These are difficult times for many clients and we appreciate that you may be required to provide cross-border insolvency or restructuring advice at short notice. This high-level guide may assist where there are Cayman Islands entities in the structure.
UNCITRAL Model Law – Recognition and Assistance to Foreign Proceedings
The Cayman Islands has not adopted the UNCITRAL Model Law. Accordingly, a foreign insolvency or restructuring proceeding of a Cayman Islands incorporated company or any resulting stay on proceedings, absent highly limited circumstances, will not be recognised by the Cayman Islands Court.
Importantly, 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.
Accordingly, if the Cayman Islands entity holds valuable assets that are not protected by the foreign proceeding, you may need to consider instituting parallel liquidation or restructuring proceedings in the Cayman Islands. Failing to do so risks dissenting creditors filing competing proceedings in the Cayman Islands Court. It may also expose directors to claims for breach of duty.
Shares in a Cayman Islands Company
An order from a foreign court 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 company. It will still be necessary to satisfy the relevant Cayman Islands corporate formalities, which will primarily depend on the terms of the constitutional documents.
Restructuring Provisional Liquidation
The Cayman Islands restructuring provisional liquidation regime is routinely used to support foreign proceedings.
Alternatively, it can be used on a stand-alone basis to assist in effecting a restructuring of a Cayman Islands or a foreign company (for example to facilitate negotiations for a fully consensual deal or through a Cayman Islands or English scheme of arrangement).
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 can be appointed jointly with the Cayman Islands RPLs.
Appointing RPLs results in a moratorium on proceedings by unsecured creditors in the Cayman Islands.
The directors of a Cayman Islands company cannot file the petition unless they have been authorised to do so by the shareholders, by way of either a shareholder resolution or power in the articles of association. If necessary, a friendly creditor, including insider creditors, can file the petition.
The Cayman Islands Court has significant flexibility when setting the powers of RPLs. This allows the appointment order to be tailored to suit the circumstances of the case and can allow what are effectively debtor in possession proceedings.1
The Cayman Islands Court and Cayman Islands insolvency practitioners are very familiar with dealing with parallel proceedings and strongly endorse cross-border cooperation and coordination.
Schemes of Arrangement
Cayman Islands schemes of arrangement can be used to compromise the domestic and foreign debt of both Cayman Islands and non-Cayman Islands entities.
Accordingly, where a COMI shift to England of a foreign company is not attractive for tax reasons, the Cayman Islands may provide an alternative solution.
Furthermore, the rule in Gibbs applies in the Cayman Islands. Therefore, consideration will need to be given as to whether a parallel scheme is necessary in the Cayman Islands in support of any compromise or arrangement in other jurisdictions.
The Cayman Islands scheme of arrangement provisions are substantially the same as those in England. The jurisdictional hook however is different in that the Cayman Islands Court can scheme any company "liable to be wound up" under the Companies Law.
This is a statutory test and includes:
(a) Cayman Islands incorporated entities and any foreign company that has property in the Cayman Islands;
(b) is carrying on business in the Cayman Islands; and
(c) is a foreign registered company (a simple administrative filing which usually can be effected in 24 hours) or is the general partner of a Cayman Islands limited partnership.
As in England, the Cayman Islands Court will have a discretion as to whether or not it is prepared to exercise its jurisdiction.
A scheme of arrangement can be implemented either with or without RPLs depending on whether a moratorium is required.
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.
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.