Corporate Insolvency and Restructuring in the Wider Commonwealth Caribbean

In summary

This article, which is the first to look at the wider commonwealth Caribbean, provides an overview of the corporate insolvency and restructuring regimes in the wider commonwealth Caribbean – which tend to follow either an English model or a Canadian model – and the similarities and differences between them.

Discussion points

• Statutory officers
• Definition of insolvency
• The commencement of formal insolvency processes and interim measures
• Corporate rescue and restructuring
• Clawback provisions and directors liability
• Creditor classes and the waterfall of priority

Referenced in this article

• Companies Acts of Antigua, Bahamas, the Cayman Islands and Montserrat
• Insolvency Acts of BVI and Jamaica
• Bankruptcy and Insolvency Acts of Barbados and St Vincent
• Commercial Code and draft Insolvency Bill of St Lucia
• China Shansui Cement Group Ltd, Grand Court of the Cayman Islands, 25 November 2015
• Cornhill Insurance plc v Improvement Services Ltd & Ors [1986] WLR 114
• Marcus A Wide as Liquidator of New Bank Limited (in Liquidation) v Thierry Dorian Nano SVGHCV 2016/0231, 15 January 2019
• Re: Constellation Overseas Ltd BVIHC (COM) 2018/0206, 5 February 2019
• BTI 2014 LLC v Sequana SA [2022] UKSC 25

Introduction

The English-speaking, or Commonwealth, Caribbean is made up of more than a dozen jurisdictions that range from independent states of millions of inhabitants, such as Jamaica and Trinidad and Tobago, to British Overseas Territories of only a few thousand inhabitants, such as Anguilla and Montserrat. The region includes the major offshore financial hubs of the Cayman Islands and British Virgin Islands, and major oil and gas producers like Guyana, as well as smaller economies focused largely on tourism and agriculture.

Save for St Lucia and Guyana, which have somewhat hybrid legal systems, the legal systems in the rest of the Commonwealth Caribbean are all English common law-derived.

It is therefore no surprise that the insolvency and restructuring law in a number of Commonwealth Caribbean jurisdictions takes its lead from the English insolvency regime; however, many of the jurisdictions have, especially in recent decades, adopted insolvency and restructuring law that is much closer to that of Canada.

Jurisdictions: English or Canadian approach?

Jurisdictions with corporate insolvency and restructuring law that generally follows the English model include:

• Anguilla;
• Antigua and Barbuda;
• the Bahamas;
• the British Virgin Islands;
• the Cayman Islands;
• Dominica;
• Guyana;
• Montserrat; and
• the Turks and Caicos Islands.

Jurisdictions with corporate insolvency and restructuring law that generally follows the Canadian model include:

• Barbados;
• Grenada;
• Jamaica;
• St Kitts and Nevis;
• St Lucia;
• St Vincent and the Grenadines; and
• Trinidad and Tobago.

It is perhaps no surprise that more of the British Overseas Territories follow the English model, whereas more of the independent states follow the Canadian model.^[1]

Supervisor of Insolvency

The most significant divergence between the two systems is probably found in the statutory office of the Supervisor of Insolvency (the Supervisor), a government-appointed position in most of the jurisdictions that adopt the Canadian system, which has no real analogy with the English style systems.

The Supervisor’s duties include:

• regulating the licensing of trustees;
• requiring the deposit of a payment, bond or security by trustees for the proper performance of their duties;
• undertaking inspection and investigation of estates and the conduct of trustees;
• receiving complaints from creditors;
• examining trustees’ accounts of receipts and disbursements and final statements; and
• approving the commencement of formal insolvency proceedings when sought by a debtor company.

The Supervisor has a right to intervene in any insolvency matter or proceedings before the court.

The Official Receiver, on the other hand (a public officer who acts as trustee or liquidator of last resort) is a position that is found in many of the jurisdictions that follow the English model,^[2] but is not found in most of those that follow the Canadian model.^[3]

Notwithstanding the distinction between the roles, one area where some crossover between the duties of the Supervisor and the Official Receiver in their respective systems can be seen is their role in receiving reports from liquidators or trustees of misconduct by company officers that might justify disqualification.

Terminology

The first difference between the two systems is one of terminology. For example, while one speaks of ‘winding up’ and ‘liquidators’, the other speaks of ‘bankruptcy’ and ‘trustees’. The aims and ultimate results of both systems are broadly the same but the language employed is indicative of subtle but fundamental differences, which become more significant when closely examined.

Under the English system, an insolvent company is placed into liquidation, or has a liquidator appointed to it. The company continues to operate (branded as ‘in liquidation’), retaining its assets, with the liquidator pre-empting both the directors’ powers and the shareholders’ general rights.

Under the Canadian system, the company and its assets are received by or assigned to the bankrupt estate of the company, under the control of a trustee in bankruptcy.

Definition of ‘insolvent’

In most of the English systems, a company is considered insolvent if:

• it is unable to pay its debts as they fall due (cash flow insolvency);or
• the value of the company’s liabilities exceed the value of its assets (balance sheet insolvency).^[4]

In most of the Canadian systems, a company is considered insolvent if:

• it is unable to meet its obligations as they generally become due;
• it has ceased paying its current obligations in the ordinary course of business as they generally become due; or
• the aggregate of its property is not, at a fair valuation, sufficient (or, if disposed of at a fairly conducted sale under legal process, would not be sufficient) to enable payment of all its obligations due and accruing due.

The latter test in the Canadian system^[5] is similar to the English balance sheet test, but maintains a focus on being able to meet obligations as they accrue, and requires consideration of the value of a company’s assets in a sale under legal process, which will often be far lower than that properly recorded on a company’s balance sheet.

Commencement of formal insolvency proceedings

Some of the ways in which formal insolvency processes (ie, liquidation under the English model and bankruptcy under the Canadian model) may be commenced would be familiar to practitioners in both systems.

Both systems allow for an insolvent company to place itself into a formal liquidation or bankruptcy process, although while the English system requires a resolution of shareholders (usually a ‘special’ or ‘qualifying’ resolution of three quarters of the voting shareholders) to appoint a liquidator, the Canadian system allows a company to assign itself into bankruptcy on the resolution of its board of directors.^[6] This is an interesting contrast, as in many of the jurisdictions that follow the English system, the directors do not have the power even to petition the court to liquidate the company, absent a shareholders’ resolution sanctioning them to do so.^[7]

The right of a creditor to apply to court for an order placing a debtor company into formal insolvency proceedings is common to both systems.

Under the English system, a creditor’s demand for repayment in the prescribed form that remains unpaid for 21 days is sufficient for a company to be deemed insolvent, and a sole creditor can successfully petition on the basis of nothing more than a single unpaid debt (above a statutorily prescribed minimum), which can be accepted as evidence of a general inability of the company to pay its debts as they fall due.^[8]

However, under the Canadian system, for an application to commence formal insolvency proceedings (referred to as an ‘application for a receiving order’) to succeed, a creditor must show not just that it is owed a debt over the statutorily prescribed minimum, but also that the debtor company has committed an ‘act of bankruptcy’ within the prior six months.

Acts of bankruptcy include:

• the making of an assignment to a trustee for the benefit of the creditors generally;
• the making of a fraudulent preference;
• allowing any execution against its property to remain unsatisfied for a specified period (of about three weeks to one month);^[9] if property seized from the debtor company by execution is sold; or if execution in favour of a creditor is returned unsatisfied;
• failing to satisfy a judgment entered against the company more than six months before the issuance of an application for a receiving order;^[10]
• exhibiting to any meeting of creditors any statement of assets and liabilities that indicates insolvency, or a written admission of the company’s inability to pay debts;
• assigning, removing, secreting or disposing of any of its property (or attempting to do so) with the intent to defraud, defeat or delay its creditors;
• giving notice in writing to any of the company’s creditors that the company has suspended or is about to suspend payment of their debts;
• defaulting on the performance of proposal (see the section on Corporate Rescue and Restructuring below); or
• ceasing to meet liabilities generally, as they become due.

As can be seen, in certain situations, the courts in both systems will make an order commencing formal insolvency proceedings on the very same grounds, such as where the company has ceased to meet its liabilities as they fall due, failed to pay a judgment debt for an extended period or confirmed its insolvency in writing. There are other situations, however, where the English system provides a far more straightforward route to obtaining such an order: confirming service on the company of a statutory demand, and the company’s failure to satisfy it, will generally be much easier than evidencing that the company has, for example, made a fraudulent preference.

Interim measures

Where it is considered necessary to protect the company’s assets, both systems provide that, after the filing of an application for a liquidation or receiving order, the court may appoint an insolvency officer on a temporary basis until the determination of that application. This is a ‘provisional liquidator’ in the English systems, and an ‘interim receiver’ in the Canadian systems.

As described in the section below, in some Caribbean offshore jurisdictions, provisional liquidation has also gained an important role in corporate restructuring.

Corporate rescue and restructuring

Few of the jurisdictions that follow the English system have comprehensive corporate rescue processes, like administration in the United Kingdom, or Chapter 11 in the United States. Some jurisdictions have legislated for administration, but never enacted those sections of the legislation. Antigua is one of the few jurisdictions in which such legislation has been enacted and administrators appointed (most notably to the inter-Caribbean airline LIAT).

Jurisdictions that follow the Canadian model provide for a company to make a proposal. This provides the company with a moratorium against its creditors, while the company remains as a debtor-in-possession and attempts to reach a compromise with its creditors, or effect a sale of all or part of its business or assets.

The key features of the proposal process are set out below:

• The process is initiated by the lodging with a licensed trustee of a proposal or a ‘notice of intention to make a proposal’ by an insolvent company (or, in some jurisdictions, a company that is facing imminent insolvency),^[11] receiver or trustee.
• The debtor remains in control of its property. The licensed trustee does not control the company’s affairs, but rather monitors the company’s actions, assists it in developing the proposal and advises the court if any material adverse changes occur.
• The filing of a proposal or a notice of intention to file a proposal provides the company with a stay against its creditors for the duration of the proposal process. The stay does not apply to secured creditors who provided a notice of intention to enforce their security more than 10 days prior to the filing of the proposal or notice of intention to file.
• The company has an initial stay of proceedings or moratorium period of 30 days in which to file a proposal. This can be extended by court order for an additional five months, in 45-day intervals.
• Secured creditors may enforce their security only if they have a served a notice of intention to enforce their security and the statutory 10-day notice period has:
  • lapsed by the time a proposal or notice of intention to file a proposal has been lodged; or
  • been waived by the debtor.
• A proposal must be approved by at least two-thirds in value and a majority in number of the creditors (including secured creditors to whom the proposal was made). If approved, the court must then sanction the proposal, which it will do if it is for the general benefit of the creditors. The court must be satisfied that the creditors will be better off under the proposal than they would be in a bankruptcy.
• After the debtor fulfils its obligations under the proposal, the trustee issues a certificate confirming the debtor’s compliance with its obligations under the proposal. After the certificate is issued, the debtor has completed its restructuring and may resume normal operations.
• If, however, the creditors do not approve the proposal, or if the debtor defaults on its obligations, the proposal may be annulled and the debtor will be deemed bankrupt.

In some of the jurisdictions that follow the English model,^[12] the appointment of provisional liquidators has been adopted as a way to provide a company with breathing space from its creditors in order to pursue restructuring through a compromise, or a statutory arrangement (most commonly a scheme of arrangement) that would otherwise not provide any stay or moratorium.

With this form of ‘light-touch’ provisional liquidation, an application to appoint liquidators is filed, together with an application for the appointment of provisional liquidators. The latter application will usually propose that the provisional liquidators enter into a protocol whereby the company’s management is left in day-to-day control of the company, supervised by the provisional liquidator, while management seeks to implement an arrangement or a compromise with its creditors.

The most common form of statutory arrangement found in the English systems is a scheme of arrangement. The process essentially consists of three steps:

• an application to the court setting out the proposed scheme, seeking sanction to call a meeting of creditors to vote on the proposed scheme;
• the creditors meeting, at which the scheme must be approved by 75 per cent of the creditors by value, and a majority in number, of each class of creditors voting on the scheme; and
• a further court hearing to approve the scheme as approved by the creditors.

A company does not have to be insolvent or nearing insolvency to propose a scheme. A successful, approved scheme may result in a cramdown of creditors. There are no automatic consequences for the company if a scheme is rejected by the creditors or the court.

Other forms of statutory arrangement that can be found in the English systems include:

• plans of arrangement, which can be used for restructuring and reorganisation of the shareholding in the company in addition to the company’s debt and contractual obligations, and which do not require the company to be insolvent or nearing insolvency. The process involves the directors submitting a proposed plan of arrangement to the court, and the court deciding what notice and approval must be given by which parties (there are no specific approvals thresholds that must be met). There is a statutory framework for the buyout of shareholders who dissent to a plan of arrangement; and
• company creditor arrangements (CCAs), which are similar to English company voluntary arrangements, and which are only available to a company that is insolvent. While the CCA process does not need to involve the courts, it does need to involve an insolvency practitioner, who is first appointed as an interim supervisor to oversee a creditors’ meeting to vote on the proposed CCA; then, if the CCA is approved, is appointed as supervisor to oversee implementation of the CCA. The proposed CCA requires the approval of 75 per cent of the creditors’ voting to pass.

An interesting recent development in the English model jurisdictions is the introduction of a statutory company restructuring officer (CRO) regime in the Cayman Islands.^[13] An application to appoint a CRO may be filed by the directors of the company (shareholder approval is not a requirement) that is, or is likely to become, unable to pay its debts as they fall due. A company is provided with a moratorium from the time the application to appoint a CRO is filed, until the application is dismissed, or if the application is granted until the CRO is discharged. The court has significant flexibility under the regime, but the CRO is otherwise expected to fulfil a role similar to that of a light-touch provisional liquidator. The legislation expressly provides that restructuring under the laws of a foreign country, as well as under Cayman Islands law, may be pursued by the company when a CRO is appointed.

None of the above forms of arrangement (nor the CRO regime) under the English systems can affect secured creditors’ rights, including their right to enforce, without the creditors’ agreement.

Creditors

The waterfall or priority of classes of creditors in each jurisdiction is not dependent on whether it follows the English or the Canadian model. Certain classes of unsecured creditors, such as employees and the revenue, are provided with a degree of priority or super-priority in some jurisdictions, while in others no classes of unsecured creditors are given priority.

All of the jurisdictions provide that the expenses of the liquidation, including the liquidator’s remuneration, will generally be paid out of the assets of the company in priority to all other claims.

Clawback provisions and relation back

Both systems make provision for the clawback of preferential transactions and transactions at an undervalue (although the latter are not provided for in some of the smaller jurisdictions that follow the English model, with older legislation).

The relation-back period for unfair preferences tends to be longer in the jurisdictions that follow the English model: typically six months prior to the commencement of insolvency proceedings for arms-length transactions and two years for related-party transactions where such provision applies. This is in contrast to three months and one year respectively, in the jurisdictions that follow the Canadian model.

For transactions at an undervalue, both systems either require the transaction to have been entered into with the intent to defraud or defeat creditors, or to provide an exception for transactions entered into in good faith. In the jurisdictions that follow the English model there is a large variance in the period in which transactions at an undervalue entered into may be voidable (from six months up to six years). Jurisdictions that follow the Canadian model tend to provide that transactions at an undervalue entered into up to a year before the commencement of insolvency proceedings may be voidable.

Insolvent trading

The jurisdictions that follow the English model generally provide that directors may be held personally liable for losses suffered by the company as a result of the company continuing to trade when insolvent. The mindset of the director (eg, reckless disregard)^[14] and the exact status of the company (eg, the insufficiency of the company’s assets to satisfy its debts and liabilities,^[15] rather than there being no reasonable prospect that the company would avoid going into insolvent liquidation)^[16] required to impose personal liability on the director varies between jurisdictions.^[17]

Jurisdictions that follow the Canadian model provide that directors can be held personally liable for certain transactions made when the company was insolvent (or if the transaction rendered the company insolvent). The relevant transactions for these purposes include:

• the payment of a dividend (other than a stock dividend); or
• the redemption or purchase for cancellation any of the shares of the company.

It is of note that a director who objected to the making of such payment is exonerated from liability.

The above provisions are, of course, in addition to any personal liability that may be imposed on directors under general companies law, for breach of duty or fraud.

Conclusion

Despite the obvious and sometimes fundamental differences between the two insolvency regimes adopted in the Caribbean (as can be seen above), and regardless of the jurisdiction in which a company is facing insolvency or an insolvency practitioner is appointed, there will typically be a route to achieve the same aims.

Notes