The Cayman Islands has long established itself as a leading offshore financial centre which offers a sophisticated and flexible restructuring toolkit by which to implement cross-border restructurings. With a robust common law legal system based on English law (with ultimate recourse to the Privy Council of the United Kingdom) providing legal certainty and predictability, a highly sophisticated, dedicated financial services division of the Grand Court of the Cayman Islands (the 'Cayman Court') and an experienced network of judges, practitioners and advisors in the insolvency and restructuring sector, it is not surprising that the jurisdiction has a proven track record for constantly delivering complex and high-value restructurings.
Although the Cayman Islands has no formal rehabilitation process for companies in financial distress similar to US Chapter 11 proceedings or English administration, the Cayman Islands scheme of arrangement is often utilised to deliver not only debt restructurings but also corporate reorganisations, acquisitions, mergers and takeovers in circumstances where it is not possible or practical to obtain the consent from all affected stakeholders. Accordingly, a Cayman scheme is not a formal insolvency process as such but where it is utilised in connection with a protective provisional liquidation wrapper or official liquidation, the Cayman scheme company1 would have the benefit of an automatic stay on any unsecured creditor action.
One aspect of the Cayman Islands' scheme of arrangement – the headcount test – which is the statutory requirement that a Cayman Islands scheme of arrangement has to be approved by a majority in number in addition to being approved by at least 75% in value of those voting at the scheme meeting(s) before the Cayman Court has jurisdiction to sanction such scheme – has however been the subject of much debate. Many commentators query its relevance in the context of modern restructurings.
Whilst originally implemented as a minority protection mechanism aimed at protecting smaller shareholders from decisions pushed through by larger shareholders with more significant stakes (and more significant financial resources), there is an argument that in today's world, the headcount test is no longer fit for purpose.
This article examines the concerns with respect to the continued application of the headcount test and considers whether, in comparing the approaches taken in certain other jurisdictions, it is now time for reform in the Cayman Islands.
Cayman Islands scheme of arrangement
The Cayman Islands legislation for schemes of arrangement is derived from 19th century English legislation. The concept of the scheme of arrangement (together with the requisite approval thresholds to be attained) was first introduced into the Cayman Islands by the Companies Law in 1961 (replicating Section 206 of the English Companies Act 1948).2
A Cayman Islands scheme of arrangement is a court-sanctioned compromise or arrangement between a company and its creditors and/or shareholders (or any class of them) which binds all affected stakeholders (including any dissenting creditors and/or shareholders) provided that: (i) a majority in number; and (ii) 75% in value of each class of stakeholder present and voting at the court ordered meeting, vote to approve the Cayman scheme.3 Cayman Islands schemes of arrangement are frequently used to implement cross-border and multilevel debt restructurings by varying or cramming down the rights of the relevant creditors and/or shareholders of a company and have become the restructuring tool of choice in the Cayman Islands given its flexibility and predictability.
A Cayman Islands scheme enables a company to enter into a binding compromise or arrangement with its creditors and/or shareholders without the need to enter into an individual and separate contract with each and every affected stakeholder and provides companies with a tried and tested mechanism to implement an arrangement where it is not possible or practical to obtain a fully consensual deal. A Cayman Islands scheme will only become effective in accordance with its terms and binding on the company and all members of the relevant classes (including any dissenting stakeholder and regardless of whether or not they voted) once the Cayman Court has sanctioned the scheme and the court sanction order has been filed with the Cayman Islands Registrar of Companies.
When schemes of arrangement were first introduced in England over 100 years ago, shareholders and creditors typically held their interests both beneficially and legally so there was little difference between the persons whose name was entered onto the register of shareholders (or equivalent) and the person beneficially entitled to those interests. In its historical context, the statutory majority test operated as an appropriate check and balance – the headcount test prevented a minority with a large stake prevailing over a majority with a smaller stake; and the value test prevented a numerical majority with a small stake prevailing over the minority with a large stake. As summarised by Brooking J, the dual majority test ensures that 'mere numbers on a count of heads will not carry the day at the expense of the amount invested and on the other hand that the weight of invested money may not prevail against the desires of a sizeable number of investors.'4
However, this is no longer the case – stakeholders' interests are now often held beneficially though nominees, custodians (such as The Depositary Trust Company in the United States or HKSCC Nominees Limited in Hong Kong), clearing houses or other third parties (this is often more of an issue with shareholder interests). If only registered legal holders of debt and/or registered shareholders are considered for the purposes of the headcount test, then any headcount is unlikely to accurately reflect the wishes of the underlying stakeholders who ultimately hold the real economic interest in the debt instrument or equity.
Importantly, Cayman Islands law provides a unique feature in this regard in that the Cayman Court, in determining whether the relevant statutory majorities have been met, must 'look through the register.'5
1. For these purposes, 'Cayman scheme company' refers to any company subject to a Cayman Islands scheme of arrangement. The Cayman Court has broad jurisdiction in relation to Cayman schemes and can consider a scheme in relation to any company (including foreign companies) liable to be wound up in the Cayman Islands including if it has property, carries on business or is registered in the Cayman Islands.
2. Section 83 of the Companies Law 1961.
3. Section 86 of the Companies Law (2018 Revision).
4. ANZ Executors and Trustees Ltd. v Humes Ltd  VR 615 at paragraph 622.
5. Cayman Islands Grand Court Rules 1995 (Revised Edition) (the 'Grand Court Rules', Order 102, r.20(6) and see also Practice Direction No. 2 of 2010, paragraph 4.
Originally published in International Corporate Rescue, Volume 16, Issue 4.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.