Portfolio of Legal Affairs

Published 6th April 2022, 3:6pm

 

Presentation by the Hon. Attorney General Samuel Bulgin QC

at the INSOL International World Bank Caribbean Round Table

Wednesday, March 9, 2022

 

CAYMAN ISLANDS INSOLVENCY REGIME

 

Description of insolvency regime and key procedures

The Cayman Islands insolvency regime incorporates international best practice and is designed to encourage strategic behaviour by creditors and debtors.

Insolvency in the Cayman Islands is regulated by Part V of the Companies Act (2022 Revision), the Companies Winding Up Rules, 2018, the Insolvency Practitioners Regulations, 2018 and the Foreign Bankruptcy Proceedings (International Co-operation) Rules, 2018. Those provisions are based on the U.K.’s Insolvency laws and have been specifically adapted for the Cayman Islands.

The provisions apply to the winding up of companies, including certain foreign companies and, pursuant to the Exempted Limited Partnership Act, Limited Liability Partnership Act and the Limited Liability Companies Act, to the winding up of exempted limited partnerships, limited liability partnerships and limited liability companies.

Case law is also important and relevant to the insolvency regime. There is a body of Cayman Islands insolvency case law that is developing and where there is no such applicable case law, the Cayman Islands courts will take account of English authorities and decisions from courts in other common law jurisdictions to the extent that they are not inconsistent with our statutory law.

There are four main insolvency procedures in the Cayman Islands:

 

Liquidation by the court (official liquidation);

 

Voluntary liquidation;

 

Winding-up subject to the supervision of the court; and

 

Provisional liquidation.

 

Liquidation procedures may be divided into voluntary procedures and those by the court. The purpose of both is to realise the assets, pay off creditors, and distribute any remaining assets to shareholders. The company will then be dissolved and cease to exist.

Liquidation by the court (official liquidation)

A company may be wound up by the court if it has passed a special resolution requiring it to be wound up, or does not commence its business within a year from its incorporation, or suspends its business for a whole year. A company may also be wound up if it is unable to pay its debts, its duration expires or the court is of the opinion that it is just and equitable that it should be wound up.

 

A petition for a winding up may be presented at any time by the company, any creditor or any contributory of the company.

The Cayman Islands Monetary Authority may also present a winding-up petition to the court at any time in relation to a company which is carrying on a regulated business in the Cayman Islands.

Further, the directors of a company incorporated after 1^st March 2009 may, if the articles of the company expressly provide, present a winding up petition on behalf of the company without the sanction of the shareholders.

Persons filing for liquidation by the court must demonstrate that the company is, or is likely to become, unable to pay its debts when due on a cash-flow basis or by proof of an unpaid debt.

 

Liquidation by the court occurs after a winding-up order is made.

Official liquidators are appointed to conduct the liquidation and their authority displaces that of the company's directors. Secured creditors are still entitled to enforce their security against the company.

Once the affairs of a company in compulsory liquidation have been fully wound up, the court makes an order, on the liquidator’s application, that the company is dissolved.

 

Voluntary winding up

 

A company may be wound up voluntarily if its duration expires or it is unable to pay its debts as they fall due. A winding-up may also take place when a company's directors resolve by special resolution that it should be wound-up voluntarily.

 

Any person, including a director or officer of the company, may be appointed as its voluntary liquidator. Directors' powers cease, except to the extent the company or the liquidator sanctions the continuance of those powers.

 

Where a company is being wound up voluntarily its liquidator must apply to the Court for an order that the liquidation continue.

A transfer of shares, not being a transfer with the sanction of the liquidator, and any alteration in the status of the company's members, made after a voluntary winding up is void.

 

Winding up under the supervision of the Court

When a resolution has been passed by a company to wind up voluntarily, the liquidator or any contributory or creditor may apply to the Court for an order for the continuation of the winding up under the supervision of the Court, on the grounds that:

 

the company is or is likely to become insolvent; or

 

the supervision of the Court will facilitate a more effective, economic or expeditious liquidation of the company in the interests of the contributories and creditors. 

 

When making a supervision order, the Court must appoint one or more qualified insolvency practitioners and may, in addition, appoint one or more foreign practitioners, as liquidator or liquidators of the company. Unless a voluntary liquidator is appointed as an official liquidator, that person must prepare a final report and accounts within twenty-eight days from the date of the supervision order.

 

A supervision order takes effect for all purposes as if it was an order that the company be wound up by the Court except that the liquidation commenced and the prior actions of the voluntary liquidator are valid and binding upon the company and its official liquidator.

 

 

Provisional liquidation

A provisional liquidator may be appointed by the court to protect a company's assets until the hearing of a winding-up petition.

 

A company may make an application for the appointment of a provisional liquidator and must establish that it is or is likely to become unable to pay its debts. Creditors, contributories and the Cayman Islands Monetary Authority may apply for the appointment of provisional liquidators, but they must also demonstrate that there is a prima facie case to wind up the company and that the appointment is necessary to prevent the dissipation of assets, oppression of minority shareholders, mismanagement or misconduct by the company's directors.

 

Provisional liquidators are subject to the court's supervision and carry out the functions that the court confers on them. Their powers may be limited by the order appointing them, and the scope of their powers depends on the reason for their appointment.

 

On the appointment of a provisional liquidator, no suit, action or other proceeding can be continued or commenced against the company without the court's leave. This automatic stay does not prohibit secured creditors from enforcing their security.

Potential or upcoming reforms to the insolvency regime

The Cayman Islands continues to reform its insolvency regime to enhance its design. The recent focus has been to provide further tools to facilitate restructuring. In December 2021, The Cayman Islands Government achieved a major milestone with the enactment of the Companies (Amendment) Act, 2021 which amended Part V of the Companies Act (2021 Revision) and renamed it Company Restructuring and Winding up of Companies and Associations.

 

The Amendment Act, which is expected to commence shortly, addresses three challenges with the current insolvency regime. It remedies an optical deficiency that may deter persons from using Cayman’s restructuring regime, it enhances the recognition and enforcement of our regime in other jurisdictions and clarifies directors standing to access the regime.

 

Currently, under section 104 of the Companies Act, in order for the Court to appoint a restructuring provisional liquidator, a winding up petition first needs to be presented by the company. Section 104 creates an uncomfortable paradox, in order to access a procedure designed to enable the restructuring and rescuing of companies that may be viable, a petition must be filed to commence a procedure designed to wind up and dissolve the company.

 

The Amendment Act addresses this deficiency by introducing a formal restructuring procedure for companies outside the traditional winding up process and under the supervision of a "restructuring officer" and the Grand Court. This separates the procedure to rescue a company from the procedure to wind up a company and facilitates the efficient restructuring of distressed companies for the benefit of their stakeholders. The new stand-alone restructuring regime introduces sections 91A to 91J into Part V of the Companies Act which permit a company to petition the Court and pursue a restructuring or rescue under the supervision of a newly created “restructuring officer” while having the benefit of a stay on claims. It also ensures that adequate protections are in place to protect and preserve the rights of creditors. The introduction of the restructuring petition will alleviate the reputational or commercial impact associated with a petition for a winding up.

 

The stand-alone restructuring regime includes or maintains key features such as:

 

the creditors ability to initiate restructuring; a stay of proceedings;

 

the ability to prevent a “hold-out” by a minority of creditors by binding a proposed compromise or arrangement by a requisite majority of creditors on all the creditors; and

 

details of the manner and extent to which the powers and functions of management are affected and modified by the powers and functions of the restructuring officer.

 

With regards to access, the current route for directors to a present a petition and thereafter access insolvency and restructuring proceeding depends on the company’s incorporation date. Companies incorporated after March 2009 currently have greater access than those incorporated before that date because they can include an express provision in their articles of association that allows the directors to present a winding up petition without requiring a shareholder resolution. The Amendment Act addresses this inconsistency by enabling all existing Cayman Islands companies to opt-in to the regime allowing directors to present a winding up without requiring a shareholder resolution.

 

Finally, regarding recognition and enforcement, the new company restructuring provisions have been strategically placed in Part V of the Companies Act to clarify that they are proceedings pursuant to law relating to insolvency. This placement increases the likelihood that our regime will be recognised in jurisdictions that have implemented the UNCITRAL Model Law on Cross Border Insolvency including the United Kingdom, US and Singapore. This is thought to be an important step in developing Cayman as a major financial centre with the ability to effectively and efficiently facilitate large-scale cross-border restructurings in accordance with established legal principles.

 

Cases per year for restructuring/liquidation and impact of COVID-19

In 2021, there were 14 petitions to the Grand Court to sanction a Scheme of Arrangement and 52 applications for an official liquidation or winding-up subject to the supervision of the court. Additionally, the Registrar of Companies recorded that 2,663 companies were dissolved voluntarily.

These 2021 figures do not appear to be significantly different from the previous years’ figures and the impact of COVID-19 on insolvency activity has not been assessed.