Our Cayman Islands Dispute Resolution & Insolvency team provide an update on insolvency and restructuring where there are Cayman Islands entities in the structure.
These are difficult times for many clients and we appreciate that cross-border insolvency or restructuring advice may be required at short notice. This Update may assist where there are Cayman Islands entities in the structure.
UNCITRAL Model Law
The Cayman Islands has not adopted the UNCITRAL Model Law. Accordingly, a Chapter 11 of a Cayman Islands debtor and the Chapter 11 global stay will not be recognised by the Cayman Islands Court.
If the Cayman Islands entity holds valuable assets and has non-US creditors that may not respect (a) the global stay or (b) any plan purporting to compromise non-US law governed debt, you may need to consider instituting a parallel restructuring provisional liquidation process in the Cayman Islands. Failing to do so risks dissenting creditors filing competing proceedings in the Cayman Islands Court, including involuntary liquidation proceedings, seeking to disrupt the Chapter 11. It may also expose directors to claims for breach of duty.
Note that secured creditors will always be entitled to enforce their security in the Cayman Islands (e.g. security over Cayman Islands shares) regardless of any domestic or foreign restructuring or insolvency proceeding.
Shares in a Cayman Islands Debtor
An order from the US Bankruptcy Court in the Chapter 11 purporting to deal with the shares in a Cayman Islands company is not effective. For example, any order purporting to cancel or issue new shares in a Cayman Islands debtor or any order purporting to effect a merger of a Cayman Islands debtor.
In order to make this part of the Chapter 11 plan effective, it will be necessary to satisfy the relevant Cayman Islands corporate formalities which will depend on the terms of the constitutional documents.
Parallel Proceedings in the Cayman Islands
The Cayman Islands restructuring provisional liquidation regime is routinely used to support Chapter 11 proceedings.
This involves a petition to the Cayman Islands Court seeking to appoint light touch restructuring provisional liquidators ("RPLs") who are qualified insolvency practitioners. A foreign qualified practitioner (e.g. the CRO) can be appointed jointly with the Cayman Islands RPLs. Appointing RPLs results in a stay on proceedings by unsecured creditors in the Cayman Islands. This limits the risk of dissenting creditors derailing the Chapter 11.
The Cayman Islands Court has significant flexibility when creating the suite of powers for RPLs. This allows the appointment order to mirror the orders obtained on the First Day Motions and importantly, to allow the directors to remain in control of the day-to-day operations of the debtor.1
Where necessary, (e.g. where there is non-US law governed debt), RPLs can use a Cayman Islands scheme of arrangement to compromise the debt of the Cayman Islands debtor to mirror the terms of the Chapter 11 plan. Once the restructuring is complete, the RPLs can be discharged.
The Cayman Islands Court and Cayman Islands insolvency practitioners are very familiar with dealing with parallel proceedings and strongly endorse cross-border cooperation.
Schemes of Arrangement
A scheme of arrangement is the Cayman Islands equivalent of a Chapter 11 plan. The Court convenes meetings of creditors or classes of creditors to vote on the scheme. If a majority in number and 75% in value of those creditors attending and voting at the meeting(s) approve the scheme, then it is binding on all creditors once sanctioned by the Court.
A scheme can be used to compromise US law governed debt and non-US law governed debt of both Cayman Islands and non-Cayman Islands entities.
Chapter 15 and Schemes of Arrangement
If the client needs to carry out a financial rather than operational restructuring and a Chapter 11 is cost-prohibitive, it may be possible to use a Cayman Islands scheme of arrangement coupled with Chapter 15 relief. This can be done either with or without RPLs depending on whether a stay on proceedings is required in the Cayman Islands or the US.
Chapter 15 relief will be required to ensure that the compromise is recognised in the US. In order to obtain Chapter 15 relief, it may be necessary to shift the centre of main interests of the debtor to the Cayman Islands.
Where a Cayman Islands company is to be liquidated rather than restructured, there are two methods available depending on the solvency of the company.
Where the company is solvent, and the directors can swear a declaration of solvency, it is possible to carry out a voluntary, out of court liquidation. This is a straightforward process that should be completed within four to twelve months depending on the level of assets held by the company. Professional insolvency practitioners can be appointed as liquidators or alternatively the directors can act as liquidators.
Where the company is insolvent, the liquidation must be carried out by way of an official liquidation. This is a Court controlled process. Professional insolvency practitioners must be appointed, at least one of whom must be resident in the Cayman Islands. The length of the official liquidation will depend on the complexity of the assets and issues.
1 Legislative amendments to the RPL regime are being considered which will provide further flexibility for debtors.
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.