Overview of the restructuring landscape
The Cayman Islands benefit from a robust and mature restructuring and insolvency regime which has its roots
in the English legal system but has developed specific processes and procedures for handling the unique
attributes of Cayman Islands entities that get into financial distress. The restructuring market is supported by welltrained and experienced practitioners both in the legal and insolvency practitioner communities, and benefits
from a stable, effective and efficient court system. The main pieces of legislation governing insolvency
procedures are as follows:
- Companies Act (2022 Revision)
- Companies Winding Up Rules 2018; and
- Insolvency Practitioners’ Regulations 2018.
Official liquidation, the main procedure for handling insolvent estates, is a process that is commenced with the filing of a winding up petition in the Grand Court of the Cayman Islands, which subsequently oversees the liquidation process. Post-filing of a petition (or in parallel), an application for the appointment of a provisional liquidator
can also be made in circumstances where there is a need to protect assets and/ or the status quo pending the court hearing of the petition. Provisional liquidations and a pivot to the new restructuring officer’s regime
Over the past few years, there have been a number of winding up petition filings in the Cayman Islands combined with an application for the appointment of “light-touch” provisional liquidators for restructuring purposes. As a
formal tool to restructure a company’s affairs, this process is soon to become redundant with the introduction of
the restructuring officer regime, discussed in further detail below.
HQP Corporation Limited (“HQP”) has been one of the high profile cases to enter into provisional liquidation
proceedings in recent times. HQP is a Cayman Islands holding company with subsidiary entities based out of
Hong Kong and the PRC. HQP was set up as a financing vehicle for the purpose of raising capital for the operating
entity of the group, a company developing a business to business auto parts trading platform in the PRC. This type of group structure is typical for the jurisdiction.
After a fraud committed by HQP’s principal, shareholders of the company filed a petition with the Grand Court of the Cayman Islands for the company to be wound up and for provisional liquidators to be appointed. Although malfeasance had occurred, there was still a possibility that the trading entity of the group could be rescued and value preserved. The provisional liquidation allowed for a moratorium on claims against the company, to allow the liquidators to assess the economic viability of the group and to adjudicate on what grounds, and to what extent, the group might continue to trade prior to the Court considering the winding up petition. Historically there have been mixed results using this mechanism for restructuring purposes, with many companies ultimately entering into official liquidation. The restructuring officer regime is being introduced to provide a viable alternative for distressed entities to enter formal restructuring proceedings without the need for a winding up petition to be filed, and to potentially avoid official liquidation.
This has been one of the more interesting developments in the restructuring space in the Cayman Islands in recent times and would allow the directors of an entity to apply to the Grand Court for the appointment of a restructuring officer, typically without shareholder consent. This process formed part of the new Companies (Amendment) Bill 2021 and we await the commencement order which is expected in May 2022, at which point the restructuring officer route will be available to companies seeking to restructure.
The expected introduction of this new regime has been well received by professionals in the industry as Cayman Islands insolvency law is now aligning itself with other jurisdictions that offer a more debtor-friendly alternative. The restructuring officer process is more akin to administration proceedings and Chapter 11 proceedings in the UK and US respectively. While the Cayman Islands may still be viewed as more of a creditor centric jurisdiction, this new regime will present a more balanced approach, leaving debtor companies with better options when in distressed situations.
Recent trends in insolvency and restructuring
As a popular jurisdiction for private fund entities and their associated fund administration (both offshore feeder funds and master funds), the Cayman Islands has seen its fair
share of high profile fund collapses in recent years. The liquidation of Penrich Global Macro Fund L.P. was brought
under the supervision of the Grand Court in 2020 when it moved from voluntary into official liquidation. The principal of the former fund manager, based out of New Zealand, was criminally indicted and subsequently convicted
for fraudulently manipulating the financial statements provided to investors and the liquidators are focused on
recovering value for stakeholders via potential civil claims against certain parties. This course of action is typical for
a fund against which a fraud has been perpetrated (in this case, alleged overvaluation of assets and fraudulent
manipulation of fund financials).
With the cross-border nature of insolvency proceedings seen in the Cayman Islands, stakeholders often need to consider which venue or jurisdiction to file their claim or winding up proceeding, which can lead to confusion and may result in officeholders being appointed in different jurisdictions over the same company. We have seen an emerging trend in Hong Kong where the High Court has made winding up orders in relation to entities incorporated in the Cayman Islands, whose operations, for example, are in the PRC. The rationale for these orders is often that he centre of main interests of the company is in Hong Kong, whereas the law in the Cayman Islands is based on the seat of a company’s incorporation. There have been concerns raised recently by the Grand Court around the need for comity and cooperation between the courts of different jurisdictions.
A considerable number of winding up applications in the provisional liquidation space have involved Cayman Islands’ entities with operations in the PRC that are listed on the Hong Kong Stock Exchange. The Hong Kong court’s
recent resistance to recognising the appointment of Cayman Islands provisional liquidators over entities listed in
Hong Kong has created difficulties for liquidators in fulfilling their duties in a meaningful way. This has occasionally resulted in parallel proceedings being conducted in two jurisdictions, often by different practitioners over the same
entity.
When faced with a recent winding up petition, the Grand Court addressed the issue in an order and judgment on Silver Base Group Holdings Limited. The bondholders of the company filed a petition to have the company placed
into liquidation in Hong Kong. Shortly thereafter, the company filed a petition in the Cayman Islands for the appointment of “light touch” provisional liquidators on the basis that there was a viable prospect of the company being restructured. The Grand Court presiding judge, Justice Doyle, adjourned the winding up hearing twice, reiterating that further work should be undertaken to update both the creditors of the company and the Hong Kong court on the steps being taken by the company. Justice Doyle subsequently granted the winding up order, however, in his judgment asserted that it was the responsibility of liquidators in the place of the incorporation of the company, not the centre of main interest, to deal with liquidation proceedings. He further stressed that the liquidators should consult with the company’s creditors on the support for and viability of the restructuring proposal, as
well as reporting to the court.
Similarly, in the winding up of GTI Holdings Limited, Justice Doyle again expressed concerns on comity and cooperation in connection with the Hong Kong court’s treatment of a winding up petition filed in Hong Kong
against the company.
This is a topic that continues to unfold, the outcome of which will no doubt have an impact on liquidations of this kind. The difficulties involved with comity is a focal point for liquidators practicing in the Cayman Islands, considering how entities have traditionally been structured in the jurisdiction where foreign recognition is usually one of the initial steps a liquidator must address upon appointment.
Another emerging topic is the ability to fund liquidations by engaging with local counsel on a conditional or contingency fee basis. The Private Funding of Legal Services Act 2020 came into force in 2021 and allows for contingency fee agreements, a mechanism previously unavailable for liquidators as a tool for financing the bringing of litigation claims. This will enhance the ability of liquidators to bring claims on behalf of an insolvent entity that would not ordinarily have the economic means to fund a claim using the resources at its disposal. This is a relatively recent legislative change and it remains
to be seen how frequently it will be utilised.
Asset realisation and recovery
As one of the leading centres for offshore company structures, investment funds and private wealth trusts, Cayman Islands entities often hold assets in jurisdictions across the world. As a result, in an insolvency context, asset realisation and claims enforcement processes are almost always conducted across multiple international borders.
When a liquidation occurs, it is often the case that cash at bank or other liquid assets have been largely depleted, as often owners/directors will have used this liquidity in an attempt to stave off insolvency or, in a fraud context, to
enrich themselves. These liquidations will likely therefore be “cash poor” but potentially “claims rich.”
There are many instances where companies act as an investment vehicle for investors to pool their money into a quasi-fund which purports to invest in property and other asset classes. Often these companies form part of a larger group structure with related entities located in other jurisdictions.
In the case of Platinum Partners Value Arbitrage Fund L.P., the complexity from an asset recovery perspective was the investigations being carried out by US authorities and the ensuing indictments and criminal trials of a number of the individuals who are currently the target of the liquidators’ civil actions. In these situations, cooperation and dialogue with foreign enforcement authorities is key, notably in explaining the role and responsibilities of a Cayman Islands liquidator and the required oversight of the Grand Court. Recently we have seen a Cayman Islands fund, having previously been accused of fraud, negotiate a settlement with the SEC using the assistance of US counsel, resulting in a settlement of $84 million with their full asset portfolio being frozen. The Grand Court commented on the agreement stating that it presented “a significant and progressive step in the constructive cooperation and dealings of both jurisdictions with each other in the best interests of international creditor investment protection”.
Upcoming developments
Global political and economic unrest has been well documented over the past 24 months. The onset of the Covid-19 pandemic has wreaked havoc on a number of industries worldwide with multiple governments introducing economic stimulus packages to prevent widespread bankruptcy and a subsequent global economic recession. Given the recent emergence from the global pandemic, governments have started to withdraw this fiscal stimulus. While we are yet to see any major economic fallout from the easing of these measures, it is likely that there will be a number of companies unable to survive without continued financial assistance.
At the same time, there were some of the largest increases to stock prices in the tech sector throughout 2021, which was a groundbreaking year for many start-up entities. This significant increase has since ground to a halt with the geopolitical disruption which has had an immediate impact on the global stock market and no indication that stock prices are set to rebound in the near future. Global oil prices are also now at an all-time high due to supply chain issues and we expect this to will have a significant impact on a number of industries.
These are unprecedented times both economically and politically, with a number of analysts commenting that there may be a global recession, considering how fragile many sectors were as they began to rebuild following the
pandemic.
Martin Trott
Martin is a Partner with the Cayman Islands firm and specialises in corporate restructuring and insolvency. Martin is also responsible for the firm’s Restructuring & Recovery service line. He has broad experience in leading complex administrations, liquidations and receiverships across a number of industry sectors. Martin is also a director of R&H Restructuring (Cayman) Ltd.…
IIR Review 2023/24