Global Restructuring Review - Cross-border restructuring and insolvency legal news, features and events

Offshore: Cayman Islands

Introduction

The success of the Cayman Islands' financial services industry is the result of a number of factors, including its freedom of investment decisions for fund managers, its tax-neutral status and the knowledge of experienced professional service providers on the Islands. The Cayman Islands' globally renowned legal system has also provided a robust framework to effectively address restructuring and liquidity issues arising from the lingering effects of the credit crisis. The Cayman Islands has a globally recognised, comprehensive and creditor-friendly regime to facilitate domestic and cross-border insolvencies and restructurings, with effective procedural rules in place both for insolvency practitioners and the courts.

The US remains the largest source of foreign direct investment into the Cayman Islands (US$260 billion), followed by Hong Kong (US$56 billion), the Netherlands (US$53 billion) and Brazil (US$52 billion).1 Recently, there has been a huge increase in Japanese portfolio investment in the Cayman Islands, from US$574 to US$713 billion during the past year. This is double the portfolio investment from Hong Kong, which stands at US$337 billion and is largely due to special legislation enacted to attract investment funds specifically targeted at Japanese investors.2 Outward direct investment from the Cayman Islands goes to Luxembourg, the US, Hong Kong, Singapore, the Netherlands and the PRC.3

Investors and opportunistic funds continue to keenly examine the PRC debt burden and the far-reaching impact any market correction is likely to have on the global economy. PRC regulators and banks have been on the offensive in reining in credit creation in light of the trend of deteriorating credit quality since 2014.4 With overdue and non-performing loans rising as economic growth moderates, it remains to be seen if the PRC can curb credit creation without jeopardising its goal of sustaining GDP growth rates at above 6 per cent.5 PRC banks are still by far the largest source of funding, facilitating massive lending to fund investment projects that are driven by the need to generate economic activity and employment.6

Below are some of the most recent cases and developments in the restructuring and insolvency sphere in the Cayman Islands.

Developments in restructuring and insolvency

Light-touch restructuring

‘Light-touch' restructurings by way of the appointment of provisional liquidators in the Cayman Islands continue to be a prominent feature for consideration by interested stakeholders, and we see no immediate signs of this trend abating, given the propensity of Asian clients to use companies incorporated in the Cayman Islands as their listing vehicle.

The Cayman Islands' legislative framework does not contain a regime that is equivalent to the United States' Chapter 11 Bankruptcy Code or the United Kingdom's administration to facilitate the rescue of an insolvent company. As a result, and in order to obtain the benefit of a moratorium against any proceedings continuing or being commenced against a company without leave of the Grand Court, companies tend to utilise the light-touch restructuring tool by seeking to appoint provisional liquidators pursuant to Part V of the Companies Law (2016 Revision) (the Companies Law), specifically section 104(3), to assist the company in promoting a compromise or arrangement with its creditors or members. An application under section 104(3) can be made by the company on an ex parte basis on the grounds that the company is or is likely to become unable to pay its debts as they fall due and, as mentioned above, the company intends to present a compromise or arrangement to its creditors or members, most commonly by the promotion of a scheme of arrangement pursuant to section 86 of the Companies Law. On the appointment of provisional liquidators, the Grand Court will determine which powers will remain with the directors and which will be vested in the provisional liquidators.

Restructuring provisional liquidators

The benefit of the light-touch restructuring process is that the appointment of provisional liquidators invokes the statutory moratorium on any proceedings (including winding-up proceedings by a disgruntled creditor) being brought against the company without leave of the Grand Court.

The area of light-touch restructuring is still developing in the Cayman Islands, as evidenced in the ruling in Re Grant T G Gold Holdings Limited. Justice Segal released an outline ruling in the case, in which he considered a creditor's winding-up petition and application for the appointment of liquidators. The company sought an adjournment of the petition in order to allow it to progress a proposal to resume trading. Justice Segal found that in light of all the circumstances it would not be appropriate to order an immediate winding up of the company. In refusing the winding-up order, Justice Segal distinguished the present case with Re Demaglass Holdings Ltd,7 in which it was held, in the absence of a good reason, that a company's unpaid creditor is entitled to a winding-up order virtually as of right. In the present case, the resumption proposal had the support of a significant group of creditors who also opposed the winding-up order and there was evidence that the appointment of liquidators might have a negative effect on the proposal. Though thoroughly considering the proper and serious concerns raised by the petitioner, on balance, Justice Segal favoured a short adjournment over a winding-up order so that the resumption proposal could be further advanced, while ensuring that the court could review the company's situation in a timely manner to safeguard the position of all creditors.

In a similar case before Chief Justice Ian Kawaley in the Bermuda Commercial Court, Up Energy Development Group Limited,8 Justice Segal's ruling was relied upon by the company in an attempt to resist a creditor's application for the appointment of provisional liquidators on the basis that it had appointed its own restructuring advisers and that deference should be given to the position of the majority of creditors, who also opposed the appointment of the provisional liquidators. Chief Justice Kawaley did not appear to place much weight on Justice Segal's ruling and instead held that the role of provisional liquidators in insolvency restructurings is so deeply entrenched in Bermudian insolvency law practice that it is now a legitimate expectation of stakeholders. The Chief Justice went on to state that there was a strong starting presumption in favour of the appointment of provisional liquidators and it would be a heavy burden to displace. Chief Justice Kawaley appeared to distinguish the position in respect of the weight to be given to the view of the majority creditors when deciding: (i) whether or not to adjourn for restructuring purposes rather than immediately order a winding up - which would ordinarily be considerable (consistent with Re Demaglass Holdings); and (ii) whether to appoint provisional liquidators to monitor a restructuring process - where the court was not obliged to blindly follow the view of majority creditors.

At the time of writing, Justice Segal's full judgment has yet to be released and it will be interesting to see whether he delves deeper into the relevant legal principles and considers the wider impact that the appointment of provisional liquidators can have beyond simply preventing a winding up. At the very least, these decisions are interesting to the extent that they appear to evidence a dichotomy between the Cayman and Bermuda positions regarding the appointment of light-touch provisional liquidators when a restructuring is proposed.

Schemes of arrangement

Z-Obee Holdings Limited is another Bermudian case that is likely to be significant in the development of the law concerning light-touch provisional liquidators and schemes of arrangement. In Z-Obee, Chief Justice Kawaley appointed Hong Kong-based restructuring provisional liquidators as joint provisional liquidators rather than a Bermuda-incorporated company for the express purpose of initiating a restructuring.9 It was explained to the Bermuda Court that an important reason for the application was the inability of the Hong Kong court to use provisional liquidators for restructuring purposes under Hong Kong law. Once the Bermuda provisional liquidators were appointed, they were expected to ask the Bermuda court to issue a letter of request to the Hong Kong court for recognition and assistance in the standard form acceptable to the Hong Kong court.

In a remarkable piece of judicial cooperation, Mr Justice Harris of the Companies Court of the High Court of Hong Kong had earlier adjourned a winding-up petition in relation to the company in Hong Kong precisely so that an application to appoint restructuring provisional liquidators in Bermuda could be made, thereby making modern restructuring law available to an offshore-incorporated, but Hong Kong-listed, company.10 To progress the restructuring, the Hong Kong provisional liquidators were later discharged so that the provisional liquidators appointed in Bermuda could seek recognition of their appointment in Hong Kong. At that point, the joint provisional liquidators could introduce parallel schemes to ultimately effect the restructuring of the company in Hong Kong and Bermuda.

The decisions by Chief Justice Kawaley in the Bermuda Supreme Court and Mr Justice Harris in the High Court of Hong Kong demonstrate the common law recognition and assistance techniques available to the courts and practitioners in attempting to solve problems encountered in cross-border insolvency. Furthermore, the case of Z-Obee goes some way in mitigating the effects of the Re Legend International case, which held that the statutory power to appoint provisional liquidators under the Companies Ordinance in Hong Kong to restructure a company's debt is impermissible.

With the judicious use of these staged applications in the offshore and onshore courts, Z-Obee has successfully introduced modern offshore restructuring law into an onshore jurisdiction. It will be interesting to see how the decision of Z-Obee will affect cross-border insolvency in the future, particularly for the Cayman Islands, given the similarities of the two jurisdictions' light-touch restructuring regimes. There is no reason, in principle, why the procedure used in Z-Obee could not be used for a Cayman Islands company.

The full extent of the light-touch restructuring jurisdiction was demonstrated in the restructuring of Mongolian Mining Corporation in the first half of 2017. Mongolian Mining was a Cayman-incorporated, Hong Kong Stock Exchange-listed coking coal producer and exporter operating in Mongolia. The company needed to restructure more than US$760 million in offshore debt. The restructuring involved light-touch provisional liquidators in the Cayman Islands, parallel schemes of arrangement under the laws of the Cayman Islands and Hong Kong, bespoke out-of-court consensual arrangements with certain creditors and recognition of the Cayman Islands' provisional liquidation proceedings, as well as schemes of arrangement in the United States under Chapter 15 of the US Bankruptcy Code. This successful restructuring was a favourable outcome for Mongolian Mining and its stakeholders, and has reaffirmed the Cayman Islands' status as a leading restructuring jurisdiction.

A company may seek to promote a scheme of arrangement, without any need for provisional liquidation, to make a compromise or arrangement with its members or creditors (or any class of them). An application may be brought by the company itself, any creditor or member of the company or, where the company is being wound up, by the liquidator. The Grand Court will order a meeting of the company's creditors or members to vote on the proposed scheme. If a majority representing 75 per cent in value of creditors or members present, either in person or by proxy and entitled to vote at the meeting, agree to the terms of the proposed compromise or arrangement, then, subject to the Grand Court's sanction, the scheme will be binding on all the creditors or members of the company and against the company itself and, if the company is in liquidation, against the liquidator and contributories of the company. The scheme becomes effective only once a copy has been delivered to the Registrar of Companies for filing.

Where a scheme is being promoted outside provisional liquidation, the directors of the company will remain in control of the company and will formulate the terms of the proposed compromise to be put to its creditors or members (practically, this will almost always be done with the assistance of qualified insolvency practitioners who will become the scheme supervisors once the company's creditors or members and the Grand Court have approved the scheme). The promotion of a scheme of arrangement outside provisional liquidation does not afford the company the benefit of the moratorium. The company remains at risk of aggressive creditor action unless it can persuade the Grand Court to use its extensive discretionary powers to stay any proceedings or suspend the enforcement of any judgment or order for a period of time.11

Compulsory liquidation

In the matter of Primeo Fund (in Official Liquidation), the Court of Appeal distinguished between the statutory obligations of liquidators under the Companies Law and their obligation as litigants before the court.12 In these proceedings, the joint official liquidators of Primeo sought damages against the Bank of Bermuda and HSBC. The Bank defendants claimed that the liquidators had not complied with their discovery obligations and sought to compel them to issue a letter of request under section 103 and to obtain the books and records of the company under section 138 (both of the Companies Law) from a bank in Austria.

At first instance, Justice Jones ordered that the liquidators issue the letter of request under sections 103 and 138. However, this decision was overturned by the Court of Appeal on the basis that: (i) the defendants were attempting to use the liquidators' statutory powers to seek documents from a third party in circumstances where the Grand Court Rules did not provide for third-party discovery; (ii) the first-instance judge had conflated the liquidators' statutory duties with the obligation to give discovery under civil procedure law and had wrongly suggested liquidators have to go as far as to assist adversaries to obtain documents in the course of litigation; (iii) the court should not interfere with the conduct of a liquidator other than in exceptional circumstances and the rationale for making the order came ‘nowhere near' meeting the exceptional circumstances test set out in Eddenote;13 (iv) the statutory powers of the liquidators are not for the benefit of a party in the liquidation, where the exercising of those powers does not serve the liquidation; and (v) it is an abuse of power if statutory powers conferred for a certain purpose are deliberately used to obtain a result outside the contemplation of the law creating the power.

Voluntary liquidation

In the recent case of In the matter of CHC Group Ltd,14 Justice McMillan considered Re China Milk Products Group Limited,15 in which it was held that directors of an insolvent company can present a winding-up petition on behalf of their company without approval by the shareholders, and Re China Shanshui Cement Group Limited,16 in which Justice Mangatal held that directors of a company do not have the standing or authority to present a winding-up petition, nor the power or authority to apply for the appointment of joint provisional liquidators, unless they are expressly authorised to do so by the company's articles of association or a valid shareholder resolution has been passed.

In CHC Group, Justice McMillan distinguished both China Milk and China Shanshui on the basis that they had no bearing on the case before him. In CHC Group, there was a pre-existing creditor's winding-up petition, which was then followed by an application by the company, acting by its directors, for the appointment of joint provisional liquidators for the purpose of restructuring. It was held that where a creditor has already filed a winding-up petition in respect of a company, not only may the directors of the company apply for the appointment of joint provisional liquidators, they may do so even without a shareholders' resolution or express provision in the company's articles of association. This interpretation appears to contradict the English common law position in Re Emmadart Ltd17 as well as the common law position in the Cayman Islands in China Shanshui, though Re Emmadart was not concerned with restructuring. A cynical interpretation of CHC Group would suggest that one should have a creditor, not the company, file the petition seeking the winding up of the company in order to best achieve a company-driven restructuring where it would not otherwise be permissible.

Clawback actions

In the matter of Re Weavering Macro Fixed Income Fund Ltd (in Liquidation),18 the Court of Appeal considered in substantial detail each stage of the test to be applied in identifying voidable preferences under section 145(1) of the Companies Law. Weavering concerned an appeal against an order of Mr Justice Clifford declaring that certain payments were voidable preference payments. In considering the solvency test under section 145(1), the Court of Appeal confirmed the applicability of the cash flow test in the Cayman Islands and clarified that this test was not confined to debts that are immediately due and payable, but also extends to debts that ‘will become due in the reasonably near future' and that any other conclusion would lead to artificiality.

On the question of establishing an intention to prefer on the part of the company in liquidation, the Court of Appeal dismissed the suggestion that a ‘taint of dishonesty'19 is required in order for a payment or transfer to be deemed preferential. The Court of Appeal explained that the ‘preference' referred to in the section refers to one creditor receiving more than the amount to which they would be entitled on a pari passu basis, not necessarily a preference of a fraudulent nature. It is also irrelevant to the question of identifying a preference that the recipient of the payment was paid by mistake. The liquidator need only prove that the company intended to prefer one creditor (not that particular creditor) to others.

The Court of Appeal also confirmed that common law defences, such as change of position, are not available to statutory claims under section 145(1) and as such, where the elements of section 145(1) are made out, the payment is automatically voided and must be returned.

Significant transactions, developments and active industries

In the recent case of Natural Dairy (NZ) Holdings Limited,20 the Grand Court confirmed that the court may substitute a contributory petitioner on a contributory's winding-up petition, even though there is no express power to do so under the Companies Winding Up Rules. Following the issuing of the petition, the petitioner discovered that it was the beneficial, rather than registered, owner of its shares and therefore did not have any standing to petition for winding up under the Companies Law. The company argued that substitution was not possible and sought to strike out the petition as a nullity. It was successfully argued that the court should allow substitution and pointed to the practice of the Cayman court prior to the introduction of the Companies Winding Up Rules, and the modern practice of the English High Court, to permit substitution on a contributory's petition, notwithstanding the absence of an express power to do so under the Insolvency Rules 1986 (the predecessor of the Companies Winding Up Rules). The petitioner relied on a series of decisions, starting with HSH Cayman I GP Limited,21 in which the Cayman courts confirmed their inherent jurisdiction to deal with irregularities in Companies Winding Up Rules proceedings. Mr Justice Segal permitted substitution, pointing out that the lack of an express power to substitute on contributories' petitions - in contrast with the position regarding creditors' petitions - was probably because the rule was intended to prevent companies paying off petitioning creditors one by one, and there was less need for such a rule regarding contributories' petitions as contributories are not so easily bought off.

The court in Uni-Asia Holdings Limited22 recently sanctioned a meeting of a company for the purpose of considering a ‘migration' scheme of arrangement. The arrangement proposed by the Cayman company was that its members exchange their shares for shares in a Singaporean company. The intended objective was an internal restructuring whereby the Singaporean company became the new holding company for the group and the Cayman company became its subsidiary.

International

The Cayman Islands has elected not to adopt the UNCITRAL Model Law on Cross-Border Insolvency. However, the Cayman Islands comprehensively revamped its cross-border insolvency legislation in 2009, inserting international cooperation provisions in the form of Part XVII of the Companies Law,23 and these are not dissimilar to the provisions of the UNCITRAL Model Law. In addition, the Grand Court customarily applies Model Law principles.24

In October 2016, judges from 10 jurisdictions, including the Cayman Islands, met in Singapore for the inaugural Judicial Insolvency Network (JIN) Conference. The result of the conference was the JIN Guidelines for Cooperation in Cross-Border Insolvency Matters. The Guidelines were designed to enhance communication between courts, insolvency representatives and other parties in the context of global restructurings and insolvency. At the time of writing, Bermuda and the BVI have both adopted the Guidelines. It will be interesting to see whether the Cayman Islands follows suit.

Future developments

The Companies Law in the Cayman Islands is substantially derived from the UK Companies Act 1948 and although Part V was revised considerably in 2009, it has not enjoyed the same developments as its English counterpart and many other offshore jurisdictions. For example, only 67 sections concern insolvency, whereas the BVI Insolvency Act comprises 505 sections. To fill the various lacunae in the Companies Law, the Grand Court has adopted a purposive approach to its interpretation and developed a set of principles that largely complement the contemporary common law position.

Notwithstanding the status of the Companies Law, the Cayman Islands Law Reform Commission can, and regularly does, make recommendations in respect of proposed changes to the Companies Law. In 2014, the Commission circulated a consultation paper examining the position of directors in the Cayman Islands and discussing whether there is a need for codification of directors' duties. Underpinning the role of the Law Reform Commission is the Insolvency Rules Committee, which is constantly reviewing the Companies Winding Up Rules. It is expected that the monitoring of the Companies Law by the Law Reform Commission and the Insolvency Rules Committee will be a continuing venture to ensure that the legislation meets the needs of the Cayman Islands' financial services industry.

Section 104(3) of the Cayman Islands Companies Law allows the appointment of provisional liquidators in circumstances where a company is or is likely to become unable to pay its debts and intends to propose a compromise or arrangement to its creditors. This is a well-established and effective company-driven restructuring tool with which Cayman Islands companies can be rehabilitated. The tool may be said to be deficient in three ways, explained below.

In order to appoint restructuring provisional liquidators, it is procedurally necessary to file a winding-up petition. This is because the Cayman Islands' restructuring provisional liquidator regime was historically born out of common law,25 adroitly adopted by Chief Justice Smellie in Re Fruit of the Loom Ltd.26 But for this historical anachronism, there can be no good reason in principle to require a winding-up petition to be filed, with all the rancour this creates.

Only the company can move a section 104(3) application, not creditors. The position is quite different in Bermuda, where creditors can drive the restructuring provisional liquidator process.27 There is no forensically sound basis for this limitation.

In the case of China Shanshui, it was held that the board of directors did not have authority to petition the court to wind up the company, a necessary precursor to a restructuring provisional liquidator appointment, without shareholder approval, unless the articles of association of the company expressly provide otherwise. This was the right decision on a strict interpretation of the Companies Law. However, it offends against the accepted rule in Re Rica Gold Washing Co28 that those without an economic interest in the outcome of a winding up, namely shareholders in an insolvent company, should stay out of it.

Consistent with our status as a creditor-friendly jurisdiction, Cayman Islands insolvency and restructuring professionals are currently discussing possible revisions to the Companies Law, which would have the effect of introducing dedicated ‘restructuring officers'. It is hoped, however, that any amendments will maintain the present balance in Cayman Islands restructuring provisions between the rights of all interested parties.

Notes

  1. Fichtner, Jan. Explaining Cayman's success through its role in the Anglo-American triangle, 26 April 2017.
  2. Ibid.
  3. Ibid.
  4. Bloomberg, ‘Can China Really Rein in Credit?', 15 June 2017; IMF Working Paper, ‘Resolving China's Corporate Debt Problem', October 2016.
  5. Bloomberg, ‘Can China Really Rein in Credit?', 15 June 2017.
  6. Ibid.
  7. [2001] BCLC 633.
  8. In the matter of Up Energy Development Group Limited [2016] SC (Bda) 89 Com (4 November 2016).
  9. In the matter of Z-Obee Holdings Limited [2017] SC (Bda) 16 Com (21 February 2017).
  10. Re Z-Obee Holdings Ltd HCCW 85/2014.
  11. Although untested in the Cayman Islands, English case law suggests this is possible. See Bluecrest Mercantile BV and another v Vietnam Shipbuilding Industry Group and others [2013] EWHC 1146 (Comm) (22 April 2013).
  12. FSD 30 of 2010.
  13. [1996] 2 BCLC.
  14. FSD 5 of 2017.
  15. Re China Milk Products Group Limited [2011 (2) CILR 61].
  16. Re China Shanshui Cement Group Limited (unreported, 25 November 2015).
  17. Re Emmadart Ltd [1979] 1 Ch 540.
  18. Re Weavering Macro Fixed Income Fund Ltd (in Liquidation) (unreported, 18 November 2016).
  19. See Re Kushler Ltd [1943] 1 Ch 248.
  20. FSD 186 of 2016.
  21. [2010] 1 CILR 114.
  22. FSD 34 of 2017.
  23. Look Chan Ho, ‘A Commentary on the UNCITRAL Model Law', Third Edition, 2012 (see in particular the chapter written by Tony Heaver-Wren and Jeremy Walton on the Cayman Islands, page 101).
  24. Save that, of course, the certainty of having the same Model Law apply in Cayman as it does in other places creates a common currency (see Guide to the Enactment of the UNCITRAL Model Law on Public Procurement (Guide to the Enactment of the Model Law)).
  25. Per Mr Justice Harman's ingenuity in Re English and American Insurance Co Ltd [1994] 1 BCLC 649.
  26. Re Fruit of the Loom Ltd (unreported, 30 October 2000).
  27. In the matter of Titan Petrochemicals Limited [2013] SC (Bda) 74 Com.
  28. [1879] 11 Ch D 36.