Synopsis
The Cayman Islands introduced the restructuring offi- cer regime
into the Companies Act (as revised) (the 'Companies Act')
on 31 August 2022. The restructur- ing officer regime allows
companies to appoint restruc- turing officers to support a
compromise or arrangement with its creditors (or classes of them)
pursuant to the Companies Act, the law of a foreign country or by
way of consensual restructuring, with the benefit of an au- tomatic
and extra-territorial moratorium (as a matter of Cayman Islands
law).
Rockley Photonics Holdings Limited (Restructuring Officers
Appointed) ('Rockley') is an example of a com- pany that
has taken advantage of the restructuring officer regime and was the
first to do so in support a foreign restructuring process.
This article examines the key features of the restruc- turing
officer regime and the flexibility of the Grand Court to support
cross-border restructuring processes. Whilst the Grand Court has
not yet issued a written judgment in respect of Rockley, this
article deals with some of the practical learnings by its Cayman
Islands counsel, which may provide useful insight to insolven- cy
practitioners.
Background to the restructuring officer regime
Prior to the introduction of the restructuring officer regime,
company restructurings were generally carried out under the
supervision of provisional liquidators. However, in order to
appoint provisional liquidators, a company (or a 'friendly'
creditor) would first have to present a winding up petition seeking
an order for the company to be wound up.
There were some disadvantages to such a procedure, including the
optics of the company being exposed to the risk of being wound up,
but also because there was generally no standing for the company to
present a winding up petition on its own without an ordinary
resolution of shareholders (unless such a power was expressly
provided for in the company's articles of association).1
Without further legislative reform, this would have had the
undesirable consequence of share- holders being able to withhold
the passing of such reso- lutions in circumstances in which they
were already 'out of the money', making it difficult for
companies to restructure through provisional liquidation on a
timely basis, or at all.The restructuring officer regime was
therefore intro- duced into the Companies Act on 31 August 2022 as
a response to the above issues. The nature of the restruc- turing
officer regime does not engage the restrictive principles of Re
Emmadart because the underpinning purpose of the restructuring
officer regime is to en- sure the rehabilitation, and not the
termination, of a company. Furthermore, section 91B(2) of the Com-
panies Act expressly authorises a company acting by its directors
to present a petition seeking the appoint- ment of restructuring
officers without a resolution of its shareholders or an express
power in its articles of association.
Rockley Photonics Holdings Limited
Rockley was a Cayman Islands exempted company listed on the New
York Stock Exchange. It acted as a holding company for a group of
companies headquar- tered in the United Kingdom (the 'Rockley
Group'). The Rockley Group is a global medical technology group
that specialises in the research and development of integrated
silicon photonics chipsets, including the de- velopment of a
sensing platform technology that could have multiple applications
in non-invasive, multi- modal biomarker monitoring.
However, Rockley had not yet fully developed and commercialised any
of its products, such that it was expected to continue incurring
losses from operations for the foreseeable future. The lack of
commercialisa- tion, coupled with negative economic developments
and headwinds in the electronic device market, led to Rockley
facing financial difficulty. This was brought to a head in
September 2022, by which time Rockley had to begin negotiations
with its key creditors in order to not be in default of its note
indentures. As part of these negotiations, Rockley:
- engaged Alvarez and Marsal to assist with manag- ing cash flow and supporting comprehensive busi- ness planning efforts; and
- appointed Jefferies Group to conduct a marketing process for the sale of all or a portion of its assets.
Despite a robust marketing process, no acceptable in- dications of interest for Rockley's assets materialised. Therefore, Rockley's board of directors (the 'Board') was of the view that, absent an imminent potential sale or additional source of liquidity, it was likely that Rockley would be unable to pay its debts.
Commencement of restructuring processes
In these circumstances, on 23 January 2023, Rockley filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the US Bankrupt- cy Court for the Southern District of New York (Case No. 23-10081) (the 'Chapter 11 Proceedings'). In con- nection with the Chapter 11 Proceedings, Rockley also filed a pre-packaged plan of reorganisation (the 'Plan') and disclosure statement, which was supported by 100% of Rockley's noteholders.
On 24 January 2023 (the following day), Rockley presented a petition to the Grand Court of the Cayman Islands (the 'Grand Court' and the 'RO Petition') seek- ing the appointment of restructuring officers on the grounds that:
- it was or was likely (at the time) to become unable to pay its debts pursuant to section 93 of the Com- panies Act, in satisfaction of the first statutory pre- condition in section 91B(1)(a) of the Companies Act; and
- it intended to present (and indeed had presented) a compromise or arrangement to its creditors pursu- ant to the law of a foreign country, namely the Plan by the Chapter 11 Proceedings in the United States, in satisfaction of the second statutory precondition in section 91B(1)(b) of the Companies Act.
The automatic and extra-territorial moratorium
Upon presentation of the RO Petition, Rockley benefited from the automatic and extra-territorial moratorium pursuant to section 91G of the Companies Act, which stipulates that as a matter of Cayman Islands law:
'... no suit, action or other proceedings, other than criminal proceedings, shall be proceeded with or commenced against the company, 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 the leave of the Court and sub- ject to such terms as the Court may impose.'
The extra-territorial effect of section 91G of the Com- panies Act has not yet been tested by a foreign court. It therefore remains to be seen whether the moratorium would be enforceable in other jurisdictions. However, to the extent a foreign court disregards the moratorium and allows a foreign proceeding to progress towards an adverse judgment, we do not expect the Grand Court to enforce or recognise that adverse judgment in the Cay- man Islands on the basis that it would be contrary to Cayman Islands public policy.
Accordingly, Rockley was able to take advantage of the automatic and extra-territorial moratorium upon presentation of the RO Petition. Even though the Plan had the support of 100% of the noteholders, which may conceptually alleviate the need for an automatic and extra-territorial moratorium, the moratorium also insulated Rockley from potential litigation from any shareholders who did not support the Plan (and were 'out of the money'). This allowed Rockley to focus on dealing with objections to the Plan through the correct forum (namely, the US Bankruptcy Court) and to focus on finalising a restructuring without the threat and disruption that hostile litigation might bring.
Advertisement issues
The Companies Winding Up Rules (2023 Revision) (the 'CWR') provides for the procedural rules applic- able to the restructuring officer regime. Order 1A, rule 1(5) of the CWR requires that the advertisement of a petition:
'... shall be made to appear not more than 7 business days after the petition for the appointment of a re- structuring officer is filed in Court and not less than 7 business days before the hearing date.'
The rationale behind the first advertisement require- ment (not more than 7 business days after filing of a petition) is likely because the automatic and extra-ter- ritorial moratorium takes effect from the date of filing, such that the petition must be advertised as soon as possible in order to put potential and existing claimants on notice of the moratorium.
However, that advertisement requirement can be dif- ficult to comply with due to:
- the time it might take for the Grand Court to re- turn an indorsed petition with a completed Judge assignment and hearing date; and
- lengthy lead times with newspaper publications, which may require final proofs of advertisements well in advance of the publication date.
In order to overcome these practical issues, Rockley ar- ranged for two sets of advertisements. The first set of advertisements was arranged prior to the return of the indorsed RO petition, with the hearing date and Judge assignment details blank, in order to comply strictly with Order 1A, rule 1(5) of the CWR; and the second set of advertisements was arranged upon receipt of the indorsed RO petition with complete details of the hear- ing date and Judge assignment.
There are obvious cost concerns for requiring a dis- tressed company to arrange two sets of advertisements, particularly if the subject company has businesses and/or creditors in multiple jurisdictions. However, this appears to be the only practical way to comply with the CWR for the time being until further reform or judicial guidance is received.
Appointment of the restructuring officers
The Grand Court heard the RO Petition on 14 February 2023 and Chief Justice Ramsay-Hale made the orders sought. Accordingly, Christopher Kennedy and Alex- ander Lawson of Alvarez and Marsal (Cayman Islands) were appointed restructuring officers of Rockley (the 'Restructuring Officers'). The appointment order was broad in scope and provided (amongst other things) that the Restructuring Officers shall, without further sanction by the Grand Court:
'...monitor, oversee and supervise the Board in its management of [Rockley], and take all necessary steps to develop and implement a restructuring of [Rockley's] financial indebtedness... in consultation with the Board and under the general supervision of [the Grand Court]...'
Following appointment, the Restructuring Officers worked alongside the Board to negotiate, finalise and implement the Plan. Rockley filed in the Chapter 11 Proceedings:
- a supplement to the Plan on 17 February 2023;
- an amended supplement to the Plan on 5 March 2023; and
- a second amended supplement to the Plan on 7 March 2023.
Despite the supplements to the Plan, the Plan faced a number of objections; most notably by a group of shareholders. All of the objections were heard by the US Bankruptcy Court at a confirmation hearing commencing on 8 March 2023 and spanned over two days of evidence and argument. On 10 March 2023, the US Bankruptcy Court overruled the remaining ob- jections and confirmed the Plan.
Additional authorisation by the Grand Court of the Plan
One of the conditions to the 'Effective Date' of the Plan (as confirmed) required the Grand Court to have issued orders satisfactory to both Rockley and the noteholders approving the transaction contemplated by the Plan (the 'Condition').
Accordingly, and given that there had been changes to the Plan since first presented to the Grand Court, the Restructuring Officers made an application seeking or- ders from the Grand Court that they be '...authorised to take all steps they consider necessary or desirable in order to implement the [Plan]...' (the 'Authorisa- tion Application'). The Authorisation Application was listed for the morning of 10 March 2023 to coincide with the expected confirmation of the Plan. Due to the unexpected overrun of the Confirmation Hearing, the Grand Court allowed the Restructuring Officers' evi- dence and skeleton arguments to be filed on the morn- ing on 10 March 2023, with the hearing to take place in the afternoon.
At the hearing of the Authorisation Application, Chief Justice Ramsay-Hale noted that there was no need for the Grand Court to look behind the US Bankruptcy Court's confirmation on the basis of judicial comity. Accordingly, Her Ladyship made the order sought by the Authorisation Application on the same day in or- der to support the effectuation of the Plan. The Grand Court's order was sufficient to satisfy the Condition and allowed the Plan to be effected shortly thereafter.
Concluding remarks
Despite its relative infancy, the restructuring officer regime has successfully been used to support a foreign restructuring process as showcased in Rockley. The ro- bustness of the regime, together with the Grand Court's flexibility to facilitate such cross-border restructuring processes, has been welcomed by insolvency practi- tioners. It is expected that more companies will seek to deploy the restructuring officer regime in order to take advantage of the automatic and extra-territorial mora- torium whilst implementing a debt restructuring and to utilise the very broad and deep bench of expertise amongst the local restructuring experts and insolvency practitioners.
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.
