The Current Approach
Cayman does not currently have a formal restructuring regime like the UK’s administration process or the US’ Chapter 11. Under the existing legislation and its precursors, where a Cayman Islands company has found itself doubtfully solvent or insolvent on a cash flow basis and wishing to propose a restructuring to its creditors, in order to have sufficient breathing room to take that course, it has had to seek the appointment of provisional liquidators, so as to trigger a moratorium on any enforcement action by creditors. Although that approach has been utilised time and again in the absence of restructuring-focused provisions able to produce the same result, the need to invoke processes concerned with liquidating companies in order to achieve a restructuring has been less than ideal: under current law directors are unable to present a winding-up petition (a precursor to seek the appointment of provisional liquidators) absent a special resolution of the company’s shareholders or an express power granted in the company’s articles of association; whilst the fact of having been in provisional liquidation might leave a certain stigma on the subject company.
Key Aspects of the New Bill
The amendments will address such issues by creating a new standalone restructuring regime, separate from the existing company winding-up procedures. Under the new regime, the directors will be empowered to petition the Court[1] for the appointment of a qualified insolvency practitioner as a “restructuring officer” if the company is (or is likely to become) unable to pay its debts as they fall due and intends to present a compromise or arrangement to its creditors. Significantly, the directors will be able to do so without a resolution of shareholders and without any express power permitting such action in the company’s articles of association (although the company’s articles of association could be crafted to curb this power). The regime will enable the restructuring officer to promote a scheme of arrangement with the subject company’s creditors or shareholders, including a scheme which involves the restructuring or amalgamation of companies.
The filing of the petition will trigger an automatic global moratorium on claims against the company. Leave of the court would be required to bring any proceedings against the company, or to pass a resolution for its winding up once the petition has been filed. Notably, the moratorium applies not only to proceedings brought against the company in the Cayman Islands but also to any proceedings brought in a foreign jurisdiction, representing an improvement on the moratorium available in respect of local proceedings in the provisional liquidation context. However, the position of secured creditors is not impacted by the proposed amendments. A secured creditor will remain free to enforce its security in accordance with the terms of the security documents without having to seek leave of the court and without reference to the restructuring officer.
Another notable change introduced by the Bill is to section 94 of the Companies Act. Directors of new companies incorporated after the commencement of the amendments will be able to present a winding up petition on behalf of the company on grounds that the company is unable to pay its debts as they fall due or, where a winding up petition has been presented, apply on the company’s behalf for the appointment of a provisional liquidator. Unlike the existing ‘opt in’ regime whereby directors of existing companies can only present a winding up petition if the company’s articles of association expressly grant the directors this authority, for new companies going forwards it will be necessary to ‘opt out’ and expressly remove or modify the directors’ authority through the company’s articles of association where the parties do not wish for these powers to apply.
Appleby’s Perspective
The amendments proposed by the Bill are a welcome addition to the Cayman Islands’ insolvency and restructuring regime. All the benefits of the ‘soft touch’ provisional liquidation process under the existing and previous regimes have been retained, whilst removing the perceptual and practical issues inherent in the use of a liquidation process to facilitate a restructuring. Further, the new regime expressly contemplates that a petition for the appointment of a restructuring officer may be made in connection with a compromise or arrangement pursuant to the law of a foreign country and so will be of interest on wider cross-border restructurings, including under the UK’s administration process and US’ Chapter 11. Perhaps the most notable change to the status quo is the greater enfranchisement of directors under the new restructuring officer regime. Directors will now be able to take the initiative to try and restructure the company’s debts without first needing to seek shareholder approval or the support of a ‘friendly’ creditor.
From a creditor’s perspective, the provisional liquidation process remains available where it is necessary to safeguard the company’s assets and the position of secured creditors is unchanged. However creditors will want to check the drafting of any insolvency “Events of Default” contained in their agreements to make sure these are sufficiently broad to capture actions taken in connection with the new restructuring regime where this is the parties’ intention (as noted above, the appointment of a restructuring officer does not require the filing of a winding up petition or commencement of formal insolvency proceedings).
[1] There is no ability to appoint a restructuring officer ‘out of court’.
