators.7 The Grand Court has a wide discretion to determine the powers.
In Natural Dairy (NZ) Holdings, the Grand Court granted the joint provisional liquidators full and unfettered powers over all the assets of the company. The joint provisional liquidators convinced the Grand Court that such powers were required in order for them to carry out the tasks for which they were appointed, namely being to investigate possible mismanagement and misconduct; and to prepare a resumption proposal. The provisional liquidators argued that 'the retention of residual powers by the Company's directors was seriously unhelpful and damaging to the ability of the [joint provisional liquidators] to perform their functions and also has resulted in confusion, complications, additional work and unnecessary delays and costs.'
Justice Segal held in Natural Dairy that:
Once the statutory pre-conditions for the appointment of provisional liquidators are established, the Court has a discretion to grant the provisional liquidators such powers as the Court considers necessary and appropriate to prevent such dissipation, misuse, mismanagement and misconduct and to ensure that the Company's assets are properly protected pending the hearing of the winding-up petition.
Although the initial intention of Section 104 was to prevent fraudulent dissipation of assets, it is now commonly used to enable companies to pursue a scheme of arrangement under Section 86 of the Companies Law, without the risk of winding-up proceedings being commenced by an aggressive and dissatisfied creditor in the interim.
Schemes of arrangement
Section 86 of the Companies Law provides for a company to promote a compromise or a scheme of arrangement with its creditors or any class of them, or between its members and any class of them.8 This can be outside or within a liquidation process. It is essentially a compromise, arrangement or reconstruction that is agreed between the parties and has the Grand Court's approval. There is no statutory definition for 'compromise or arrangement' and these words do not place a limitation on each other. They may include most forms of legal transaction if there is an element of 'give and take' for both sides and the transaction receives the necessary approval. The transaction cannot involve a total surrender or confiscation of assets, but there is no requirement that it must be beneficial to all parties.
An application may be made by the company, a creditor or, if the company is being wound up, by the liquidator. The Grand Court Rules9 provide a clear procedural pathway and directions for the sanction of such schemes. This essentially entails:
- a convening hearing: A preliminary court hearing to obtain an order allowing for the convening of the necessary class meetings. While the scheme is being promoted the directors remain in control of the company and can formulate the terms of the proposed scheme;
- meeting of creditors: During the meeting, two tests need to be satisfied for a scheme to be approved at the convened meetings:
- first, 75 per cent in value of the creditors in each class of creditors or members present at the meeting, either in person or by proxy, vote in favour; and
- second, a majority in number of each class vote in favour;
- a sanction hearing: A second court hearing seeking court sanction of the scheme. Once the Grand Court provides sanction, the scheme is binding on creditors or members and against the company itself, or if the company is in liquidation the liquidator and contributories of the company; and
- registration: However, the scheme only becomes effective when the court order sanctioning the scheme is delivered to the Cayman Islands Registrar of Companies for registration.
It is important to note, however, that Section 86 of itself does not confer a statutory moratorium on the company during the period of negotiation or presentation of the scheme, therefore the company remains at risk to aggressive creditor actions while the scheme is being promulgated. This risk can be mitigated in three main ways.
First, companies can use the 'light touch restructuring' tool available under Section 104(3) of the Companies Law, by appointing one or more provisional liquidators to implement the scheme of arrangement procedures under Section 86 (see further Section III). As detailed above, the appointment provisional liquidator will trigger an automatic moratorium.
Second, companies can enter into some form of a standstill or lock-up agreement with major creditors where solvency is an issue.
Third, there may be jurisdiction for a company to 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. Although this is untested in the Cayman Islands, it is to be hoped that the English case of Bluecrest Mercantile BV and another v. Vietnam Shipbuilding Industry Group and others will be followed. In that case, Mr Justice Blair held that his discretion to grant a stay could be exercised in order to protect a proposed scheme of arrangement. Materially, he held that:
It is clear that a vast amount of work has gone into this restructuring and, now that the requisite majority of lenders are agreed and 25 June 2013 is provisionally booked for the hearing, there is at least a reasonable prospect of the scheme finally going ahead. I agreed with [the Applicant] that matters have now reached a delicate stage. I am satisfied that unless I grant a stay now, there is a risk of exactly the kind of free-for-all that Thomas J feared in the Garuda Airlines case. The balance, in my view, is in favour of the proceedings.
Liquidation by the Grand Court
A company may be wound up by the Grand Court if (among other things):
- the company has passed a special resolution requiring the company to be wound up by the Grand Court;
- the company is insolvent; or
- the Grand Court is of the opinion that it is just and equitable that the company should be wound up.10
The last two on the list above are the most common grounds upon which the Grand Court orders the winding up of a company.
A company may be wound up on the basis of insolvency if it is unable to pay its debts as they fall due. A company is treated as unable to pay its debts if:
- it fails to satisfy a valid statutory demand;
- execution on a judgment is returned wholly or partly unsatisfied; or
- it is otherwise proved to the satisfaction of the Grand Court that the company is unable to pay its debts (i.e., a cash-flow test).11 (See also the recent case of NBRL Global Ltd  FSD 83 of 2017 (unreported, 20 June 2017) decided by Parker AJ).
Liquidation by petition
The application to wind up a company can be made by petition at the Grand Court, 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 petition must be made in accordance with the Winding Up Rules, and verified by an affidavit stating the statements made in the petition are true or true to the best of the deponent's knowledge, information and belief.12
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. Once a winding-up order is made:
- the statutory moratorium comes into effect 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;13
- any disposition of the company's property and any transfer of shares made after the commencement of the winding up is void, unless the Grand Court orders otherwise;14
- the powers of the directors are automatically terminated. The liquidators are subject to the supervision of the Grand Court; and
- the winding up is deemed to commence at the time of the presentation of the petition.15 A liquidator appointed to a Cayman Islands company must be an independent and qualified person that is resident in the Cayman Islands and holds the relevant licence.16
For cross-border liquidations, usually multiple liquidators operating in different jurisdictions are appointed over the company, and the qualified liquidator situated overseas will deal with assets and investigations outside the Cayman Islands. In those circumstances, at least one must be a qualified insolvency practitioner resident in the Cayman Islands.
Duties and powers of liquidators
The functions of a liquidator include but are not limited to:
- collecting, realising and distributing the assets of the company to its creditors and, if there is a surplus, to its members; and
- reporting to the company's creditors and contributories upon the affairs of the company and the manner in which it has been wound up.17
A liquidator also has various powers under the Companies Law, some of which could be exercised without sanction of the Grand Court, such as the power to promote a scheme of arrangement, and to collect, get in, and take possession of the property of the company.18 The powers that are only exercisable with sanction of the Grand Court include the power to commence and defend proceedings in the name and on behalf of the company, and to carry on the business of the company so far as may be necessary for its beneficial winding up.19
The relationship between the liquidators' statutory obligations under the Companies Law and the obligation as litigants before the court were discussed by the Court of Appeal in The matter of Primeo Fund (in Official Liquidation).20 In these proceedings, the Bank of Bermuda and HSBC (the Banks) sought to compel the liquidators of Primeo Fund to issue a letter of request against a bank in Austria for books and records of the company under Sections 103 and 138 of the Companies Law. The Banks argued that those books and records from the bank in Austria should be produced by the liquidators as part of discovery. The official liquidators argued that the powers under Sections 103 and 138 should only be exercised for the purposes of liquidation.
At first instance, Justice Jones ordered that the joint official liquidators issue the letter of request. However, this decision was overturned by the Court of Appeal on the basis that: (1) the defendants were attempting to use the liquidators' statutory powers to seek documents from a third party in circumstances where Grand Court Rules did not provide for third party discovery; (2) the first instance judge had conflated the liquidators' statutory duties with the obligation to give discovery under civil procedural law and had wrongly suggested liquidators have to go so far as to assist adversaries to obtain documents in the course of litigation; (3) the court should not interfere with the conduct of the liquidator other than in exceptional circumstances and the rationale for making the order came 'nowhere near' meeting the exceptional circumstances test set out in Edennote; (4) the liquidators' statutory powers are not for the benefit of a party in the liquidation, where the exercising of those powers does not serve the liquidation; and (5) it is an abuse of power if statutory powers conferred for a certain purpose are deliberately used to obtain a result outside the contemplation of the law creating the power.
Secured creditors and distribution of property
The appointment of official liquidators does not prohibit secured creditors from enforcing their security. However, a 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 of 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, the assets of a company will be distributed and applied as follows:
- 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;21 and
- 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.22
A company may be voluntarily wound up by (among other things) passing a members' resolution:
- by a special resolution: the company resolves by special resolution that it be wound up voluntarily; or
- by an ordinary resolution: the company, in general meeting, resolves by ordinary resolution that it be wound up voluntarily because it is unable to pay its debts as they fall due.23
In these cases, the voluntary liquidation of the company commences upon the passing of the resolution.24
At the commencement of a voluntary winding up:
- the company must cease to carry on its business except so far as it may be beneficial for its winding up;
- the company's corporate state and powers will continue until the company is dissolved; and
- any transfer of shares, not being a transfer with the sanction of the liquidator, and any alteration in the status of the company's member is void.25
Any person, including a director or officer of the company, may be appointed as its voluntary liquidator.26 The voluntary liquidator may be removed from office by a resolution of the company in a general meeting convened especially for that purpose.27 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.
Application for supervision order
A voluntary liquidator must 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, the directors sign a declaration of solvency. A declaration of solvency is a declaration that the company will be able to pay its debts in full (with interest) within 12 months of the commencement of the liquidation. The making of a supervision order converts a voluntary liquidation to an official liquidation; and the provisions of Part V of the Companies Law (being the provisions applicable to a winding up by the court) will apply.
Even after a declaration of solvency is made, 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 in the interests of the creditors and members.
Power of directors to present a winding-up petition in the company's name
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 appointment as official liquidator.
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 CHC Group Ltd ,28 a creditor filed a petition to wind up the company, and the directors of the company subsequently filed an application for the appointment of joint provisional liquidators for the purposes of restructuring. The Grand Court was asked to consider whether the directors had the authority to present an application for the appointment of provisional liquidators.
Justice McMillan considered both the decisions of Justice Jones in Re China Milk Products Group Limited and Justice Mangatal in Re China Shanshui Cement Group Limited. In China Milk, it was held that directors of an insolvent company can present a winding-up petition on behalf of their company without approval by the shareholders. However, in China Shanshui, it was held that directors of a company do not have standing or authority to present a winding-up petition, or the power or authority to apply for the appointment of joint provisional liquidators, unless they are expressly authorised to do so by the company's articles of association or a valid shareholder resolution.
Justice McMillan distinguished both China Milk and China Shanshui on the basis that they had no bearing on the present situation. It was held that where a creditor has already filed a winding-up petition in respect of a company, not only may the directors of the company apply for the appointment of joint provisional liquidators, but also that they may take that step without a shareholders resolution or express provision in the company's articles of association. This interpretation appears to contradict the English common law position in Re Emmadart Ltd as well as the Cayman Islands' common law position in China Shanshui. The case of CHC Group confirms the workaround of having a creditor, not the company, file the petition underpinning the proceedings for provisional liquidation for the purposes of restructuring.
Secured creditors can appoint receivers over charged assets to enforce their security interests if the security instrument allows the secured creditor to do so. The security instrument will also specify the asset that the receiver can be appointed over and the extent of the receiver's powers. Under the normal circumstances, the receiver has the power to deal with or sell the charged assets; and the power of sale can be exercised either out of court, or through a court-supervised process. In practice, a power of sale is much more commonly exercised out of court.
A receiver can also be appointed by court order, although in practice this is rare. The primary reason for seeking a court order is to vest the receiver with the implied authority that is given by a court order. This will assist the receiver when he or she exercises powers in any foreign jurisdictions that offer limited recognition to a receiver appointed out of court.
By way of example, most share securities in the Cayman Islands are enforced by way of appointing a receiver out of court. This has a number of advantages: (1) the receiver is deemed to be the agent of charger or mortgagor; (2) it is not necessary to register any transfers to enable the receiver to vote the shares; (3) Cayman Islands law provides criminal penalties for non-cooperation with receivers; and (4) third parties are usually more comfortable taking instructions from a licensed receiver in relation to the collateral (rather than directly from a lender).
Although a receiver is an agent of the mortgagor, his or her primary duty is owed to its appointor (i.e., the creditor). A receiver has various duties, including but not limited to a duty to obtain the best price reasonably possible at the time of selling the charged assets and the duty to exercise his or her powers for a proper purpose (usually, this is to secure repayment of the debt).
The security instrument may provide other forms of enforcement rights other than the appointment of receivers. This may include the right for the secured creditor to take possession of, or in relation to shares to exercise voting rights of, the charged assets; to sell the charged assets to a third party; or to effect any contractual right of set-off or otherwise.
As discussed above, it is noteworthy to repeat that a secured creditor can appoint a receiver under its security instrument even after a winding-up order has been made.29 Despite this, if the charged assets are shares, any transfer of those shares made between the commencement of the winding up and the winding-up order is void, unless otherwise ordered by the court.30
ii Taking of enforcement of security
The Cayman Islands is a creditor-friendly jurisdiction with a general ease of enforcement. As such, it remains a popular jurisdiction for lenders to provide finance.
The most common forms of security in the Cayman Islands are mortgages (legal or equitable) and charges (fixed and floating) over a company's property, undertaking and assets. Save in respect of special asset classes such as, for example, ships, aircraft and land, there is no public filing of security interests. A register of security interests should however be kept at the company's registered office,31 and where security is created over shares, an annotation made in the share register. However, annotation in the register of mortgages or charges does not confer priority, which is determined by common law principles.
iii Duties of directors of companies in financial difficulty
The Companies Law and the common law impose various duties and responsibilities on directors that are owed to the company. However, if a company is insolvent or it is likely to become insolvent, the duties and responsibilities of its directors will also be owed to the company's creditors.
While there is no statutory codification of the general duties and liabilities owed by directors, principles have been derived from English common law. At common law, a director owes two types of duty to the company:
- fiduciary duties: These are broadly described as the duty to act in good faith in dealings with or on behalf of the company, exercise powers for a proper purpose and to exercise the powers and fulfil the duties of the office honestly; and
- duties of skill, care and diligence: In recent years, English and Commonwealth authorities have moved from the traditional subjective test towards an objective test.
Following the common law position, 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.32
Therefore, there is a minimum objective standard that the directors are required to meet, which could be raised if 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.
The Companies Law also imposes penalties upon persons, including but not limited to directors and officers of the company, who are involved in the following types of transactions (as they are defined in the Companies Law): (1) fraud in anticipation of winding up;33 (2) transactions in fraud of creditors;34 (3) misconduct in the winding up;35 and (4) making material omissions from statements relating to the company's affairs.36 These penalties can also extend to shadow directors.37 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. As an example, an investment manager of a company making recommendations as to the purchase or sale of investments should not ordinarily constitute a shadow director.
However, it is important to note that unlike in other common law jurisdictions, the Companies Law does not expressly subject shadow directors to the common law or equitable duties imposed (e.g., the duties set out in the above) on de jure directors.
iv Voidable actions
The Companies Law provides two types of voidable actions by the liquidator to recover assets belonging to the company: (1) claims against members of the company to recover redemption payments; and (2) claims against other third parties to recover company assets.
Claims against members
The following transactions made with a member of the company can be voided by a liquidator:
- 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;38 and
- 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, unless the Grand Court orders otherwise.
In the case of a solvent liquidation, redemption payments may also be voidable where members were overpaid as a result of a misstated net asset value attributed to the company's property. The liquidator will have power to settle and, if necessary, rectify the company's register of members if the company has issued redeemable shares at prices based upon a misstated net asset value that is not binding on the company by reason of fraud or default, with the result that the company:
- has issued an excessive or inadequate number of shares in consideration for the prices paid by one or more subscribes; or
- paid out excessive of inadequate amount to former members in consideration for the redemption of their shares.39
This statutory procedure does not expressly state that former investors must repay any sums; nor does it provide for any procedure to be invoked by the liquidators to make such recoveries. However, it seems to follow that after the restatement of the net asset value of the company and rectification of the register of members, members that were overpaid may be required to make repayments to the company.
This power must also be considered in light of the Privy Council decisions in Fairfield Sentry Ltd v. Migani  UKPC 9 and Pearson v. Primeo Fund  UKPC 19, the effect of which was to allow former members or redemption creditors to retain redemption payments or enforce redemption claims against a BVI and a Cayman Islands company respectively, despite the fact that the net asset value of the shares in question were calculated by reference to fictitious assets and profits. It should be noted that neither the scope nor application of Section 112(2) of the Companies Law was considered by the Board in Pearson v. Primeo Fund, so this may yet be the subject of litigation in future.
Claim against third party
The following transactions with a third party may be voided by a liquidator:
Any transactions in which property of the company is disposed of at undervalue with the intention of defrauding the company's creditors are void upon an application by the official liquidator. 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.40
Any business of the company that has been carried on with the intent to defraud creditors of the company or for any fraudulent purpose can be voided. The liquidator may apply to the Grand Court for a declaration that the transactions are fraudulent and the Grand Court may order those found liable to make contributions to the company's assets.41
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 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. 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, such payment will be deemed to have given a preference. 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. 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.
In the matter of Re Weavering Macro Fixed Income Fund Ltd (in Liquidation), the Court of Appeal considered in substantial detail each stage of the test to be applied in identifying voidable preferences under the Companies Law. Weavering concerned an appeal against an order at first instance declaring certain payments were invalid preference payments.
Intention to prefer
The Court of Appeal dismissed the suggestion that a 'taint of dishonesty' is required in order for a payment or transfer to be deemed preferential. The Court of Appeal explained that the 'preference' referred to in the Companies Law refers to one creditor receiving more than the amount to which they would be entitled on a pari passu basis, not necessarily a preference of a fraudulent nature. It is also irrelevant whether the payment was made by mistake. The liquidator need only prove that the company intended to prefer a creditor over others.
The Court of Appeal also confirmed that common law defences, such as change of position, are not available to statutory claims under section 145(1) and as such, where the elements of Section 145(1) are made out, the payment is automatically voided and must be returned.
In considering whether the company was solvent when the transaction was made, the Court of Appeal confirmed the applicability of the cash flow test in the Cayman Islands and clarified that this test was not confined to debts that are immediately due and payable, but also extends to debts that 'will become due in the reasonably near future' and that any other conclusion would lead to artificiality. This was recently considered by the Grand Court in In The Matter of the NBRL Global, Ltd,42 where it was held that deferred debts remain enforceable and payable, but subject to timing of payment by the terms in the deferral arrangements. The arrangements may be binding legal arrangements to pay later or a goodwill extension of time to pay. The Grand Court further stated that a goodwill extension is no defence to a statutory demand.
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 was published in the Cayman Islands on 28 June 2016 and came into force on 8 July 2016. This is now encapsulated in the Limited Liability Companies Law (2018 Revision) (the LLC Law).
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, to 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.
The Cayman Islands beneficial ownership register regime (the Regime) came into force on 1 July 2017. This requires Cayman Islands companies and limited liability companies to establish and maintain beneficial ownership registers within scope, unless they fall within the exemptions of the Regime. Regulated entities incorporated in the Cayman Islands under the Companies Law and the LLC Law will still be obliged to maintain their local register at the company's registered office address. The registers under the Regime will not need to be submitted immediately to the government but instead, the separate registers will be accessed from a central point within the Cayman Islands government, when the need arises. The registers will not be open to the public unless and until that becomes an accepted and implemented international standard. This strikes a sensible balance by enabling law enforcement authorities to have access to the information they need in cases where there may be an abuse of the corporate veil, while continuing to protect the privacy of legitimate commercial interests and individuals.
2018 saw the introduction of the Companies Law (2018 Revision) and the Companies Winding Up Rules 2018 both of which came into force on 1 February 2018; insolvency practitioners also saw the introduction of the Insolvency Practitioners Regulations 2018 coming into effect on the same date. Internationally, the Foreign Bankruptcy Proceedings (International Cooperation) Rules 2018 made by the Insolvency Rules Committee pursuant to Section 155 of the Companies Law (2016 Revision) (as amended) also came into force.
IV SIGNIFICANT TRANSACTIONS, KEY DEVELOPMENTS AND MOST ACTIVE INDUSTRIES
i A light-touch restructuring
As there is no statutory fetter on the Grand Court's discretion to determine the functions and powers of the provisional liquidators, recent case law demonstrates that in appropriate circumstances, a provisional liquidator appointed with powers to preserve assets may also have powers to promote a scheme of arrangement or other compromise or arrangement with the company's creditors or members. In the Cayman Islands, provisional liquidators have powers to promote a scheme or compromise without sanction.43
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.44
Re Legend was recently clarified in China Solar Energy Holdings Limited.45 In that case, provisional liquidators were appointed to the company with asset preservation and restructuring powers, and they procured an investor to inject a profit-making business into the company. A creditor did not support the restructuring proposal and sought to discharge the provisional liquidators. The creditor argued that following Re Legend, appointment of provisional liquidators can only be appointed 'for the purposes of winding up' and restructuring of a company is 'an alternative to a winding up'. Accordingly, the provisional liquidators should be discharged.
Mr Justice Harris held that the creditor's argument is a misreading of Re Legend and does not comport with the Hong Kong statutory regime. The Hong Kong Court of First Instance clarified that:
- the law has never been that provisional liquidation is meant to lead to a winding up, but rather that it ensures that winding up will not be frustrated;
- where matters associated with a winding up are absent, in particular where the company's assets are not in jeopardy, it would not be appropriate to order provisional liquidation despite the company's need for restructuring; and
- post-Re Legend case law states that even after the provisional liquidators have secured the company's assets, they may continue to exercise their restructuring powers pending the resolution of the winding-up petition.
The area of 'light-touch' restructuring is still developing in the Cayman Islands, as evidenced in the ruling in Re Grant T G Gold Holdings Limited. Justice Segal released an Outline Ruling in the case, where the Grand Court considered a creditor's winding-up petition and application for the appointment of provisional liquidators. The company sought an adjournment of the petition in order to allow it to progress an early stage restructuring. Justice Segal found that, in light of all the circumstances, it would not be appropriate to order a winding up or to appoint 'light touch' provisional liquidators. Justice Segal seemed to rely on the principles in Re Demaglass Holdings Ltd, that in the absence of a good reason (such as the opposition of a majority of creditors or lack of prospective benefit from the appointment of a liquidator), a company's unpaid creditor is entitled to a winding-up order virtually as of right. In the present case, the restructuring had the support of a significant group of creditors who also opposed the winding-up order, and there was evidence that an immediate winding up might negatively impact the proposed restructuring. Accordingly, Justice Segal granted a short adjournment that would allow the company to progress its proposed restructuring, and the court could review the position in a timely manner to ensure that the position of all creditors was protected.
In a similar case before Chief Justice Ian Kawaley in the Bermuda Commercial Court, Up Energy Development Group Limited, Justice Segal's ruling was relied upon by the company in an attempt to resist a creditor's application for the appointment of provisional liquidators on the basis that it had appointed its own restructuring advisers and that deference should be given to the position of the majority of creditors, who also opposed appointment of the provisional liquidators. Chief Justice Kawaley did not appear to place much weight on Justice Segal's ruling, and instead held that the role of provisional liquidators in insolvency restructurings was so deeply entrenched in Bermudian insolvency law practice that it was now a legitimate expectation of stakeholders. The Chief Justice went on to state that there was a strong starting assumption in favour of the appointment of provisional liquidators and that it would be a heavy burden to displace. Chief Justice Kawaley appeared to distinguish the position in respect of the weight to be given to the view of the majority creditors when deciding: (1) whether or not to adjourn for restructuring purposes rather than immediately order a winding up, which would ordinarily be considerable (consistent with Re Demaglass Holdings); and (2) whether to appointment provisional liquidators to monitor a restructuring process, which the court was not obliged to blindly follow.
As of publication, Justice Segal's full judgment has yet to be released, and it will be curious to see whether he delves deeper into the relevant legal principles and considers the wider impact that the appointment of provisional liquidators can have beyond simply preventing a winding up. At the least, these decisions are interesting to the extent that they appear to evidence a dichotomy between the Cayman Islands and Bermuda positions regarding the appointment of light-touch provisional liquidators where a restructuring is proposed.
In continuing with Bermuda position to inform us on the possible path the Cayman Islands may take with regard to light-touch provisional liquidators and restructuring, Chief Justice Kawaley in Z-Obee Holdings Limited appointed Hong Kong restructuring provisional liquidators as joint provisional liquidators over a Bermuda-incorporated company for the express purpose of initiating a restructuring. Z-Obee applied to appoint Hong Kong provisional liquidators as Bermuda provisional liquidators for the explicit purpose of restructuring the company. It was explained to the Bermuda Supreme Court that an important reason for the application was the inability of the Hong Kong courts to use provisional liquidators for restructuring purposes under Hong Kong law. Once the Bermuda provisional liquidators were appointed, they would ask the Bermuda Supreme Court to issue a letter of request to the Hong Kong courts for recognition and assistance in the standard form acceptable to the Hong Kong courts.
In a remarkable piece of judicial cooperation, Mr Justice Jonathan Harris of the Companies Court of the High Court of Hong Kong had earlier adjourned a winding-up petition in relation to the company in Hong Kong precisely so that an application to appoint restructuring provisional liquidators in Bermuda could be made, thereby making modern restructuring law available to an offshore incorporated, Hong Kong-listed company. Parallel schemes of arrangement in both Hong Kong and Bermuda would likely be the restructuring tools of choice. To progress the restructuring, Hong Kong provisional liquidators were later discharged so that the joint provisional liquidators appointed in Bermuda could seek recognition of their appointment in Hong Kong. At that point, the joint provisional liquidators introduced parallel schemes to ultimately effect the restructuring of the company in Hong Kong and Bermuda.
The decisions by Chief Justice Kawaley in the Bermuda Supreme Court and Mr Justice Harris in the High Court of Hong Kong demonstrate the common law recognition and assistance techniques available to the courts and practitioners in attempting to solve problems encountered in cross-border insolvency. Furthermore, the case of Z-Obee goes to mitigate the effects of the Re Legend case that held that the statutory power to appoint provisional liquidators under the Companies Ordinance in Hong Kong to restructure a company's debt, as opposed to preserve assets, is impermissible. With the judicious use of these staged applications in the offshore and onshore courts, Z-Obee has successfully 'slingshotted' modern offshore restructuring law into an onshore jurisdiction.
The full extent and effect of the Cayman Islands' light-touch restructuring regime was demonstrated in the restructuring of Mongolian Mining Corporation in the first half of 2017. Mongolian Mining was a Cayman Islands-incorporated, Hong Kong Stock Exchange-listed, coking coal producer and exporter operating in Mongolia. The company struggled with declining coal prices, caused by oversupply and a weakening demand for China's steel industry, leading to the need to restructure more than US$760 million in offshore domiciled debt. The restructuring was executed by way of a Cayman Islands provisional liquidation of Mongolian Mining, parallel schemes of arrangement under the laws of the Cayman Islands and Hong Kong, bespoke out-of-court consensual arrangements with certain creditors and recognition of the Cayman Islands provisional liquidation proceedings and schemes of arrangement in the United States under Chapter 15 of the US Bankruptcy Code. This successful restructuring was a favourable outcome for Mongolian Mining and its stakeholders and has reinforced the Cayman Islands as a leading restructuring jurisdiction, thanks to the Cayman Islands courts, legislative framework and insolvency practitioners.
In the recent case of Ocean Rig,46 four companies in the Ocean Rig Group (three of which were Marshall Islands companies) successfully restructured US$3.7 billion New York law-governed debt using Cayman Islands provisional liquidation and schemes of arrangement regime. The schemes were effected through the provisional liquidation mechanism and are clear examples of the Cayman Islands courts' willingness and ability to sanction complex restructurings.
Ocean Rig is novel both for its complexity and the size of the restructured debt. In particular:
- the schemes were promoted by scheme companies themselves, rather than the provisional liquidators (who oversaw and supported the schemes in any event);
- the scheme companies obtained the benefit of a statutory moratorium on adverse creditor action and the appointment allowed companies to seek a temporary restraining order in the US pending Chapter 15 US Bankruptcy Code recognition;
- the Grand Court appointed provisional liquidators to the Marshall Islands companies, which confirmed the breadth of the Cayman Island's restructuring jurisdiction; and
- the Grand Court sanctioned the proposed schemes despite dissent from minority creditors, who argued that they belong to a separate class of creditors. The Grand Court applied the relevant test47 and ruled against the minority creditors. This restructuring-friendly analysis further boosts the Cayman Island's reputation in circumstances where other common law jurisdictions are also prepared to be flexible in the interests of facilitating restructuring.
ii General cases
In the recent case of Natural Dairy (NZ) Holdings Limited, the Grand Court confirmed that the court may substitute a contributory petitioner on a contributory's winding-up petition, even though there was no express power to do so under the Winding Up Rules. Following the presentation of the petition, the Petitioner discovered it was the beneficial – not the registered – owner of its shares, and, therefore, did not have standing to petition for winding up under the Companies Law. The company argued that substitution was not possible and sought to strike out the petition as a nullity. It was argued successfully that the court should allow substitution and pointed to the practice of the Cayman Islands courts prior to the introduction of the Winding Up Rules, and the modern practice of the English High Court, to permit substitution on a contributory's petition, notwithstanding the absence of an express power to do so under the Insolvency Rules 1986, which applied in the jurisdiction prior to the introduction of the Winding Up Rules. The Petitioner relied on a series of decisions starting with HSH Cayman I GP Limited in which the Cayman Islands courts confirmed their inherent jurisdiction to deal with irregularities in Winding Up Rules proceedings. This was necessitated by the lack of an equivalent in the Winding Up Rules to Order 2, Rule 1 of the Grand Court Rules, which enabled the court to relieve a party from non-compliance with procedural requirements. Justice Segal permitted substitution, pointing out that the lack of an express power to substitute on contributories' petitions – in contrast with the position regarding creditors' petitions – was probably because the rule was intended to prevent companies paying off petitioning creditors one by one, and there was less need for such a rule regarding contributories' petitions as contributories are not so easily bought off. New Rule 21 of the Winding Up Rules 2018 now provides that where a company petitions and is later found not to have been entitled to do so or where the petitioner fails to advertise, withdraws the petition, fails to appear, seeks to adjourn, seeks dismissal of the petition or does not apply for an order it sought in its petition, the Grand Court may substitute that petitioner and the date of the original petition shall stand as the date of the original petition.
The Grand Court in Uni-Asia Holdings Limited recently sanctioned a members' meeting of a company for the purpose of considering a 'migration' scheme of arrangement. The arrangement proposed by the Cayman Islands company was that its members exchange their shares for shares in a Singaporean company. The intended objective – an internal restructuring – was for the Singaporean company to become the new holdings company for the group and the Cayman Islands company to become its subsidiary.
Shareholders may hold their shares through a central depository, with the result that a single shareholder (the depository) may hold shares on behalf of several owners beneficially. This poses a unique problem in a members' scheme of arrangement because the scheme is passed on a 'head count' (and 'value') test.
In the Cayman Islands, the approved approach is to look through the register and treat the registered shareholders as having a head for each beneficial owner, rather than a single head, for the head count test. The challenge then becomes how to incorporate a mechanism into the scheme documents that enfranchises those beneficial owners to vote on the scheme when that right otherwise rests with the registered shareholder.
In Uni-Asia, the Grand Court approved a mechanism by which the nominee gave voting proxies to each beneficial owner (or someone else appointed by the owner) in respect of that owner's shares. The Grand Court rolled up its sleeves when it came to the drafting of the scheme documents on that issue (and others) requiring that: (1) the mechanism be hardwired into the scheme documents – it was not sufficient to rely on a provision in the articles of association by which the registered shareholder was 'deemed' to authorise a beneficial owner to act even without a formal proxy; and (2) the order specify that the registered shareholder be able to split its vote.
The Cayman Islands is one of the world's leading international financial centres and, since the introduction of the Mutual Funds Law in 1993, has grown into one of the world's leading offshore investment jurisdictions. As such, it is highly accustomed to handling international matters, and the Grand Court is frequently called upon to recognise and facilitate cross-border restructurings of conglomerates that are either domiciled or hold assets in the Cayman Islands. As a result, it has rightly earned the reputation of being at the forefront of cross-border cooperation and development.
While the Cayman Islands has elected not to adopt the UNCITRAL Model Law on Cross-Border Insolvency (the Model Law) per se, it has enacted its own rules and procedures pursuant to which the Grand Court applies Model Law principles in a manner that means the adoption of the Model Law is not strictly necessary within its jurisdiction.48
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, which are supplemented by the Foreign Bankruptcy Proceedings (International Co-operation) Rules 2018. 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 and in some ways, 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.
The main key provisions are contained within Sections 240–243 of the Companies Law.
Section 241 of the Companies Law entitles the Grand Court to provide recognition and ancillary relief to a 'foreign representative' who has been appointed to a 'debtor' in the course of a 'foreign bankruptcy proceeding'. Specifically orders may be made for the purposes of:
- recognising the right of a foreign representative to act in the Islands on behalf of or in the name of a debtor;
- enjoining the commencement or staying the continuation of legal proceedings against a debtor;
- staying the enforcement of any judgment against a debtor;
- requiring a person in possession of information relating to the business or affairs be examined by and produce documents to its foreign representatives; and
- ordering the turnover to a foreign representative of any property belonging to a debtor.
Section 240 of the Companies Law defines a 'debtor' as a foreign corporation or other foreign legal entity that is subject to a foreign bankruptcy proceeding in the country in which it is incorporated or established. These provisions are commonly used for local recognition of extant proceedings in relation to companies incorporated in and subject to the laws of the United States. Notably, Part XVII confers jurisdiction based merely on the debtor's incorporation (i.e., that the foreign bankruptcy proceedings are in the company's country of incorporation.49 The reference to simply incorporation as a qualifying test for a foreign representative's standing to apply for ancillary relief is a somewhat lower and more universalist threshold than has been applied under the Model Law.
Consistent with this liberal approach, Part XVII does not require a determination of a debtor's centre of main interest 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.
Pursuant to Section 242(1) of the Companies Law, in determining whether to make an order under Section 241, the court will be guided by matters that will best ensure an economic and expeditious administration of the debtors estate, including the just treatment of all creditors wherever they may be domiciled (a long-established principle underlying Cayman Islands insolvency law),50 protection against prejudice and inconvenience in processing claims in the foreign proceeding, the prevention of preferential or fraudulent dispositions of property, the distribution of the estate in accordance with the statutory waterfall of payments and the recognition and enforcement of security interests.
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 and Re Reserve International Liquidity Fund.51 Both cases relied upon the dicta in Cambridge Gas Transport Corporation v. The Official Committee of Unsecured Creditors,52 which held 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. The statutory jurisdiction in cross-border cases has not pre-empted or replaced the existing common law jurisdiction. As Jones J in Picard and Bernard L Madoff Securities LLC (in liquidation) v. Primeo Fund (in liquidation) commented:
Part XVII of the Companies Law supplements and partially codifies the common law. It does not abolish the common law rules which continue to exist alongside the new statutory provision.53
In respect of companies incorporated in the Cayman Islands that are subject to Cayman Islands law and subject to overseas insolvency proceedings (which are not governed by Section 241 of the Companies Law as they are not subject to a foreign bankruptcy proceeding in the country in which they are incorporated within the meaning of Part XVII), the Grand Court commonly draws on common law cross-border insolvency principles to recognise overseas attempts to effect a restructure. In Re Lancelot Investors Fund Ltd,54 Quin J emphasised that the Cayman Islands Grand Court 'embraces the concept of facilitation of co-operation and co-ordination in cross-border insolvency proceedings'. Accordingly, the Grand Court has on numerous occasions appointed provisional liquidators to companies in the Cayman Islands (at the behest of either the company itself or creditors) where they are subject to extant Chapter 11 proceedings in the United States.55 In the landmark Cayman Islands case of China Agrotech Holdings Limited, Justice Segal, citing with approval the Singapore decision of Re Opti-Medix Ltd (in liquidation)56 and the Cayman Islands decision of FU JI Food Catering Services Holdings Limited,57 held that the Grand Court could grant common law assistance to a liquidator who was not appointed in the place of incorporation of the company.
In China Agrotech, the Grand Court considered an application by the Hong Kong liquidators (the Agrotech Liquidators) of a Cayman Islands company, China Agrotech Holdings Limited (China Agrotech Company), together with a letter of request issued by the High Court of Hong Kong to seek powers and authority, by way of common law assistance, to act on behalf of China Agrotech Company to present an application to promote a scheme of arrangement between Agrotech and its creditors in the Cayman Islands as part of a corporate rescue involving a parallel scheme of arrangement in Hong Kong.
In permitting the Agrotech Liquidators to apply on behalf of China Agrotech Company to present a petition under Section 86(1) of the Companies Law to promote the parallel scheme in the Cayman Islands, the Grand Court held that:
- since the Agrotech Liquidators were appointed in a place other than China Agrotech Company's place of incorporation, they could not be empowered to act on behalf of China Agrotech Company as a matter of Cayman Islands private international law;
- the Grand Court was unable to grant relief in the form provided in the letter of request to treat the Agrotech Liquidators 'in all respects in the same manner as if they had been appointed as joint and several provisional liquidators by [the Cayman] Court' as no such provisional liquidators had been appointed and any such order seemed to be impermissible (per Lord Collins in Rubin and Singularis);
- however, the Grand Court could and should exercise its discretion to recognise and assist the Agrotech Liquidators in authorising them to make an application under Section 86(1) of the Companies Law and to consent to the proposed scheme on China Agrotech Company's behalf; and
- in addition, while a moratorium under Section 97 of the Companies Law was only available to Cayman Islands-appointed liquidators, the Grand Court invoked its case management powers to grant similar relief. These powers included requiring any action against China Agrotech Company in the Cayman Islands to be listed before the same judge, to ensure that proceedings against China Agrotech Company could be stayed or adjourned pending the outcome of the sanctioning of the scheme.
China Agrotech was recently considered in Changgang Duxin Enterprise Company Limited58 where the Grand Court granted common law recognition of joint provisional liquidators that were appointed in Hong Kong to act in the name of and on behalf of the company for the purposes of presenting a winding-up petition to the Grand Court for the company. In Changgang, the relevant company was incorporated in the Cayman Islands but registered in Hong Kong. Joint provisional liquidators were appointed in Hong Kong, and at the time it was considered that Hong Kong law did not allow provisional liquidators to be appointed solely for the purposes of enabling corporate rescue (but see now China Solar Energy Holdings Limited59). The joint provisional liquidators successfully applied to be recognised in the Cayman Islands as well.
Following China Solar (which sought to clarify Re Legend), it appears that joint provisional liquidators can now be appointed in Hong Kong for restructuring purposes as long as there are also good grounds to petition to wind up the company. However, it is still thought that the place of incorporation will be the most appropriate forum to wind up a company.60
The Winding Up Rules, Order 21 also provides for an official liquidator in the Cayman Islands to enter into an international protocol regime with a foreign office holder (which could include a liquidator or trustee) when a company subject to Part V of the Companies Law (winding up by the Grand Court) in the Cayman Islands has assets located in other jurisdictions.
In Re Trident Microsystems (Far East) Ltd,61 Cresswell J expressly found that 'the principles in the Companies Winding Up Rules 2008, O.21 concerning international protocols applied equally to provisional liquidations'. Thus the Grand Court has extended the application of these international protocol provisions to joint provisional liquidators who may be overseeing a restructuring, demonstrating its purposive approach towards international cooperation. 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. 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.
In October 2016, judges from 10 different jurisdictions, including the Cayman Islands, met in Singapore for the inaugural Judicial Insolvency Network (JIN) Conference. The result of the conference was the JIN Guidelines for Cooperation in Cross-Border Insolvency Matters. The Guidelines were designed primarily to enhance communication between courts, insolvency representatives and other parties in the context of global restructurings and insolvency. As a result of the increased efficiency, it is hoped that stakeholders will see a reduction in delays and costs. As of the date of publication of this chapter, Bermuda and the BVI have both adopted the Guidelines. It will be interesting to see if and when the Cayman Islands considers it appropriate to follow suit.62
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. The Commission published its Final Report on 30 March 2017. Taking into account the extensive comments from stakeholders, the Commission was persuaded that codification in this area of law was not appropriate in light of the principles established under common law but that the issue may be revisited in the future. The Commission also concluded that there was no need to expand the legislative regime for the disqualification of directors or to introduce legislation concerning the indemnification of directors. The Law Reform Commission, in its Annual Report No. 13 dated 31 March 2018, reports that it has been requested to examine the laws and Practice Directions applicable when dealing with the rights and obligations of the mortgagor and mortgagee in relation to bank foreclosure proceedings. Underpinning the role of the Law Reform Commission is the Insolvency Rules Committee, which is constantly reviewing the 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.
Nevertheless, Cayman Islands insolvency and restructuring professionals are currently discussing revisions of the Companies Law, which would have the effect of introducing 'restructuring officers'. It is hoped, however, that any amendments will maintain the present balance in Cayman Islands restructuring provisions of the rights of all interested parties.
The 'just and equitable' winding-up petition is the remedy of choice for aggrieved shareholders in Cayman Islands companies. Not only is a petition the gateway to winding up a company, but once the court is satisfied that it is just and equitable to do so, it may grant alternative relief such as order regulating the conduct of the company's affairs, or an order that a shareholder be bought out. However, the Companies Law expressly limits the right to petition to a shareholder who is either the original allottee of shares, or has been the registered shareholder for at least six months prior to presentation of the petition. This provision reinforces and extends the common law principles that a company need not recognise trusts of its shares, which has also be recognised by the Cayman Islands courts in Svanstrom v. Jonasson63 and Schultz v. Reynolds,64 both of which held that the beneficial owner of shares was not able to purse a derivative action in the name of the company. The expressed legislative intent behind this provision was to prevent vulture funds from buying shares purely for the purpose of petitioning. However, the effect is to exclude the large number of investors who hold their shares through custodians or clearinghouses from the remedy of just and equitable winding up.
The vast majority of such investors are unaware that this is the effect of using a custodian, and many custodians are unwilling to petition. Even if a custodian is willing to transfer the shares to the beneficial owner to allow it to petition in its own name, in most cases relief is required urgently and the requirement to wait six months before petitioning will be fatal. The law is ripe for review, as the effect of the current provisions, combined with the widespread use of nominees, is that many investors are left without an effective remedy for wrongdoing by the company.
1 Ian Mann and Chai Ridgers are partners and Lorinda Peasland is a consultant at Harney Westwood & Riegels.
2 The 2016 Banking Digest of the Cayman Islands Monetary Authority, pages 14–15.
3 Cayman's banking sector continued slide in 2016, 2 January 2018, the Cayman Compass: https://www.caymancompass.com/2018/01/02/caymans-banking-sector-continued-slide-in-2016/.
4 Section 104(1) of the Companies Law.
5 Section 104(2) of the Companies Law.
6 Section 97 of the Companies Law.
7 Section 104(4) of the Companies Law.
8 Section 86 of the Companies Law.
9 Grand Court Rules, Order 102, Rule 20.
10 Section 92 of the Companies Law.
11 Section 93 of the Companies Law.
12 Order 3, Rule 3 of the Winding Up Rules.
13 Section 97 of the Companies Law.
14 Section 99 of the Companies Law.
15 Section 100(2) of the Companies Law.
16 Rules 4–6 of the Insolvency Practitioner's Regulations 2018.
17 Section 110 of the Companies Law.
18 Section 110 and Part II Schedule 3 to the Companies Law.
19 Section 110 and Part I Schedule 3 of the Companies Law.
20 FSD 30 of 2010 (unreported, 21 November 2016).
21 Schedule 2 of the Companies Law.
22 Sections 140 and 141 of the Companies Law.
23 Section 116 of the Companies Law.
24 Section 117 of the Companies Law.
25 Sections 118 and 125 of the Companies Law.
26 Section 120 of the Companies Law.
27 Section 121 of the Companies Law.
28 FSD 5 of 2017 (unreported, 24 January 2017).
29 Section 142 of the Companies Law.
30 Section 99 of the Companies Law.
31 Section 54 of the Companies Law.
32 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).
33 Section 134 of the Companies Law.
34 Section 135 of the Companies Law.
35 Section 136 of the Companies Law.
36 Section 137 of the Companies Law.
37 Sections 134–136 and 147 of the Companies Law.
38 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.'
39 Section 112 of the Companies Law, and Order 12 Rule 2 of the Winding Up Rules.
40 Section 146 of the Companies Law.
41 Section 147 of the Companies Law.
42 FSD 83 of 2017 (unreported, 20 June 2017).
43 Sections 89 and 110 of the Companies Law. China Solar Energy  HKCFI 555 (20 March 2013) and In Ocean Rig UDW Inc, Drill Rigs Holdings Inc FSD 100, 101, 102 and 103 of 2017 (unreported, 18 September 2017).
44  2 HKLRD 192 per Hon Rogers VP at Section 35; see also Re Luen Cheong Tai International Holdings Ltd  2 HKLRD 719.
45  HKCFI 555.
46 FSD 100, 101, 102 and 103 of 2017, (unreported, 18 September 2017).
47 The test is whether the persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest as applied in Soverign Life Asurance Co v. Dodd  2 QB 573.
48 Save that, of course, the certainty of having the same Model Law apply in the Cayman Islands 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)).
49 Stutts v. Premier Benefit Capital Trust [1992–1993] CILR 605.
50 Akin to Article 13 of the Model Law (parity of treatment for foreign and local creditors).
51 16 April 2010.
52  3 WLR 689.
53  (1) CILR 164 at paragraph 13.
54  CILR 7.
55 See Re Fruit of the Loom Ltd (in provisional liquidation) Cause 823 of 1999 (unreported, 30 October 2000), where the Cayman Islands-domiciled company filed for protection under Chapter 11 in Delaware contemporaneously with an application for the appointment of provisional liquidators in the Cayman Islands and Arcapatia Investments Holdings Limited, 19 March 2012 (unreported).
56  SGHC 108.
57 FSD 222 of 2010.
58 FSD 270 of 2017 (unreported, 1 March 2018).
59  HKCFI 555.
60 Hong Kong Court of Final Appeal in Kam Leung Sui Kwan v. Kam Kwan Lai (2015) 18 HKCFAR 501.
61  (1) CILR 424.
62 Wessels, Bob 'JIN Guidelines strengthen court-to-court cross-border cooperation in insolvency cases' Leiden Law Blog, 29 May 2017 (http://leidenlawblog.nl/articles/jin-guidelines-strengthen-court-to-
63  CILR 192.
64 [1992-3] CILR 59.