Legacy of Stability: Why Provisional Liquidation was preferred over Restructuring Officer as part of a successful restructuring

Key facts

Kingkey Financial International (Holdings) Limited (“Kingkey”), established in the Cayman Islands on 31 March 2011, operates as an exempted company with limited liability , acting as a holding entity for multiple subsidiaries located in Hong Kong, the People’s Republic of China, and Denmark.

Recent history has seen the company grapple with significant financial challenges, primarily stemming from market conditions and internal board-related issues. In response to the need for capital infusion, the management determined that fundraising via a share issuance would be the most viable strategy. Negotiations for a share subscription deal commenced in 2023 with an investor and gained approval from the majority of the Board. However, an executive director, holding a substantial shareholding, dissented and initiated legal proceedings in Hong Kong to block the share subscription.

Consequently, the company accrued substantial current liabilities, and efforts to raise capital were hindered, leading to statutory demands from creditors.

Recognising the conflicts among directors and the necessity for a restructuring plan, the Board opted to engage neutral and independent third parties in managing the company's restructuring. Subsequently, to initiate the restructuring they filed a winding-up petition in the Cayman Islands and sought the appointment of JPLs.

Appointment of the JPLs vs ROs

The application to appoint the JPLs, initiated by the company, was presented before Mr. Justice Jalil Asif KC through a summons filed by Conyers, Dill & Pearman on 28 February 2024. The company sought an order for the company’s provisional liquidation (for restructuring purposes) instead of opting for a RO under section 91B of the Cayman Islands’ Companies Act (2023 Revision) (“Act”).

Despite the potential suitability of appointing a RO, opting for a provisional liquidator (“PL”) was deemed more advantageous in addressing the impasse at the board level and formulating a viable restructuring plan. The judge's decision appears to have been influenced by several factors:

• The unopposed nature of the summons.
• The company's proactive initiative in seeking the appointment of PLs.
• The broader authority granted to PLs to assume management control.

Consequently, the appointment of independent management in the form of PLs was deemed expedient to stabilise the company's situation.

Accordingly, on 6 March 2024, the judge issued the order appointing provisional liquidators: Johnathan Lai and Osman Arab from Acclime Corporate Advisory (Hong Kong), alongside Martin Trott from R&H Restructuring (Cayman).

The judgment provided helpful insight into the rationale behind choosing PLs over the recently introduced RO regime.

The judge observed implicit presumptions within section 91B(4) of the Act, particularly regarding the involvement of the company's Board of Directors. However, given the ongoing disputes within Kingkey's management, it was deemed unrealistic to rely solely on the directors for day-to-day operations, rendering the restructuring officer regime unsuitable in this instance.

Additionally, the judge highlighted the more prescriptive language in the former section 104(3) of the Act compared to the current iteration, suggesting a broader scope for appointing PLs.

Moreover, while the RO regime is aimed to supplant provisional liquidation, it posed challenges such as requests for assistance and recognition in foreign courts, which the provisional liquidators may have needed.

The judge concluded that appointing PLs would be more practical in this case, underscoring the utility of their appointment in addressing the company's challenges.

Objective

The primary objective of the JPLs was to swiftly devise and present a viable restructuring plan to prevent the underlying business from succumbing to insolvency. This aligned with management's prior efforts to secure additional capital in late 2023 and the share subscription agreement in January 2024, which was thwarted by the Hong Kong proceedings.

Given the pressing need to address the cash flow challenges, exacerbated by regulated subsidiaries needing to suspend trading due to the petition, it was imperative for management, together with the JPLs, to promptly assess the company's financial status and finalise a plan.

The JPLs tackled this by scrutinising the four primary reasons prompting the company's decision to seek their appointment for restructuring purposes:  

• Investigating the current financial standing of the group and the urgent funding requirements, particularly the demands from creditors.
• Reviewing the recent unsuccessful fundraising endeavors due to internal board conflicts and objections from the former major shareholder.
• Analysing the Board's inefficient operation resulting from internal conflicts among directors.
• Reviewing the complaints received by the company regarding allegations of market manipulation.

Outcome

Through their efforts, the JPLs successfully achieved several significant milestones to restore the company to a going concern status:

• Resolving the internal management conflict, culminating in an Extraordinary General Meeting on 8 March 2024, where an executive director was removed.
• Resuming share trading on 13 March 2024, just seven days after their appointment.
• Negotiating with creditors who had issued statutory demands which included one creditor withdrawing a winding up petition filed in the Hong Kong Court.
• Accelerating the collection of accounts receivable, resulting in the receipt of HK$1.82 million by the Kingkey Group.
• Completing the placement of 1,525,992,613 new shares at HK$0.060 per share on 26 April 2024, raising net proceeds of approximately HK$89.6 million.
• Securing a substantial credit facility with flexible repayment terms.
• Preparing for another significant capital raise, projected to strengthen equity capital and reduce debt.

Subsequently, the JPLs collaborated with the company to compile a comprehensive report to update the Cayman Court, accompanied by a cash flow forecast outlining the company's long-term outlook. These efforts collectively demonstrate a strategic and proactive approach towards stabilising and revitalising the company's financial standing.

Wider picture

The argument holds weight that while the legislature has established a restructuring officer regime which was widely welcomed by the Cayman financial services industry, there may be scenarios where appointing provisional liquidators is still the most effective option.

As can clearly be seen, this recent expedient and successful appointment of provisional liquidators for restructuring purposes under section 104(3) of the Act underscores the significance of this remedy in the Cayman Court's arsenal.

The Cayman Court's guidance illuminates such circumstance favouring the appointment of provisional liquidators over restructuring officers: when internal management disputes cripple the company's functionality, rendering the debtor-in-possession model of the restructuring officer regime unsuitable.

However, given the broad language of section 104(3) post the August 2022 amendments, the scope of when the Cayman Court deems it appropriate to appoint PLs instead of ROs remains to be fully delineated.

It is conceivable that if applications for PLs gain traction, the Cayman Court may consider defining criteria or parameters regarding the circumstances and purposes for which the PL jurisdiction can be invoked. Such measures could serve to ensure the judicious and prudent use of provisional liquidators compared to restructuring officers.

JPL Discharge

The former JPLs are pleased to announce that on 6 June 2024, Mr. Justice Jalil Asif KC approved the withdrawal of the winding up petition and the discharge of the JPLs after 93 days since their appointment.

This successful restructuring marks a significant achievement for R&H Restructuring and underscores our commitment to delivering exceptional results for our clients. We are proud to have played a key role in this case and look forward to continuing to support our clients in achieving their strategic objectives.