A new corporate restructuring process for the Cayman Islands
On 21 October 2021, the Cayman Islands' legislature gazetted the Companies (Amendment) Bill 2021 (Bill) which introduced a new corporate restructuring process in the Cayman Islands (Cayman). The Bill represents a welcome development to the restructuring regime in the Cayman Islands and once again fortifies the Cayman Islands' standing reputation as a leading offshore financial hub and a popular destination for foreign investment opportunities.
In this article, we examine the amendments introduced in the Bill and the implications it will have for existing and prospective investors in the Cayman Islands.
Overview of Amendments
Current position under the Cayman Companies Act 2021 (Act)
Before the introduction of the Bill, there was no formal restructuring regime in the Cayman Islands akin to the UK's administration process or the US Chapter 11 proceedings. Under the Act, the only option available to a company in distress is to appoint provisional liquidators, the appointment of which will trigger a moratorium that will in turn allow the company breathing space and where appropriate, will enable it to propose a restructuring to its creditors.
In practice, this means that a winding up petition against the company will first have to be presented in order for it to undergo any restructuring. That can be done by the company (through a shareholders' special resolution), its creditors, or contributories. Further, directors may present a winding up petition on the company's behalf without needing the sanction of a shareholders' special resolution provided that such power is expressly provided for in the company's articles.
At the hearing of a winding up petition, the Court has jurisdiction to, inter alia, make appropriate orders to facilitate a restructuring of the company. This would ordinarily involve the appointment of provisional liquidators to facilitate the restructuring process. The presentation of a winding up petition alone will not give rise to a moratorium; only the making of an order for the appointment of a provisional liquidator (or an official liquidator) will have that effect.
The new regime under the Bill
With the introduction of the Bill, Part V of the Act will be amended to include provisions for a company restructuring. The new provisions thereunder introduce a formal, standalone restructuring procedure for companies outside the traditional winding up regime under the Act.
The new regime establishes the concept of a "restructuring officer", a qualified insolvency practitioner who acts as an officer of the court, and who will supervise the company's restructuring process.
A company's directors are empowered under that regime to present a petition for the appointment of a restructuring officer – this can be done without a shareholders' resolution or any express power in the company's articles. That being said, the company's members may have grounds to restrain the directors from doing so where there is a provision in the company's articles which expressly prohibits this.
Under the proposed section 91B, a company may present a petition to the Court for the appointment of a restructuring officer on the basis that the company is or is likely to become unable to pay its debts, and intends to present a compromise or arrangement to its creditors or classes of creditors either pursuant to the Act, the law of a foreign country, or by way of a consensual restructuring.
It will therefore no longer be necessary for a winding up petition to be presented as a precursor to a court-supervised restructuring, and the Court will not have power to wind up the company when presented with a petition to appoint a restructuring officer. Pending the hearing of that application, the company may also apply ex parte to the Court for the appointment of an interim restructuring officer.
An automatic moratorium would be triggered upon the presentation of a petition to appoint a restructuring officer. This will prevent the continuation or commencement of any proceedings against the company without the leave of Court – including all foreign proceedings, and any proceedings to wind up the company. However, secured creditors will still be able to enforce their security against the company, without needing Court sanction and without seeking the approval of the restructuring officer.
The powers conferred on a restructuring officer are generally flexible, and will be subject to the Court's discretion.
Where the restructuring officer proposes to pursue a scheme of arrangement as part of the company's restructuring plan, he/she may make an application within the restructuring proceedings, without the need for separate proceedings under the Act for sanction of that scheme. As a result, there will be significant time and costs savings for a company already in distress.
In addition to the introduction of a standalone restructuring regime, there is another notable amendment in the proposed legislation. That amendment will allow directors of companies incorporated after the Bill comes into force to present a winding up petition on behalf of the company on grounds that the company is unable to pay its debts as they fall due or, where a winding up petition has been presented, to apply on the company’s behalf for the appointment of a provisional liquidator. As stated above, at present, directors may present a winding up petition on the company's behalf without the sanction of a special resolution passed at a general meeting only if such power is expressly provided for in the company's articles of association. The new Bill, however, grants directors this authority without the need for sanction; it will therefore be necessary for provisions to be included in the company's articles to either expressly remove or modify the directors' authority in this regard, should the stakeholders wish to depart from this statutory right.
Implications for the Client
The client as creditor
The interests of creditors of a company intending to appoint a restructuring officer are well-protected under the regime introduced in the Bill.
Amongst other things, the petition for the appointment of a restructuring officer must be heard on an inter partes basis, unless the company can otherwise satisfy the Court that there are grounds justifying an ex parte application.
In addition, creditors of the company, including contingent or prospective creditors, may apply to the Court to seek either a variation or discharge of the order appointing a restructuring officer, or for that officer's removal or replacement. Thus, for example, if the creditor has concerns about the independence of the restructuring officer proposed by the company, they will have an opportunity to nominate their own candidate.
Where the restructuring of a company under the guidance of a restructuring officer fails, and the company is subsequently wound up, the winding up will be deemed to have commenced from the date of the presentation of the petition for the appointment of a restructuring officer. This will affect, inter alia, the scope of the official liquidators' powers to claw back any preference payments made to creditors within the relevant period.
The Bill presents a welcome approach to facilitate company restructurings in the Cayman Islands. The benefits of the 'light-touch' provisional liquidation afforded under the current regime are retained, whilst the negativity and stigma associated with a winding up petition are no longer present with the establishment of a standalone restructuring process. It is anticipated that this will present a more collaborative and cohesive approach in the context of cross-border restructurings.
An original version of this article was first published by Asia Business Law Journal, January 2022.
© Carey Olsen 2022.