Jan 2025
On August 31, 2022, Part V of the Cayman Islands Companies Act (the “Companies Act”) was amended to introduce the new role of a court-appointed “Restructuring Officer” and a dedicated “Restructuring Petition” (the “RO Regime”). The RO Regime was largely intended to replace the pre-existing restructuring framework by way of ‘light touch’ provisional liquidation (the “PL Regime”). The pre-existing PL Regime for restructuring was replaced with a broad and flexible discretionary test. Under the revised framework, pursuant to section 104(3) of the Companies Act, the Court may appoint joint provisional liquidators (JPLs) upon an application by a company “if it considers it appropriate to do so”.
However, following the introduction of the RO Regime, there remained uncertainty as to whether JPLs could still be appointed for restructuring purposes or whether the PL Regime had been relegated to the status of a vestigial tail with no practical utility in modern legal practice. This article discusses recent guidance from the Cayman Islands Court in two decisions which demonstrate that the PL Regime lives on (albeit that the scope of its new lease on life remains yet to be fully determined).
More information on the RO Regime can be found in our other previous thought leadership on our website.
Re Kingkey Financial International
In Re Kingkey Financial International (Holdings) Limited (FSD 0056 of 2024) (JAJ) (“Kingkey”) (decided on 12 April 2024), the Court ordered the first appointment of ‘light touch’ JPLs under the revised PL Regime, since the introduction of the RO Regime. The Court considered that, given the circumstances, the usage of the PL Regime may be more appropriate than the RO Regime. In Kingkey, given the disagreements within the company’s board of directors, the appointment of restructuring officers alone was held likely “to be inadequate to address the current issues”. The Court also accepted the submission that the PL Regime may have certain advantages over the RO Regime as “there may be difficulties in obtaining recognition in other jurisdictions of the appointment of a restructuring officer and in obtaining any assistance from a foreign court for such an office holder”.
The Court considered the differences between the new and old statutory requirements in section 104(3) of the Companies Act for the appointment of ‘light touch’ JPLs:
- The revised form of the PL Regime in section 104(3) of the Companies Act was drafted in wide terms and provides substantial flexibility, which gives the court the ability to appoint provisional liquidators “if it considers it appropriate to do so”.
- Under the old regime, in order for a company to obtain the appointment of light touch provisional liquidators, it was necessary to demonstrate both that: (i) the company is or is likely to become unable to pay its debts and (ii) the company intends to present a compromise or arrangement to its creditors.
- When considering the differences, the court commented that the current version had “broader language” and that the “language formerly used in s.104(3) was arguably more prescriptive as to the situations in which provisional liquidators can be appointed…”.
The Court considered that Kingkey was or was likely to be unable to pay its debts and intended that a restructuring plan be prepared and presented to the court. Accordingly, the Court was satisfied that Kingkey met both the requirements of the new more flexible test and the Court would have also appointed provisional liquidators “even if the more restrictive language of the former version of s 104(3) applied”. The judge declined to address the interaction between the test for the appointment of JPLs and the RO regime, and “whether the new wording of s 104(3) expands the circumstances in which the court will be willing to appoint provisional liquidators”.
Although this judgment provided welcome clarification that the ‘light touch’ PL Regime would have a continuing role, it was made at an uncontested hearing such that the Court did not have the benefit of full argument on the point and there remained questions left unanswered regarding the extent to which the PL Regime survived the introduction of the RO Regime.
Re Oakwise Value Fund SPC
More recently, in Re Oakwise Value Fund SPC (FSD 303 OF 2024) (IKJ) (“Oakwise”), Justice Kawaley made an order on 31 October 2024 appointing JPLs over all three segregated portfolios (“SPs”) of Oakwise Value Fund SPC (the “Company”), a Cayman Islands segregated portfolio company (“SPC”).
The Company’s application to appoint JPLs was met by objections from certain creditors of Enhanced Fixed Income SP (“EFI SP”), who had obtained a judgment in default against the Company in the High Court of Hong Kong for payment of alleged unpaid redemption proceeds (the “HK Judgment Creditors”). The HK Judgment Creditors applied for a garnishee order over the bank accounts of all three of the Company’s SPs, irrespective of which SP they had contracted with. This was contrary to the ‘segregation principle’ under part XIV of the Companies Act which provides that creditors of a particular SP are only entitled to have recourse to that SP’s assets and are not entitled to assets of other SPs.
The HK Judgment Creditors asserted that, amongst other things, the Court had no statutory jurisdiction to appoint JPLs in the circumstances as the only statutory route to appoint court officers for restructuring purposes was via the appointment of restructuring officers pursuant to Section 91B(1) of the Companies Act.
The Court indicated that Section 91B clearly created a “bespoke jurisdiction for insolvent restructuring which runs parallel to the winding-up regime which can only be accessed through a winding-up petition.” However, at the same time, when considering the broad scope of section 104(3) which provides that JPLs may be appointed by the Court upon an application by a company “if it considers it appropriate to do so”, the Court found that it is “obvious” that if one wants to appoint court officers to do the sort of things that JPLs do, on the grounds that the company is prima facie liable to be wound-up, one would “not appoint restructuring officers under a regime dedicated to restructuring alone.”
The Court rejected the statutory interpretation proposed by the HK Judgment Creditors, reasoning that: “It requires creative writing skills rather than statutory interpretation skills to formulate the form of words that must be read into section 104 (3) if they are to exclude a Petition such as this.” In effect, the Court found that the HK Judgment Creditors were inviting the Court to read that sub-section as including a proviso to the following effect: “provided that provisional liquidators may not be appointed in any case where their powers are to include the pursuit of the implementation of an insolvent restructuring in relation to the whole or any part of a company’s business. Only restructuring officers appointed under section 91B can implement any form of corporate restructuring.”
The Court declined to hold that only restructuring officers appointed under Section 91B could implement any form of corporate restructuring as: “…not only would this lead to absurd results, provisional liquidators appointed in relation to companies with different books of business would arguably be required to appoint restructuring officers to restructure those parts of the business they wished to restructure and would only be able to “liquidate” those parts requiring liquidation. There is nothing in the statutory language, context or legislative history which points to such an improbable legislative purpose.”
The Court appointed JPLs over the various SPs, which included plans to carry out a ‘spin off’ of the solvent SPs to new successor vehicles in tandem with plans to restructure the insolvent EFI SP. The Court’s reasoning for doing so was multifaceted due to the unique circumstances of the case, including the context of an SPC structure, and that it did not involve plans to effect a debt restructuring alone. The Court considered that: “the fact that a company’s management is willing to voluntarily cede significant control to independent officeholders will typically be very persuasive indeed.”
A further consideration weighing in favour of the appointment of the JPLs was the actions of the HK Judgment Creditors and the garnishee order obtained over bank accounts of all three SPs, which had created a contagion risk that the assets of one SP might be used to satisfy the assets of another SP contrary to the segregation principle.
However, the Court ultimately declined to address whether the PL Regime under section 104(3) could be exercised for the sole purposes of pursuing an insolvent restructuring with the directors continuing in place and indicated that it is a question “which must await determination in an appropriate future case”.
Takeaways
Both Kingkey and Oakwise are welcome decisions which demonstrate that the PL Regime is a highly flexible tool that has found a new lease of life after the introduction of the RO Regime. Although Kingkey was uncontested, Oakwise provides welcome further clarity on the law as it is the first time that there has been a fully contested decision on the continuing scope of the PL Regime. Both decisions illustrate the benefits and flexibility of the PL Regime alongside the RO Regime in the arsenal of tools available in Cayman Islands restructurings without undermining the efficacy and role of the RO Regime.
Further consideration by the Court is no doubt required on issues such as whether the appointment of JPLs will be permissible solely for the purposes of restructuring in a more straightforward case or whether the RO Regime exclusively occupies the field in that respect. At this stage however, it is clear that while not appropriate for all circumstances, the PL Regime will be a sensible and effective method by which large, multinational groups in complex or unique scenarios may seek to restructure their debt obligations and other affairs for the benefit of their stakeholders.
The key to navigating corporate restructuring, through the Cayman RO Regime, PL Regime or otherwise, will always be timely action with the right advisory team to guide the process.
Conyers acted on behalf of the successful applicant company in both Oakwise and Re Kingkey to obtain the appointment of JPLs in both cases.