Restructuring & Insolvency: Cayman Islands
First published in Getting the Deal Through
What main legislation is applicable to insolvencies and reorganisations?
The Companies Law (2018 Revision) and the Companies Winding Up Rules, 2018 are applicable to corporate insolvencies. Recent amendments to the Winding Up Rules apply certain provisions of the Grand Court Rules, which govern proceedings in court generally, to winding up proceedings. One of those rules gives the court wider discretion as to how it deals with parties who do not comply with the Winding Up Rules. The Companies Law also provides a regime for what are known as arrangements and reconstructions, enabling companies to reach compromises or arrangements with their creditors or members, and a regime for the merger or consolidation of Cayman companies and Cayman companies with foreign companies.
It is noted that the corporate insolvency regime also applies to the winding up and dissolution of exempted limited partnerships and limited liability companies, save to the extent that it is varied by the Exempted Limited Partnership Law (2018 Revision) and the Limited Liability Companies Law (2018 Revision), respectively; and that the Bankruptcy Law (1997 Revision) and Grand Court (Bankruptcy) Rules, 1977 (as amended) apply to personal bankruptcies.
Excluded entities and excluded assets
What entities are excluded from customary insolvency or reorganisation proceedings and what legislation applies to them? What assets are excluded or exempt from claims of creditors?
All companies that are formed and registered under the Companies Law and the Limited Liability Companies Law, or that existed under Cayman Islands law prior to the original enactment of the Companies Law, may be susceptible to customary insolvency proceedings. A foreign company may also be susceptible to customary insolvency proceedings, but only where it has property situated in the Cayman Islands, is carrying on business in the Cayman Islands, is the general partner of a Cayman Islands exempted limited partnership or is registered as a foreign company in the Cayman Islands.
Assets over which the company has granted a creditor security will be excluded from the insolvency estate. While the liquidator might realise such assets with the consent of the secured creditor, the net proceeds after deduction of the liquidator’s costs can be paid only to the secured creditor. Assets that a company holds as trustee are similarly excluded from the insolvency estate.
What procedures are followed in the insolvency of a government-owned enterprise? What remedies do creditors of insolvent public enterprises have?
There are a number of entities that the government has established to perform particular public functions. Such entities are created by specific enactments that generally do not address what is to happen in the event of their insolvency. The government generally provides subsidies, as needed, to ensure insolvency does not occur.
In the event that the government decides that a particular entity should be dissolved, it will typically need to enact specific legislation to achieve that purpose, for example, the Health Services Authority (Dissolution) Law 1993, which dissolved the Health Services Authority and vested all of its property, rights and liabilities in the government. One exception is the Cayman Islands Development Bank, in respect of which the Monetary Authority is given specific powers under the legislation that established the bank to (among other things) appoint a person to advise the bank on the proper conduct of its affairs where the bank is or appears likely to become insolvent and to report to the Monetary Authority thereon within three months of his or her appointment; upon receipt of the report, the Monetary Authority will have power to (among other things) permit a reorganisation of the bank’s affairs or request that it be wound up.
Protection for large financial institutions
Has your country enacted legislation to deal with the financial difficulties of institutions that are considered ‘too big to fail’?
No such legislation has been enacted.
Courts and appeals
What courts are involved? What are the rights of appeal from court orders? Does an appellant have an automatic right of appeal or must it obtain permission? Is there a requirement to post security to proceed with an appeal?
Insolvency proceedings will be commenced in the Financial Services Division of the Grand Court. Where an appeal from a decision of the Grand Court is possible, it would be made to the Cayman Islands Court of Appeal, and any possible appeal from the Court of Appeal would be made to the Judicial Committee of the Privy Council in England.
The court will have the power to wind up a company if:
- the company has passed a special resolution requiring it to be wound up by the court;
- the company does not commence business within a year of its incorporation, or suspends its business for a year;
- the period, if any, fixed for the company’s duration by its articles of association expires, or an event occurs upon which the articles of association provide it is to be wound up;
- the company is insolvent; or
- the court is of the opinion that it is just and equitable that the company be wound up (eg, because of fraud, managerial misconduct, breakdowns of trust and confidence, loss of substratum).
The court thus has the power to wind up a company in each of the circumstances in which its winding up should be appropriate. Where a winding up order is sought on the just and equitable basis, the court will, however, be cautious to ensure that the winding up is not being sought for an ulterior purpose, as the Grand Court has recently affirmed; and in the appropriate circumstances the court may strike out such a winding up petition.
An order for the winding up of a company is treated as a final order and the respondents to the winding-up petition will therefore have an automatic right of appeal against that order. Orders that are made in the course of, or by way of regulation of, a liquidation and any other orders that are ancillary to or consequential on a winding-up order are, however, treated as interlocutory orders and a party who wishes to appeal against any such order must therefore obtain permission to proceed with an appeal. The appellant is required to deposit CID 50 with the Grand Court as security for the due prosecution of the appeal, and the court has a broad discretion to order the appellant to provide further security for the respondent’s anticipated costs of the appeal. The amount of security that an appellant may be ordered to provide will be based on the anticipated costs, and, in deciding whether to make such an order, the court will have regard to, inter alia, the prospects of the appeal succeeding, the location of the appellant and the appellant’s conduct in the proceedings, including its attitude to adverse costs orders made against it.
What are the requirements for a debtor commencing a voluntary liquidation case and what are the effects?
A company may place itself into voluntary liquidation by a special resolution of its members, or its articles of association may require it to go into voluntary liquidation at a particular time or upon the occurrence of a particular event. Once the voluntary liquidation commences, the company will only be permitted to carry on business if and to the extent that doing so is beneficial for its winding up, and any share transfer will be void unless sanctioned by the liquidator. In order for the liquidation to continue as a voluntary liquidation (without the court supervising), the directors must swear a declaration of solvency within 28 days of its commencement. Provided the declaration is sworn, the person or persons appointed as voluntary liquidators will exercise their powers to wind up the company’s affairs and distribute its assets, and the company will be dissolved thereafter.
What are the requirements for a debtor commencing a voluntary reorganisation and what are the effects?
A debtor company may commence a formal financial reorganisation by petitioning the court for its approval of a scheme of arrangement. The scheme will be required to show some element of accommodation by both the company and its creditors or members (as the case may be), and will be required to provide sufficient information to enable creditors or members to reach an informed decision on the proposal. Procedurally, evidence will need to be filed describing the purpose and effect of the proposed scheme, and providing information that enables the court to determine whether meetings of classes of creditors or members should be convened and the appropriate composition of the classes. If creditor or member approval is obtained at properly convened meetings (see question 8), the court will be asked to approve the scheme, and may do so either absolutely or subject to certain conditions in light of any opposition to the scheme.
In conjunction with the scheme, the company may seek the appointment of provisional liquidators to trigger and take advantage of the statutory moratorium on claims. It is commonplace for provisional liquidators to be appointed for the purposes of proposing the scheme, as the law permits.
How are creditors classified for purposes of a reorganisation plan and how is the plan approved? Can a reorganisation plan release non-debtor parties from liability, and, if so, in what circumstances?
Creditors will be placed into classes for voting purposes if their legal rights are so dissimilar that they cannot sensibly consult with each other with a view to their common interest. The meeting or class meetings of creditors will need to be convened in accordance with directions from the court, and the scheme of arrangement will have creditor approval (but remain subject to court approval) where it is approved by a majority in number representing 75 per cent in value of those voting at the meeting or at each class meeting.
It is typical for a scheme to provide indemnities and releases to parties (particularly provisional liquidators) involved with its implementation. It is also possible that it may release non-debtor parties from liability, which might be appropriate where the benefit to the company in waiving its claim and retaining the party’s services is considered greater than the value of the claim.
What are the requirements for creditors placing a debtor into involuntary liquidation and what are the effects? Once the proceeding is opened, are there material differences to proceedings opened voluntarily?
Whereas voluntary liquidations generally do not involve the court’s supervision, involuntary liquidations may be commenced by a creditor petitioning the court on the ground that the debtor company is insolvent and obtaining a winding-up order. Upon the making of the winding-up order, any disposition of the company’s property and any transfer of shares or alteration in the status of its members made after the presentation of the petition will be void, unless the court otherwise orders. The winding-up order will also trigger the liquidators’ obligations to collect, realise and distribute the company’s assets to its creditors, and any surplus to its members, and to report to creditors and members on the liquidation.
As to the effects of the winding-up order on the commencement or continuation of legal proceedings against the debtor company, see question 21.
What are the requirements for creditors commencing an involuntary reorganisation and what are the effects? Once the proceeding is opened, are there any material differences to proceedings opened voluntarily?
The Companies Law does not permit a company to be reorganised involuntarily.
Do procedures exist for expedited reorganisations (eg, ‘prepackaged’ reorganisations)?
There is no expedited scheme of arrangement process in the Cayman Islands. The speed with which a scheme of arrangement will obtain court approval will vary from case to case, and depends on (among other things) how quickly creditor or member approval can be obtained and the level and strength of any opposition to the scheme.
Members of a company may, however, choose to make use of the statutory merger and consolidation regime to effect a reorganisation, which is a streamlined out-of-court process requiring only members’ approval of the proposed plan.
How is a proposed reorganisation defeated and what is the effect of a reorganisation plan not being approved? What if the debtor fails to perform a plan?
A reorganisation, either by scheme of arrangement or a merger or consolidation, will be defeated if it is not approved by the necessary majorities of creditors or members, as the case may be. A scheme of arrangement may also be defeated, even if approved by the requisite majorities, if the court refuses to approve it on the basis that it is unfair or there is some sufficiently serious and justifiable objection to its implementation. In the case of a merger or consolidation, it will be open to a member of a constituent company to commence proceedings to challenge its validity on the ground that the statutory approval process was not complied with, or that it was approved on the basis of inadequate or incorrect information.
If a debtor company were to fail to perform a scheme, it is likely that a creditor would petition for its winding up and it would be placed into insolvent liquidation.
Are there corporate procedures for the dissolution of a corporation? How do such processes contrast with bankruptcy proceedings?
There is no process other than a formal liquidation by which a company may be dissolved. While a company may cease to exist where the Registrar of Companies strikes it from the register of companies (either at the request of the company or of his or her own motion), unlike a dissolution, the striking off may be reversed by an order of the court up to 10 years after the company was struck.
Solvent companies often use the strike-off process to bring their existence to an end where they are able to verify to the Registrar that they have no assets and liabilities, they consider the more formal voluntary liquidation process unnecessary and wish to save time and expense. The Registrar may also strike a company from the register of his or her own motion where he or she has reason to believe that it is no longer carrying on business or in operation, often because it has failed to pay its annual fees. Where a company has been struck from the register in either case, it will be open to the struck off company (acting by a former director) or a member of that company to apply to the court for an order restoring it to the register on the ground that it was in fact carrying on business or in operation at the time of the striking off, or that justice requires it to be restored. A creditor of a struck-off company may also petition the court to restore the company and put it into liquidation. The effect of a restoration is that the company will be treated as never having ceased to exist.
Conclusion of case
How are liquidation and reorganisation cases formally concluded?
A liquidation case will be formally concluded when the company is dissolved. In the case of a voluntary winding up, the dissolution will follow the filing of the liquidator’s return with the Registrar. In the case of a compulsory or court-supervised winding up, once the affairs are fully wound up and any assets distributed in accordance with the law, the liquidators will i) produce a final report for creditors; ii) schedule a court hearing of the application for dissolution of the company; and ii) publish notice of the hearing at least 14 days before the date of the hearing in accordance with the Winding Up Rules. The dissolution of the company will then follow the filing of the court order.
A reorganisation by way of a scheme of arrangement will be concluded in accordance with the terms of the scheme. Where the scheme is a creditors’ scheme that has been carried out in conjunction with the appointment of provisional liquidators to take advantage of the statutory moratorium on claims, it will, however, also be necessary to apply to the court for an order discharging the provisional liquidators and bringing the provisional liquidation to an end.
Conditions for insolvency
What is the test to determine if a debtor is insolvent?
A debtor company will be insolvent if it is unable to pay its debts as they fall due for payment. The onus is on the party petitioning for the winding up of the company to prove that it is insolvent, not on the company to prove its solvency.
Must companies commence insolvency proceedings in particular circumstances?
The Companies Law does not impose any obligation on a company to commence insolvency proceedings at any time. As to voluntary liquidation proceedings, see question 6.
Directors’ liability - failure to commence proceedings and trading while insolvent
If proceedings are not commenced, what liability can result for directors and officers? What are the consequences for directors and officers if a company carries on business while insolvent?
No civil or criminal liability will arise purely because a company in fact continued to trade after it had become insolvent. Criminal liability may, however, arise in such circumstances where steps have been taken by officers of the company (among others) with an intent to defraud its creditors. Additionally, any persons who were knowingly parties to the carrying on of the company’s business with an intent to defraud its creditors or for any fraudulent purpose may be held liable to contribute to the company’s assets. Directors may also incur civil liability where it can be shown that they breached their duties in permitting the company’s business to be carried on while it was insolvent.
Directors’ liabilities - other sources of liability
Apart from failure to file for proceedings, are corporate officers and directors personally liable for their corporation’s obligations? Are they liable for corporate pre-insolvency or pre-reorganisation actions? Can they be subject to sanctions for other reasons?
Corporate officers and directors are not ordinarily liable for their corporation’s obligations. It is, however, possible for them to assume responsibility for payment of particular liabilities by giving personal guarantees in respect of them. It is also possible for an officer or director to be declared liable to contribute to his or her company’s assets where the court finds that he or she was knowingly a party to the company carrying on business with the intent to defraud its creditors or for some other fraudulent purpose.
Aside from this, where an officer or director acts in breach of the fiduciary duty or duty of care that he or she owes to his or her company, he or she may be held liable to compensate the company for any loss; alternatively, where he or she profits from a breach of fiduciary duty, he or she may be held liable to pay the profit to the company.
Shift in directors’ duties
Do the duties that directors owe to the corporation shift to the creditors when an insolvency or reorganisation proceeding is likely? When?
Directors owe their duties to the company. In normal circumstances this in practice means to the general body of the shareholders. However, where a company is insolvent, or at risk of becoming insolvent (of doubtful solvency), the duties of the company’s directors extend to the interests of its creditors. There are a number of Commonwealth authorities to this effect, which have been approved and followed in the Cayman Islands.
Accordingly, where the interests of the company’s creditors intervene, they replace the interests of the shareholders and in such circumstances the directors will owe a duty to the company to take due care to protect the interests of the creditors.
The effect of this is that in the insolvency scenario, a company’s directors must act in the creditors’ interests, effectively putting aside the interests of the shareholders at least until such time as the company is solvent again. This does not automatically necessitate the directors ceasing trading and putting the company into liquidation. However, the directors must consider the financial position of the company and take a view on the most effective way of maximising a return for creditors. It will usually be sensible for the company to take the advice of an insolvency practitioner as to the options available.
Directors’ powers after proceedings commence
What powers can directors and officers exercise after liquidation or reorganisation proceedings are commenced by, or against, their corporation?
In a scheme of arrangement, the directors may carry on the company’s business for the purpose of the restructuring, subject to the supervision of any appointed provisional liquidators. In a liquidation, the liquidators essentially step into the role of the directors in the management of the company for the purpose of the winding up, and the directors’ powers cease, save that directors retain residual powers to allow them to initiate an appeal against the winding-up order.
Stays of proceedings and moratoria
What prohibitions against the continuation of legal proceedings or the enforcement of claims by creditors apply in liquidations and reorganisations? In what circumstances may creditors obtain relief from such prohibitions?
There is no prohibition against the continuation of legal proceedings or the enforcement of claims by creditors in a voluntary liquidation. However, once an order has been made for the winding up of a company under the court’s supervision or for the appointment of a provisional liquidator, no legal proceedings (including arbitration proceedings) may be commenced or continued against that company without the permission of the court; the exception to this rule is that a secured creditor may enforce its security without first obtaining such permission. In determining whether to grant permission to commence or continue legal proceedings against the company, the court will consider whether it is right and fair to all parties to do so in the circumstances of the case, and whether it is necessary to impose any conditions on the granting of such permission to alleviate any potential unfairness. It is also noted that, in the period between the presentation of the petition and the making of a winding-up order, a creditor, member or the company itself may apply for an order staying any proceedings being pursued against the company before the local courts or restraining further proceedings from being pursued before a foreign court. While there is no reported local authority that indicates the matters the court will consider in determining whether to grant such an order, it is expected that the main consideration will again be what is fairest to all parties in the circumstances of the case.
There is no prohibition against the continuation of legal proceedings or the enforcement of claims by creditors in a reorganisation by way of a scheme of arrangement. However, the appointment of provisional liquidators may be sought in conjunction with the scheme to trigger and take advantage of the statutory moratorium on claims while the scheme is implemented.
When can the debtor carry on business during a liquidation or reorganisation? Is any special treatment given to creditors who supply goods or services after the filing? What are the roles of the creditors and the court in supervising the debtor’s business activities?
There is no statutory provision dealing directly with insolvent trading in the Cayman Islands. The terms of a scheme of arrangement may restrict or qualify the company’s ability to do certain things (eg, obtaining credit). If provisional liquidators have been appointed in conjunction with the scheme, they may carry on the company’s business for the purposes of the restructuring or, less frequently, may supervise the directors of the company in carrying on its business. As to liquidations, see the answers to questions 6 and 9. Directors may be liable for breach of fiduciary duties if the company continues to incur liabilities while it is unable to pay its debts.
Creditors can stay involved in liquidation proceedings by reviewing the liquidators’ reports on the financial status of the company and progress of the liquidation, or have even greater involvement through election to the Liquidation Committee, upon which they can attend court hearings of the liquidators’ applications for the court’s sanction of proposed dealings with the assets of the company (see the answers to questions 32 and 33). In a scheme of arrangement, the sanctioning of the scheme itself, once approved by the requisite majority of creditors, is subject to the court’s approval. Creditors are entitled to attend the sanction hearing.
May a debtor in a liquidation or reorganisation obtain secured or unsecured loans or credit? What priority is or can be given to such loans or credit?
There is no absolute legal prohibition against loans or credit being obtained by the liquidators of a company in liquidation or by a company undergoing a reorganisation: a liquidator may borrow and grant security over the company’s assets with the court’s permission, and a company’s ability to borrow during a reorganisation by way of a scheme of arrangement will be delimited by the terms of the scheme.
Funds borrowed by a liquidator for the purposes of carrying out a liquidation will generally be expenses of the liquidation and would be paid in priority to the claims of preferred and other unsecured creditors in the liquidation.
Sale of assets
In reorganisations and liquidations, what provisions apply to the sale of specific assets out of the ordinary course of business and to the sale of the entire business of the debtor? Does the purchaser acquire the assets ‘free and clear’ of claims or do some liabilities pass with the assets?
The terms of a scheme of arrangement may address matters concerning the sale of company assets or the company’s entire business, if considered necessary. In a liquidation (save for a provisional liquidation for the purposes of reorganisation), the liquidator will be seeking to realise the assets of the company in the manner that produces the greatest return for creditors or members. The purchaser will acquire the assets on such terms as to liabilities and encumbrances as the sale agreement provides.
Negotiating sale of assets
Does your system allow for ‘stalking horse’ bids in sale procedures and does your system permit credit bidding in sales?
There is no prohibition on sales processes that involve ‘stalking horse’ bids or credit bidding. In a court-supervised liquidation, the court will, however, need to consider whether a sale on either of those bases should be approved as being likely to produce the best outcome for the creditors as a whole. While a sale agreement that permits ‘stalking horse’ bids may lead to the liquidator achieving a substantially better price for the asset, credit bidding is less likely to result in the best price being paid.
Rejection and disclaimer of contracts
Can a debtor undergoing a liquidation or reorganisation reject or disclaim an unfavourable contract? Are there contracts that may not be rejected? What procedure is followed to reject a contract and what is the effect of rejection on the other party? What happens if a debtor breaches the contract after the insolvency case is opened?
Cayman Islands law does not permit a debtor undergoing insolvency proceedings to reject or disclaim an unfavourable contract without the usual consequences for breach following. In a reorganisation, the debtor may nevertheless seek to renegotiate the terms of the contract if there is some prospect that the counterparty might agree to more favourable terms.
If there is a breach of contract by the company following the commencement of insolvency proceedings that gives rise to a claim for damages, the party having the claim will likely file a proof of debt in the liquidation. Where, however, the contract conferred a proprietary right on the counterparty prior to the commencement of the liquidation, the counterparty may call on the company for a transfer of the property and, if necessary, seek the court’s permission to sue the company for the property.
Intellectual property assets
May an IP licensor or owner terminate the debtor’s right to use the IP when a liquidation or reorganisation is opened? To what extent may IP rights granted under an agreement with the debtor continue to be used?
The licence agreement will typically set out the circumstances in which termination of the licence by either party is permissible, or when termination will automatically occur. If the agreement does not provide for automatic termination in the event of insolvency, the company (and thus its liquidator) will continue to be entitled to make use of the rights until such time as the licence is terminated. The liquidator may terminate the agreement with the court’s permission if appropriate, but would not be entitled to make use of the IP in any manner that is adverse to the interests of the licensor or owner.
Where personal information or customer data collected by a company in liquidation or reorganisation is valuable, are there any restrictions in your country on the use of that information or its transfer to a purchaser?
Where a company owes a common law duty of confidence to a person from whom it has received information, that duty will generally prevent the company from disclosing the relevant information. The Confidential Information Disclosure Law, 2016 (CIDL) lists a number of instances where the disclosure of such confidential information will not, however, constitute a breach of the duty of confidence and will not be actionable at the suit of any person: examples include disclosure in compliance with certain orders of the court and other authorities, in compliance with statutory obligations and to high-ranking police officers in connection with their investigation of a criminal offence; another key instance is where the person to whom the duty of confidence is owed consents to the proposed disclosure. If it were necessary for an insolvent company (acting by an officer or officers) to give evidence in its insolvency proceeding that consisted of or included information that it held in confidence for others and could not disclose under any such exception in the CIDL, it would be necessary for an application to be made to the court in a separate proceeding under the CIDL for directions as to whether the evidence should be given, and whether any safeguards should be imposed to maintain its confidentiality. If an insolvent company were contemplating transferring information that it held in confidence for others to a purchaser of all or part of its business, it would be prudent for it to seek the consent of the persons to whom the duty of confidence was owed before making such a transfer. The Cayman Islands Data Protection Law (the DPL) was passed in March 2017, is expected to come into force by January 2019 and will apply to the processing of all personal data in the Cayman Islands. Drafted around a set of internationally recognised privacy principles, the DPL provides a framework of rights and duties designed to give individuals greater control over their personal data. The DPL requires data controllers to put in place policies and procedures to ensure that their handling of personal data complies with the new law, that all data is transferred and stored securely and is protected against unauthorised access and use. In addition, any business that offers goods or services to individuals in the European Union now also has to comply with the EU’s General Data Protection Regulation, which came into effect on 25 May 2018.
How frequently is arbitration used in liquidation or reorganisation proceedings? Are there certain types of disputes that may not be arbitrated? Can disputes that arise after the liquidation or reorganisation case is opened be arbitrated with the consent of the parties?
Cases have arisen locally where a company has sought to restrain the presentation of a creditor’s winding-up petition on the ground that the debt is disputed and the relevant agreement requires the dispute to be arbitrated. Recent judgments indicate that where a debt is disputed and subject to an arbitration clause, unless there are ‘exceptional circumstances’, the court will exercise its discretionary power to stay or dismiss the petition in order to compel the parties to resolve the dispute through arbitration. The effect of the commencement of insolvency proceedings on the commencement and continuation of arbitration proceedings is addressed above in the response to question 21. An arbitration agreement between the company and a third party will remain enforceable after the commencement of insolvency proceedings and, where the liquidators wish to pursue a claim which the company has agreed to submit to arbitration, they may commence and continue the arbitration in respect of that claim with the permission of the court. If court proceedings were commenced in spite of an arbitration agreement, the defendant might assert its entitlement to have the dispute arbitrated and seek a stay of the court proceedings, but the court will not enforce that entitlement of its own motion.
Are there processes by which some or all of the assets of a business may be seized outside of court proceedings? How are these processes carried out?
A creditor will typically be permitted by the terms of its charge to appoint a receiver without needing to apply to the court, and the terms of the charge will determine the circumstances and manner in which the appointment may be made (typically by written notice to the chargor). Where the receiver is appointed over real property, notice of the appointment must, however, also be filed with the Registrar of Lands.
Where real property is let, a landlord may seize and sell property belonging to the tenant on the premises to set off the sales proceeds against unpaid rent. In the sale of goods context, where the contract for sale contains an effective title retention clause and the purchaser fails to pay for goods received, the clause may cause the purchaser to return the goods to the seller without requiring litigation to be pursued.
What remedies are available to unsecured creditors? Are the processes difficult or time-consuming? Are pre-judgment attachments available?
An unsecured creditor will generally need to commence proceedings against a debtor company to recover its debt in the event of non-payment. If the debt is disputed, the proceedings are typically commenced by writ of summons. If the creditor obtains judgment in such proceedings for payment of the debt, it may then take steps to enforce its judgment against the assets of the company, and what step will be appropriate will depend on the nature of the assets against which enforcement is sought: for example, land and shares may be charged and, if necessary, sold; debts owed to the company may be garnished; and other movable property may be seized by the court’s bailiff and sold. If the debt is not disputed, the creditor may prefer to serve a statutory demand for payment on the company and, in the event of non-payment, petition the court to wind the company up on the ground that it is insolvent. If the winding-up order is made, the creditor would then (at the appropriate time) prove its debt in the liquidation.
Proceedings commenced by writ can take between months or years to be decided, depending on how vigorously they are defended. Where there is no strong defence to a claim for payment, judgment may be delivered within a year or less. If the defence has no prospect of success, the creditor may even obtain summary judgment against the debtor and accelerate to the enforcement stage well within a year. The time it will take to enforce a judgment can also vary considerably depending on (among other things) the nature and location of the assets against which enforcement will be sought, and indeed whether those assets first need to be discovered.
The time it takes to carry out a liquidation will depend on the state of the debtor company when liquidators are appointed: if information is readily available and assets can easily be realised, the liquidation should be completed within a short time frame, but, if the opposite is found, the process could be very lengthy.
Pre-judgment attachments are not available under Cayman Islands law. A creditor may, however, apply to the court for an injunction restraining the debtor from disposing of its assets up to the value of the claim if (among other things) there is a real risk that the debtor will dispose of the assets to render a judgment against it nugatory or more difficult to enforce. The court also has the power to award interim payments in respect of amounts that a plaintiff is almost certain to be awarded at trial.
During the liquidation or reorganisation, what notices are given to creditors? What meetings are held and how are they called? What information regarding the administration of the estate, its assets and the claims against it is available to creditors or creditors’ committees? What are the liquidator’s reporting obligations?
Notice of the hearing of a creditor’s winding-up petition and the hearing of a dissolution application at the end of the winding-up process must be advertised once in a newspaper circulated in the Cayman Islands and, where the company carries on business outside the Islands, once in a newspaper that is most likely to bring it to the attention of creditors there, unless the court directs that such advertisements are not required. Under recent amendments to the Companies Winding Up Rules, the court can dispense with the requirement of liquidators to publish notices in newspapers if the expense is disproportionate or would be unlikely to serve any useful purpose. The court may therefore allow liquidators to publish notices through more effective and less expensive means, such as companies’ websites. Creditors will also be notified of (among other things) the making of a winding-up order and the appointment of official liquidators, as well as any meeting of creditors that is to be held and the liquidators’ intention to declare and distribute a dividend.
In an insolvent liquidation, the liquidator will convene a first meeting of creditors primarily for the creditors to elect their liquidation committee. Thereafter, meetings of creditors may be held as often as the liquidator considers necessary, at creditors’ requests, at the direction of the court and, in any event, not less than once per year. The liquidation committee will also meet on the dates or at the intervals that it resolves, as requested by any two of its members and, in any event, not less than semi-annually.
Official liquidators will report to the liquidation committee on the administration of the estate, and the company’s assets and liabilities. The information is typically communicated by way of detailed written report and accounts, which the liquidators also produce to the court.
What committees can be formed (or representative counsel appointed) and what powers or responsibilities do they have? How are they selected and appointed? May they retain advisers and how are their expenses funded?
The Winding Up Rules require a liquidation committee to be established in respect of every company that is being wound up by the court, though permitting the court to dispense with the requirement in particular cases. The committee will be composed of members, creditors or both, depending on whether the company is solvent, insolvent or of doubtful solvency: its composition will be determined by a vote of the creditors where the company is insolvent, members where it is solvent, and both where its solvency is doubtful (with a majority of creditors being elected). Any creditor will be eligible for appointment as long as he or she has submitted a proof of debt that has not been rejected, and members (including beneficial owners of shares certified as such by their custodians or clearing houses) will be eligible for appointment. A person cannot be a committee member as both a creditor and member, and cannot act as representative of more than one committee at once, or act as both committee member and representative of another committee member.
Official liquidators are under a duty to report to the committee on matters that are of concern to it with respect to the winding up. Liquidators and committees typically meet regularly, and not less than semi-annually, and any two committee members can requisition a meeting. The committee will often be asked to approve certain matters by resolution (either by majority vote at a meeting or unanimously in writing) on which the liquidators propose to seek the court’s permission, such as obtaining funding to pursue litigation, engaging legal counsel or other professionals, sales of property and payment of the liquidators’ own remuneration.
Recent decisions of the Grand Court have shown that liquidation committees can, where necessary, get the court to intervene in the liquidators’ conduct of the liquidation by seeking orders requiring the liquidators to do or refrain from doing certain things in order to expedite the process and maximise overall returns for creditors.
The committee is entitled to engage a legal adviser, and the legal fees and expenses that the committee reasonably and properly incurs in obtaining legal advice will be paid out of the assets of the company as an expense of the liquidation.
Enforcement of estate’s rights
If the liquidator has no assets to pursue a claim, may the creditors pursue the estate’s remedies? If so, to whom do the fruits of the remedies belong? Can they be assigned to a third party?
Creditors are not permitted to pursue the estate’s remedies themselves. They may, however, decide to provide the liquidator with funding to pursue the claim if they expect to benefit sufficiently from any recoveries that the liquidator may make. Any funding they provide would also be an expense of the liquidation, for which they would be reimbursed out of any assets in the estate before any distribution is made. Alternatively, where for example funding is unavailable or the claim is considered too risky, the liquidator might seek the court’s permission to sell and assign the claim to a third party, who might then pursue it for his or her own benefit.
How is a creditor’s claim submitted and what are the time limits? How are claims disallowed and how does a creditor appeal? Can claims for contingent or unliquidated amounts be recognised? Are there provisions on the transfer of claims and must transfers be disclosed? How are the amounts of such claims determined?
A creditor must set out details of its claim on a proof of debt form and submit the form, together with any relevant documentary evidence, to the liquidator. Time limits are addressed in the response to question 43. The liquidator may admit the proof of debt, either entirely or in part, for a distribution, or reject it.
The liquidator must give the creditor notice of a rejection or admission of only part of its proof of debt, with the reasons thereof, and informing the creditor of its right to apply to the court for a reversal or variation of his or her decision. An application to the court must be made by summons within 21 days of the creditor receiving the notice, with supporting evidence. The Grand Court has recently held that cross-examination of witnesses may be allowed at the hearing of such an appeal, despite there being no express provision for cross-examination in the applicable rules.
Creditors are permitted to assign their rights to receive distributions to third parties or instruct the liquidator to pay them to third parties. Notice of an assignment would need to be given to the liquidator to enable the liquidator to pay the distribution to the assignee.
Claims for contingent and unliquidated amounts can be proved in a liquidation, and the liquidator adjudicating a proof for such a debt must consider the proof and supporting documents and make a just estimate of the value of the claim.
Set-off and netting
To what extent may creditors exercise rights of set-off or netting in a liquidation or in a reorganisation? Can creditors be deprived of the right of set-off either temporarily or permanently?
Creditors remain able to exercise existing common law and contractual rights of set-off and netting as against a company following the commencement of its liquidation. In the case of an insolvent liquidation, save where the creditor had notice at the time the debt fell due for payment that liquidation proceedings had been commenced, set-off will be automatic, absent any contractual arrangement to disapply it. Where it applies, an account will be taken of what the company owes to the creditor and vice versa as at the commencement of the liquidation and the balance after the set-off will be paid to the party to whom it is due.
In a reorganisation by way of a creditors’ scheme of arrangement, the terms of the scheme may restrict or exclude rights of set-off or netting, if approved by the statutory majority of creditors and by the court.
Modifying creditors’ rights
May the court change the rank (priority) of a creditor’s claim? If so, what are the grounds for doing so and how frequently does this occur?
The court has no power to alter the rank of a creditor’s claim, which is fixed by statute.
Apart from employee-related claims, what are the major privileged and priority claims in liquidations and reorganisations? Which have priority over secured creditors?
Apart from employee-related claims, debts due to bank depositors and taxes due to the Cayman Islands government will rank as preferred debts over those owed to other unsecured creditors. There is no type of unsecured claim that has priority over secured creditors.
What employee claims arise where employees’ contracts are terminated during a restructuring or liquidation? What are the procedures for termination? (Are employee claims as a whole increased where large numbers of employees’ contracts are terminated or where the business ceases operations?)
Employees who are terminated as a result of a restructuring are often terminated for redundancy, which is a fair reason for dismissal under Cayman Islands employment law. The employer must, however, be seen to have acted reasonably in all the circumstances to avoid liability for unfair dismissal. It is wise to consult employees in advance of termination for redundancy in a restructuring, and employees terminated for this reason are entitled to notice and severance pay. Where employment is terminated by reason of a company going into liquidation, the law provides that the employee is entitled to severance pay. Severance pay is calculated as one week’s wages at the employee’s latest basic wage for each year of service the employee has completed, but legislative reforms are being considered that may increase the amount employers are required to pay in future cases. The financial liability on employers for severance pay and compensation for unfair dismissal (where a claim is successfully brought) does not change whether a claim is brought by one employee or a number of employees, or where a business ceases operation. For each individual employee, severance pay and unfair dismissal compensation are capped.
What remedies exist for pension-related claims against employers in insolvency or reorganisation proceedings and what priorities attach to such claims?
A company with employees in the Cayman Islands is generally required by law to contribute to their pensions: the employer and employee must each contribute 5 per cent of the employee’s earnings, though they may contribute more.
Employers typically assume responsibility for deducting and delivering their employees’ contributions to the pension plan at the same time that they pay in their own. Where the employer has failed to pay its own contributions to the pension plan, it therefore tends to be the case that it has also failed to deliver its employees’ contributions. Both classes of unpaid contributions will be held by the company on trust and will fall outside of the insolvency estate: undelivered employee contributions are held on trust for the employee and unpaid employer contributions are held on trust for the beneficiaries of the pension plan as a whole. The law additionally provides that the administrator of the pension plan has a lien and charge on assets of the employer in an amount equal to the amount of the unpaid contributions that it holds on trust, thus making the administrator a secured creditor.
Environmental problems and liabilities
Where there are environmental problems, who is responsible for controlling the environmental problem and for remediating the damage caused? Are any of these liabilities imposed on the insolvency administrator personally, secured or unsecured creditors, the debtor’s officers and directors, or on third parties?
This is not a matter addressed by local legislation. It is, however, noted that claims in tort may lie against the company and possibly others who are responsible for causing environmental damage.
Liabilities that survive insolvency or reorganisation proceedings
Do any liabilities of a debtor survive an insolvency or a reorganisation?
In the case of corporate insolvency, the debtor company will be dissolved once its affairs are completely wound up and any assets have been distributed. It is not possible for any liability of the debtor company to survive this process, because dissolution means that the debtor company has irreversibly ceased to exist.
In the case of a reorganisation by way of a creditors’ scheme of arrangement, the scheme will set out the terms on which all liabilities to the creditors to which the scheme applies will be discharged. Once the scheme is approved by vote and receives court approval, its terms will bind all creditors and all liabilities to them will be discharged in accordance with the terms of the scheme.
How and when are distributions made to creditors in liquidations and reorganisations?
A liquidator may declare an interim distribution to creditors when he or she determines that sufficient assets have been realised to be able to make the distribution. Upon making that determination, the liquidator is required to publish a notice of his or her intention to declare the distribution, fixing a date not less than 30 days from the date of publication by which proofs of debt must be lodged with him or her and stating that any creditor who lodges its proof of debt after that date will be excluded from the interim distribution but not from any subsequent interim or final distribution.
The liquidator is required to declare a final distribution once he or she has i) realised all of the company’s assets, or so much of them as can be realised without needlessly protracting the liquidation; and ii) divided any unrealised assets among the creditors in specie, if and to the extent that it was practical to do so. The liquidator is again required to publish a notice of his or her intention to declare the distribution, but, in this case, fixing a date not less than 60 days from the date of publication by which all proofs of debt must be lodged with him or her and stating that any creditor who lodges its proof of debt after that date may be excluded from the final distribution.
While the Winding Up Rules do not fix a deadline for the liquidator to adjudicate proofs of debt submitted for the purposes of an interim distribution, the liquidator is obliged to adjudicate proofs of debt submitted prior to the final date for lodging proofs of debt (fixed by the notice of his or her intention to declare a final distribution) within 14 days from the final date.
The manner and timing of distributions to creditors in a reorganisation by way of a scheme of arrangement will be determined by the terms of the scheme; similarly, the manner and timing of payments to members that are being cashed out in a merger or consolidation will be determined by the plan of merger or consolidation.
Secured lending and credit (immovables)
What principal types of security are taken on immovable (real) property?
The principal type of security that is taken on immovable property in the Cayman Islands is a registered charge, all land in the Cayman Islands being registered. The charge will not transfer title to the immovable property to the chargee, but will entitle the chargee to take steps in the event of non-payment, typically leading to a sale of the charged property.
Secured lending and credit (movables)
What principal types of security are taken on movable (personal) property?
The principal types of security that are taken on movable property are mortgages, fixed and floating charges, liens and pledges.
A mortgage will involve a transfer by the mortgagor of its interest in the mortgaged property to the mortgagee to secure repayment, subject to the mortgagor’s right to redeem its interest in the property upon repayment.
A fixed charge is a security interest that the chargor grants over specific property (without transferring the specific property) to the chargee to secure repayment. It requires the chargor to retain the charged property and gives the chargee certain rights of enforcement against the charged property in the event of a default.
A floating charge is a security interest that the chargor grants over property it needs to remain able to deal with freely, but that will crystallise into a fixed charge over the property it holds, and give the chargee rights of enforcement against such property in the event of a default in repayment.
A lien may arise by operation of law where a creditor has lawful possession of an asset and payment is due to him or her for services rendered to the owner.
The creditor may retain the asset until payment is made, but will not be entitled to sell it to settle the account.
A pledge will involve a debtor depositing goods with his or her creditor to secure the debt, which the creditor may then sell if the debtor fails to meet its obligation to pay the debt.
Contracts for the sale of goods may also provide for the supplier to retain title to the goods until full payment has been received, enabling it to call for the return of the goods in the event of default.
Transactions that may be annulled
What transactions can be annulled or set aside in liquidations and reorganisations and what are the grounds? Who can attack such transactions?
As indicated in the response to question 9, any disposition of the company’s property and any transfer of shares or alteration in the status of its members made after the commencement of the winding up will, unless the court otherwise orders, be void. Additionally, where a company has made a payment or transferred property to a creditor while insolvent, and within the six months preceding the commencement of its insolvency proceedings, with the dominant intention to prefer that creditor over other creditors, the liquidator may ask the court to declare the payment or transaction void and to order that the payment be refunded or the property returned to the company (known as a voidable preference claim). The liquidator may also ask the court to declare a disposition of property by the company void where the company has disposed of the property at an undervalue with the intention of defeating an obligation owed to a creditor and seek an order for restitution (an undervalue claim). A creditor prejudiced by such a disposition may also seek such relief under the Fraudulent Dispositions Law whether or not insolvency proceedings have been commenced or are ongoing. The Grand Court has held, and the Court of Appeal affirmed, that the usual common law defences to a restitutionary claim cannot be raised to defeat such statutory claims. The decision has been appealed to the Privy Council and the judgment is now pending.
Are there any restrictions on claims by related parties or non-arm’s length creditors (including shareholders) against corporations in insolvency or reorganisation proceedings?
There is no restriction in insolvency proceedings on bona fide claims being made by insiders or non-arm’s length creditors. The claim will be subject to proof in the usual way and the liquidator will need to be satisfied by the evidence that it is valid (both as to liability and as to the amount claimed) and take into account any claim that the company may set off against it, before admitting it for payment.
Groups of companies
In which circumstances can a parent or affiliated corporation be responsible for the liabilities of subsidiaries or affiliates?
A parent or affiliated corporation may be responsible for certain liabilities of a subsidiary or affiliate where it has given a guarantee to the creditor to whom those liabilities are owed. Absent a contractual assumption of responsibility for the payment of such liabilities, the parent or affiliated corporation might only be made responsible if it can be shown that it has abused the separate corporate personality of the subsidiary or affiliate to evade payment or frustrate the enforcement of those liabilities, such that the corporate veil of the subsidiary or affiliate can be pierced.
Combining parent and subsidiary proceedings
In proceedings involving a corporate group, are the proceedings by the parent and its subsidiaries combined for administrative purposes? May the assets and liabilities of the companies be pooled for distribution purposes?
While the insolvency proceedings relating to each group company must be commenced by a separate petition, the court will take a pragmatic approach to the management of the proceedings and may permit the proceedings to be dealt with together in appropriate cases.
Save where there are reasons for piercing the corporate veil (see the response to question 48), it will generally not be possible for the assets and liabilities of separate companies to be pooled for distribution purposes: one possible exception is where the affairs of the separate companies are so interwoven, and improperly and inadequately accounted for, that it would be impracticable or uneconomic to attempt to treat the companies separately and distinctly for the purposes of their liquidations. Where, however, a single Cayman Islands company has operations in various jurisdictions and there are liquidators appointed in one or more of those jurisdictions, then (subject to court sanction) a pooling arrangement may be entered into (ie, the assets realised in each jurisdiction may be aggregated and distributions to admitted creditors, pursuant to claims of creditors in the respective jurisdictions, are made from that pool of assets).
Recognition of foreign judgments
Are foreign judgments or orders recognised and in what circumstances? Is your country a signatory to a treaty on international insolvency or on the recognition of foreign judgments?
Cayman law permits a representative appointed in foreign bankruptcy proceedings to apply to the court for orders in aid of foreign insolvency proceedings. Where the court is willing to exercise its discretion, it may:
- grant the foreign representative recognition (power to act in the Cayman Islands);
- enjoin the commencement or stay the continuation of legal proceedings against the debtor;
- stay the enforcement of any judgment against the debtor;
- require a person in possession of relevant information to be examined and produce documents; and
- order the delivery up to the foreign representative of any property belonging to the debtor.
UNCITRAL Model Law
Has the UNCITRAL Model Law on Cross-Border Insolvency been adopted or is it under consideration in your country?
While the Cayman Islands is not a signatory to any treaty on international insolvency, the court is willing to exercise its powers in aid of foreign proceedings based on comity. These powers and the basis on which they will be exercised follow many of the principles enshrined in the UNCITRAL Model Law, but stop short of implementing it.
How are foreign creditors dealt with in liquidations and reorganisations?
Foreign creditors are treated the same as local creditors. If a foreign creditor has obtained judgment in a foreign court against a debtor with assets situated in the Cayman Islands, it may seek to enforce that judgment against the assets in the Cayman Islands. Such enforcement will generally require proceedings to be commenced in the Cayman court claiming the judgment debt from the debtor (though there is a statutory regime that simplifies the enforcement of Australian judgments), and, once a Cayman judgment is obtained, it may then by enforced against the assets in the Cayman Islands by the usual processes.
Cross-border transfers of assets under administration
May assets be transferred from an administration in your country to an administration of the same company or another group company in another country?
With respect to cross-border transfers and asset pooling in liquidations, see the answers to questions 49 and 50.
What test is used in your jurisdiction to determine the COMI (centre of main interests) of a debtor company or group of companies? Is there a test for, or any experience with, determining the COMI of a corporate group of companies in your jurisdiction?
In the Cayman Islands, there are no threshold tests for the grant of assistance in respect of foreign insolvency proceedings, or automatic rights based on the COMI of the debtor. The foreign representatives must satisfy the court that it is appropriate for it to exercise its discretion to grant the relief sought by their application.
Does your country’s system provide for recognition of foreign insolvency proceedings and for cooperation between domestic and foreign courts and domestic and foreign insolvency administrators in cross-border insolvencies and restructurings? Have courts in your country refused to recognise foreign proceedings or to cooperate with foreign courts and, if so, on what grounds?
With respect to recognition, see the response to question 50. The court is willing to cooperate with foreign courts and foreign representatives in cross-border insolvencies based on comity, a consequence of which is that the court may refuse to grant recognition or other assistance where to do so would be materially inconsistent with Cayman Islands law and contrary to public policy. This willingness to cooperate in appropriate circumstances has recently been affirmed by the Grand Court, including by the exercise of non-statutory powers to assist and recognise Hong Kong liquidators of a Cayman company in sanctioning a parallel scheme of arrangement between the company and its creditors in the Cayman Islands in circumstances where there were no ongoing insolvency proceedings in Cayman, and in granting the application of Hong Kong provisional liquidators of a Cayman incorporated (but Hong Kong Stock Exchange listed) company to wind up the company in the Cayman Islands and be appointed as provisional liquidators.
Cross-border insolvency protocols and joint court hearings
In cross-border cases, have the courts in your country entered into cross-border insolvency protocols or other arrangements to coordinate proceedings with courts in other countries? Have courts in your country communicated or held joint hearings with courts in other countries in cross-border cases? If so, with which other countries?
In any case where a company in liquidation or its assets are subject to bankruptcy proceedings in another jurisdiction, a Cayman liquidator is required to consider whether it would be appropriate to enter into a cross-border protocol with any relevant foreign representative. The court may authorise cross-border protocols requiring the pooling of assets, information sharing and allocation of responsibility between liquidators to ensure fairness, efficiency and costs savings.
The court in appropriate cases may communicate or hold joint hearings with courts in other countries, and has previously done so with courts in, for example, England, the United States and Luxembourg. The Grand Court’s Practice Direction 1 of 2018 now further requires official liquidators to consider whether to enter into a cross-border protocol by providing that not only office holders appointed in Cayman but any company subject to court-supervised restructuring proceedings and any other interested party involved in a cross-border insolvency case should consider at the earliest opportunity whether to incorporate some or all of two sets of published guidelines, with suitable modifications, either into an international protocol to be approved by the court or an order of the court adopting the guidelines. Those two sets of guidelines are: the American Law Institute/International Insolvency Institute Guidelines Applicable to Court-to-Court Communications in Cross-Border Cases; and The Judicial Insolvency Network Guidelines for Communication and Cooperation between Courts in Cross-Border Insolvency Matters. Those guidelines primarily cover the procedural rules that may be applied in particular cross-border cases for regulating the manner of communications between the courts involved, the appearance of counsel in each court, notification to parties in parallel proceedings, the acceptance as authentic of official documents or orders made in the foreign jurisdiction or court and joint hearings. Such guidelines are ideal in situations where there are parallel schemes of arrangement or ancillary proceedings in different jurisdictions.