When a corporate borrower faces financial difficulties, there are a variety of enforcement, restructuring and insolvency options available to creditors. From a creditor’s perspective, the choice of procedure will depend on whether the borrower has granted security. If security has been granted over the shares or the assets and undertakings of a Cayman Islands incorporated company pursuant to a Cayman Islands law governed security document, the most appropriate enforcement choice for any secured creditor may be receivership.
Receivership is a contractual self-help remedy only available to secured creditors on the terms set out in the security document. It is a method by which a secured creditor can enforce its security, realise the secured property and obtain repayment (full or partial) of the debt owed. There are no specific statutory provisions under Cayman Islands law determining how a receiver should be appointed, and the appointment of a receiver must be made in accordance with the terms of the security document in order to be valid.
There is no statutory requirement to register the appointment of a receiver in the Cayman Islands. Whilst the receiver appointed will act principally in the interest of the appointing secured creditor and not for the general body of creditors, it will act in its capacity as the agent of the security provider.
The effect of appointing a receiver is to take away control of the secured property from the security provider – in the case of a debenture, this means suspending the authority of a company’s directors to deal in the secured assets, and in the case of a share mortgage, suspending the shareholder’s rights attaching to the secured shares, both in accordance with terms of the security document. The powers of a receiver to deal with the secured property will be as expressly provided for in the security document and may only be exercised for the purposes for which they were conferred. Typical powers of a receiver include the power to take possession of, sell and/or manage the secured property, the power to exercise all voting rights pertaining to the secured property, and the power to receive and retain all dividends or interest accruing in respect of the secured property.
The receiver owes its primary duties to the appointing secured creditor, with secondary duties owed to the security provider and any other party with an interest in the equity of redemption. The receiver must exercise these duties in good faith and in accordance with the terms of the security document.
The receiver is not obliged to exercise any power of sale and realise the secured property within a defined time period following its appointment. If and when the receiver does decide to exercise its power of sale over the secured property, it must take steps to obtain the best price reasonably obtainable for the secured property at the time that it decides to sell. If, having regard to its duties, the receiver decides not to sell the secured property immediately following its appointment, then it has a duty to act diligently when carrying on the business or management of the company in the case of a debenture, or when exercising the rights in respect of the secured shares in the case of a share mortgage. The terms of a receiver’s remuneration, including any indemnity given by the appointing secured creditor, will usually be governed by the instrument of appointment. Typically such remuneration is paid from the realisation of the secured property in priority to any distributions to the secured creditor.
Any defect in the form of the appointment of a receiver or relating to the validity of the security document itself, may render the appointment invalid. If the appointment is invalid, the receiver may be liable to the security provider in trespass, damages for wrongful action by the receiver, tortious interference or otherwise.