In appointing restructuring provisional liquidators ("RPLs") to the Cayman Islands incorporated company, CW Group Holdings Limited ("CW"), in the face of opposition from a creditor seeking a remedy that may have led to CW's liquidation, the Cayman Islands court has reinforced its reputation in (i) putting company rescue first and (ii) seeking to ensure that returns to creditors are maximised. A significant step has also been taken in applying a more commercial and pragmatic reality to the question of officeholder independence.
Two distinct provisional liquidation regimes exist in the Cayman Islands. First, provisional liquidation in the traditional sense - here, once a petition to wind-up a company has been presented, an application can be made by a creditor to appoint provisional liquidators on the grounds that the company's assets need protecting and / or to prevent mismanagement / misconduct on the part of the company's directors. The provisional liquidator will typically assume control of the company's affairs, to maintain the status quo and protect the assets until the winding up petition is heard. Secondly, there is restructuring provisional liquidation, where provisional liquidators can be appointed by the company in order to obtain breathing space from action by unsecured creditors (there is no stay on secured creditors enforcing security rights). In this breathing space the RPLs, usually with the company, seek to formulate and promote a restructuring. RPLs are therefore often appointed on a 'light-touch' debtor in possession basis (leaving the directors in control of day to day operations, subject to the supervision and monitoring of the RPLs). However, there is a high degree of flexibility as to what may be ordered, and, in some circumstances, the directors will be divested of most of their powers with the RPLs taking over management.
CW was cash flow insolvent but balance sheet solvent and applied for the appointment of RPLs. The appointment was to be on a light-touch basis leaving CW's directors in place; the RPLs to have an oversight and monitoring role with the aim of developing and promoting a restructuring of CW's debt. One creditor, B, applied to appoint its own 'traditional' provisional liquidators, in order to protect CW's assets; alleging mismanagement and misconduct on the part of CW's directors. Alternatively, B argued that, if CW's nominated RPLs were appointed then, so as to provide a proper check and balance, an individual from its nominee firm should be appointed alongside the CW nominated RPLs.
CW's nominated RPLs were appointed (and none of B's nominees were appointed – see further below). The court held that while some of B's concerns may have been genuine, it was not necessary to appoint traditional provisional liquidators. The oversight and monitoring to be provided by the RPLs was sufficient to assuage any genuine concerns. To allow the company to continue as a going concern (with the board retaining all powers of management) would, in the interests of the creditors as a whole, give the directors and its advisors the best possible opportunity to secure a favourable restructuring. This was particularly the case as the majority of CW's assets were receivables; so it was important for current management to maintain customer relationships in order to maximise the ability to recover the receivables and therefore value for creditors.
The Cayman Islands has, in the past, taken a stricter approach to officeholder independence than some other jurisdictions. This is, in part, because the Insolvency Practitioner Regulations 2018 ("IPR") provide that an individual may not be appointed as liquidator or provisional liquidator of a company unless he can properly be regarded as independent as regards that company. The IPR does not define what 'independent' means (save that the appointee cannot be from the same accounting firm as the company's auditors) – this lack of a definition has given rise to some uncertainty and debate.
So, where a financial advisor is engaged, pre-formal restructuring proceedings being commenced (for example to advise the company and engage with creditors as to restructuring options) the conservative approach would be for the financial advisors to take a more arm's length position than would be the case if an appointment as officeholder in US or UK restructuring proceedings were on the cards. This is because it could be argued that, having been submerged in the development of restructuring options and discussions with creditors, and having been 'shoulder to shoulder' with management during that process, potentially the financial advisors may not be seen as independent for the purpose of the IPR.
Keeping the company's proposed officeholder nominees at arm's length therefore has, in past cases, helped to remove a negotiating / litigation weapon from a disgruntled creditor seeking to impose their own nominee on the distressed company or take a hold-out / ransom position. However, commercially this means that the financial advisors are potentially hamstrung in not being able to be fully submerged in the detail and potential proposals as perhaps the company (and its supporting creditors) may want.
Were CW's nominees independent?
While the level of the RPLs pre-appointment involvement is not set out in detail in the judgment, it is clear that the RPLs had previously been engaged by CW to develop an overall restructuring solution for the group and had been involved in creditor negotiations. B, therefore, raised issues as to the proposed RPLs nominees' independence.
It was held that CW's proposed RPLs could properly be regarded as independent because:
(a) In the interests of efficiency and economy it made sense to appoint individuals that were up to speed with CW's situation and the restructuring options that could be explored.
(b) Once appointed, RPLs are officers of the court and are required to act in the interests of all creditors and stakeholders – attacking the proposed officeholders' independence was, in effect, an accusation that, once appointed, the RPLs would not fulfil their statutory duties. This approach is in contrast to earlier cases, which emphasised that the mere perception of a lack of independence could rule out a proposed appointee, without any aspersions being cast over their integrity.
(c) There was no need to appoint an individual from B's nominees to ensure the RPLs independence – this would be unnecessary and inefficient (again it amounted to an accusation that the RPLs, as officers of the court, could not be trusted).
Parker J's decision, therefore, moves Cayman Islands law on officeholder independence forward to reflect the commercial reality of the significant role often played by financial advisors in the early stage of company debt restructurings. This is important; the stricter line on independence (or perceptions of independence) that had been taken in earlier cases had been criticised as ignoring commercial reality and giving rise to increased costs and inefficiencies within Cayman Islands restructuring and insolvency proceedings (another firm needing to spend time and money in getting up to speed with what can be considerable detail and nuances).
Whether the proposed officeholder is independent and so can take the appointment does always turn on the facts – this decision does not mean that care does not still need to be taken. Further, the past decisions of the Cayman Islands court on independence were not overruled - it therefore remains to be seen whether in future cases the court will continue taking this more robust view on independence.
Even if the Cayman Islands court does, in future cases, continue to take this more robust position, there may still be good reasons to keep the company's nominees for RPLs distanced from commercial negotiations if it is anticipated that the restructuring will be contested. This is because the RPLs can then provide independent scrutiny to a restructuring plan that they took no or little role in developing. The RPLs' recommendation to approve the plan (assuming the RPLs view the plan as fair, taking into account creditors as a whole) then raises the bar for any dissenting creditor to overcome. In such circumstances, the court is likely to be slow to depart from the recommendation of its own officers.
How far (if at all) does a restructuring plan have to be formulated in order for RPLs to be appointed?
In order for the court to have jurisdiction to appoint RPLs, the company must intend to present a compromise or arrangement to its creditors. The question often posed is what level of evidence is required to prove the company's intention? The court confirmed that the evidential bar is low and, in particular, at the time the application for RPLs is made, it is not necessary for there to be a formulated (or partly formulated) restructuring plan. "Intend" is future tense so the company need only demonstrate (with credible evidence) that it intends to present a compromise or arrangement to its creditors. This need not be the immediate future (e.g. in the next few weeks or months - although the court will, of course, want to see progress made when the adjourned winding up petition is re-heard).
This endorses the past practice of the Cayman Islands court in allowing for the appointment of RPLs in order to give a restructuring a chance to breathe, even if that restructuring is in the very embryonic stages of development.
The trend from recent years has been of common law courts seeking to give company rescue every viable chance to succeed. See for example the: (i) Bermudan decision in Re Up Energy Development Group Limited1, where a winding up petition was adjourned for a further three months in order to permit restructuring efforts to continue; and (ii) English decision in Bluecrest Mercantile BV2, where case management powers were used to provide for a stay of execution against a company to allow a scheme of arrangement to be put in place. CW Group reinforces that the Cayman Islands court takes the similar policy approach and that a creditor seeking to 'blow-up' a potential restructuring to leverage its position will need strong evidence to back up its allegations that an alternative (and potentially more value destructive) path should be taken.