1 . What are the most commonly used corporate insolvency procedures available?
The following key procedures are available in the case of an exempted company:
- the appointment of restructuring officers (RO or ROs);
- provisional liquidation (including “soft touch” provisional liquidation);
- official liquidation; and
- court supervised liquidation (where an entity in voluntary liquidation is considered to be insolvent or of questionable solvency and is brought under the supervision of the court).
In the case of a segregated portfolio company (an entity in which assets and liabilities can be segregated into different pools, known as portfolios), there is also the option to appoint a statutory receiver to a specific portfolio (rather than to liquidate the company as a whole) under sections 224 and 225 of the Companies Act (CA).
2. What options are there for debtors to obtain protection from their creditors pending or during a restructuring process?
Prior to recent reforms, a company seeking protection from creditors during a restructuring process was required to present a winding-up petition to appoint official liquidators (OL or OLs) together with an application to appoint “soft touch” provisional liquidators (PL or PLs) with a restructuring mandate under section 104(3) of the CA.
Under the PL route, there is no statutory moratorium until PLs are appointed and therefore no automatic protection from creditor claims upon presentation of the petition (absent anti-suit injunctive relief which can be sought under section 96 of the CA). Once PLs are in place, a mandatory stay of proceedings (other than criminal proceedings and enforcement by secured creditors) is imposed by section 97 of the CA. It will usually be necessary for the PLs to seek recognition and enforcement of the stay in the relevant foreign jurisdiction(s) to ensure extra-territorial effect.
In August 2022, new legislation came into force which introduced the concept of a restructuring officer. ROs can be appointed on an interim or final basis to assist the company through a restructuring. In contrast to the PL regime: (1) there is no need to present a winding-up petition at the same time; and (2) the statutory moratorium under the RO route comes into effect immediately upon presentation of the petition and remains in place until determination of the application. The moratorium is also expressly stated to apply extra-territorially (albeit as a matter of Cayman Islands law). Accordingly, the RO route provides more certain protection to the company at an earlier point in time.
It appears that “soft touch” restructuring PLs are still available in the suitable case, despite the introduction of the RO regime: Re Kingkey Financial International (Holdings) Ltd and Re Oakwise Value Fund SPC.
The statutory test for the appointment of both “soft touch” PLs and ROs is in identical terms. The remedy will be available where:
- the company is or is likely to become unable to pay its debts as they fall due; and
- the company intends to present a compromise or arrangement to its creditors.
In both cases, it will also be necessary to satisfy the court that 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.
3. What pre-insolvency, debtor-in-possession restructuring regimes can arise?
The principal restructuring tool in the Cayman Islands is a court-supervised scheme of arrangement under section 86 and/or section 91I of the CA.
3.1 What are the conditions to entry?
In theory, any compromise or arrangement proposed between a company and its creditors or members (or, in each case, any class of them) can form the subject of a scheme of arrangement. However, in order for that scheme to be successful, in addition to satisfaction of the appropriate level of member or creditor consent (discussed below), the court will need to be satisfied that the scheme participants obtain some accommodation or advantage that compensates them for the scheme’s alteration of their rights. A scheme will likely not be sanctioned where the terms of the scheme are unfair such that an intelligent and honest creditor, being a member of the class concerned and acting in its own interests, would not reasonably vote in favour of the scheme.
3.2 Can creditor claims be compromised “within a class”?
Creditor claims may be compromised within a class. The court will typically determine class composition at the convening hearing at the outset of the scheme proceedings.
In order to obtain sanction, the scheme proponents will need to demonstrate the support of at least 50% by number (on a headcount test) and 75% by value of those attending and voting in each scheme class (including by proxy).
3.3 Is there a “cross-class cramdown”?
There is currently no way to achieve a “cross-class cramdown”, although the matter is currently the subject of consultation.
3.4 Can shareholder claims be compromised?
Shareholder claims are also capable of compromise. The court will typically determine class composition at the convening hearing at the outset of the scheme proceedings.
In the case of a members’ scheme, the support of at least 75% by value of those attending and voting in each scheme class (including by proxy) is required.
3.5 Can secured creditors’ claims be compromised? Are deficiency claims treated differently?
In principle, claims of secured creditors ought to be capable of compromise under a scheme where the threshold consent requirements of the class are met. However, the CA is clear that the statutory moratorium imposed upon the presentation of a petition to appoint ROs or after the appointment of PLs or OLs does not apply to enforcement proceedings commenced by a secured creditor in respect of any secured liability. Accordingly, in practice, compromise is only likely to be achievable where all secured creditors within the relevant class are willing to consent to the proposal or perhaps in exceptional circumstances where anti-suit relief has been obtained via another method.
3.6 Can creditors propose competing plans?
In principle, creditors appear to be able to propose competing plans, although no authority has been identified on the point.
3.7 What level of court or other third-party supervision is there of the process(es)?
Schemes of arrangement are subject to court oversight and approval. The court will be required to consider and approve class categorisation (where applicable) at the convening hearing. Court sanction of the scheme will also be required.
As a matter of practice, companies seeking to restructure will typically engage ROs or “soft touch” PLs to: (1) monitor, oversee and supervise the board in its management of the company; and (2) develop and implement a restructuring of the company’s financial indebtedness in consultation with the board and under the general supervision of the court. Under the new regime, RO are expressly empowered under sections 86 and 91I of the CA to commence the scheme proceedings on behalf of the company.
4. Are clawback claims provided for and, if so, on what basis can they be pursued?
There are a number of routes open to OLs who are seeking to impugn transactions entered into by a company prior to liquidation.
Often, the company will have good claims at common law and in equity that arose prior to the appointment of the OLs (for example, claims against directors or managers for breach of fiduciary duty or against recipients of company property in knowing receipt and restitution) and these may be pursued by the OLs on the company’s behalf if not time barred.
Additionally, under section 99 of the CA (avoidance of property dispositions), any dispositions of a company’s property or transfer of its shares made after the deemed commencement of the winding-up order (i.e. the date of presentation of the petition to wind up, or in the case of a voluntary liquidation which subsequently becomes subject to court supervision, the date of the resolution to place the company into liquidation) will be void in the event that a winding-up order is subsequently made, unless validated by the court.
Finally, there are statutory clawback claims that arise upon the commencement of the winding up or entry of the company into official liquidation and are vested in the OLs directly.
There are also several criminal offences contained in the CA that relate specifically to antecedent transactions — see section 134 (fraud in anticipation of a winding up) and section 135 (transactions in fraud of creditors). The penalty for these offences can include imprisonment and a fine.
4.1 What is the applicable law that provides for clawback and/or antecedent transaction claims?
Section 145 of the CA (voidable preference) provides that any payment or disposal of property to a creditor constitutes a voidable preference upon the application of the liquidator if:
- it occurs in the six months before the deemed commencement of the company’s liquidation and at a time when the company is unable to pay its debts; and
- the dominant intention of the company’s directors was to give the applicable creditor preference over other creditors (or is deemed to have been so in the case of certain related parties).
Section 146 of the CA (avoidance of dispositions at an undervalue) provides that dispositions at an undervalue made with the intention of wilfully defeating an obligation owed to a creditor are voidable on the application of the liquidator.
Under section 147 of the CA (fraudulent trading), a liquidator may apply for a declaration that the business of the company has been carried on with the intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose and for orders that the relevant persons make such contributions to the company’s assets as the court thinks proper.
4.2 What are the relevant “look-back” periods for claims?
Voidable preference claims concern transactions carried out within the six-month period prior to the deemed commencement of the winding up.
An undervalue claim under section 146 of the CA must be brought within six years of the disposition.
There is no limit on the applicable “look-back” period for fraudulent trading. The cause of action arises, at the very earliest, from the date of liquidation and a six-year limitation period applies.
4.3 Who can pursue the claims?
Claims under sections 145 to 147 of the CA are office holder claims that may be brought only by the OLs once the company has entered liquidation.
4.4 What remedies are available and how do they operate in practice?
Under section 145 and section 146 of the CA, the OLs can apply for an order avoiding the disposition. There are no additional statutory remedies beyond avoidance, with the result that it will also be necessary to pursue common law/equitable claims for recovery on behalf of the company.
Under section 147, the OLs can apply to court for declaratory orders:
- that fraudulent trading has occurred; and
- that any persons who were knowingly parties to the fraudulent trading are liable to make such contributions to the company’s assets as the court thinks proper.
4.5 What defences are available?
There are no statutory defences to claim under sections 145 or 147 where the requirements of statutory cause of action are otherwise made out.
There are certain statutory protections for bona fide transferees under section 146 of the CA in relation to fees, costs, pre-existing rights, claims and interests.
4.6 Is there a general right of action in respect of transactions defrauding creditors or Actio Pauliana claims?
Under the Fraudulent Dispositions Act (as revised) (FDA), dispositions made with an intent to defraud and at an undervalue are voidable at the instance of a creditor prejudiced by the transaction regardless of whether the company is in liquidation.
The intention to defeat a creditor need only be a purpose of the disposition but does not need to be the sole or dominant purpose.
4.7 Who can pursue the claims?
Claims under the FDA may be pursued by creditors “thereby prejudiced” which may include contingent creditors.
4.8 What remedies are available and how do they operate in practice?
Where a claim is made out, the court may only set aside the disposition “to the extent necessary” to satisfy the obligation owing to the applicant creditor.
Where the debtor is insolvent, the court may require that a greater amount be restored than the amount simply owed to the applicant creditor given that the restored assets would be distributed pari passu in a liquidation.
4.9 What defences are available?
Aside from limitation, there are no technical defences to a claim under the FDA where the grounds for avoidance are otherwise made out. However, there are certain statutory protections for bona fide transferees and trust beneficiaries in relation to fees, costs, pre-existing rights, claims and interests.
5 . How is the liability of directors and managers of an insolvent company catered for?
5.1 What are the duties of directors and managers?
There is no statutory codification of the core duties owed by directors in the Cayman Islands, which arise in equity (fiduciary duties) and at common law.
The core fiduciary (or quasi-fiduciary) duties owed to the company include the following:
- to act in good faith or bona fide in the interests of the company;
- the duty of loyalty;
- to exercise powers in the company’s interests and only for the purpose or purposes for which they are given;
- to act confidentially;
- to avoid any conflict of interest (whether actual or potential) between the director’s duty to the company and the director’s personal interests or a duty owed to a third party and the corollary, to declare interest in a proposed transaction where one exists;
- not to improperly fetter the exercise of the director or manager’s future discretion;
- not to make secret profits;
- to exercise independent judgement;
- not to accept benefits from third parties;
- not to misuse the company’s property (including any confidential information and trade secrets);
- not to exceed authority;
- to deal fairly between shareholders; and
- to act in accordance with the company’s articles of association or constitution.
The Grand Court appears to have adopted the conclusions of the English Supreme Court in BTI 2014 LLC v. Sequana SA, that the duty to act in the best interests of the company requires the directors to take into account the interests of creditors when the company is insolvent or bordering on insolvent and to act in the interests of creditors once insolvent liquidation or administration becomes inevitable (the “Creditor Duty”). The Creditor Duty is owed to the company and cannot be enforced by a shareholder directly.
Directors also owe a tortious duty at common law to the company to exercise appropriate skill and care in the carrying out of their functions (and potentially an analogous equitable duty).
Further obligations can be found in the company’s memorandum and articles of association (M&AA) and other constitutional documents.
The same documents may contain provisions which modify the directors’ non-statutory duties. As a matter of practice, these documents typically contain broad exculpatory language which excludes director liability for wrongdoing. Whilst these clauses have been found to be enforceable (in contrast to the position under English law), it has been suggested that it is not possible to exclude liability in respect of wilful default, wilful neglect or fraud. It is also common for the M&AA to contain wide-ranging indemnities in favour of the directors, although an indemnity in respect of wilful default, wilful neglect or fraud is unlikely to be enforced.
Additional civil and criminal duties and restrictions relating to the day-to-day running of the affairs of the company are imposed on office holders under various statutes and regulations including: the CA, the Penal Code, the Proceeds of Crime Act, the Mutual Funds Act (where applicable), the Private Funds Act (where applicable) and the Monetary Authority (Administrative Fines) Regulations.
In certain limited circumstances, directors may find themselves under duties to shareholders regarding, for example, the accuracy of information provided at general meetings, typically where liability has been assumed through conduct.
The duties owed by managers will depend entirely upon the underlying contractual arrangements and the manager’s own conduct in relation to the company. Managers may also benefit from exculpatory and indemnity provisions under the relevant management agreements (albeit provisions purporting to exclude liability or indemnify the managers in respect of wilful default, wilful neglect or fraud are unlikely to be enforced). Given that the position in respect of managers will be highly fact specific, it is not considered further under Question 5.
5.2 What claims can be brought against directors and managers arising from breaches of those duties?
In the absence of fraud or wilful neglect or default, the question whether a claim can be brought against a director, or whether there is a practical benefit to bringing such a claim (given the indemnification position), will turn on the scope of the relevant exculpatory and/or indemnity provisions in the constitutional documents.
Subject to the above, typical claims that might be brought against directors will include claims for the following relief:
- declarations of breach of fiduciary duty and/or trust;
- damages in the tort of deceit, where fraud can be established;
- restitution;
- an account of profits;
- equitable compensation;
- declaratory relief avoiding transactions entered into by the director in breach of duty or declaring them to be void ab initio; or
- injunctive relief (for example preventing further breaches).
See Question 4, above, for discussion of office holder claims that may be utilised against directors once the company has entered into liquidation.
5.3 Who can pursue the claims?
Typically, only the company (whether through its board or a liquidator) can pursue claims against directors for breach of fiduciary duty.
In certain circumstances, it may be open to shareholders to commence a derivative action to pursue litigation against a director or manager on behalf of the company, particularly where the wrongdoers are still in control of the company. The Grand Court’s permission will be required before such an action can be continued with.
As identified above in Question 5.1, in certain limited circumstances directors may owe a direct duty to shareholders which may be the subject of a shareholder claim.
Relatedly, it has recently been confirmed by the Privy Council in Tianrui (International) Holding Company Ltd v. China Shanshui Cement Group Ltd, that where directors act in breach of the duty to exercise their powers for proper purpose, shareholders may be able to bring direct claims against the company (not the directors) in relation to that breach where it affects their rights qua shareholder.
5.4 Do directors have, at any time, a strict obligation to file for insolvency and, if so, when does that arise?
There is no equivalent under Cayman Islands law to the English law concept of wrongful trading.
Given that the Cayman Islands appears to have adopted the Creditor Duty following Sequana, it is possible that a claim could be brought against directors for a failure to place the company into liquidation where it could be shown that such a failure was a breach of that Creditor Duty (following the reasoning in Re BHS Group (in liquidation)). However, exculpatory and indemnity provisions in the company’s constitutional documents may provide a defence to such a claim or render it impractical to pursue.
5.5 Can directors and managers be found liable for the increase in sums owed to creditors after a company becomes insolvent?
This liability is only likely be to be established where it is connected with a different substantive claim, for example a fraud claim, or a claim for fraudulent trading.
5.6 In what other circumstances can directors and managers be found liable directly to creditors of the company?
Unless a director has assumed a tortious duty to a particular creditor through conduct, there is no specific basis for a claim to be brought by a creditor (acting in that capacity) directly against a director.
6 . What tools are available to obtain information in respect of the debtor’s property and affairs?
6.1 What information can be obtained by office holders in respect of a debtor’s property, information and affairs?
Once appointed, OLs are empowered to take possession of, collect and get in the property of the company, including the books and records.
OLs are entitled to require relevant individuals to furnish a statement of affairs (SoA) for the company, which must be verified by way of affidavit. The SoA should include:
- particulars of the company’s assets and liabilities;
- names and addresses of any persons having possession of the company’s assets and creditors; and
- details of any securities held by creditors and the dates when granted.
6.2 How is that information obtained in practice?
In addition to the information obtained from the books and records and from any SoA, the OLs have broad investigatory powers under section 102 of the CA.
Any current or former director or any other person who is or has been concerned with or taken part in the promotion or management of the company (each a “relevant person”) is under a statutory obligation to cooperate with the OLs.
6.3 Can the court assist in obtaining that information and how does that work in practice?
The OLs can seek to examine relevant persons and to require delivery of any property or documents belonging to the company by any person with possession. The examination may be ordered to take the form of an affidavit and/or an oral examination.
Under section 136 of the CA (misconduct in the course of winding up), a relevant person can be held liable of a criminal offence punishable by imprisonment and/or fine for failing to assist or interfering with the liquidator’s investigations with the intent to defraud creditors.
Under section 137 (material omissions for statement relating to company’s affairs), a relevant person also commits an offence if they make any material omission from the SoA with an intent to defraud creditors.
7. How are office holders from other jurisdictions, including by recognition, assisted?
7.1 Is the UNCITRAL Model Law on Cross-Border Insolvency adopted?
The UNCITRAL Model Law is not adopted in the Cayman Islands, and nor is the jurisdiction a signatory to any international treaties relating to insolvency. However, Part XVII of the CA, the Companies Winding Up Rules (2023 Revision) (CWR) and Foreign Bankruptcy Proceedings (International Cooperation) Rules 2018 contain provision for international co-operation in relation to foreign insolvency proceedings, and common law and comity principles are also applied by the court.
Order 21, rule 1 of the CWR provides for OLs to enter into a cooperation protocol with foreign office holders appointed in respect of a Cayman Islands company in liquidation where approval is obtained from the court and the relevant foreign court or authority. The purpose of the protocol is to promote the orderly administration of the estate of a company in liquidation and avoid duplication of work and conflict between the OL and the foreign office holder.
7.2 Is it possible to recognise office holders from other jurisdictions?
A foreign representative of a foreign corporation or other foreign legal entity subject to a foreign bankruptcy proceeding in the country in which it is incorporated or established may apply for recognition of its right to act in the Cayman Islands on behalf of or in the name of a debtor under section 241(1)(a) of the CA.
7.3 What is the process and what are the conditions for recognition?
The court has a discretion as to whether to recognise the foreign office holder and will consider the following matters as prescribed by statute:
- the just treatment of all holders of claims against or interests in a debtor’s estate, wherever they may be domiciled;
- the protection of claim holders in the Cayman Islands against prejudice and inconvenience in the processing of claims in the foreign bankruptcy proceeding;
- the prevention of preferential or fraudulent dispositions of property comprised in the debtor’s estate;
- the distribution of the debtor’s estate amongst creditors substantially in accordance with the order prescribed by Part V of the CA (where applicable);
- the recognition and enforcement of security interests created by the debtor;
- the non-enforcement of foreign taxes, fines and penalties; and comity.
7.4 What information can be obtained by office holders in respect of a debtor’s property, information and affairs?
A foreign insolvency practitioner can apply for orders:
- requiring a relevant person in possession of information relating to the business or affairs of a debtor to be submitted to examination and to produce documents; and
- for the turnover of any property belonging to a debtor, including books and records.
7.5 What steps can a foreign office holder take to recover assets belonging to the debtor?
A foreign office holder can apply to the court for an order against a relevant person for the handover of property belonging to a debtor.
Once recognised, the foreign officer holder will also be able to take steps in the name of the relevant debtor to recover assets in the usual manner (for example, by the commencement of enforcement proceedings).
7.6 Is a foreign office holder able to bring clawback claims or fraudulent transaction claims?
The statutory clawback claims under the CA are claims vested in OLs appointed by the Cayman Islands courts only.
8 . How are insolvency office holders licensed and regulated and what are the main ethical rules?
8.1 Can a foreign office holder take appointments?
Any individual may be appointed as a voluntary liquidator of a Cayman Islands company.
Foreign practitioners who are qualified under the law of a foreign country to perform functions equivalent to those performed by OLs under the CA and who meet the requirements of the Insolvency Practitioners Regulations (IPR) can take appointments in the Cayman Islands as both PLs and OLs, provided that they are appointed to act jointly with a “qualified insolvency practitioner” resident in the jurisdiction.
8.2 What are the conditions for becoming an office holder?
To accept an appointment by the court as OL of any company, a person shall be a licensed insolvency practitioner or a qualified professional accountant with the relevant experience prescribed within the IPR and resident in the Cayman Islands (unless a foreign practitioner taking office jointly with a Cayman Islands practitioner). The appointee must meet certain independence and insurance requirements.
8.3 What are the main rules of professional conduct?
There is no regulator that oversees the conduct of insolvency practitioners. Instead, the conduct/practice of insolvency practitioners is monitored and controlled during the course of their appointment by the court in accordance with the provisions of the CA, the CWR and the IPR.
