Break the Bank
On 1 March, 2009, the Companies Amendment Law 2007, the Companies Winding Up Rules 2008, the Insolvency Practitioners Regulations 2008 and the Foreign Bankruptcy Proceedings (International Co-operation) Rules 2008 were enacted to bring the insolvency law and practice in the Cayman Islands clarity and procedural certainty, replacing a rather ad hoc adoption of the Insolvency Rules (1986) (UK) which were applied "to the extent that it was practical to do so".
This article is part one in a two-part series that focuses on areas that are significantly different in the new law and the opportunities that may arise in distressed scenarios. In this article we discuss:
Alternatives to winding up
While the Companies Amendment Law continues to provide contributories with the ability to petition for the winding up of a company, the new law provides for specific alternative orders by the court if the petition is presented on "just and equitable grounds".
The alternative orders include the following remedies:
>> the company refraining from doing or continuing an act complained of by the petitioner;
>> regulating the conduct of the company’s affairs in future;
>> allowing civil proceedings to be brought on behalf of the company by the petitioner; and
>> the purchase of shares of some members by other members, or the company itself.
We anticipate these changes will provide options where there may be a dispute between contributories or oppressed minorities, providing an avenue previously unavailable in these circumstances.
While how the process would be implemented is not clear, presumably the concerned contributory must petition to wind up the first and then seek alternative remedies available under s95(3) at the hearing of that application.
While provisional liquidation has long been viewed as a flexible and timely alternative to official liquidation, the Companies Amendment Law s104(3) contains a new provision allowing the Grand Court to make orders allowing a company to pursue a compromise with its creditors. A company may petition the court for a provisional winding-up order on an ex-parte basis if it is or is likely to become unable to pays its debts and it intends to present a compromise to its creditors. In making a provisional winding-up order, the court may grant the company certain relief such as a stay of proceedings while it works towards a compromise. Pursuing a compromise or scheme of arrangement in this manner allows the company protection from creditors during reorganisation from which it may emerge as a going concern.
Applications for provisional winding-up orders can be made by a creditor or contributory on grounds to prevent:
(a) the assets of the company from being dissipated or misused;
(b) the oppression of minority shareholders; or
(c) mismanagement or misconduct of the directors.
CWR (O4r1) allows the application for provisional winding-up to be heard on an expedited basis requiring four day’s notice to the company or, in exceptional circumstances, the application can be heard on an ex parte basis.
Fraudulent trading provisions
Section 134 contemplates fraud in anticipation of the winding up of the company and includes the concealment or removal of property of the company and the destruction or falsification of documents. Such actions are now codified as an offence, carrying penalties of fines and/or up to five year’s jail. The section allows the liquidator to review fraudulent actions for the twelve month period prior to the commencement of the winding up.
In addition, section 147 now allows the liquidator to apply to the court for a declaration of fraudulent trading and any persons knowingly a party to such conduct may be ordered to make a contribution to the assets of the company as the court thinks proper.
Provisions relating to voidable preferences now introduce the concept of a "related party" defined as someone who has significant influence over the affairs of the company. Section 146 makes void any disposition of assets at under value by a related party with the intent to defraud creditors.
International protocols and cooperation
The increasing popularity and international nature of Cayman’s financial sector has provided the Grand Court with a large volume of cross-border insolvency cases over the past 25 years. While case law and practice in the Cayman Islands has been largely viewed as open and cooperative in cross-border cases, the new insolvency regime seeks to codify the law consistent with the objectives of the UN Commission on International Trade Law model law.
Where a company in official liquidation is the subject of a parallel foreign insolvency proceeding, the official liquidator has a duty (CWR O21r2) to consider whether it is appropriate to enter an international protocol agreement with the office holder of the parallel proceedings. In making that assessment, an official liquidator will likely consider the defined purpose of an international protocol which is "to promote the orderly administration of the estate of a company in liquidation and avoid duplication of work and conflict between an official liquidator and the foreign officeholder".
The areas which an international protocol may cover (CWR O21r3) include, inter alia:
>> procedures for dealing with assets and causes of actions located outside the Cayman Islands;
>> information sharing, reporting and the transfer of assets between the official liquidator and foreign officeholder; and
>> procedures relating to the adjudication and payment of claims.
Any international protocol arrangements must be agreed by both the Grand Court and the foreign court in order to be binding and effective (CWR O21r2(3)).
Part XVI of the Companies Amendment Law and the Foreign Bankruptcy Proceedings Rules contain provisions governing cooperation in foreign insolvency proceedings. Under the Companies Amendment Law 253(1)(a), a foreign representative may seek declaratory orders recognising their rights to act in the islands on behalf of a foreign company, which is subject to insolvency proceedings in its country of establishment. The Companies Amendment Law 253(b-e) governs ancillary orders which may be sought such as enjoinment, stay proceedings, enforcement of judgments, examination or the delivery up of property. The court has discretion in considering whether to make orders sought under the Companies Amendment Law 253 however 254 provides that the court shall be guided by matters which will best assure an economic and expeditious administration of the foreign company’s estate consistent with:
>> the just treatment of all claims/interests in the foreign estate;
>> the protection of Cayman Islands claims from prejudice and inconvenience in the processing of claims;>>
>> the prevention of preferential and fraudulent dispositions;
>> distribution of the foreign estates’ assets consistent with Part V of the Companies Amendment Law;
>> recognition and enforcement of security interests of the foreign estate;
>> non-enforcement of foreign taxes, fines, and penalties; and comity.
The FBR prescribe how the applications are to be made by the foreign representative and the necessary contents of petitions in the case of declaratory orders, originating summons and affidavits and other ancillary orders.
In the next edition of the Cayman Financial Review, we will look at some of the other aspects of the new insolvency regime in the Cayman Islands.