Guide to restructuring and corporate recovery

What are the principal insolvency procedures for companies in the Cayman Islands?

Liquidation: voluntary and official.

The Cayman Islands 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 a 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:

• there is a prima facie case for making a winding-up order; and
• it is necessary to prevent:
  • the dissipation or misuse of the company's assets;
  • the oppression of minority shareholders; or
  • 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 must 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 will 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; or
• 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
Voluntary liquidation may be commenced:

• automatically (per the company's memorandum and articles of association); or
• by special resolution of the shareholders.

If the directors do not 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.

Schemes of arrangement/soft-touch liquidations
As mentioned, a company can also apply for the appointment of a provisional liquidator on the grounds that:

• it is likely to become unable to pay its debts; and
• it 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 approved by the court, schemes are binding on all creditors and 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, the following apply:

• The petition 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.
• The petition must also be supported by an affidavit sworn by the proposed official liquidator in respect of their consent to act, independence, insurance provision and qualifications. Similar requirements apply in respect of proposed foreign liquidators.
• The petition must be served on the registered office of the company and service must 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 the Cayman Islands).
• The advertisement must be made to appear no less than seven business days after service of the petition on the company and no less than seven business days before the day of the hearing.
• A directions hearing will be listed in respect of a contributory's petition.
• A petition hearing will typically be listed within three to six weeks of a creditor's petition being presented and six to nine 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. If it does so decide, it will appoint one or more official liquidators or it may order an alternative remedy – such as an order that the company buy out the petitioner's shares

Schemes of arrangement/soft-touch liquidations
For schemes of arrangement/soft-touch liquidations, the following steps are taken:

• The Cayman Islands Monetary Authority (CIMA) is approached (regulated businesses only).
• The petition, application for the appointment of provisional liquidators and supporting documents, including an affidavit exhibiting the scheme in draft, are filed.
• The first court hearing takes place. Usually, provisional liquidators are appointed and the scheme meeting is convened.
• Once finalised and approved by the court, the scheme circular will be sent to creditors/members and the meeting will occur within the notice periods.
• The meeting outcome is reported to the court and a second hearing takes place, where the court can approve the scheme.
• If approved, the registrar of companies will be notified.
• Provisional liquidation is thereafter concluded and the petition is 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 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 carry out only those 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 or 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 just and equitable;
• the company passes a special resolution requiring it to be wound up by the court;
• it fails to commence business within one 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; or
• 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 approval, 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 approval.

To what extent do the Cayman courts 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; and
• 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; and
• 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 assist foreign liquidators in cross-border insolvencies only if the relief sought:
  • could be granted by the foreign court conducting or controlling the winding up; and
  • 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 appointee have been recognised in your jurisdiction?

Trustees, liquidators and other officials appointed overseas in respect of a debtor for the purposes of a foreign bankruptcy proceeding.

Do the Cayman courts assist in applications to subject a company incorporated in the Cayman Islands 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 United Nations Commission on International Trade Law Model Law, which has not been adopted in the Cayman Islands.

Although the Cayman Islands is 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 cooperative 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 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).

What are the principal forms of security taken in the Cayman Islands 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 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, expenses and disbursements of the liquidators, costs of making the supervision order and remuneration of the liquidator rank equally with the expenses and disbursements incurred by the official liquidator but in priority to the remuneration of the official liquidator.

What, if any, categories of transaction can be avoided or set aside?

Potentially voidable transactions comprise:

• unfair preferences; and
• transactions at an undervalue.

Preferences are voidable where the transaction was made:

• "with a view to giving the creditor a preference over other creditors";
• within six months preceding the commencement of the liquidation; or
• at a time when the company could not 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; and
• 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.

A disposition of property made by a company can be avoided if:

• the disposition was made at an undervalue (for no consideration or for a consideration which is significantly less than the value of the property which is the subject of the disposition); or
• the disposition was made with the intent to defraud the company's creditors.

There must be an intention to wilfully 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 six years of the disposition.

Who is responsible for seeking orders to set aside such transactions?

The liquidator.

Can directors or shareholders be required to contribute to the liquidation estate?

Yes, in the case of:

• delinquent directors – breaches of fiduciary duty (eg, 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 having 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 five years may be imposed for knowing and wilful breach; and
• 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. 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 (the exculpation and indemnity provisions in a company's articles of association should be noted; however, under Renova v Gilbertson the 'irreducible core' of a fiduciary's obligations (ie, 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 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, in which case its directors must be registered and licensed by CIMA, directors may find that their licence is revoked if CIMA becomes aware of relevant fraud or dishonesty offences or regulatory penalties applicable to the registrant.