Shining a Light on Validation Orders in Cayman Insolvency Proceedings

A recent judgment of the Cayman Islands Court of Appeal has provided certainty for directors, general partners and insolvency practitioners with respect to the principles that the Cayman Islands Courts will take into account in determining whether to grant a validation order in the context of Cayman Islands winding up proceedings. This article provides an overview of validation orders in Cayman Islands insolvency proceedings and a summary of the relevant factors to consider when making an application seeking a validation order.

Introduction

Under Cayman Islands law, if a winding up order is made, the winding up of a company is deemed to commence at the time of the presentation of the winding up petition for an official liquidation or the passing of the members’ resolution in the event that a Court supervised liquidation commenced as a voluntary liquidation. 1 There will inevitably be a period of time that passes between the commencement of the winding up and the making of a winding up order. As such, a question often arises as to whether a company that is the subject of winding up proceedings can enter into valid transactions during that intervening period in circumstances where a winding up order is ultimately made by the Grand Court of the Cayman Islands (the ‘Grand Court’).

The answer can be found in section 99 of the Companies Law (2018 Revision) (the ‘Companies Law’), which provides that:

‘When a winding up order has been made, any disposition of the company’s property and any transfer of shares or alteration in the status of the company’s members made after the commencement of the winding up is, unless the Court otherwise orders, void.’

The requirements for obtaining a validation order (which can be sought either in advance or retrospectively) were recently considered and reaffirmed by the Cayman Islands Court of Appeal (‘CICA’) in In Re Torchlight Fund L.P. (Unreported, 27 April 2018, CICA). This article provides an overview of validation orders in Cayman Islands insolvency proceedings and summarises the applicable principles that the Grand Court will consider in determining whether to grant a validation order.

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This article first appeared in Volume 15, Issue 3 of International Corporate Rescue and is reprinted with the permission of Chase Cambria Publishing - www.chasecambria.com.

BRITISH VIRGIN ISLANDS
Meenaa AzmayeshSenior AssociateT +1 284 542 2221meenaa.azmayesh@walkersglobal.com

CAYMAN ISLANDS
Fiona MacAdamSenior CounselT +1 345 914 4273fiona.macadam@walkersglobal.com

HONG KONG
Joanne CollettPartnerT +852 2596 3354joanne.collett@walkersglobal.com