The Cayman Islands' new insolvency regime in practice one year on

April 18, 2010

Tim Le Cornu and Mathew Clingerman discuss
Published in Corporate Rescue and Insolvency, April 2010

Historically, insolvency procedures in the Cayman Islands have been governed through the application of the UK’s

Insolvency Rules 1986 insofar as such rules were not inconsistent with Cayman Islands’ law. While this practice worked well for many years, the UK’s Insolvency Rules 1986 were not designed with Cayman Islands’ Law in mind and led to a rather ad-hoc solution.

In 2006, a committee of experienced Cayman Islands’ insolvency specialists, and the country’s Law Reform Commission conducted an extensive review and released a report making three key recommendations: (1) the existing law on corporate insolvency was too complex and should be updated; (2) tailored rules relevant to the jurisdiction were needed; and (3) that existing judicial co-operation in cross-border cases should be codiﬁed.

The recommendations led to an update of the insolvency regime which came into force on 1 March 2009 as the Companies Amendment Law 2007 (the ‘Law’) together with the Companies Winding-up Rules 2008 (the ‘Rules’), the Insolvency Practitioners Regulations 2008 (the ‘Regulations’) and the Foreign Bankruptcy Proceedings (International Co-operation) Rules 2008.

This feature discusses how a few aspects of the new Law, Rules and Regulations have been applied in practice since the introduction of these rules.

International C0-Operation: Protocols and Joint Appointments

The Rules introduced a new duty on oﬃcial liquidators requiring them to consider whether an International Protocol (a ‘Protocol’) is appropriate and can be entered into when a company has become subject to parallel insolvency proceedings. International protocol agreements are intended to facilitate co-ordination and co-operation between courts and/or insolvency representatives in cross-border insolvency cases. These types of agreements have become popular in recent years as a way to bridge the gaps between insolvency regimes of diﬀerent countries in order to generate a more eﬃcient and eﬀective global result. Speciﬁcally, the Rules consider that the purpose of these agreements is to promote the orderly administration of the liquidation estate, avoid duplicative work, and assist in the resolution of potential conﬂicts between an oﬃcial liquidator and the foreign oﬃceholder as they relate to the pursuit, custody and distribution of assets, as well as other matters relating to cross-border insolvency.

In August of 2009 a Protocol was agreed in the winding-up of Lancelot Investors Fund Ltd between a Cayman Islands’ oﬃcial liquidator and a US Chapter 7 trustee. This Protocol dealt with a number of procedural and substantive matters of cooperation including; the exchange of information, division of responsibility regarding the determination and payment of claims (including detailed provisions allowing the Cayman liquidator to challenge purported secured claims), and pursuit of speciﬁc assets and litigation in a number of jurisdictions.

Another interesting aspect of this Protocol was the limitation of action provisions that indirectly dealt with the priority of the proceedings. Under the Protocol, the liquidator agreed not to seek recognition in the US under Chapter 15 as a ‘foreign main proceeding’ and the trustee agreed not to object to any request by the liquidator for recognition of the Cayman proceeding as a ‘foreign non-main proceeding’. Reciprocally the liquidator also agreed not to object to any request by the trustee for recognition of the US proceedings in the Cayman Islands.

The Lancelot winding-up application was granted in December 2008 and ordered the liquidator to use his ‘best endeavors’ to enter into a Protocol, foreshadowing the new duty. Interestingly, that ruling also suggested that the trustee consider a joint appointment as an oﬃcial liquidator as a way to increase co-operation in cross-border insolvency situations. While joint appointments of foreign practitioners are not new to the Cayman Islands, the Rules and Regulations now spell out the speciﬁc requirements which must be met.

Speciﬁcally, the Regulations allow for a foreign practitioner to be exempt from the residency requirement so long as they are appointed jointly with a resident qualiﬁed insolvency practitioner. Notwithstanding the residency requirement, the foreign practitioner and the associated ﬁrm must meet the standards required for domestic insolvency practitioners including independence and minimum insurance. The Regulations are silent with respect to a foreign practitioner’s qualiﬁcations/experience; however, the Rules provide that a foreign practitioner seeking appointment must submit evidence of his qualiﬁcations and details of his experience.

Since the new Rules and Regulations have come into eﬀect there have been at least ﬁve joint court appointments of foreign insolvency practitioners with resident insolvency practitioners. We expect this avenue to continue to be used frequently as a way to promote cross- border co-operation.

Just and Equitable Winding Up: Alternatives to Winding Up

Members or contributories have always had the ability to petition for the winding up of a company in the Cayman Islands; however, a new addition to the Law, s 95(3), provides that the Grand Court may make speciﬁc alternative orders on winding-up petitions presented on just and equitable grounds. This section provides the Grand Court with additional powers and options to grant alternative relief instead of providing for the company’s winding-up. The alternative relief which may be granted are orders that:

regulate the conduct of the company’s aﬀairs in future;
require the company to refrain from doing or continuing an act complained of by the petitioner;
require the company to do a speciﬁc act which the petitioner has complained as being omitted;
allow civil proceedings to be brought on behalf and in the name of the company by the petitioner; and
provide for the purchase of shares of some members of the company by other members, or by the company itself.

The legislative Bill proposing the amendments to s 95 referred to the expansions as ‘equivalent’ to ss 459 and 461 of the English Companies Act 1985. However, ss 459 and 461 explicitly deal with providing a company’s members with the ability to seek free-standing relief on the basis that conduct by the company has been unfairly prejudicial whereas s 95(3) requires that a winding-up petition be presented.

It was wondered whether s 95(3) would provide a new avenue by which contributories could obtain suitable remedies where contributories or oppressed minorities were in dispute with a company. Such a circumstance arose in the case of Camulos Partners Oﬀshore Limited (‘Camulos’).

In August 2009, the Grand Court of the Cayman Islands heard a just and equitable petition in which alternative relief was sought by an investor in Camulos. In this case the investor had redeemed all of their shares but did not receive payment, despite the fact that other investors were paid redemption proceeds. Camulos contended that it was entitled to maintain a suspension on the payment of redemption proceeds speciﬁcally against that investor alone. Further, Camulos held that, if and when it decided to lift the suspension, it would be entitled to satisfy the obligation to the investor by way of an ‘in-kind’ distribution of assets, which the investor was concerned, would be worth substantially less than the original redemption price.

On this basis the investor communicated to Camulos that unless they were paid their redemption price they would present a petition on just and equitable grounds seeking a winding-up order and/or alternative relief under s 95(3) including an order for payment of their redemption proceeds and declaratory relief as to the amount owed and manner of payment. In response, Camulos sought an order restraining the presentation of such a petition. Camulos argued that it would amount to an abuse of court process and that allegations of unfair prejudice were insuﬃcient to form the basis of a petition on just and equitable grounds. Further, Camulos argued that a contributory could only present a just and equitable petition against a ‘quasi-partnership’ company, which Camulos was not.

The Grand Court ruled in favor of the investor and dismissed Camulos’s application for injunctive relief. The judge concluded that the presentation of the petition in these circumstances would not amount to an abuse of process, that the legislative intention had been to broaden the scope of the just and equitable remedy to include considerations of unfairness, and that the just and equitable remedies were not restricted to ‘quasi-partnership’ type companies. At the time of writing Camulos had since appealed and a decision is anticipated shortly.

Presentation of Winding-Up Petition

The Rules surrounding the presentation of winding-up petitions have been strengthened to ensure that general creditors have the opportunity to be heard. In this regard, additional details are now required to be included in the content of the petition. The requirements detailed in the Rules state that every winding-up petition shall contain: particulars of the company’s incorporation; a description of the company’s business, including a statement about the countries in which it carries on its business; if the company is a foreign company, a statement of the particulars of: any property in the Islands, any business carried on in the Islands, whether it is registered under pt IX of the Law, and whether it is a general partner of a limited partnership; a concise statement of the grounds upon which the winding up order is sought; and the name and address of the insolvency practitioner (and any foreign practitioner) whom the petitioner nominates for appointment as oﬃcial liquidator.

In September 2009, a creditor petitioned for the winding-up of HSH I Cayman GP Ltd (‘HSH’). In doing so, the petitioners originally intended to nominate a foreign practitioner and resident Cayman insolvency practitioner to act as joint liquidators. At the time of submitting the petition the nominated foreign practitioner did not have the insurance requirements in place as required by the Regulations, although eﬀorts were being made to remedy this issue before the hearing. It later became clear that the foreign practitioner would not be able to accept the appointment. As a result the petitioners attempted to substitute a diﬀerent insolvency practitioner who did meet the requirements. A winding-up order was made in November 2009 appointing the substituted practitioner.

HSH appealed the decision on the basis that the substitution led to defects in that the name, address, and country of the nominated liquidator was incorrect on the petition and thus failed to comply with the Rules. The Court of Appeal agreed and set aside the winding up orders in December 2009.

The judgment by the Court of Appeal considered, among other things, that the requirements were in place so that creditors and investors could have an appropriate opportunity to decide on whether to support the nominated liquidator or an alternative candidate and the new Rules exist principally for the beneﬁt of the general body of creditors who are entitled to be heard on a winding up petition.

Conclusion

The ﬁrst years that follow an updated insolvency regime can be some of the most important as the changes are put to the test of actual practice. It is clear that the Cayman Islands’ regime is no exception as market participants have been quick to utilise the changes in practice and in certain instances are testing the correct interpretation and application before the court. The months and years that follow will continue to build on this and create a history of practice that will complement future interpretation and application of the new insolvency regime.