Cayman Islands:
Restructuring And Corporate Recovery Jurisdiction Guide
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Domestic Procedures
Question |
Answer |
What are the principal insolvency procedures for companies in
your jurisdiction?
|
Liquidation: voluntary and official.
Cayman does not have an equivalent to the English concept of the
company administration or to the Chapter 11 process in the United
States.
Schemes of Arrangement/“Soft Touch Liquidations”
allow the company to enter into an agreement with its shareholders
and/or creditors.
|
Are any of the procedures available on a provisional
basis? |
Yes. A provisional liquidator can be appointed on the
application of a creditor or member after presentation of a
petition but before the making of a winding up order. The Court
must be satisfied that: (i) there is a prima facie case for making
a winding up order; and (ii) it is necessary to prevent the
dissipation or misuse of the company's assets, to prevent the
oppression of minority shareholders or to prevent mismanagement or
misconduct on the part of the company's directors.
In addition, even if the company is not the petitioner, a
company can apply ex parte to appoint a provisional liquidator on
the grounds that:
- the company is or is likely to become
unable to pay its debts; and
- the company intends to present a
compromise or arrangement to its creditors.
|
What requirements are to be satisfied for the procedures to be
pursued? |
Official liquidation
- A company may be wound up by the
Court if it is unable to pay its debts
- A company shall be deemed to be
unable to pay its debts if:
- It fails to comply with, or set
aside, a statutory demand
- Execution of a judgment or order
obtained from the Court is returned unsatisfied
- The company is unable to pay its
debts as they fall due (cash flow test)
- The general rule followed by the
Court is that, where a petitioning creditor can prove that its debt
is unpaid and the company is insolvent, it has a right to a winding
up order
Voluntary liquidation
- May be commenced: (i) automatically
(per the company's M&As); or (ii) by special resolution
of the shareholders
- If the directors are unable to sign a
declaration of solvency within 28 days the liquidation must
continue under the supervision of the Court
- The liquidator or a creditor or
contributory may apply for the liquidation to continue under the
supervision of the court if the company is or is likely to become
insolvent or it would be more effective, economic and expeditious
for the liquidation to continue under Court supervision
Scheme of Arrangement/“Soft Touch
Liquidation”
- As mentioned a company can also apply
for the appointment of a provisional liquidator on the grounds
that: (i) the company is likely to become unable to pay its debts;
and (ii) the company intends to present a compromise or arrangement
to its creditors
- Schemes involve meetings of classes
of creditors/members whose rights are sufficiently similar to allow
them to discuss the effect of the scheme together
- Each class meeting must achieve
statutory majorities of 75% by value and a majority (over 50%) by
number to agree to the proposed agreement
- Once subsequently sanctioned by the
Court, Schemes are binding on all creditors/members
|
What is the procedure and how long does it typically take? |
Official liquidation
The application to the Court for the winding up of a company is
made by petition. For a creditor's or contributory's
petition:
- It will be presented to the Court,
together with verifying and supporting affidavits confirming the
contents of the petition and setting out any other relevant facts
relied upon
- It must also be supported by an
affidavit sworn by the proposed official liquidator in respect of
his or her consent to act, independence, insurance provision and
qualifications. Similar requirements apply in respect of proposed
foreign liquidators
- It must be served on the registered
office of the company and service to be confirmed by an affidavit
of service
- A statutory advertisement of a
creditor's petition must be placed in a suitable newspaper
having circulation in the Cayman Islands (requirements for
advertisements in foreign newspapers apply where a company carries
on business outside of the Cayman Islands)
- The advertisement must be made to
appear not less than 7 business days after service of the petition
on the company and not less than 7 business days before the day of
the hearing
- A directions hearing will be listed
in respect of a contributory's petition
- Petition hearing will typically be
listed within 3 to 6 weeks of a creditor's petition being
presented and 6 to 9 months of a petition on the just and equitable
ground being presented. The Court has a discretion as to whether to
place the company into official liquidation and, if it does so
decide, it will appoint one or more official liquidators or Court
may order an alternative remedy - such as an order that the company
buy out the petitioner's shares
Schemes of Arrangement / "Soft Touch"
liquidations
The following steps are taken:
- Approach to CIMA (regulated
businesses only)
- Filing petition, application for
appointment of provisional liquidators and supporting documents
including an affidavit exhibiting the scheme in draft
- First court hearing –
provisional liquidators usually appointed and scheme meeting
convened
- Where there are concurrent bankruptcy
proceedings
- Scheme circular once finalised and
approved by Court will be sent to creditors/members and the meeting
occurs within notice periods
- Meeting outcome reported to the Court
and a second hearing takes place at Court where the Court can
sanction the Scheme
- If sanctioned, the registrar of
companies will be notified
- Provisional liquidation is thereafter
concluded and petition dismissed
|
Can any procedures be pursued without the involvement of the
Court? |
Yes. Voluntary (solvent) liquidations do not require Court
involvement. |
What is the effect upon control of the company and its assets
during those procedures? |
- Upon appointment (by members or the
Court) the liquidator controls the company's affairs. The
powers of the directors and members cease, save for very limited
exceptions
- Any disposition of the
company's property and any transfer of shares or alteration
in the status of the company's members made after the
commencement of the winding up is, unless the Court otherwise
orders, void upon the making of a winding up order
- Provisional liquidators are subject
to the Court's supervision and only carry out the functions
that the Court orders with such powers as the Court confers on
them
|
Is there an automatic moratorium and, if so, when does it come
into effect and what is its effect? |
Yes (save for in the case of a voluntary liquidation). When a
winding up order is made or a provisional liquidator is appointed,
no suit, action or other proceedings, including criminal
proceedings, shall be proceeded with or commenced against the
company except with leave of the Court and subject to such terms as
the Court may impose. There is also scope to apply for a
stay/moratorium in the period after presentation of a petition and
before a winding-up order is made. |
Can companies be forcibly wound up other than when
insolvent? |
Yes, if:
- The Court considers it is just and
equitable
- The company passes a special
resolution requiring it to be wound up by the Court
- It fails to commence business within
a year of incorporation
- It suspends its business for a whole
year
- The period (if any) fixed by the
company's articles for the company's duration expire,
or an event occurs which under the articles initiates the
company's winding-up
- It is carrying on a regulated
business in the Cayman Islands without being duly licensed or
registered to do so
|
To what extent are the procedures designed to facilitate a
rescue of a company's business? |
Neither an official nor a voluntary liquidation is designed to
facilitate a company rescue but rather to wind up the company by
getting in and distributing the assets of the company to
stakeholders in accordance with prescribed priorities.
The “soft touch” provisional liquidation practice is
designed to facilitate the rescue of a company's business by
a scheme or compromise with creditors/ members with insolvency
professionals working alongside management.
|
Can the procedures be used to facilitate the sale of all or
part of the insolvent company's business? |
Yes. A liquidator has the power, exercisable with Court
sanction, to sell any of the company's property by public
auction or private contract. Powers of sale may also be conferred
on provisional liquidators and exercised with Court sanction. |
Cross Border
Question |
Answer |
To what extent do the courts in your jurisdiction lend
assistance to overseas appointees (through recognition) and in what
circumstances? |
Statutory recognition: the Cayman Islands can provide assistance
to foreign representatives in respect of foreign entities and make
orders ancillary to a foreign bankruptcy proceeding for the below
statutory purposes:
- Recognising the right of a foreign
representative to act in the Cayman Islands on behalf of or in the
name of the 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 of a debtor to be
examined by and produce documents to its foreign
representative
- Ordering the turnover to a foreign
representative of any property belonging to a debtor
In making such an order, the Court will take into account:
- The just treatment of all holders of
claims against or interests in a debtor's estate wherever
they may be domiciled
- The protection of claim holders in
the Cayman Islands against prejudice and inconvenience in the
processing of claims in the foreign bankruptcy proceeding
- The prevention of preferential or
fraudulent dispositions of property comprised in the debtor's
estate
- The distribution of the
debtor's estate amongst creditors substantially in accordance
with the order prescribed by Part V of the Companies Law
- The recognition and enforcement of
security interests created by the debtor
- The non-enforcement of foreign taxes,
fines and penalties
- Comity
Outside the above statutory purposes, the Court may also provide
assistance at common law.
|
Are there any limitations typically imposed in respect of the
recognition of an overseas appointee? |
Yes, if:
- The recognition under statute is
limited to the purposes set out above
- Under common law, the Court will only
assist foreign liquidators in cross- border insolvencies if the
relief sought: (a) could be granted by the foreign court conducting
or controlling the winding-up; and (b) is available at common law
in the Cayman Islands. These principles were set out in the Privy
Council decision (on appeal from Bermuda) of Singularis v
PWC and adopted in the Cayman Islands in the matter of
Primeo Fund [2016] (2) CILR 26
|
What kinds of overseas appointees have been recognised in your
jurisdiction? |
Trustees, liquidators or other officials appointed overseas in
respect of a debtor for the purposes of a foreign bankruptcy
proceeding. |
Do the courts in your jurisdiction assist in applications to
subject a company incorporated in your jurisdiction becoming
subject to an insolvency procedure in another jurisdiction? |
No. The Court has no jurisdiction to provide judicial assistance
under statute upon the application of a foreign representative of
an insolvent company appointed by a court in any country other than
the country of its incorporation. This is to be contrasted with the
approach reflected in the UNCITRAL Model Law which has not been
adopted in Cayman.
Although the Cayman Islands are not a signatory to any
international treaties relating to bankruptcy or insolvency,
liquidations that come before the Court frequently involve an
international element so the Court will usually adopt a
co-operative approach to facilitate the effective winding up of the
company. While the Court will not generally assist a foreign
officer appointed to a Cayman company, it welcomes concurrent
appointments with Cayman insolvency practitioners and has
experience of approving international protocols in circumstances
where Cayman Islands insolvency practitioners are appointed jointly
with representatives from other jurisdictions.
The Court may also recognise and assist a foreign liquidator
appointed in a place other than the place of the company's
incorporation where the relief being sought is an order authorising
the liquidators to make an application to present a parallel scheme
of arrangement (such that there is unlikely to be a winding up
order) and provided that the company has a substantial connection
to and has submitted to the jurisdiction of the appointing court,
(see In re China Agrotech Holidays Limited). |
Creditors
Question |
Answer |
What are the principal forms of security taken in your
jurisdiction in respect of movable and immovable property? |
Mortgages, charges (fixed and floating), liens and
pledges. |
What is the effect on secured creditors of the commencement of
an insolvency proceeding? |
None. The assets fall outside of the liquidation estate. To the
extent that their debt exceeds the value of their security, they
may prove for the unsecured balance in the estate. |
Which creditors are preferred and to what extent?
|
Employees, debts due to bank depositors and taxes due to the
Cayman Islands Government rank in priority to all other debts. |
What is the position regarding the recoverability and quantum
of liquidator's fees and expenses of the insolvency
procedure? |
- The expenses of the liquidation are
payable out of the assets of the company in accordance with
published rules on priorities
- Liquidators can be remunerated based
on time spent, a percentage of recoveries achieved or a combination
of the two (such fee arrangements are subject to regulation and
approval by a liquidation committee and the Court)
- Liquidators can receive payment of an
amount not in excess of 80% of the remuneration sought in the
liquidator's reports and accounts pending approval by the
Court
- For voluntary liquidations brought
under Court supervision (i) expenses and disbursements of the
liquidators; (ii) costs of making the supervision order; and (iii)
remuneration of the liquidator shall rank equally with the expenses
and disbursements incurred by the official liquidator but in
priority to the remuneration of the official liquidator
|
Avoidance transactions
Question |
Answer |
What, if any, categories of transaction can be avoided/set
aside |
Potentially “Voidable Transactions”
comprise:
- Unfair preferences
- Transactions at an undervalue
“Voidable preferences”
- Where the transaction was made
“with a view to giving the creditor a preference over other
creditors”
- Within 6 months preceding the
commencement of the liquidation
- At a time when the company was unable
to pay its debts
In order to demonstrate an intention to prefer one
creditor over others
- There is no requirement to
demonstrate dishonesty
- The intention to prefer must be the
“dominant intention”
- If the payment is motivated by other
factors (eg duress) the transaction may not be voidable
- It is irrelevant if the payment was a
mistake
Transfers to related parties are deemed to have been made with a
view to giving the creditor a preference. A “related
party” includes an entity which has the ability to control
the company or exercise significant influence over the company in
making financial and operating decisions.
Avoidance of dispositions made at an
undervalue
- A disposition of property was made by
the company
- The disposition was made at an
undervalue (for no consideration or for consideration the value of
which is significantly less than the value of the property the
subject of the disposition)
- The disposition was made with an
intent to defraud the company's creditors. There must be an
intention to willfully defeat an obligation or liability (which
includes contingent liability) owed to a creditor which existed on
or prior to the date of the disposition
The burden of establishing intention to defraud is upon the
liquidator and proceedings must be commenced within 6 years of the
disposition. |
Who is responsible for seeking orders to set aside such
transactions? |
The liquidator. |
Contributions to the liquidation estate and liability of
officers
Question |
Answer |
Can directors or shareholders be required to contribute to the
liquidation estate? |
Yes, in the case of:
- Delinquent directors: breaches of
fiduciary duty (e.g. in making preference payments or for
fraudulent trading)
- Fraudulent trading: intention to
defraud creditors of the company or creditors of any other person
or for any fraudulent purpose
- Shareholders paid a dividend: payment
of a dividend is liable to be clawed back from a shareholder where
a company is insolvent. A CI$15,000 fine and imprisonment of up to
5 years may be imposed for knowing and willful breach
- Claw-back claims against the
recipients (shareholders) of preferential redemption payments:
under certain circumstances - the developing law in this area
indicates that such claims are difficult in practice. Note:
redemption payments made from a company's share premium
account are not payments out of capital
|
What liability can directors or other officers attract in
respect of an insolvent company? |
Directors, including shadow directors, may be liable for breach
of their common law or equitable duties, or negligence for failure
to exercise skill and care (note the exculpation and indemnity
provisions in a company's articles of association; however
under Renova v Gilbertson the “irreducible core” of a
fiduciary's obligations, that is the duty to act honestly and
in good faith, remains despite the terms of any indemnity).
Statutory offences relating to the management and liquidation of a
company, including intention to defraud creditors, can give rise to
financial penalties and imprisonment. |
In what circumstances can directors be disqualified as a
consequence of a company being wound up? |
There are no provisions contained in the laws of the Cayman
Islands for the disqualification of directors as a consequence of a
company being wound up.
However, if the company is regulated by CIMA for which directors
are required to be registered and licensed by CIMA, directors may
find that their license is revoked if CIMA becomes aware of
relevant fraud or dishonesty offences or regulatory sanctions
applicable to the registrant.
|
Originally published by Ogier, October 2020
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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