After a substantial industry consultation process, the Cayman Islands has introduced the concept of a Court-appointed Restructuring Officer into Part V of the Cayman Islands Companies Act (the ‘Companies Act’) with effect from 31 August 2022. The reforms seek to improve on the existing system for restructuring companies in financial difficulty that involved the court-appointment of ‘soft-touch’ provisional liquidators. This article will be of interest to anyone involved in restructurings, corporate transactions and insurance or reinsurance involving Cayman Islands incorporated entities, and also to corporate entities incorporated elsewhere, which may be interested in re-domiciling to the Cayman Islands for restructuring purposes to take advantage of the new regime.
The Cayman Islands has always been known for a few things other than its white sandy beaches. It has a well-earned reputation as a global financial hub. Many global businesses restructure through the Cayman Islands due to its tax neutrality and sophisticated restructuring legal framework.
The new reforms make the process more user-friendly by allowing a company to petition for the appointment of restructuring officers and take advantage of an automatic moratorium from the date of filing the petition, which is similar to the United States Chapter 11 stay or the English administration moratorium.
With the benefit of the breathing space under the new regime, it allows corporate entities to promote and implement a restructuring, for example, via a scheme of arrangement, a parallel process in a foreign jurisdiction or a consensual compromise. Having the benefit of the breathing space offered by the new reforms will make the regime attractive to any companies that are seeking breathing space to restructure due to the tumultuous global macroeconomic climate arising from issues such as currency fluctuations, supply chain issues, the war in Ukraine, inflation and skyrocketing interest rates.1
This article provides: (1) an overview of the new regime; (2) some practical takeaways from the first appointment of restructuring officers on 11 November 2022; and (3) an analysis of the consequential cross-border considerations arising from these reforms.
Overview of the new regime
The following are the key features of the new Cayman Islands restructuring regime:
- A company may seek the appointment of restructuring officers on the grounds that: (i) the company is or is likely to become unable to pay its debts; and (ii) intends to present a compromise or arrangement to its creditors.
- Directors will be expressly permitted to present petitions to appoint restructuring officers: (i) without, in the first instance, being required to present a winding up petition; (ii) and without a shareholder resolution and/or an express power to present a winding up petition in its articles of association. Under the old regime, in order to restructure through provisional liquidation, a prerequisite was first to present a winding up petition before an application could be made to place the company into provisional liquidation. This was compounded by the fact that the default position due to the rule in Emmadart was that directors of Cayman Islands companies were not permitted to present a petition to wind up a company unless expressly authorised by the articles.2 If such a power was not provided, it required that companies obtain approval from shareholders to file a winding up petition.3 Although this was beneficial for the well-earned reputation of Cayman companies being generally considered insolvency remote from the point of view of lenders, it made it difficult for certain Cayman Islands companies, such as publicly listed companies with large groups of disinterested shareholders, to take pro-active steps to restructure.
- From the date of filing a petition to appoint restructuring officers until it is withdrawn or dismissed, section 91G of the Companies Act provides that there is a worldwide stay on civil claims against the company, which gives the company breathing room to allow it to restructure. The scope of the moratorium under the new legislation is much broader than
the previously more limited stay imposed once provisional liquidators were appointed (rather than from the date the application was made). This was aimed at tackling the uncertainty in the interim period where a winding up petition has been filed with a view to restructuring that might have triggered events of default but a stay on claims was only put in place when provisional liquidators were appointed.
- The new restructuring officer regime is a separate statutory process to the winding up regime that does not use the ‘liquidation’ wrapper at all. The logic for this is that, historically, the primary avenue for Cayman companies to restructure was through soft touch provisional liquidation. The old regime suffered optically from the perception that the company was being ‘liquidated’ rather than undergoing a restructuring process, which had the potential to mislead creditors. Accordingly, these reforms will also be of particular relevance to lawyers and lenders involved in Cayman Islands governed debt finance arrangements who may need to revisit the terms of events of default clauses to ascertain whether restructuring is covered more generally in addition to liquidation in a limited sense.
- Typically, the majority of applications will be on an inter partes basis, with notice to stakeholders; however, the Companies Act does contemplate the possibility of urgent applications to appoint interim restructuring officers on an ex parte or without notice basis pending the hearing of the petition to appoint restructuring officers.
- The court has significant discretion regarding the terms of the appointment of restructuring officers and the matter of the continued involvement of directors in the future operations of an entity will largely depend on the terms of the court order.
- The new regime maintains the pre-existing position for insolvency proceedings under section 142 of the Companies Act that secured creditors with security over the whole or part of the assets of the company are permitted to enforce their security without regard to the court or court-appointed restructuring officers.
- Additionally, in an effort to streamline restructuring, it is no longer necessary to incur the time and expense of commencing separate proceedings to seek court sanction of a scheme of arrangement under the Companies Act.
The first decision under the new regime
On 11 November 2022, Justice Kawaley ordered the first4 appointment of restructuring officers in Re Oriente Group Ltd (FSD 231 of 2022) under the new Cayman Islands restructuring regime, with reserved written reasons to follow. On 8 December 2022, Kawaley J handed down his written judgment.
On 27 September 2022, Liu Chak Kwan Kelvin and Tsangs Group Holdings Ltd, two unsecured creditors (the ‘Petitioners’), filed a creditor’s winding up petition in the Cayman Islands following the issuance and expiry of statutory demands in respect of debts of approximately US$275,000 and US$1.1 million.
Subsequently, on 21 October 2022, the respondent company, Oriente Group Ltd (the ‘Company’), presented a restructuring petition seeking the appointment of restructuring officers in the Cayman Islands. On 11 November 2022, the Company’s restructuring petition came on for a hearing.
The day before the hearing, the Petitioners also filed a winding up petition in Hong Kong in breach of the automatic stay imposed by section 91G of the Companies Act seeking, among other things, the winding up of the Company (on substantially similar grounds advanced in the Cayman Islands winding up petition).
Effect of the automatic moratorium
A preliminary threshold matter was the statutory construction of section 91G of the Companies Act which provides for an automatic worldwide moratorium upon filing the petition for the appointment of restructuring officers, unless withdrawn or dismissed. This is to be compared with the remedy of presenting a winding up petition and applying for the appointment of
provisional liquidators for restructuring purposes under the previous regime, which provided for a stay from the date a provisional liquidator was appointed and/or a winding up order was made under section 97(1) of the Companies Act.
In the Re Oriente judgment, Kawaley J commented that the statutory stay on proceedings under Section 91G of the Companies Act: ‘might be said to turbo charge the degree of protection filing a restructuring petition affords to the petitioning company[…]’
The relevant text provides:
‘91G. Stay of proceedings
(1) At any time –
(a) after the presentation of a petition for the appointment of a restructuring officer under section 91B, but before an order for the appointment of a restructuring officer is made, and when the petition has not been withdrawn or dismissed; and
(b) when an order for the appointment of a restructuring officer is made, until the order appointing the restructuring officer has been discharged, no suit, action or other proceedings, other than criminal proceedings, shall be proceeded with or commenced against the company, no resolution shall be passed for the company to be wound up and no winding up petition may be presented against the company, except with the leave of the Court and subject to such terms as the Court may impose.
(3) In this section –
(a) references to a suit, action or other proceedings include a suit, action or other proceedings in a foreign country; and
(b) references to other proceedings include any court supervised insolvency or restructuring proceedings against the company’ [emphasis author’s own].
The objecting creditors contended that: (1) it was not permissible to present a petition for the appointment of restructuring officers after a winding up petition had been filed; and (2) that the stay did not have any impact on extant winding up proceedings.
The Company submitted that there was nothing in the statutory scheme that prohibited the Company from doing so. The Company further submitted that the automatic stay under section 91G of the Companies Act takes effect from the date of filing and effectively covers both domestic winding up proceedings, such as the Petitioners’ extant winding up petition in the Cayman Islands, and also foreign winding up proceedings, including the creditor’s winding up petition filed by the Petitioners in Hong Kong the day before the restructuring petition was heard in the Cayman Islands in breach of the automatic stay of proceedings. The Company submitted that it would be possible for the Petitioners to seek leave of the Cayman Court to lift the stay and pursue the winding up petition(s), if appropriate.
Having heard from the parties as to whether the statutory scheme permits a restructuring officer petition to be presented after a creditor’s winding up petition is filed, Kawaley J found that, following the presentation of a winding up petition against a company, there is no prohibition on a company presenting a petition seeking the appointment of restructuring officers and such a filing triggering the automatic stay under section 91G.
While Kawaley J found ‘it was easy to accept’ that, if a restructuring petition could be validly presented while a winding up petition was extant, this might interfere with existing winding up proceedings, it was difficult to find any literal or contextual support for the proposition for the position adopted by the objecting creditors.
Kawaley J was also critical of the fact that the objecting creditors had breached the automatic stay (which included foreign proceedings) by filing a creditors’ winding up petition in Hong Kong the day before the Cayman Islands hearing, such that it ‘would have been difficult for the Court to hear them or place much reliance on their objections as to the merits of the Petition’.
Kawaley J held that, in light of previous cases dealing with the provisional liquidation for restructuring regime (now repealed), ‘it may confidently be stated that the jurisdiction to appoint restructuring officers is a broad discretionary jurisdiction[…]’ to be exercised where the Grand Court is satisfied that:
- the statutory precondition of insolvency or likely insolvency of the company is met by credible 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 credible evidence of a ‘rational proposal with reasonable prospects of success’; and
- 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’.
Continuing relevance of pre-existing case law
Kawaley J indicated that the previous body of case law on light touch or restructuring provisional liquidations under the former rescue regime would continue to be relevant and persuasive in the context of petitions to appoint restructuring officers.
Kawaley J accepted that both regimes were broadly analogous for two primary reasons.
First, the statutory requirements for the appointment of restructuring officers under section 91B(1) of the Companies Act are expressed in broadly similar terms as the grounds for appointing provisional liquidators for restructuring purposes under the provisions section 104(3) of the Companies Act. Both regimes require that an applicant satisfy the court that the relevant company: (1) is or is likely to become unable to pay its debts; and (2) intends to present a compromise or arrangement to its creditors.
Second, Kawaley J accepted that the cases under the former provisional liquidation regime ‘[…] record valuable judicial and legal experience in essentially the same commercial sphere[…]’.5 Kawaley J held that, in particular, Re Sun Cheong Holdings6 was the authority as regards the governing legal principles, which ‘lucidly paints an instructive portrait of the old statutory scheme which applies with equal force to the restructuring officer regime[…]’ and Re Midway Resources International,7 which provides practical guidance as to how to evaluate evidence relating to a proposed restructuring.
It is helpful to have early clarification on the breadth of the automatic stay and the relevance of existing case law. It is clear that the court is concerned with promoting consistency and certainty, albeit under a turbo-charged framework. This clarification will be especially important for foreign courts considering whether to recognise and assist Cayman Islands restructuring officers in future.
However, notwithstanding that Kawaley J confirmed that pre-existing case law will continue to apply, it remains to be seen how foreign courts, such as the US, England and Wales, and Hong Kong, will approach applications for recognition by court-appointed restructuring officers in light of the rapidly evolving nature of the law in this area, having regard to authorities under the provisional liquidation regime, such as Modern Land. In brief, and without attempting to predict the future, it is anticipated that the new regime will make recognition easier in the US given that US bankruptcy courts already have the concept of a ‘chief restructuring officer’. Concerning Hong Kong, the question remains open how such courts will approach recognition applications in light of various judicial comments made in judgments, such as Justice Harris’s obiter remarks in In the matter of Rare Earth Magnesium Technology Group (provisional liquidators appointed) (for restructuring purposes only)  HKCFI 1686. Similarly, it is anticipated that the similarity of the new restructuring regime to the English administration regime will make recognition more likely in the United Kingdom.
Compromise of English Law Governed Debt The new Cayman restructuring regime could also potentially have the ability to compromise English law governed debt which traditionally was difficult due to the Rule in Gibbs8, which provided that only English legal proceedings (and not foreign proceedings) could compromise English law governed debt.
In Irish examinership proceedings in Norwegian Air9, the Irish Courts were willing to accept that on the basis of expert evidence on English law that the English Courts would recognise an Irish scheme of arrangement that compromised English law governed debt due to the similarities with the English administration regime.
Given the similarities between the Cayman restructuring regime and Irish examinership proceedings, it suggests that notwithstanding the Rule in Gibbs it may be possible in future that English law governed debt could be compromised through the Cayman restructuring regime.
The restructuring officer reforms represent a substantive improvement on the pre-existing provisional liquidation regime after substantial industry consultation. In particular, it is anticipated that the new regime will be more readily recognised in foreign jurisdictions. The Re Oriente decision represents a useful and interesting development in Cayman Islands jurisprudence under the new statutory regime. However, as with all of these issues, it will be important to monitor further developments, based on different fact patterns, as more cases are brought before the Cayman Islands Court (and recognition is sought elsewhere) in the ensuing months and years.
- Which makes debt financing more expensive to obtain and certain existing debt with variable interest rates more expensive to service.
- Re Emmadart Ltd  1 Ch 540; In the matter of China Shanshui [2015 (2) CILR 255].
- Or seek the assistance of a friendly creditor to file a winding up petition for a nominal sum.
- Other appointments have followed; e.g. Re Rockley Photonics Holdings Limited (FSD 16 of 2023) 14 February 2023 (Grand Court)
- In reference to a recent speech of Lady Arden in the Cayman Islands: Taking stock of recent case law of the Judicial Committee of the Privy Council – its breadth and depth on 25 March 2022. A copy of our recent article on the role of the Privy Council can be found at www.conyers.com/publications/view/the-judicial-committee-of-the-privy-council accessed 1 May 2023.
- [2020 (2) CILR 942].
- Unreported, 30 March 2020, Segal J.
- Antony Gibbs & Sons v La Société Industrielle et Commerciale des Métaux (1890) LR 25 QBD 399)
- Arctic Aviation Assets DAC & Ors v Companies Act  IEHC 268
This article first appeared in the June 2023 issue of Insolvency and Restructuring International (Vol 17, No 1), and is reproduced by kind permission of the International Bar Association, London, UK. © International Bar Association.