Full steam ahead – the Cayman Islands restructuring officer regime in motion

Introduction

The reforms to Part V of the Cayman Islands Companies Act (as amended) (the “Companies Act”), including the introduction of the Cayman Islands restructuring officer regime, came into force with effect from 31 August 2022. A number of petitions have been presented by companies seeking the appointment of restructuring officers: Walkers acted as Cayman Islands legal counsel to Oriente Group Limited (“Oriente”)² in respect of the very first successful petition for the appointment of restructuring officers in the Cayman Islands.

Accordingly, it is an appropriate time to consider the practical guidance and learning developed to date in respect of the Cayman Islands restructuring officer regime.

Practical guidance and learning

Case law authorities regarding provisional liquidation will apply to restructuring officer regime

In the matter of Oriente Group Limited,3 the Honourable Justice Kawaley helpfully confirmed that case law authorities regarding the restructuring or ‘light touch’ provisional liquidation regime would be both relevant and persuasive in respect of the appointment of restructuring officers for two principal reasons:

1. the grounds upon which a restructuring officer petition may be presented under Section 91B of the Companies Act are expressed in the same terms as the grounds for appointing provisional liquidators for restructuring purposes under the (former) provisions of Section 104(3) of the Companies Act before the new restructuring officer regime came into force; and
2. the cases under the provisional liquidation regime “… record valuable judicial and legal experience in essentially the same commercial sphere…”.⁴

Having regard to such relevant provisional liquidation cases, and in particular In re Sun Cheong Holdings⁵ as regards the governing legal principles and In re Midway Resources International⁶ for practical guidance as to how to evaluate the evidence relating to a proposed restructuring, Kawaley J held that: “…it may confidently be stated that the jurisdiction to appoint restructuring officers is a broad discretionary jurisdiction…” to be exercised where the Grand Court of the Cayman Islands (the “Cayman Court”) is satisfied that:⁷

1. the statutory precondition of insolvency (or likelihood of becoming insolvent)⁸ is met, by reference to credible
   evidence from the relevant company or some other source;
2. the statutory precondition of an “intention” to present a restructuring proposal to creditors (or any class thereof)⁹ is met by reference to credible evidence of a “rational proposal with reasonable prospects of success”; and
3. “… 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 …”.¹⁰

Debtor companies and practitioners have clear guidance regarding the manner in which the Cayman Court will approach the question of whether the statutory test for the appointment of restructuring officers has been met and, accordingly, whether the Cayman Court should exercise its discretion to make an order for the appointment of restructuring officers, as well as the evidence required to be prepared and filed in support of such application (or petition) seeking the appointment of restructuring officers to a company.

Restructuring moratorium

A standalone restructuring moratorium automatically arises upon the filing of the petition seeking the appointment of restructuring officers with the Cayman Court (an “RO Petition”), such that no suit, action or other proceedings (other than criminal proceedings), whether domestic or foreign, shall be proceeded with or commenced against the subject company, except with leave of the Cayman Court.¹¹ Such restructuring moratorium has extra-territorial effect, as a matter of Cayman Islands law.

Importantly, it has been confirmed that the restructuring moratorium operates to stay the commencement or continuation of civil proceedings (including winding up proceedings) commenced prior to the presentation of an RO Petition. In the matter of Oriente Group Limited, Kawaley J held that the “unambiguous” terms of the restructuring moratorium impose an automatic and extra-territorial stay on broadly defined civil proceedings, which expressly includes “… any court supervised insolvency or restructuring proceedings”, which includes winding up proceedings.¹² It follows that in circumstances where a creditor or contributory has presented a winding up petition prior to a debtor company presenting a RO Petition, such petitioning creditor or contributory may not take any steps to advance the prosecution of its winding up petition, including the advertisement of the winding up petition. If such winding up petition has already been advertised, the hearing of the winding up petition should be vacated or adjourned administratively (i.e. notwithstanding the restructuring moratorium).

Kawaley J described the restructuring moratorium as “turbo charging” the protection afforded to the debtor company, compared to the (former) remedy of presenting a winding up petition for restructuring purposes (pursuant to which the stay applied only from the date a provisional liquidator was appointed and/or a winding up order was made). However, the restructuring moratorium is not ‘bullet proof’.

In appropriate circumstances, the Cayman Court will grant leave to commence and/or continue certain proceedings in respect of the petitioning company. By way of example, In the matter of Carbon Holdings Limited (Cause No. FSD 218 of 2022 (DDJ)),¹³ a creditor presented a petition to the Cayman Court seeking the winding up of Carbon Holdings Limited (“CHL”) on the basis of an outstanding debt in respect of an award for damages, interest and costs (the “CHL Winding Up Petition”), following which CHL presented an RO Petition. The Honourable Justice Doyle, on the oral application of the petitioning creditor,¹⁴ granted leave to continue the CHL Winding Up Petition.

There is a risk that debtor companies may present an RO Petition in order to obtain the benefit of the restructuring moratorium (that is obtained on filing of the RO Petition), in circumstances where a debtor company does not genuinely intend to present a compromise or arrangement to its creditors (or any class thereof), in an effort to frustrate or delay a creditor’s or contributory’s (as applicable) legitimate attempts to wind up the subject company. We expect the Cayman Court to be cognisant to such risk of abuse of process and judges of the Cayman Court will take a dim view of any debtor companies attempting to utilise the new restructuring officer regime for an improper purpose. Where an RO Petition is presented only shortly before the hearing of a winding up petition (of which the debtor company has been on notice for some time), the debtor company can expect to provide a proper explanation of the timing of such RO Petition.

Foreign restructuring process or proceedings

The test that the Cayman Court needs to apply in order to determine whether a debtor company intends to genuinely pursue a restructuring and what type of restructuring can be implemented is the same as under the restructuring provisional liquidation regime (that was previously utilised).

Whilst section 91B(1)(b) of the Companies Act contains more detail with respect to the types of restructurings that may be implemented than that set out under the former section 104(3)(b) (before the new amendments to Part V of the Companies Act came into force), this is only really intended to make it clear that the compromise or arrangement can be given effect in a number of different ways (as was previously the case with respect to the restructuring provisional liquidation regime). Section 91B(1)(b) of the Companies Act specifies that a company may implement a restructuring pursuant to the Companies Act, the law of a foreign country or by way of a consensual restructuring. As such, it follows that the restructuring officer regime can be utilised in order to explore and/or support a Cayman Islands scheme of arrangement under the Companies Act or foreign restructuring proceedings such as United States Chapter 11 proceedings, English administration proceedings or a scheme of arrangement under a foreign law.
 
Whilst foreign law restructuring processes have been effectively supported in the past by way of the Cayman Islands restructuring ‘light touch’ provisional liquidation regime (under former section 104(3)(b)) to successfully deliver cross-border restructurings;¹⁵ this is now expressly provided for in the new language of Section 91B(1)(b) of the Companies Act. We expect that, where appropriate, the Cayman Islands restructuring officer regime will be deployed in support of a foreign law restructuring process so as to take advantage of the moratorium on unsecured creditor action in the Cayman Islands, thereby protecting the integrity and/or successful implementation of the proposed restructuring.

Advertisement

Pursuant to the Companies Winding Up Rules (2023 Consolidation) (the “CWR”), every RO Petition is required to be advertised once in a newspaper having circulation in the Cayman Islands¹⁶ and, if a company is carrying on a business outside of the Cayman Islands, once in a newspaper having circulation in a country (or countries) in which it is most likely to come to the attention of the company’s creditors (including any contingent or prospective creditors).¹⁷ In addition, such advertisements shall be made to appear not more than 7 business days after the RO Petition is filed in the Cayman Court and not less than 7 business days before the hearing date.¹⁸

The requirements relating to the advertisement of the RO Petition can be difficult for a company to comply with, particularly where it may take some time to obtain a listing date for the hearing of the RO Petition and/or where there may be a long lead time for submission of advertisements for publication (in the Cayman Islands or elsewhere).

In light of the significant impacts of the restructuring moratorium on the company and its creditors, at the hearing In the matter of Oriente Group Limited, Kawaley J emphasised the importance of the publication of the advertisements occurring immediately upon filing of an RO Petition. As regards compliance with the CWR provisions on advertisement, Kawaley J helpfully remarked that it would be appropriate to advertise the RO Petition upon its presentation (and before the RO Petition has been assigned, listed and/or sealed). This may result in the subject company advertising the RO Petition in the appropriate jurisdictions both: (i) immediately upon presentation; and again (ii) when the listing / assignment information becomes available.

Recognition of restructuring officers (and their powers) in foreign jurisdictions

As at the date of publication, the restructuring officers appointed by the Cayman Court in respect of Oriente have not sought recognition of their appointment and/or powers in any other jurisdiction. The restructuring officer regime is designed to facilitate holistic cross-border restructurings of a company’s financial obligations, which may require restructuring officers to take certain steps outside of the Cayman Islands. How foreign jurisdictions may approach any application for recognition of the appointment of a Cayman Islands restructuring officer remains to be seen.

Conclusion

Instructive judicial guidance and principles will continue to develop as more restructuring officers are appointed in the Cayman Islands. We expect that more debtor companies (including those not incorporated in the Cayman Islands¹⁹) will seek to take advantage of the flexible nature and protections offered by the new Cayman Islands restructuring officer regime particularly where cross-border restructuring solutions are required.

This much anticipated restructuring regime reflects a similar approach adopted by certain other key onshore jurisdictions which aims to facilitate effective cross-border restructurings in the best interests of stakeholders in a way that would be recognised and understood by courts and restructuring professionals in other jurisdictions.

1. Walkers’ article: ‘New Restructuring Officer Regime to be introduced into the Cayman Islands’, which gave an overview of the then proposed reforms to Part V of the Companies Act, appeared in the Q1 2022 INSOL International World.
2. Cause No. FSD 231 of 2022.
3. (Unreported, 8 December 2022, Kawaley J).
4. Such reference from a lecture delivered by Lady Arden on 25 March 2022: Taking stock of recent case law of the Judicial Committee of the Privy Council – its breadth and depth).
5. [2020 (2) CILR 942].
6. (Unreported, 30 March 2020, Segal J).
7. In the matter of Oriente Group Limited at [11].
8. Section 91B(1)(a) of the Companies Act.
9. Section 91B(1)(b) of the Companies Act.
10. In the matter of Oriente Group Limited (n 4) at [11(c)].
11. Section 91G(1) of the Companies Act.
12. Section 91G(3) of the Companies Act.
13. Walkers acted as Cayman Islands counsel to a group of lenders in respect of the winding up proceedings in respect of CHL (Cause No. FSD 218 of 2022 (DDJ)) and in respect of the restructuring officer proceedings in respect of CHL (Cause No. FSD 4 of 2022 (DDJ)).
14. Order 1A, rule 5 of the CWR.
15. See for example, In the matter of CHC Group Ltd (Grand Court, unreported, McMillan J, 24 January 2017), Walkers acted as Cayman Islands counsel to CHC Group Ltd.
16. Order 1A, rule 1(3) of the CWR.
17. Order 1A, rule 1(4) of the CWR.
18. Order 1A, rule 1(5) of the CWR.
19. Section 91A of the Companies Act.

This article was first published in INSOL World.