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What are the primary procedures used to liquidate an insolvent company in your jurisdiction and what are the key features and requirements of each? Are there any structural or regulatory differences between voluntary liquidation and compulsory liquidation?
The principal means of winding up an insolvent company is an official liquidation where an insolvent company enters voluntary liquidation. During this process, the voluntary liquidators must seek the appointment of official liquidators if the directors of the company have not signed declarations of solvency within 28 days of the commencement of the voluntary liquidation by making an application for court supervision. Following the presentation of a winding-up petition by the company, creditor, shareholder or (in the case of a regulated company) CIMA, or on the making of a supervision application by a voluntary liquidator, the court will consider the petition and decide whether to appoint one or more official liquidators. If so appointed, the liquidators will collect the books, records and assets of the company with a view to paying off creditors and distributing any surplus to shareholders in accordance with the statutory order of priorities.
Official liquidation is available for Cayman Islands incorporated companies, other bodies incorporated under other Cayman Islands statutes (including limited liability companies, exempted limited partnerships and limited liability partnerships) and foreign companies that:
- carry on business or have property located in the Cayman Islands;
- are the general partner of a limited partnership registered in the Cayman Islands; or
- are registered as foreign companies under the Companies Law.
A creditor, shareholder, the company itself or (in respect of regulated businesses) CIMA may present a winding-up petition and seek the appointment of provisional liquidators between presentation and hearing of the winding-up petition.
The purpose of a provisional liquidation is to:
- preserve and protect the company’s assets, if there is evidence of management wrongdoing, until the hearing of a winding-up petition and the appointment of official liquidators; or
- facilitate the proposal of a compromise or arrangement to creditors.
Although an insolvent company may initially be wound up voluntarily, an application must be made to bring a voluntary liquidation under the supervision of the court if any of the directors are unable or unwilling to swear the requisite statutory declaration of solvency, at which point the liquidation becomes an official liquidation.
How are liquidation procedures formally approved?
The court has oversight of official and provisional liquidations. The Grand Court must approve certain actions by the liquidators. So-called ‘sanction applications’ are typically made by the liquidators but may also be made by a creditor. The court retains an inherent supervisory jurisdiction and the liquidator or a creditor can invoke this jurisdiction to seek the advice, guidance and direction of the court with respect to any issue arising in the course of liquidation.
In a voluntary liquidation of a solvent company, the shareholders have oversight, since the liquidator calls and reports in general meetings on the progress of the winding up. However, even in the case of voluntary liquidations, the liquidator or any contributory may apply to the court to determine any question or exercise powers that would be exercised if the voluntary liquidation were proceeding subject to supervision.
What effects do liquidation procedures have on existing contracts?
Other than employment contracts, the winding-up process will have no effect on contracts unless there is a specific contractual provision to that effect. Further, liquidators have no statutory power to disclaim onerous contracts under Cayman Islands law. Therefore, the parties must perform their outstanding obligations, although in practice a liquidator may repudiate the contract and instead adjudicate whatever claim the contractual counterparty seeks to prove in the liquidation as a result of the repudiation. Liquidators must give effect to any contractual rights of set-off or netting of claims between the company and any persons, subject to any agreement to waive or limit such rights. In the absence of any set-off provision, account must be taken of what is due from each party to the other in respect of their mutual dealings, and set-off is applied in relation to those amounts.
What is the typical timeframe for completion of liquidation procedures?
Voluntary liquidations of special purpose vehicles that have served their purpose or of solvent funds that are being wound down may be completed swiftly within a matter of months.
There is no typical timeframe for the completion of an official liquidation. Insolvent funds may have contingent assets in the form of international claims against third parties, including directors and service providers; the liquidation will remain open while such assets are being valued and pursued. Holding companies at the top of a large structure may take time to liquidate, given that the liquidators need time to gain control of companies lower down the structure – which may not be Cayman Islands companies – in order to collect in assets and begin the process of liquidating the whole structure from the bottom up.
Role of liquidator
How is the liquidator appointed and what is the extent of his or her powers and responsibilities?
Provisional liquidators are appointed by the court. They are subject to the court’s supervision and only carry out the functions which the court confers on them. Their powers are prescribed by the order appointing them and the scope of these will depend on the reason for their appointment. If a company restructuring is proposed, existing management may remain in control of the company subject to the supervision of the court and provisional liquidators, although in other cases the management will be displaced entirely by the provisional liquidators. The court may direct that a provisional liquidation committee be established.
Official liquidators are also appointed by the court and their authority always displaces that of the company’s directors. The official liquidators control the company’s affairs, subject to the court’s supervision, with statutory duties to:
- investigate the reason for the company’s failure to wind down its affairs;
- distribute the company’s assets in accordance with the pari passu principle and the statutory order of priority; and
- report to the court and the company’s stakeholders with respect to the winding up.
Some of their powers are exercisable without the court’s approval, whereas others cannot be exercised without court approval. A liquidation committee must be established in every official liquidation. Its role is to act as a sounding board for the liquidators with respect to the issues arising in the liquidation and to scrutinise liquidators’ fees.
If the articles of association specify who will act as voluntary liquidator, this person will be appointed at the commencement of the voluntary liquidation. Otherwise, this is decided in a general meeting. The appointment takes effect when a consent to act is filed by the voluntary liquidator with the Registrar of Companies. Once a voluntary liquidator is appointed, the directors’ powers cease, except to the extent that the company (through a general meeting) or the liquidator approves the continuance of those powers.
What is the extent of the court’s involvement in liquidation procedures?
The court will not be involved in a voluntary winding up unless a petition is presented to bring it under the court’s supervision or the voluntary liquidator or any contributory applies to the court to determine any question arising in the voluntary liquidation or with regard to the exercise of powers which the court might exercise in a court-supervised liquidation.
By contrast, the court will be actively involved in both provisional liquidations and official liquidations. The liquidators must take certain steps as the liquidation progresses, including filing reports.
What is the extent of creditors’ involvement in liquidation procedures and what actions are they prohibited from taking against the insolvent company in the course of the proceedings?
Creditors or contributories of the company may apply to the court for orders and directions with regard to the exercise or proposed exercise of the provisional liquidators’ powers (these are known as ‘sanction applications’).
A provisional liquidation committee formed of creditors and/or shareholders may (but will not always) be established in a provisional liquidation. The composition and function of liquidation committees are addressed in more detail below in the context of official liquidations.
There is no restriction on the enforcement of security during a provisional liquidation, but the appointment of provisional liquidators triggers an automatic stay on the commencement or continuance of proceedings against the company without the leave of the court.
Creditors or contributories of a company may also make sanction applications with regard to the exercise or proposed exercise of the official liquidators’ powers.
In addition, a liquidation committee must be appointed unless the court orders otherwise. The principal purpose of a liquidation committee is to act as a sounding board for the liquidators and to consider the basis and amount of their remuneration. The committee comprises three to five creditors (if the liquidator has determined that the company is insolvent) or shareholders (if the liquidator has determined that the company is solvent). If the liquidator determines that the company is of doubtful solvency, the committee must comprise three to six members of whom a majority must be creditors and at least one must be a shareholder. Members are elected at meetings of creditors and/or shareholders (as appropriate). Liquidation committees also have standing to make sanction applications.
There are no prohibitions or restrictions on the rights of secured creditors to enforce their security during an official liquidation but, as in provisional liquidations, no proceedings can be commenced or continued against the company without the court’s leave.
Voluntary liquidators must pay debts owed to creditors as they fall due. If they fail to do so, there is nothing to stop a secured creditor from enforcing its security or to prevent any creditor from commencing ordinary litigation or winding-up proceedings against the company.
Director and shareholder involvement
What is the extent of directors’ and shareholders’ involvement in liquidation procedures?
In a voluntary liquidation a director or shareholder may be appointed as a voluntary liquidator.
Directors have a statutory obligation to cooperate with the liquidator. This may include an obligation to:
- prepare and submit a statement as to the affairs of the company in order for this to be examined by the liquidator; and
- deliver up all of the company’s property or documents.
Shareholders may participate in a solvent liquidation or if the liquidators have determined that the company is of doubtful solvency – for example, in the liquidation committee. However, in insolvent liquidations, shareholder involvement will be limited given the absence of an economic interest in the estate.
A contributory may apply to the Grand Court to determine any question arising in the voluntary winding up or with regard to the exercise of all or any of the powers which the court might exercise if the company were being wound up under the court’s supervision.
What are the eligibility criteria for initiating liquidation procedures? Are any entities explicitly barred from initiating such procedures?
Voluntary winding up
A company can be voluntarily wound up:
- when the period, if any, fixed for the duration of the company by its memorandum or articles of association expires;
- on the occurrence of an event which its constitution provides should lead to a voluntary winding up;
- if the company resolves by special resolution that it be voluntarily wound up; or
- if the company in general meeting resolves by ordinary resolution that it should be voluntarily wound up because it is unable to pay its debts as they fall due.
Compulsory winding up
A creditor (existing, future or contingent) may petition to wind up a company on the grounds that it is unable to pay its debts. The insolvency test is a cash-flow test; the company must be said to be unable to pay its debts now or in the reasonably near future.
A shareholder or, more unusually, a creditor may petition to wind up a company on the grounds that it is just and equitable to do so. There are many bases on which just and equitable grounds can be advanced.
The court may also order that a company be wound up in other circumstances, including if the company has passed a special resolution requiring it to be wound up or, in the case of a regulated entity, on petition by the Cayman Islands Monetary Authority (CIMA).
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