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Lawmakers reform Cayman’s restructuring regime

Updated: Apr 9

Parliament has passed amendments to the Companies Act that reform Cayman’s restructuring regime for insolvent companies.

The changes introduce a formal restructuring procedure under the supervision of a restructuring officer outside the traditional winding-up process.

Distressed companies can now apply to the Grand Court for a restructuring officer to be appointed when the company is unable to pay its debt and aims to present an alternative arrangement or compromise to its creditors.

Such a petition will automatically stay any domestic or foreign proceedings against the distressed company and prevents any winding-up petitions or resolutions without the permission of the court.

Until now, a distressed company first had to present a winding-up petition and then file a petition to the court for a provisional liquidator to be appointed, in order to obtain a stay against unsecured creditor actions that would allow the company to restructure debt and present an alternative to creditors.

In an advisory, law firm Ogier said the presentation of a winding-up petition can have adverse reputational or commercial consequences and the introduction of the new bespoke restructuring petition will address some of these concerns.

This provisional liquidation regime also suffered from poor optics, Financial Services Minister André Ebanks said when he presented the bill in Parliament last week.

“It is not intuitive to potential users of the restructuring regime, and therefore unclear that the provisional liquidator’s aim is to rescue and not liquidate the company,” he said.

By separating the restructuring regime from the winding up procedures, the “optical deficiency” that potentially deters business from coming to Cayman is removed.

Under the provisional liquidation regime, companies incorporated since March 2009 had greater access to restructuring proceedings than those incorporated before that date, because they could include an express provision in their articles of association that allowed the directors of a company to present a winding up petition without requiring a shareholder resolution, Ebanks explained.

The changes to the Companies Act allow all Cayman Islands companies to opt into this regime.

The new rules would also enhance the recognition and enforcement of Cayman’s restructuring regime in other jurisdictions, which is important because both the company’s assets and creditors are often located abroad.

Cayman may be able attract companies that decide where to file their restructuring proceedings by replicating the preferred features of competing regimes, Ebanks said.

Commercial advantages

The minister said the new legislation intends to attract and maintain restructuring and insolvency business and “at its heart” creates opportunities for local restructuring and insolvency firms.

The changes stemmed from proposals made by insolvency practitioners participating in various government-private sector committees, seeking to give Cayman commercial advantages, and were subject to extensive industry consultation.

Ogier called the new legislation “an important step in the ongoing development of the Cayman Islands as a leading financial centre with the ability to effectively and efficiently implement large-scale cross-border restructurings according to established legal principles”.

In an advisory, Maples Group said the changes are “good news” for debtors seeking to restructure their debt in the Cayman Islands with the protection of a stay on unsecured creditor action, because they will be able to do so without needing to file a winding up petition.

Creditor protection

Under the new regime, creditor protections remain unchanged. Secured creditors can still enforce a security over assets of the company without permission of the court.

Unsecured creditors can still be heard by the court on whether a restructuring officer should be appointed. The application to appoint restructuring officers should be heard within 21 days.

A creditor may still seek permission of the court to present a petition for the company to be wound up, both before and after a restructuring officer has been appointed.

However, the courts are typically inclined to give a distressed company some time to restructure, whereas liquidations are considered a last resort.

Creditors also have the right to make a court application to replace or remove the restructuring officer or to vary the appointment order, which defines the powers of the restructuring officer.

Should a restructuring fail and lead to the company being wound up after all, the winding-up will be deemed to have started on the date the restructuring petition was presented.

That allows official liquidators to claw back any preference payments made to creditors in the six months before the petition was presented.

IMS is one of the longest established company management firms in the Cayman Islands. IMS is licensed by the Cayman Islands Monetary Authority to provide independent directors, company management and incorporation, mutual fund administration, captive insurance and trust services. For more information about our services, please contact us.

Disclaimer: this publication does not constitute legal or professional advice and should not be relied on as such.

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