Restructuring Officers and Schemes of Arrangement: A Modernisation of Cayman Islands Insolvency
By Julie Engwirda, Wenhao Han, Nick Hoffman, Andrew Johnstone, Paula Kay, Vicky Lord, Paul Madden, Ian Mann, William Peake, Chai Ridgers, Nicola Roberts, Jessica Williams and Jayson Wood (Harneys)
Introduction
In a highly welcome and much anticipated move, the Cayman Islands has introduced an update to its insolvency and restructuring regime, making the jurisdiction one of the most modern and forward looking when it comes to international insolvency and restructuring regimes.
Prior to the Companies Amendment Act 2021 (the “Amendment Act”), which came into force on 31 August 2022, and similar to many common law jurisdictions, creditors or a distressed company would have to apply to court to place the company into provisional liquidation. Innovative practitioners and pragmatic judges managed for a number of years to facilitate very complex international restructurings using “light touch” provisional liquidators – a creative but somewhat inelegant answer to the UK’s administration procedure or to a US Chapter 11 procedure.
The Amendment Act and a Restructuring officer
The Amendment Act introduces a number of key changes that will assist international insolvencies and restructurings and will enable greater cross-jurisdictional cooperation for international insolvencies. Of these, the most notable is that the management of a company may now petition the Grand Court for the appointment of a restructuring officer, who will work alongside management to present a compromise or arrangement pursuant to the law of the Cayman Islands and/or a foreign country. Furthermore, that restructuring process will now be aided and supported by the provision of an automatic moratorium, with express worldwide effect at the time of filing for the appointment of a restructuring officer.
Crucially, because a restructuring under the new regime is court supervised, conducted by an insolvency practitioner (which is a qualifying requirement before a restructuring officer can take up the appointment) and is a process of collective enforcement for the benefit of the general body of creditors, it is likely to be regarded as a “collective insolvency proceeding” by the UNCITRAL Model Law on Cross Border Insolvency 1997 (the “Model Law”) and by places “that matter” (i.e. those places where the company is likely to have assets, creditors or is the governing law of its’ debt obligations). This facilitates the recognition of a Cayman appointed restructuring officer in those jurisdictions “that matter” and will enable a holistic international approach to restructuring.
Competing Interests and Applications
A hitherto typical facet of multi-jurisdictional insolvencies is there is often a ‘race’ as between competing creditors or as between creditors and the company to file a winding up petition. It is likely the new restructuring regime will somewhat temper this spirited competition to be the first to petition, as a company may still file a petition to appoint a restructuring officer even if a winding up petition has been presented, and would still have the benefit of the automatic moratorium (i.e. the winding up petition would not be heard without permission of the Court even though it was first in time). This will give some much needed breathing space to companies that may be viable but find themselves in a distressed situation.
However, it is to be expected that in some cases there will be applications by creditors (as they cannot apply to appoint a restructuring officer themselves) to petition the winding up of a company in order to prompt a counter-petition by the company for the appointment of restructuring officers, which would then give creditors a forum to cross apply for the appointment of their own restructuring officers and to seek to have the existing board’s powers curtailed. This is not dissimilar to competing applications for appointments of provisional liquidators under the previous regime, and would be more likely in cases where there has been a breakdown of trust and/or allegations of mismanagement as against the current board.
Schemes of Arrangement and Cross Border Issues
The Model Law makes it compulsory (for participating jurisdictions) to give “recognition and assistance” to a foreign insolvency process based in the Centre of Main Interest (COMI) of the debtor; and allows for “discretionary” assistance to be given to “non-main” centres of interest. In either case, there is a strong normative framework for, in essence, “being helpful”. In most common law jurisdictions, the Model Law will apply, or a framework of innovative precedent and jurisprudence has developed to allow courts to be helpful to recognize foreign insolvency processes. This is because there is generally a prevailing view between the courts and practitioners that it is better for a single court dealing with the assets of the debtor universally – saving costs of multiple layers of professionals. Naturally, jurisdiction-specific legal advice will need to be obtained in each jurisdiction where assistance is sought, and whether a Court from a non-Model law jurisdiction assists or not will depend on a number of factors.
Once a restructuring officer has been appointed, they may proceed to push through a scheme of arrangement and introduces express provisions to facilitate the reconstruction and amalgamation of companies. The Court may make provision for — (a) the transfer to the transferee company of the whole or any part of the undertaking and of the property or liabilities of any transferor company; (b) the allotting or appropriation by the transferee company of any shares, debentures, policies, or other like interests in that company which under the compromise or arrangement are to be allotted or appropriated by that company to or for any person; (c) the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company; (d) the dissolution, without winding up, of any transferor company; (e) the provisions to be made for any person who within such time and in such manner as the Court directs dissents from the compromise or arrangement; and (f) such incidental, consequential and supplemental matters as are necessary to secure that the reconstruction or amalgamation is fully and effectively carried out.
A scheme that is put forward by a restructuring officer may also compromise foreign debt, provided that Court can be persuaded that it will be given “efficacy” in that foreign jurisdiction. Often practitioners will consider that this interacts incompatibly with the “rule in Gibbs”. To be clear, the Cayman Islands still follows the “rule in Gibbs”, however, the rule is sometimes misunderstood in that it is thought that a “Gibbs rule” jurisdiction cannot compromise foreign debt. In fact, it is only that a “Gibbs rule” jurisdiction is not permitted to recognize the compromise of foreign debt. For example, the Cayman Islands Grand Court could not recognize the compromise of Hong Kong law governed debt by a Singapore Court. The Cayman Islands Courts are perfectly entitled to compromise foreign debt if that foreign state permits it, recognizes it or is immaterial to “efficacy” since it is not a place “that matters” (no assets, no creditors and/or no governing law).
In order to ensure that its decision will be given ‘efficacy’, A Cayman Court will typically require expert evidence that the scheme will be recognized and/or effective in the place of the foreign debt.
Conclusion
Overall, the Amendment Act and the new restructuring regime is a welcome development in the Cayman Islands. It provides creditors with the certainty of sound legal principles and jurisprudence backed by an infrastructure of sophisticated practitioners and judiciary, while providing viable debtor companies with an appropriate court supervised process supported by an insolvency practitioner (the restructuring officer) and breathing space (the automatic moratorium). The new regime represents the commitment of the jurisdiction as a major offshore structuring hub, to pragmatic and holistic solutions to international insolvency and restructurings with a view towards maximizing returns for creditors. The first restructuring officer appointed under the new regime took place on 11 November 2022 (In re Oriente Group Limited) and the regime has been met with enthusiasm by stakeholders.
(*) The full-length version of this article was originally published as an Insight by Harneys