Sep 2023
A version of this was first published in INSOL I-Read Student Newsletter, Issue 9, September 2023, and is republished with kind permission of INSOL International.
After a substantial industry consultation process, the Cayman Islands introduced the concept of Court-appointed restructuring officers into Part V of the Cayman Islands Companies Act (the “Companies Act”) with effect from 31 August 2022.
The reforms sought to improve on the existing system for restructuring companies in financial difficulty and make the process more user-friendly by allowing a company to petition for the appointment of restructuring officers. This allows companies to take advantage of an automatic moratorium from the date of filing the petition which is similar to the US Chapter 11 stay or the English administration moratorium.
A general overview of the new restructuring regime can be found here.
Now that the new restructuring regime has had its one year anniversary, we take the opportunity to provide a brief update on how the regime is working in practice and to review the first case under it1.
On 11 November 2022, Justice Kawaley ordered the first appointment of restructuring officers in Re Oriente Group Limited (FSD 231 of 2022), with reserved written reasons to follow.
On 8 December 2022, Justice Kawaley handed down his written judgment.
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for an automatic worldwide moratorium upon filing the petition for the appointment of restructuring officers, unless withdrawn or dismissed.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 provisional liquidators were appointed and/or a winding up order was made under section 97(1) of the Companies Act.
The Court commented that the statutory stay on proceedings under Section 91G: “might be said to turbo charge the degree of protection filing a restructuring petition affords to the petitioning company…”
The parties disagreed whether the statutory scheme permits a restructuring officer petition to be presented after a creditor’s winding up petition is filed.
The Court 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 filing triggering the automatic stay under Section 91G.
Whilst the Court found “it was easy to accept” that, if a restructuring petition could be validly presented whilst 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 that such conduct was not permitted.
The Discretionary Considerations for the Appointment of Restructuring Officers
The Court 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:
- 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
The Court 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.
- Firstly, 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: (i) is or is likely to become unable to pay its debts; and (ii) intends to present a compromise or arrangement to its creditors.
- Secondly, Mr Justice Kawaley accepted that the cases under the former provisional liquidation regime “… record valuable judicial and legal experience in essentially the same commercial sphere…”2.
Mr Justice Kawaley held that, in particular, Re Sun Cheong Holdings3 was 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 International4 which provides practical guidance as to how to evaluate the evidence relating to a proposed restructuring.
Comments
The restructuring officer reforms represent a substantive improvement on the pre-existing provisional liquidation regime after substantial industry consultation. It is helpful to have early clarification in Re Oriente on the breadth of the automatic stay and the relevance of the 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, 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.
1Restructuring officers were also appointed subsequently by Chief Justice Ramsay-Hale on 14 February 2023 in Re Rockley Photonics Holdings Limited (FSD 16 of 2023), albeit without a written judgment.
2In 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 here.
3[2020 (2) CILR 942]
4(unreported, 30 March 2020, Segal J)