While Evergrande has been the media’s primary focus because of its incredibly large outstanding liabilities, it is just one distressed property developer among many. The announcement of the “three red lines” policy by the People’s Bank of China in August 2020 led to tightening of controls over debt financing which has substantially affected the sector. Given the popularity of the Cayman Islands and the BVI in corporate structuring for Chinese companies, there has been a corresponding increase in restructuring work for offshore law firms.
CHANGES TO THE CAYMAN RESTRUCTURING REGIME
The Companies (Amendment) Act, 2021 (Amending Act) was gazetted on 16 December 2021, but is not yet in force. The Amending Act introduces for the first time a standalone restructuring regime, separate from the existing company winding-up procedures, enabling Cayman Islands companies and other in-scope entities to restructure under the supervision of a Court-appointed “restructuring officer”.
Under the existing regime, where a Cayman Islands company wishes to propose a restructuring to its creditors, it is able to seek the appointment of provisional liquidators, so as to trigger a moratorium on any enforcement action by creditors. However, under the current law, directors are unable to present a winding-up petition absent a special resolution of the company’s shareholders or an express power granted in the company’s articles of association, whilst the fact of having been in provisional liquidation might leave a certain stigma.
The Amending Act addresses such issues by creating a new standalone restructuring regime. Once the new regime is brought into force, a company’s directors will be empowered to petition the Court for the appointment of a qualified insolvency practitioner as a “restructuring officer” if the company is (or is likely to become) unable to pay its debts as they fall due and intends to present a compromise or arrangement to its creditors. Significantly, the directors will be able to do so without a resolution of shareholders and without any express power permitting such action in the company’s articles of association.
The filing of the petition will trigger an automatic global moratorium on claims against the company. The moratorium will apply not only to proceedings brought against the company in the Cayman Islands, but also to any proceedings brought in a foreign jurisdiction.
The new regime expressly contemplates that a petition for the appointment of a restructuring officer may be made in connection with a compromise or arrangement pursuant to the law of a foreign country and so it will be of interest to wider cross-border restructurings, including those under the UK’s administration process and US’ Chapter 11. A notable change is that, once the new regime is brought into force, directors will be able to take the initiative in trying to restructure the company’s debts, without first needing to seek members’ approval or the support of a ‘friendly’ creditor. Note that a creditor having security over the whole or a part of the assets of a company will be entitled to enforce its security without leave of the Court and without reference to any restructuring officer appointed.
THE CURRENT POSITION
CAYMAN ISLANDS
As matters stand, the route to obtain a moratorium on claims pending a financial restructuring is to invoke the Court’s jurisdiction to wind up the company and to seek the appointment of provisional liquidators.
Typically, a friendly creditor will apply to wind up the company on the ground that the company is insolvent. A petition for the winding-up of a company may be issued by the company itself if authorised by the company’s shareholders or expressly in its articles of association.
In the Cayman Islands, a company will be insolvent when it is unable to pay its debts; if the company does not satisfy a creditor’s statutory demand; if an order, judgment or decree in favour of a creditor is returned unsatisfied in whole or part; or if it is otherwise proved to the Grand Court’s satisfaction that the company is unable to pay its debts. When considering whether a company is unable to pay its debts, the test applied in the Cayman Islands is a cashflow test (rather than a balance sheet test).
BVI
Corporate insolvency in the BVI is governed by the Insolvency Act and the Insolvency Rules. An application may be made to appoint a liquidator on the ground that the company is insolvent where (a) there is a failure to comply with a statutory demand that has not been set aside; (b) execution of a judgment is returned unsatisfied, (c) liabilities exceed assets, or (d) the company is unable to pay its debts as they fall due.
An application for the appointment of a liquidator of an insolvent company can be made by the company itself (if authorised by the company’s shareholders) or by a creditor (including contingent and prospective creditors).
PROVISIONAL LIQUIDATION
Once an application to wind up has been filed, an application can be made to the court for the appointment of provisional liquidators. Whilst there is a statutory stay of proceedings following the appointment of provisional liquidators in the Cayman Islands, there is no similar statutory moratorium in the BVI following the appointment of provisional liquidators, although the Court has the power to stay proceedings.
In the Cayman Islands, there is express provision allowing for provisional liquidators to be appointed where the company is or is likely to become unable to pay its debts and the company intends to present a compromise or arrangement to its creditors for the purpose of a debt restructuring. This is commonly referred to as a “light touch” or “soft touch” provisional liquidation. The moratorium on the enforcement of claims against the company provides breathing space for the company to promote a restructuring. A petition for the winding up of the company is filed together with an application for the appointment of provisional liquidators. The winding up petition serves as a backstop to the restructuring – if the restructuring is successful, the petition to wind up is withdrawn; if the restructuring fails, the petition to wind up the company is usually listed and the company wound up. If the restructuring does fail, the provisional liquidators will likely remain in place as Official Liquidators for the company.
There is no equivalent express provision in the BVI, but in the absence of an express statutory “soft touch” regime, the BVI Court has, in Constellation Overseas Ltd and Others BVIHC (COM) 2018/0206, 0207, 0208, 0210, 0212 (4 February 2019), used its general powers to appoint provisional liquidators to appoint “soft touch” provisional liquidators over a group of companies registered in the BVI to help the business restructure. The Court also imposed a stay on proceedings against the company.
An offshore company with its substantial management and operations in Hong Kong may, however, in some cases be unable to prevent a winding-up Order in Hong Kong by the appointment of provisional liquidators in its home jurisdiction. In Re Lamtex Holdings Ltd [2021] HKCFI 622, the Hong Kong Court held that attempts to engineer a de facto moratorium to frustrate legitimate Hong Kong winding-up proceedings may be refused. Recognition and assistance provided to foreign provisional liquidators by the Hong Kong Court are likely to be subject to more scrutiny.
SCHEME OF ARRANGEMENT
A scheme of arrangement is a court-approved compromise or arrangement entered into between a company and its creditors or members or any classes of them, and is a popular mechanism in many jurisdictions for debt restructuring. An application for a scheme of arrangement is commenced in the Cayman Islands by a petition filed with the Court. The application may be commenced by the company or a creditor or liquidator of the company. The petition seeks the Court’s sanction of a proposed scheme of arrangement or compromise.
At a first directions hearing, the Court will be asked to approve the convening of meetings of the classes of creditors or members affected. Then the meetings are held and the stakeholders vote on the scheme. If each class meeting approves the scheme by a majority in number representing 75% in value of the class, the scheme goes back before the Court for final approval. This is not a mere formality, and the Court can refuse sanction even if the required majority has been obtained, if it considers that the rights of any minority are being unfairly prejudiced. If Court approval is given, the scheme will bind all of the company’s creditors, including those who opposed its terms. The Amending Act clarifies that Court approval will also bind all of the company’s members or class of members (where the scheme has been approved by a majority in number representing 75% in value of the members or class of members). Under the Companies Act, the Court may grant to members dissent rights in respect of the proposed compromise or arrangement – typically, in the Order made at the conclusion of the first direction hearing if the Court approves the convening of meetings of members or classes of members.
