Potential Changes to the Cayman Islands Restructuring Regime: Restructuring Officers
Could the proposed introduction of restructuring officers help offset the impact of the inevitable financial contagion?
As the world deals with the Global Pandemic COVID-19, the economy has taken a back seat. Once the spread of the virus has slowed, the focus will begin to shift towards understanding the “exit”. Businesses will need to assess the impact caused by the interruption and determine what options are available to mitigate any damage and to facilitate recovery.
This article briefly sets out the current restructuring regime in the Cayman Islands and the proposed changes which are now before the Cayman Islands Government for consideration and designed to further enhance the Cayman Islands as an international restructuring jurisdiction.
Restructuring regime – the current landscape
The Cayman Islands legislative framework does not currently contain equivalent reorganisation processes, such as the United Kingdom’s administration regime or the United States’ Chapter 11. The Cayman Courts, which regularly deal with complex cross border financial transactions, have adapted the existing provisional liquidation provisions as a way of providing protection to a company while it restructures.
Ordinarily, provisional liquidators are appointed to protect a company’s assets until a winding up petition can be heard by the court. However, in Cayman, provisional liquidations, in conjunction with schemes of arrangement, are often used to allow a company or group to emerge from the provisional liquidation process and continue on its business with a reorganised balance sheet.
The appointment of a provisional liquidator triggers a moratorium on claims of unsecured creditors and an automatic stay of proceedings against the company, which affords time to a company to restructure its affairs.
Despite the fact that the Cayman Courts’ innovative solution has resulted in a number of high profile and successful reorganisations, the precondition of the filing of a winding up petition can be a difficult concept for directors and shareholders, who may not be familiar with the process, to understand and accept. For example, the taint of liquidation can impact the value of assets that might otherwise be sold, trigger insolvency clauses in contracts or cause reputational damage with customers.
Additionally, directors are generally only able to file winding up petitions when they are authorised by the constitutional documents of the company, or by way of a shareholders’ resolution. This limitation presents certain difficulties to directors who owe fiduciary duties to creditors in circumstances where the company becomes insolvent.
Proposed changes to the legislation
The strength of the Cayman Islands as a leading offshore financial center is due, in part, to the collaborative approach from its policy makers and the private sector.
In this regard, industry along with the Cayman Islands Government is in the process of developing and negotiating certain amendments to the Cayman Islands’ Companies Law. The amendments, once enacted, would introduce separate rescue provisions, outside of the liquidation process, under the governance of a court appointed restructuring officer. The amendments would require a restructuring officer to be a qualified insolvency practitioner who meets the professional qualification, insurance and independence requirements.
By allowing restructuring to take place outside of the liquidation process, the likelihood of rehabilitating a business increases. Jobs can be preserved, creditors can receive a higher return from a business that is a going concern and the country itself would benefit from the continuing business.
Also in contrast to the current laws, under certain circumstances directors could apply to the court to appoint a restructuring officer, ensuring that they are able to comply more effectively with their fiduciary duties to act in the best interest of the company.
How we can help
Kalo is a leading independent advisory firm and has been involved in a number of high profile provisional liquidation restructurings in both its Cayman Islands and BVI offices, including the successful restructuring of Ocean Rig, the largest restructuring in Cayman Islands’ history, and the successful restructuring of the Constellation Group, BVI’s first “light touch” provisional liquidation.
Each of Kalo’s senior appointment holders has in excess of 20 years’ experience in international business restructuring and recovery and the team is well placed to act as restructuring officers when the proposed amendments to the legislation are enacted. In the meantime, business owners and advisors who are seeking urgent advice in relation to the restructuring of Cayman Islands entities under the current framework should contact Kalo for prompt and proactive advice.
The Cayman Islands, like the rest of the world, is experiencing a shift in the way our business community interacts as a result of Covid-19. The Cayman Islands financial and professional communities, alongside the Cayman Islands Government, are doing their part to ensure world-class service continuity is maintained in all areas, including Cayman’s well-recognised and well-utilised restructuring and insolvency regime.
The islands’ agile, well-resourced business community has seamlessly moved to remote working, based on many years of investment in technology, data and internet infrastructure. Cayman’s law firms and insolvency practices continue to operate fully, liaising remotely with clients and colleagues in all the major global financial centres.
When it comes to Cayman’s legal system, The Grand Court of the Cayman Islands has implemented a number of pro-active practical steps and practice directions to ensure continuity of its operations in response to the Covid-19 crisis.
For example, The Grand Court has been designated as an essential service and it remains fully staffed remotely. Court proceedings are taking place by video-link and telephone and court documents can be filed and processed electronically.
It is hoped that the planned amendments to the restructuring regime will be enacted as soon as practicable under the current circumstances and we look forward to advising clients on the new arrangements in short order.
For more information please contact: Cassandra Ronaldson, Senior Manager at Kalo, on CRonaldson@kaloadvisors.com.