Intention Matters in the Matter of Aubit International

Aubit International (the Company) was an investment manager that suffered significant losses in its brokerage accounts held by Ardu Prime Investments SA (Ardu Prime).  Following the refusal by Ardu Prime to release any of the approximately US$60.4 million in fiat currency and cryptocurrencies held in its brokerage accounts, the Company sought the appointment of restructuring officers on the grounds that: (1) it was insolvent within the meaning of s 93 of the Act; and (2) it intended to present a consensual restructuring plan to its creditors.

In respect of its intention to present a restructuring plan, the Company acknowledged that:

The Company’s restructuring is atypical in that it will need to be conducted in two distinct phases: first, an asset and information gathering phase in order to be able to formulate the terms (sic) a recovery or restructuring plan, followed by a more typical restructuring phase once the exact financial position of the Company and its potential asset recoveries are known.

The petition and evidence filed by the Company also revealed that the Company’s main motivation for appointing Restructuring Officers arose from its concerns that a key individual involved with Ardu Prime had been convicted of fraud, such that his involvement with Ardu Prime gave rise to “a compelling need for Restructuring Officers, as independent insolvency practitioners and officers of the court, to undertake their own forensic investigations into all activities relating to the Company’s brokerage accounts at Ardu Prime, and to report to the Court their findings as to any involvement, activities or dealings of the convicted fraudster”.

Doyle J dismissed the petition on the grounds that:[1]

• the statutory pre-conditions had not been met as there was no credible evidence of a rational restructuring proposal with reasonable prospects of success.  The Company gave ‘extremely’ limited information of their restructuring plan which simply noted that, “the Company “proposes to be placed under a Cayman court restructuring regime with Grant Thornton teams in Cayman and Greece as Restructuring Officers” but was otherwise devoid of detail, which led Justice Doyle to conclude that “if I was left to feast on the bones of the ”very outline plan” then frankly I would likely be left to starve”.
• The Company had not ascertained its financial position.  Until that step had been completed, the Company could not have had any realistic intention to come up with a rational restructuring plan in the reasonably near future.
• Although the creditors that had filed a Notice of Appearance supported the petition, their views were immaterial as the statutory pre-condition had not been meet.
• The appointment of restructuring officers for the purposes of continuing forensic investigations, commencing legal proceedings and obtaining assets, documentation and information and to add respectability and credibility to the management of the Company was not a proper use of the restructuring regime.

This decision provides a useful contrast to Re Oriente in which restructuring officers were appointed notwithstanding the absence of a formulated re-structuring plan, on the basis that approximately 46% of the creditors (by value) had expressed their support for the proposed restructuring.  In that case, however, the “broad parameters” of the proposed restructuring had been “sketched out” and a “lot more meat on the bones” were provided than in the present case.  In addition, the petitioner in Re Oriente had persuaded the Court that the restructuring would generate a better return for unsecured creditors than would be yielded through a traditional liquidation whereas the Company in this case could not even provide the Court with its exact financial position.

Although 91B of the Act only requires the petitioner to show that it ‘intends to present a compromise or arrangement to its creditors’, the two decisions to date suggest that it is necessary for the petitioner to put to the Court some detail as to its proposed restructuring plan, even in outline form, in order to demonstrate that its intention is realistic, bona fide and held on adequate grounds.   As put by Justice Doyle: “The Court does not have to be provided with the finished fully grown plant but the seeds must be sufficient to suggest that it is likely the plant will bear some fruit before too long”.[2]

In our previous article “Fun And Games Ahead? Possible Abuses Of The New Cayman Restructuring Officer Regime”, we expressed some concern that the Restructuring Officer regime may be ripe for abuse by debtors, in particular those who may wish to avail themselves of the automatic statutory moratorium which takes place upon the filing of the petition.  Indeed, this automatic stay on proceedings was said by Kawaley J in Re Oriente to “turbo-charge the degree of protection filing a restructuring petition affords to the petitioning company in contrast with the former remedy of presenting a winding-up petition for restructuring purposes.”[3] However, the dicta of Doyle J provides a welcome affirmation by the Grand Court that it remains alive to the potential abuses of the regime:[4]

Great care must be taken to ensure that the recently introduced restructuring officer regime is not abused. It should only be used for proper purposes. The clue as to its proper purpose is in the name. It is intended to provide a regime whereby ROs may be appointed to facilitate and finalise a financial restructuring. It is not intended to provide a mechanism whereby the ROs’ main role is to recover assets, data, documentation and records of the company (if need be by commencing legal proceedings) and to undertake a forensic investigation into the affairs of the company. To attempt to abuse it in that way risks bringing it into disrepute and adversely affecting the credibility of the new regime internationally. Moreover the restructuring regime is not intended to be used simply to obtain the statutory moratorium and to add credibility and respectability to the company’s management.

That being said, both Re Oriente and In the Matter of Aubit International are relatively straightforward decisions. In light of the Grand Court’s broad discretion to determine whether to appoint restructuring officers, including by reference to the list of twenty-five principles set out by Doyle J at [126] of his judgment, the outcome may become more difficult to predict in less clear-cut scenarios.  Those borderline cases are likely to provide the largest scope for potential abuses of the regime.

As each case will present its own unique considerations and the case law is expected to continue to evolve, companies contemplating the appointment of restructuring officers and creditors assessing whether to challenge an appointment should seek advice from Cayman counsel at the earliest opportunity.

[1] [161] – [192]
[2] At [126(8)]
[3] At [12]
[4] At [171]