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22 October 2020
Rumours that a company is in the zone of insolvency may trigger a race to its assets, with potential creditors or interested parties commencing proceedings in an attempt to secure payment from the company before its assets are fully dissipated or tied up in the insolvency process. This can destroy the company's collective value or scupper a restructuring and result in significant duplicative costs.
To ensure the orderly and collective resolution of a company's affairs, Section 97(1) of the Companies Law imposes a moratorium on commencing or proceeding with any suit, action or other proceedings against the company once liquidators are appointed by the court (including on a provisional basis). Once these officeholders are appointed, proceedings can be commenced or proceeded with against the company in question only with the leave of the Grand Court, subject to such terms as the court may impose.(1)
The main purposes of Section 97 are:
In order to secure leave from the Grand Court to commence or continue proceedings against a company subject to Section 97, a party must demonstrate that:
An example where the Grand Court held that proceedings should be allowed to proceed irrespective of the existence of the insolvency process is where a party had a proprietary claim against a company arising out of an alleged fraud. In that instance, it was found that the issues could be conveniently determined only in a writ action (with all of the procedural and substantive safeguards that route affords) rather than via a contested proof of debt process. However, in other cases where the issues in dispute are relatively straightforward, it may prove difficult to persuade the Grand Court that the estate of the insolvent entity should incur the expense of defending legal proceedings.
The Cayman courts have held Section 97 to have extra-territorial effect – that is, it also imposes a moratorium against proceedings and attachments against assets in jurisdictions other than the Cayman Islands. While the Grand Court cannot directly put a stop to proceedings commenced abroad, it is likely to take a dim view of attempts to enforce any judgments against a company obtained in breach of Section 97. Liquidators may seek recognition of their appointment, and of the moratorium, where foreign cases are not otherwise stayed, but the Grand Court may be persuaded to allow foreign proceedings to continue if they involve substantive determinations of foreign law, or the company is a necessary party to preserve litigants' rights, subject again to any terms that the Grand Court may impose.
Under Cayman law, the moratorium does not prevent a secured creditor from enforcing its security without leave of the Grand Court and without reference to the liquidator at any time. There is no moratorium where the liquidation process is voluntary, and all claims must be resolved before the liquidation may be concluded.
For further information on this topic please contact Jennifer Fox or Sam Keogh at Ogier by telephone (+1 345 949 9876) or email (email@example.com or firstname.lastname@example.org). The Ogier website can be accessed at www.ogier.com.
(1) Similarly, once a winding-up order has been made, Section 97(2) renders any attachment, distress or execution put in force against the estate or the effects of the company after the commencement of the winding up (the date on which the relevant winding-up petition was originally presented in respect of the company) void.
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