Insolvency law in the Cayman Islands is principally regulated by the Companies Law (2013) and the Companies Winding Up Rules 2008, which are supplemented by a wide body of case law. The following guidance is a summary only.
Under Cayman law, a company may be wound up on the basis of insolvency if it cannot pay its debts as they fall due. A company is treated as unable to pay its debts if:
- it fails to satisfy a valid statutory demand;
- execution of a judgment is returned wholly or partly unsatisfied; or
- it is otherwise proven to the court that the company cannot pay its debt.
The courts are also prepared to wind up a company on just and equitable grounds if the value of its liabilities is proven to be greater than the value of its assets.
On making an order for the appointment of a liquidator, the commencement of the winding up is deemed to start on the date of the petition; all dispositions of the company's property between the date of the petition and order are void unless the court orders otherwise.
Establishing insolvency will enable a creditor to petition the court for the appointment of a liquidator and may also have other consequences (eg, when a company is insolvent, directors must exercise their powers in the best interests of the company with regard to the interests of its creditors, rather than its members). The members of a company can also voluntarily appoint a liquidator by passing a special resolution (or an ordinary resolution if the company is insolvent); and if the company cannot pay its debts as they fall due, the voluntary winding up will be conducted subject to the supervision of the court. Non-petition clauses have statutory force in the Cayman Islands.
Liquidation is a class right under Cayman law. Once appointed, the liquidator's primary duty is to collect in all of the company's assets and distribute them pari passu to the company's creditors in accordance with the statutory scheme of distribution; the legislation confers on the liquidator wide powers to do so. Once a liquidator is appointed, unsecured creditors cannot commence legal proceedings against the company in the Cayman Islands without permission from the court; rights of action against the company are converted into claims in the liquidation process. Secured creditors generally do not participate in the liquidation process and may proceed with any enforcement action directly against their collateral, pursuant to a valid security interest. Cayman law provides for only a very small class of preferential creditors, which are rarely commercially significant in insolvent liquidations.
A liquidator has no right to disclaim either onerous property or unprofitable contracts under Cayman law.
When a company goes into winding up, any mutual debts between the company and a creditor will be offset. Any creditor which extended credit to the company at a time when it had notice of the winding-up petition cannot offset. The Companies Law provides that any netting agreement relating to financial contracts (including multilateral netting) will prevail over the statutory insolvency set-off provisions.
A liquidator may challenge transactions entered into in the twilight period before insolvency where such transactions constitute either a preference or a disposition at an undervalue. There is no separate avoidance regime for floating charges. In each case the company must have been unable to pay its debts at the relevant time or the transaction must have made it unable to pay its debts. The relevant vulnerability period is six months before the commencement of winding up in the case of preferences; or six years in the case of dispositions at an undervalue. Regarding preferences, it is necessary to show an 'intention to prefer' on the part of the insolvent company for a transaction to be challenged as a preference; however, if the preferred party is a related party, there is presumed to be an intention to prefer.
A liquidator may also pursue former directors (including shadow or de facto directors) and officers of the company for either misfeasance or fraudulent trading. If it appears that any person has been carrying on the business of the company to defraud creditors or for any fraudulent purpose, the liquidator may apply to the court for an order that such persons make a contribution to the company's assets.
An insolvent company can enter into a scheme of arrangement to try to restructure its debts. Companies proposing to implement a scheme of arrangement will often apply to the court for the appointment of a provisional liquidator to stay claims by unsecured creditors while they try to implement the scheme; however, this does not affect the rights of secured creditors. Any scheme of arrangement must be approved by each class of creditors, by three-quarters of creditors by value and a majority in number.
In order to act as a liquidator winding up an insolvent company, a person must be a licensed insolvency practitioner. A practitioner must be resident in the Cayman Islands to obtain a licence. However, a foreign insolvency practitioner may be appointed jointly with a Cayman Islands resident licensed insolvency practitioner.
The Companies Winding Up Rules 2008 provide for the liquidator of a company to enter into protocols with a foreign officeholder appointed by a foreign court in another jurisdiction to promote the orderly winding up of the company's affairs and avoid conflict between the winding-up proceedings the Cayman Islands and the foreign jurisdiction.
For further information on this topic please contact David Butler or Colin Riegels at Harney Westwood & Riegels' Grand Cayman office by telephone (+1 284 494 2233) or email (firstname.lastname@example.org or email@example.com). Alternatively, contact William Peake at Harney Westwood & Riegels' London office by telephone (+44 207 842 6085) or email (firstname.lastname@example.org). The Harney Westwood & Riegels website can be accessed at www.harneys.com.
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