Cayman Islands: Setting Aside A Cayman Islands Charge Upon Insolvency

INTRODUCTION

The Companies Law (as amended) (the "Law") provides that only companies incorporated in the Cayman Islands can be wound up there. There is no provision akin to Part V of the UK Insolvency Act 1986 (UK)under which the English court can wind up unregistered or foreign companies.

The Cayman winding up regimes are found in Part V of the Law.

There are three regimes:

1. voluntary winding up;
   
   
2. compulsory winding up; and
   
   
3. voluntary winding up subject to Grand Court supervision.
   
   

KEY FACTOR: THE DATE OF COMMENCEMENT OF A WINDING UP

Voluntary winding up

The date of commencement of the relevant winding up is a key factor in the setting aside of a Cayman Islands charge

A voluntary winding up is taken to have commenced¹ at the time when either:

1. a special resolution (being greater than a two thirds majority or such greater number as may be specified in the articles) is passed by the company in general meeting; or
   
   
2. when the period fixed for its duration expires or the event specified in the company's articles occurs and the company in general meeting passes an ordinary resolution (being by way of asimple majority) requiring its voluntary winding up; or
   
   
3. in the context of a Limited Duration Company) when²:
   
   

Compulsory winding-up

When a compulsory winding-up order is made, the liquidation is deemed to have commenced at the date of presentation of the petition³. Any disposition of the company's property, effects and things in action, orany transfer of shares or alteration in the status of members of the company during the period between presentation of the petition and the making of the winding up order is void, unless the Grand Court orders otherwise⁴.

SUSPECT TRANSACTIONS

Should a secured lender execute a security after the commencement of the winding-up, that security isliable to be set aside by the Grand Court. Therefore, prior to taking any security, a secured lender shouldmake certain that no winding up petition has been issued at the Grand Court, that an appropriate special resolution has not been passed by the members in general meeting, and, in respect of an LDC, that a triggering event has not occurred.

FRAUDULENT PREFERENCES

Both Official and Voluntary Liquidators have the power to apply to the Grand Court for an order that any security be set aside on the basis that its intention was fraudulently to prefer that creditor over others⁵. Any security granted by the debtor company within six months prior to the commencement of the winding-upmay be challenged if the liquidator can prove that the dominant intention of the company was to givethat creditor a preference for his debt over others. Case law suggests that the burden of proof, which falls upon the liquidator, is a heavy one.

It is unlikely that a bank in consideration of it agreeing to continue to support a company financially wouldbe held to have fraudulently preferred itself if, in consideration for providing that further support, the bankhad obtained security for its historic lending.

TRANSACTIONS AT AN UNDERVALUE

Under the Fraudulent Dispositions Law (as amended) any disposition of a company's property at an undervalue with an intent to defraud a creditor is voidable at the instance of a creditor thereby prejudiced.

"Undervalue" is defined as:

1. provision of no consideration for the deposition; or
   
   
2. a consideration for the disposition the value of which in money or money's worth is significantly lessthan the value of the property the subject of the disposition.
   
   
3. "Disposition" is defined by reference to the Trusts Law (as amended) as "every form of conveyance, transfer,assignment, lease, mortgage, pledge or other transaction by which any legal or equitable interest in property is created, transferred or extinguished"⁶.
   
   

If a court finds that there has been a disposition of the company's property at an undervalue with an intention to defraud creditors it will set aside that disposition only to the extent necessary to satisfy the obligation to a creditor at whose instance the disposition has been set aside together with such costs asthe Court may allow. Accordingly, a lender must make sure that he is providing good consideration for the security interest. If it does not, it risks its security coming under attack at the instance of other creditors.Before a disposition will be set aside the Grand Court must be satisfied that there was an element of bad faith in the transaction. Any application under the Fraudulent Dispositions Law must be commenced within six years of the date of the relevant disposition.

CONCLUSION

The onset of a winding-up will affect a company's ability to grant a valid security interest over its assets andthe cautious lender should make sure that no formal steps have been taken by the company or any third party to commence the company's winding up. In respect of a compulsory winding-up petition or apetition to place a company in voluntary liquidation subject to the supervision of the Grand Court, a search of the court records will show whether there is a pending petition. In respect of a voluntary liquidation warranties from the directors and examination of the directors' and shareholders' minute booksshould show whether the company has commenced a voluntary winding up. Security will not be set aside either as a fraudulent preference or as a fraudulent disposition unless it can be shown that the company acted in bad faith in granting the security to the lender.

Footnotes

^{1 s.132 Companies Law}

^{2 s.200 Companies Law}

^{3 s.98 Companies Law}

^{4 s.156 Companies Law}

^{5 s.168 Companies Law}

^{6 s.87 Trusts Law}

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.