In a highly welcomed modernisation, the Cayman Islands Government has introduced the Companies Amendment Act 2021 which will commence on 31 August 2022, allowing a debtor to seek the appointment of a restructuring officer, supported by a worldwide moratorium (viz unsecured creditors), with a view to restructuring its debts through a refined scheme of arrangement.
The regime should qualify as a collective insolvency proceeding for recognition and assistance by Model Law and similar jurisdictions. The refined scheme will be available to both Cayman Islands and foreign debtors (with qualifications) and will, so long as “efficacy” is likely, compromise both Cayman Islands and foreign law governed debt. It creates the necessary ecosystem for the Cayman Islands to become a global restructuring hub.
The following is our house view about this exciting new regime that promotes global cross border co-operation and reduces transactional costs for stakeholders of distressed companies with multi-jurisdictional capital structures. We believe that professionals have an important positive role to play in creating the necessary consensus and environment for efficient co-operative global restructuring. Private investors are understandably more likely to invest where the rules are predictable, transparent, and broadly consistent across jurisdictions, since this gives reassurance of a fair and efficient exit in distress situations.
A rescue regime
- The first ingenuity is the provision an automatic moratorium, with expressly worldwide effect at the time of filing, in support of the rescue process, namely the restructuring officer (RO).
- Like the present “light touch” regime, the RO may be appointed, alongside the management, in support of a company intending to present a compromise or arrangement pursuant to the law of the Cayman Islands and/or a foreign country.
- The RO regime is intended, for the purposes of foreign recognition and assistance, to be a collective insolvency proceeding under the supervision of the Grand Court that has a financial difficulty threshold, unlike a standard scheme of arrangement without a RO.
- The RO regime does not require the company to be the subject of a winding up petition. It should be noted that the Cayman Islands already had a rescue process: debtors, if insolvent or facing insolvency, were able to petition to appoint a “light touch” provisional liquidator for the purpose of compromising debt with the important caveat that management could stay in place. However, the new regime seeks to decouple rescue from liquidation such that the debtor now seeks the appointment of a “restructuring officer”. All formal public insolvency proceedings entail the stigma of insolvency. However, nomenclature is important, and if a debtor has a realistic prospect of rescue, it should be allowed to say so, by name. One cannot generally enter a rescue process without being insolvent, or facing insolvency.
The steps to promoting a refined scheme of arrangement are:
- The company is or is likely to become unable to pay its debts and intends to present a compromise or arrangement to its creditors, either pursuant to the Act, the law of a foreign country, or by way of a consensual restructuring.
- The company files an application to appoint a RO and the automatic extraterritorial moratorium takes immediate
- effect.
- There is a first hearing to determine whether to appoint the RO.
- If appointed, the RO may wish to seek for the appointment (and concomitant moratorium) to be recognised by Model Law and similar jurisdictions as a collective insolvency proceeding. This means that the moratorium’s extraterritorial effect as a matter of Cayman Islands law, also (hopefully) has extraterritorial effect in the places “that matter” ie where the debtor has assets, the creditors are located and/or the place of the governing law of the debt.
- Significant consultation and negotiation yields a restructuring plan and the usual scheme of arrangement process begins: (1) convening meeting hearing; and (2) sanction hearing.
- If foreign law is the subject of the compromise then the Grand Court will need expert evidence to prove that in jurisdictions “that matter”, the scheme will be recognised ie have “efficacy”.
- The RO may wish to seek for the scheme itself to be recognised by Model Law and similar jurisdictions so that dissentient creditors cannot wreck the scheme.
Step 1: Filing the RO application with the Grand Court Registrar
The appointment of a RO by the Court can be applied for by the debtor company, where the company is or is likely to become unable to pay its debts and intends to present a compromise or arrangement to its creditors, either pursuant to the Act, the law of a foreign country, or by way of a consensual restructuring. The power to present such a petition is given to the company acting by its directors and most significantly without the requirement of a resolution of its members or an express power in its articles of association.
The new regime does not allow a creditor to file an application to appoint a RO. It is therefore a company-led process.
Automatic moratorium
Immediately upon the filing of the application for the appointment of a RO, no proceedings shall be proceeded with or commenced against the company (including in foreign countries), no resolution shall be passed for the company to be wound up and no winding up petition may be presented against the company, except with leave of the Court, and subject to such terms as the Court may impose. Proceedings include any Court supervised insolvency or restructuring proceedings against the company. In Re Olympia & York Canary Wharf Ltd [1993] BCC 154 legal process has been defined as a process which requires the assistance of a court, not some self-help remedy or contract default notice. Arbitration proceedings would be caught.
This means that even before the application for the appointment of a RO is heard by the Court, a protective moratorium, upon filing, will give the debtor the necessary breathing space worldwide (subject to local recognition). Debtors would be advised to ensure that they receive a time and date stamped sealed copy of their filing, although it should be noted that even enforcement action filed before the moratorium commences “may not be proceeded with”.
The stay is expressed to be extra-territorial. This of course will be subject to other territories recognising the same, but one can envision most common law and Model Law jurisdictions applying legal principles which favour recognition. One exception may arise as to the terms of a stay over a foreign suit if the debt is governed by that foreign law, by reason of the rule in Gibbs (see National Bank of Greece and Athens SA v Metliss [1958] A.C. 509 where an English Court refused to allow a debtor to rely upon a Greek moratorium as a defence to an action for payment of interest on bearer bonds governed by English law and payable in England). It will depend if the suitor is subject to the jurisdiction of the Cayman Islands Court and can therefore be effectively restrained.
Further, in The Wimbledon Fund, SPC (In Official Liquidation) (unreported, Justice Parker, FSD 111 of 2019), the Grand Court considered an application for leave pursuant to section 97 of the Cayman Islands Companies Law to commence proceedings in New York against a Cayman Islands company (in liquidation). The threshold question on an application for leave under section 97 is whether the applicant has a claim worth entertaining. The rationale for this is that the company and its liquidator should not be burdened by having to defend a plainly futile claim. The court then goes on to consider whether it is fair to grant leave. Fairness means fairness in the context of the liquidation of the whole, and necessarily involves a consideration of the interests of the creditors and the capacity of the liquidator to deal with the proposed litigation. If the claim can be conveniently decided through the proof of debt process then leave is usually refused.
Automatic moratorium does not apply to secured creditors
Notwithstanding the presentation of a petition for the appointment of a restructuring officer or the appointment of a restructuring officer by the Court under proposed section 91B or 91C, a creditor who has security over the whole or part of the assets of the company is entitled to enforce the creditor’s security without the leave of the Court and without reference to the restructuring officer appointed under proposed section 91B or 91C. If a breathing space is sought from this group, forbearance agreements should be sought and negotiated.
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Step 2: At the first hearing
At the first hearing, the automatic moratorium already in place, the Grand Court will consider whether to grant the application to appoint a RO.
In an analogous area, Cayman Islands law as to the appointment of light touch restructuring provisional liquidators (PLs), has not traditionally required extensive scrutiny of the viability of the restructuring plan at the early stage of seeking an appointment of a PL. It is likely that this will remain the case for the appointment of ROs. The practical reality at the early stages is that any restructuring plan will change in the future, depending on the outcome of dialogue with stakeholders.
It is likely that the Grand Court will consider in each case whether to add conditions to the debtor by limiting the ongoing moratorium for initial periods such as 30 days and requiring periodic reviews of the same. In some cases, depending on the facts, the Grand Court may well take the view that the filing was timely, sensible, and conducive to a restructuring.
Debtors may wish to be proactive in managing stakeholder engagement, communications, and the provision of financial information so that by the time of the first hearing, there is a demonstrably high level of engagement.
It is also likely to be a condition of any standard order that the moratorium will only be continued if the debtor still intends to propose a scheme or other compromise. If it is concluded that this is no longer viable, debtors will undoubtedly be expected to draw this to the Court’s attention promptly.
Debtors will need to consider whether they additionally ask the Court for the protection of a moratorium over the debtor’s holding company and/or subsidiary in order to facilitate a more comprehensive group restructuring, if they are integral to any proposed compromise and arrangement and any action taken against them might frustrate the scheme.
Complexities will no doubt arise. Debtors will need to further consider whether to apply for letters of request to the places that matter. In practice, implementation of the same will be significantly aided by Chapter 15 assistance.
Frontloading
Although as yet untested, a debtor company that does not avail itself of the RO regime, but then later finds itself in a more traditional insolvency process, is likely to find itself having to answer whether in fact there are reasons to believe that either the company is not viable and/or the creditors simply cannot trust the management. In either case, it may well be that the company will not be able to justify being reorganised subsequently, and that a company-led process simply will not do. This may be a reason for allowing a creditor led RO process in future legislative changes.
Rights of creditors in the RO regime
Creditors have standing to seek the removal or replacement of the RO. Further, when the Court appoints a RO it is required to set out:
- “the manner and extent to which the powers and functions of the restructuring officer shall affect and modify the powers and functions of the board of directors” (s91B(5)(b)); and
- “any other conditions to be imposed on the board of directors that the Court considers appropriate, in relation to the exercise by the board of directors of its powers and functions” (s91B(5)(c)).
Variation or discharge
The proposed section 91E provides for the variation or discharge of the order appointing a RO by the Court on an application made by the company, a restructuring officer, a creditor or contributory of the company or the authority in respect of a company carrying on a regulated business. An important example of such an application is likely to be where creditors are seeking to remove, or curtail the authority of, some or all of the board of directors.
The proposed section 91F provides for the removal and replacement of a restructuring officer by the Court on an application made by the company, a creditor or contributory of the company or the authority in respect of a company carrying on a regulated business. A RO who has been removed and replaced must prepare a report and accounts for the RO replacing the removed restructuring officer, within 21 days of the date of removal and replacement. These are sensible protections enabling creditors to seek the de facto removal of the board or more precisely the cessation of its powers viz the restructuring.
Seeking a winding up instead
A creditor may take the view that a restructuring is not viable, that any RO should be discharged, and that the company should be wound up. By reason of the automatic moratorium, leave of Court is required to present a winding up petition against the company.
Parrying cross-applications
Since creditors cannot apply to appoint a RO, we anticipate that companies that are not trusted, but have value, will inevitably be encouraged by creditors to apply to appoint a RO, but will find that creditors then seek to denude the board subsequently by Court order. Alternatively, creditors may petition to wind up a company, causing the company to respond by filing a RO application, which will then result in cross applications by creditors seeking to appoint their own RO and have the board’s powers curtailed.
Further in the alternative, creditors may file a winding up petition, the company may respond with a RO application, and the creditors may nevertheless move their winding up petition on the basis that there is no viable restructuring of the capital structure of the company in light of its future revenues.
It is to be expected that the Cayman Islands Courts will very much require that the company had fully ventilated the proposed restructuring, such that is, and the identity of any RO, with the creditors and stakeholders before the first hearing. That is not to say that a detailed restructuring plan would have been presented to the creditors at this stage, since it is precisely because the debtor needs a breathing space that a moratorium is automatic.
Step 3: Recognition and assistance
The UNCITRAL Model Law on Cross Border Insolvency 1997 for those jurisdictions that have signed-up, makes it compulsory 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”.
The most efficient recovery for creditors is in theory a single Court dealing with the assets of the debtor universally – saving costs of multiple layers of professionals. It is increasingly the view of insolvency judges that there is an element of “good citizenry” in recognising foreign insolvency processes. The practical and parochial realties that come from the sovereignty of nation states can, on occasion, justifiably impede this judicial ambition.
For those jurisdictions that have not signed up to the Model Law, remarkably innovative and ingenious ways have been found to “be helpful” in using the old common law power to recognise foreign insolvency processes, largely achieving the same result as the Model Law. The common law principle is that assistance may be given to foreign officeholders in insolvencies with an international element. In Hong Kong, a new “common law COMI test” would appear to be applied to recognition to bring itself in line with the Model Law, but the law in Hong Kong as to recognition of offshore insolvency processes is complex. Assistance should be sought from Hong Kong lawyers.
The refined Cayman Islands scheme with its RO, is likely to be recognised by Model Law countries as a “a process of collective enforcement of debts for the benefit of the general body of creditors” since it is a process under the supervision of a RO of a company in financial difficulty seeking to compromise debt under a scheme protected by a moratorium. Whether it is considered a “main” or “non-main proceeding” will depend on the facts of each case and may make little practical difference to the assistance afforded.
Step 4: Refining the scheme of arrangement
The new Act elevates the potency of the traditional scheme of arrangement giving it significant jurisdictional competitive advantages. It is hoped that foreign companies will avail themselves of the Cayman Islands scheme and that it becomes a favourite tool for debtors.
It is hoped that the Act will spur legitimate forum shopping to the Cayman Islands by, for example:
- Consensually amending the governing law of the debt to the Cayman Islands
- Migrating a company’s place of incorporation from, for example the BVI to the Cayman Islands
- Transferring intra-group liabilities to Cayman Islands obligors, including a co-obligor new co, for bond restructuring;
- Shifting COMI to the Cayman Islands for the purpose of recognition and assistance The “elevation” of the traditional scheme manifests itself in the following ways:
- It is protected by an extraterritorial automatic moratorium
- It is “supervised” by a Court appointed RO
- It removes the “numerosity” or “headcount” test for members’ schemes (only)
- It is likely to obtain Chapter 15 and/or other “recognition and assistance”, thereby having “efficacy” (even when, and especially where, foreign law debt is schemed)
- It is available to both Cayman Islands and foreign companies – creating a Cayman Islands restructuring hub
In next weeks edition of Legal Spotlight, we will conclude this article.
