A restructuring plan can include different restructuring options; for instance, extension of maturity dates, debt-to-equity conversion or issuance of new debt instruments against debt forgiveness. A restructuring can also take different forms; for example, a plan of arrangement or creditor arrangement in the British Virgin Islands (BVI) or a consensual restructuring out of court with the assistance of a standstill agreement (often referred to as a restructuring support agreement). More complex restructurings often involve schemes of arrangement which are possible in all three jurisdictions.
It is up to the company to propose a restructuring plan and this commonly involves extensive negotiations with creditors. In a number of recent restructuring plans, creditors have been offered a combination of restructuring options including a debt for equity swap in whole or in part. If a restructuring plan is to include a debt for equity swap, the company should ensure that the structure would not fall foul of international sanctions.
A restructuring can be achieved through an in-court or an out-of-court process. Which option is best for a company will depend on the facts and circumstances of each case, such as the time scale available to the company and the risk of hostile creditor action.
A restructuring differs from a formal insolvency of a company (also referred to as a company’s liquidation or winding up). A formal insolvency is aimed at liquidating the company’s assets in order to distribute the proceeds among the creditors of the company. The process will result in the company’s business operations terminating and the company ultimately ceasing to exist.
This article focuses on restructuring options and processes only, and will merely touch on formal insolvency where it is intended to aid a restructuring process.
Provisional liquidation as a restructuring tool
The appointment of provisional liquidators of a company (as a process in aid of a restructuring or otherwise) is available in all three jurisdictions. Provisional liquidators are appointed by a court and their appointment can be sought by, amongst others, the company or a creditor.
If a creditor seeks the appointment of provisional liquidators, it will usually be for the purpose of asset protection or preservation whereby the powers of the company’s board will be displaced. This is generally referred to as the “traditional” approach and usually requires a creditor to prove mismanagement by the company’s board to validate the Court appointing provisional liquidators as a protective measure.
The application by a company, on the other hand, is usually for restructuring purposes and will give the appointed provisional liquidators “light touch” powers and leave the board in place.
While the main purpose of appointing “light touch” provisional liquidators is to aid a restructuring and avoid a liquidation of the company, the gateway to filing an application to appoint “light touch” provisional liquidators is a winding-up petition. This is an imperfect process, as the presentation of a winding-up petition (which is public) will usually have a number of unwelcome consequences, e.g.
- triggering of cross-defaults in security documents;
- potential termination of operating contracts;
- negative reputational consequences;
- necessary funding being more difficult to obtain; and
- time for avoidance actions starting running.
One of the main benefits to a company of appointing provisional liquidators is a moratorium against actions by unsecured creditors. This gives the company some breathing space to continue its restructuring negotiations without the threat of creditor actions. In the Cayman Islands and Bermuda, a moratorium is automatic upon the appointment of provisional liquidators. In the BVI, a moratorium has to be applied for, but is generally granted when the provisional liquidation order is made.
The moratorium does not affect enforcement rights of secured creditors who will be able to start or continue enforcement actions against the company despite a winding-up petition having been filed.
In August 2022, a new rescue regime was introduced in the Cayman Islands which allows a company to seek the appointment of a restructuring officer (RO). The RO regime separates the restructuring from a formal insolvency process and makes it easier for a company to restructure, allowing it to avoid many of the imperfections (mentioned above) that generally result from a winding-up petition being filed. Whilst technically it may still be possible for a Cayman company to apply for the appointment of provisional liquidators, this remedy has to all intents and purposes been superseded by the new RO regime when it comes to restructuring. We will delve into the RO regime in more detail later in this article.
The gateway to a provisional liquidation application – a winding-up petition
The gateway for a company wishing to appoint provisional liquidators is the filing of a winding-up petition or, in the BVI, an application seeking the appointment of liquidators (which is the same thing, just by a different name). This means that the company must be insolvent in accordance with the statutory requirements in the relevant jurisdiction.
Table 1 below provides a summary of the insolvency tests across the three jurisdictions, which are broadly similar. One specific point to note is that the BVI recognises in its legislation that a company can be insolvent on a balance sheet basis. This is not explicitly stated in the legislation in either the Cayman Islands or Bermuda.
|Bermuda||British Virgin Islands||Cayman Islands|
|The company is unable to pay its debts (s.161(e) Companies Act 1981)||The company is insolvent (s.162(1)(a) Insolvency Act (as revised)||The company is unable to pay its debts as they fall due (s.92(d) Companies Act (as revised))|
|A company shall be deemed to be unable to pay its debts if:||The company is insolvent if:||A company is deemed to be unable to pay its debts if:|
The winding-up petition will usually be accompanied by (i) an application for the appointment of provisional liquidators; and (ii) supporting evidence in the form of an affidavit/affirmation from a director of the company where a restructuring is to be pursued. The company will also be required to file draft orders and affidavits/affirmations or, at the very least, the consents to act of the insolvency practitioners it is nominating for appointment as provisional liquidators.
Once all documents have been filed, the Court will set a date for a hearing which, unless urgency can be demonstrated, is often somewhere between 4-10 weeks after filing, depending on the Court’s availability. It is generally not possible to “reserve” a hearing date which can only be set once the documents have been filed.
At the hearing, the Court will determine whether or not it should make the requested order and, if so, on what terms. If the order appointing “light touch” provisional liquidators is granted, the Court will adjourn the winding-up petition to allow for the restructuring to be promoted and implemented.
While it is not necessary to serve the application seeking the appointment of provisional liquidators on creditors, the Court will generally expect to see some form of notification to key creditors.
Table 2 sets out in broad terms the elements relevant to a company’s application for appointment of “light touch” provisional liquidators in each jurisdiction. Whilst these are broadly the same, there are some differences between the jurisdictions. One key difference to take note of is whether shareholders’ authorisation is required for a director to be able to file a winding-up petition; a director requires authorisation in the Cayman Islands, while it is undetermined in the BVI and on current case law no such authorisation is required in Bermuda. If authorisation is required and lacking, a solution could be to inquire whether a supportive creditor would be willing to file the winding-up petition which can then be followed by the company’s application for the appointment of provisional liquidators. This process has been used in a number of cases.
|Bermuda||British Virgin Islands||Cayman Islands|
|Winding-up petition required||Application for the appointment of liquidators required||Winding-up petition required|
|The Bermuda Court has taken the view that it has jurisdiction to appoint “light touch” provisional liquidators pursuant to s.170 of the Companies Act 1981|
Company should demonstrate:
|The BVI Court has taken the view that it has wide jurisdiction to appoint “light touch” provisional liquidators under s.170 of the Insolvency Act (as revised)|
Company should demonstrate:
|Since the RO regime came into force in August 2022, appointment only if Court considers it “appropriate to do so” (s.104(3) Companies Act (as revised))|
There is no case law yet clarifying what “appropriate to do so” means
|Directors do not require specific authorisation to file winding-up petition||It has not been determined definitively whether authorisation is required||Directors need specific authorisation to file winding-up petition, unless the Articles of Association of the company expressly provide otherwise|
|Powers of provisional liquidators defined in order appointing them||Powers of provisional liquidators defined in order appointing them||Powers of provisional liquidators defined in order appointing them|
|Moratorium commences on appointment (does not prohibit secured creditors from enforcing their security)||Moratorium possible on application to the Court (does not prohibit secured creditors from enforcing their security)||Moratorium commences on appointment (does not prohibit secured creditors from enforcing their security)|
While it will depend on the facts and circumstances of each case whether the Court will make an order appointing provisional liquidators, the Court will take into consideration the following key items from the materials submitted by the company in support of its application:
- an outline of a restructuring plan;
- some financial information as to the benefits of entering into a restructuring as opposed to an official liquidation (this is usually referred to as the liquidation analysis); and
- an indication as to the likely response of creditors.
If the Court makes an order to appoint provisional liquidators, no form of the order is prescribed by statute and the Court has absolute discretion when it comes to defining the powers assigned to the provisional liquidators, but most orders now follow a similar theme.
While an application for the appointment of “light touch” provisional liquidators is usually made at the company’s request, in Bermuda it is also possible (but highly unusual) for a creditor to seek the appointment of provisional liquidators for restructuring purposes. There is no statutory framework or precedent for doing so in the Cayman Islands or the BVI, but in the BVI it might be possible with the consent of the company or if such appointment would be in the public interest.
The Cayman Islands restructuring officer regime
The Cayman Islands introduced the new RO regime under section 91B of the Companies Act (as revised) which came into force on 31 August 2022. The regime is aimed at assisting a company with a restructuring and separates a restructuring from a formal insolvency which helps to resolve certain imperfections inherent in the “light touch” provisional liquidation process.
A company must satisfy certain statutory requirements if it wishes to file a RO petition. First, the company is required to demonstrate that it is or is likely to be unable to pay its debts; and second, that it intends to present a compromise or arrangement to creditors. As is the case with an application for the appointment of “light touch” provisional liquidators, a company is expected to present an outline of a restructuring plan, financial information as to the benefits of entering into a restructuring as opposed to an official liquidation (preferably a liquidation analysis), as well as some demonstration of creditors’ support for a restructuring.
Table 3 gives an overview of the elements relevant to the RO regime in comparison to a provisional liquidation process (reflecting amendments to the Companies Act (as revised) on introduction of the RO regime).
|Provisional liquidation process||Restructuring Officer Regime|
|Directors filing||Yes, if authorised to do so||Yes (unless expressly prohibited by Articles of Association)|
|Application requirements||Creditor: if necessary to prevent (i) dissipation or misuse of assets, or (ii) mismanagement by or misconduct of directors|
Company: if Court considers it “appropriate to do so”
|Company is or is likely to become unable to pay its debts and intends to present a compromise or arrangement to its creditors|
|Moratorium||Yes, upon Order being granted||Yes, upon filing RO petition|
|Global moratorium||No||Yes, according to Cayman Island law|
(*TBD how other jurisdictions will handle this)
|Enforcement by secured creditors permitted||Yes||Yes|
|Possibility of Court granting a winding-up order on the basis of the process||Yes||No|
Compared to a provisional liquidation process, the RO regime offers a much simpler process with more benefits. Most importantly, the RO regime does not require a director to file a winding-up petition alongside the RO petition, so the company is not at risk of being wound up if the Court decides to decline the company’s application for the appointment of a RO.
The RO regime is, however, exclusive to the company and hence a creditor is not allowed to present a RO petition. The Companies Act (as revised) therefore specifically provides that a director does not require authority to file a RO petition (unless directors are expressly prohibited from doing so by the company’s Articles of Association).
As mentioned earlier, a moratorium under the provisional liquidation process would usually commence when the order for the appointment of provisional liquidators is made. In contrast, there will be an automatic moratorium under the RO regime when the RO petition is filed with the Court which, based on Cayman law, will have extra-territorial effect. It remains to be seen how other jurisdictions will treat such intended global effect.
The restructuring officer regime – process
The flow chart below provides a general outline of the RO process.
Directors file RO petition with Cayman Court (moratorium kicks in)
Company advertises RO petition and notifies creditors / other stakeholders
Hearing (to take place within 21 days) in open court – creditors can appear and be heard
Order – Cayman Court can:
Note: RO order could also specify (i) manner and extent to which powers and functions of RO affect and modify powers and functions of board and (ii) if applicable, any other conditions imposed on the board which the Court considers appropriate, in relation to the exercise by the board of its power and functions
If RO appointed, advertisement and notification of appointment per the RO order
Certain statutory requirements and tight timelines must be followed when it comes to advertising the RO petition; the RO petition shall be advertised within 7 business days from its filing and not less than 7 business days before the hearing date. The company may also be required to advertise outside of the Cayman Islands (in the language of that country), depending on where it carries out its business. The purpose of the advertisement requirements is that the RO petition reach as many of the company’s stakeholders as possible, so that they are made aware of the company having filed a petition and may attend and be heard at the hearing.
In practice, given that it might take time to obtain the hearing date of the RO and/or lead time is required for submission of advertisements for publication, it is possible for the company to make two rounds of advertisements; one upon filing of the RO petition and the other when the hearing date has been fixed.
Once a RO has been appointed, further advertisements and notification are required to be made in accordance with the applicable rules and the RO order.
The restructuring officer regime – case law to date
Given that the RO regime is fairly new, there has been limited case law to date. So far, two RO appointments have been made by the Grand Court of the Cayman Islands and only one full judgment has been handed down, In the matter of Oriente Group Limited, unreported, 8 December 2022. This judgment provides some helpful guidance from the Court and is therefore discussed briefly below.
The background to Re Oriente Group Limited is that a creditor had presented a winding-up petition against the company in the Cayman Islands which was followed by the company applying for the appointment of ROs. Before the hearing of the RO petition, the same creditor also presented a winding-up petition against the company in Hong Kong SAR.
In his judgment, the Hon. Justice Kawaley confirmed that a company is entitled to present a RO petition where a winding-up petition has already been filed. Kawaley J also ruled that the presentation of the winding-up petition in Hong Kong is in fact in breach of the global moratorium under the Companies Act (as revised) which commenced on the filing of the RO petition. Kawaley J also made it clear that in dealing with a RO petition, the Court has a wide discretion which is applied in a manner largely similar to that of a restructuring provisional liquidation, if the Court is satisfied that:
- the statutory preconditions of insolvency or likelihood of becoming insolvent are met by creditable evidence from the company or some other independent source;
- the statutory precondition of an intention to present a restructuring proposal to creditors or any class thereof is met by creditable evidence of a rational proposal with reasonable prospect of success;
- the proposal has or will potentially attract the support of a majority of creditors as a more favourable commercial alternative to a winding-up of the company petitioning for the appointment of ROs.
The Court determined that all above-mentioned conditions had been satisfied by Oriente Group Limited and, hence, made the RO order.
As far as we are aware, the Hong Kong winding-up petition has not yet been heard by the Hong Kong court. It remains to be seen how the Hong Kong court will treat the appointed ROs and the intended global effect of the moratorium under the Companies Act (as revised). The Hong Kong court has previously made it clear, in the context of “light touch” provisional liquidators, that where they have been appointed in the jurisdiction of incorporation, this does not mean that the Hong Kong court will automatically adjourn a winding-up petition filed in Hong Kong. A strict approach by the Hong Kong court is unlikely to aid companies in financial distress that are looking to promote a restructure with the aim of continuing as a going concern.
Rockley Photonic Holdings Limited is the other company that has so far obtained a RO appointment. It also filed for reorganisation proceedings under Chapter 11 of the US Bankruptcy Act as part of its restructuring strategy, shortly before seeking the appointment of the RO. The restructuring plan that was presented to both the Courts in the Cayman Islands and in New York has been approved and is, presumably, in the process of being implemented.
Schemes of arrangement
A scheme of arrangement is a common method by which a company achieves a restructuring. It is often preceded by some form of restructuring agreement setting out the key terms of the proposed scheme and agreed to by the company and any number of its creditors.
The key benefit of having a scheme sanctioned by the court is that once the Court has sanctioned the scheme, the dissenting creditors (if any, assuming they have submitted to the jurisdiction of the offshore Court or some other process is implemented in relevant jurisdictions where the company has a presence, assets or liabilities) will also be bound by the scheme and the dissenting creditors would not be able to commence any further actions against the company concerning their debts which have been compromised under the scheme.
The requirements of a scheme are substantially the same in all three jurisdictions and the process is very similar. The flow-chart below provides a general outline of getting a scheme of arrangement sanctioned by the court.
Company files a scheme petition and a summons (with supporting affirmation) to convene class meeting(s)
Court hears the summons and grants order to convene class meeting(s)
|Company gives notice to creditors|
Company holds meeting(s) and stakeholders vote
|Court sanctions the scheme|
Company files the order with Registrar of Companies
The terms of the scheme become effective and binding
In terms of differences between the jurisdictions, the Cayman Islands requires a letter (prescribed by practice direction) to be issued to creditors setting out in some detail the process and creditors’ rights and information. Whilst it is not a formal requirement in the BVI or Bermuda, it has become the practice to send similar letters for schemes in those jurisdictions as well.
The threshold for approving a creditors’ scheme at a scheme meeting is a majority in number representing 75% in value of each class of creditors attending and voting at the meeting. Even if the threshold is met, the court is not bound to sanction the scheme, but in the absence of good reason to do so, the court will not normally seek to second-guess the commercial decision of creditors. Judges sitting in each jurisdiction will be bound by the case law of their own jurisdictions and may exercise their discretion differently.
One downside to a standalone scheme of arrangement is that there is no automatic moratorium and therefore a company will often also seek to have provisional liquidators (or ROs) appointed to obtain such moratorium.
When considering whether to sanction a scheme, the Court will assess whether:
- the provisions of the statute have been complied with;
- the class was fairly represented by those who attended the meeting and that the statutory majority acted bona fide and are not coercing the minority in order to promote interests adverse to those of the class whom they purport to represent;
- the scheme is such as an intelligent and honest man, a member of the class concerned with acting in respect of his or her interest, might reasonably approve; and
- there is no blot on the scheme.
By far the most time-consuming aspect, and to which the Court will pay significant attention, is the constitution of the classes of creditors voting on the scheme. Class constitution is based on similarity of rights of creditors: a class “must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest”. Generally, a company will not want one or two creditors sitting in a class of their own and effectively having the ability to hold the company to ransom. Therefore, a company will usually wish to make sure that creditors’ rights are aligned and nothing is being done that might “fracture” the class (for example, by way of consent fees or incentives to vote). The Court will also expect to see some financial analysis which will usually take the form of a comparison between the outcome for creditors in the scheme and the outcome for them in a liquidation (assuming the company is insolvent). The Court will also need to be satisfied there is no blot on the scheme. Fundamentally:
- the Court will need to be satisfied that the scheme will substantially achieve its purpose in the key jurisdictions in which the company has liabilities or assets; and
- the Court does not require certainty as to the position under foreign law, but will need to be satisfied it is not acting in vain.
Most common law jurisdictions, including the Cayman Islands, and, considering the current state of the law, likely BVI and Bermuda, adopt the English law “rule in Gibbs” where a debt is treated as discharged only if compromised by the law of the jurisdiction governing the debt. By way of example, to satisfy the BVI Court that a BVI scheme to compromise New York law-governed bonds would be substantially effective in New York and binding not only on those creditors who had submitted to the jurisdiction of the BVI Court (by voting on the scheme) but also those that had not, evidence was adduced to demonstrate that the BVI scheme would be effective in New York by way of a Chapter 15 proceeding.
We have highlighted some of the most common restructuring tools available in Bermuda, the BVI and the Cayman Islands for companies under financial distress. The offshore courts recognise the draconian effects of putting a company into liquidation and therefore have developed case law and implemented legislation to give companies space for a restructuring. As we have discussed, the Cayman Islands has even established the RO regime with an automatic moratorium to allow the company to promote a restructuring plan without facing the risk of being wound up in the Cayman Islands.
Of course, despite the willingness of the offshore courts to allow companies to go through restructuring instead of winding-up, whether or not a financially distressed company will “survive” is very much dependent on the terms of its restructuring plan and the support of its creditors.