Today, we continue that profile taking a closer look at the specific role that a restructuring officer plays in a company.
What can be compromised?
The proposed section 91J provides for the powers of the Court when considering an application for the sanctioning of a compromise or arrangement and introduces express provisions to facilitate the reconstruction and amalgamation of companies. The Court may make provision for:
- 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;
- 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;
- the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company;
- the dissolution, without winding up, of any transferor company;
- 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
- such incidental, consequential and supplemental matters as are necessary to secure that the reconstruction or amalgamation is fully and effectively carried out.
The proposed section 91J also provides that where an order provides for the transfer of property or liabilities, that property shall, by virtue of the order, be transferred to and vest in, and those liabilities shall, by virtue of the order, be transferred to and become the liabilities of, the transferee company. The proposed section 91J further provides that any such property shall, if the order so directs, be freed from any charge which is, by virtue of the compromise or arrangement, to cease to have effect.
Scheming foreign debt – Cayman Islands still follows the “rule in Gibbs”
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.
In relation to foreign debt, Cayman Islands schemes very often scheme foreign debt if the Court can be persuaded that it will be given “efficacy” in that foreign jurisdiction. The “rule in Gibbs” 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 recognise the compromise of foreign debt. For example, the Cayman Islands Grand Court could not recognise 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, recognises it or is immaterial to “efficacy” since it is not a place “that matters” (no assets, no creditors and/or no governing law).
A Cayman Islands Court will not wish to act in vain, and will require expert evidence that the scheme will be recognised and/or effective in the place of the foreign debt.
Another method of “efficacy” is not about the law at all. Rather, it is about pragmatism and enforcement. Of course in the situation where there might well be a right for dissentient creditor to take wrecking action in a jurisdiction, such as the place of the governing law, but for practical reasons, for example, there are no debtor assets there, and so no creditor would bother, since it wouldn’t matter even if they did.
Varying New York law debt
A Cayman Islands scheme of arrangement could seek to vary the New York law governed contractual obligations of a company incorporated in the Cayman Islands and the company could obtain recognition of the scheme in New York pursuant to US Chapter 15.
Our understanding of the position under US law, based on our experience in cross-border restructurings, is that recognition of a foreign scheme of arrangement takes place under US Chapter 15, which gives effect to, and extends, the Model law. We understand that recognition, as a procedural matter, results in the commencement of a US Chapter 15 case for the scheme, which then provides the basis for the US Bankruptcy Court to consider a request to extend comity by recognising and enforcing the compromises effected by the scheme. It is our understanding that the effect of such “recognition” and “enforcement” is a variation, as a matter of New York law, of the New York law governed rights and obligations. This is because the variation of New York law governed obligations by operation of New York law will be effective in places which apply the “rule in Gibbs”. However, these matters should be confirmed with New York lawyers.
Varying English law
Where a Cayman Islands scheme of arrangement includes a variation of English law governed contractual obligations of a company incorporated in the Cayman Islands, the scheme will of course be effective in the Cayman Islands. It may be necessary to take further steps, this may include a parallel scheme of arrangement, to ensure that the restructuring has practical effect in any material “Gibbs rule” jurisdictions. The scheme company will want to ensure that the compromises are effective not only in the Cayman Islands (as the jurisdiction of incorporation) but in other jurisdictions where its assets are located.
In order to seek recognition of a Cayman Islands RO scheme of arrangement, the RO is likely to avail itself of s426 of the English Companies Act which allows certain jurisdictions, such as the Cayman Islands to be given recognition and assistance of its collective insolvency regimes.
If the English Court agrees to grant the request, Section 426 provides it with the flexibility to choose whether to apply English insolvency law or the insolvency law of the requesting state. This allows officeholders to potentially access powers which are available under English law that they would not have had in their home jurisdiction or to exercise in England powers which they have in their home jurisdiction but which a UK officeholder would not. However, these matters should be confirmed with English lawyers.
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Varying Hong Kong law
A Cayman Islands scheme which purported to scheme Hong Kong law governed debt, we understand, would not be recognised in Hong Kong since Hong Kong is a “Gibbs rule” jurisdiction. The next question is whether the scheme could nevertheless have practical “efficacy” viz the Hong Kong law governed debt.
One would have to consider whether there were dissentient creditors in Hong Kong who would take action (ie vote against or not participate), and whether even if they did so, there are any assets and/or some other connection in Hong Kong making it liable, as a foreign company to being wound up in Hong Kong under the “sufficiency of connection” test.
If the scheme included Chapter 15 recognition, where a Cayman Islands Court compromise of Hong Kong law would be recognised and given full effect as a discharge (a non “Gibbs rule” jurisdiction), then any Hong Kong dissenters would have to carefully consider whether to do so, if they had exposure to the US. However, these matters should be confirmed with Hong Kong lawyers. The law of recognition in Hong Kong is complex.
Who can act as RO?
Proposed section 91D provides for the requirements related to and functions of restructuring officers and the remuneration of restructuring officers. The proposed section provides that a restructuring officer is an officer of the Court who shall be a qualified insolvency practitioner. The proposed section further provides for the appointment of two or more persons as restructuring officers under section 91B or 91C who shall be authorised to act jointly and severally, unless their powers are expressly limited by an order of the Court.
The proposed section 91D also provides for the appointment by the Court of a foreign practitioner to act as a restructuring officer but shall not act as the sole restructuring officer of a company. The proposed section 91D further provides for an application to be made to the Court by a restructuring officer, a creditor of the company or contributory of the company, in order to determine any question arising in the course of carrying out the restructuring officer’s functions.
What is the role of the RO?
A RO must be a qualified insolvency practitioner. This is hardly surprising since the role of the RO is to:
- Provide periodic and detailed reports as to the debtor’s financial position and likely restructuring to the Court and stakeholders;
- Investigate the affairs of the company, verify the accuracy of financial statements and report any issues to all stakeholders;
- Report any failure by the board to provide it with full information;
- Robustly advise the board (if it still remains in power) as to behaving in a manner consistent with open, transparent and communicative restructuring principles;
- Act as liaison between the company and the creditors and other stakeholders;
- Monitor the company’s affairs to keep under review whether it remains likely that the moratorium will result in the rescue of the company as a going concern;
- Alert stakeholders if the Company no longer intends to compromise its debts so that the automatic moratorium can be terminated and a winding up ensue;
- Negotiate, perhaps alongside the board, with creditors to facilitate a debt restructuring at the various levels of debt and interest; and
- Act as “an honest broker” between stakeholders.
What is the role of the board of directors?
The board of directors is permitted to file the application to appoint the RO, and thereby obtain an automatic moratorium, without shareholder approval. Consistent with a “debtor in possession” type regime, the board remains in control of the company and is expected in the period of the moratorium to be actively considering how best to restructure the debts of the company and its operational aspects, to be proposed to creditors. A prudent board will have alerted creditors to the application, the identity of the RO and had early discussions with creditors to outline any nascent plan of restructuring.
The regime is flexible in that any order appointing the RO 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. Much consideration will be given to this, bearing in mind the behaviour of the board and its attitude to open and communicative restructuring processes, as well as its role in the debtor’s current demise. Further, an important possible variation application will inevitably be made by creditors seeking to remove, or curtail the authority of, some or all of the board of directors.
RO remuneration
The proposed amendments to section 109, provide for the expenses incurred in a petition for a restructuring officer and during the term of appointment of a restructuring officer to be payable out of the company’s assets in priority to all other claims.
Regulated business
The proposed section 91B further requires that where a company which is carrying on a regulated business presents a petition under section 91B(1), the directors of the company shall immediately serve notice of the petition on the authority.
Relation back period
Clause six amends section 100 of the principal Act to provide for any subsequent winding up of a company to be deemed to have commenced at the time of the presentation of the petition to appoint a restructuring officer pursuant to section 91B in circumstances where the order appointing the restructuring officer has not been discharged.
Providing for the appointment of an interim restructuring officer on an ex parte application by a company
The proposed section 91C provides for the appointment of an interim restructuring officer by the Court on an ex parte application by a company, pending the hearing of the petition. An application under this proposed section may be presented by a company acting by its directors without a resolution of its members or an express power in its articles of association.
It would be unusual to seek the appointment of an interim RO for the following reasons:
- There is an automatic moratorium on filing with the board of directors still remaining in office. There is no obvious situation where the formal appointment of the RO is additionally required on an interim basis before the first hearing – especially since there is no provision for pre-packs;
- Restructuring in an open and transparent process unlikely to win support or trust if proceeded with clandestinely ex parte; and
- The filing of the RO application – achieving a moratorium straightaway – is in essence ex parte.
Shareholder approval not necessary
A petition seeking to appoint a RO may be presented by a company acting by its directors without a resolution of its members or an express power in its articles of association.
Reforms to authority to wind up a company by the BoD
For a company incorporated before the commencement of the new regime, the rule in The Matter of China Shanshui Cement Group Limited [2015] (2) CILR still applies to the presentation of winding up petitions and express authority in the articles of association or shareholder approval is required to petition to wind up a company.
For a company incorporated after the commencement of the new regime no express power is required in the articles of association to enable a company to petition to wind up itself; however, the company’s articles of association may expressly remove or modify the directors’ authority to present such petitions.
