As companies across many sectors look to restructure company and group debt in the face of demand and supply shocks that have rocked the global economy, advisors will need to carefully consider the restructuring forum.
The Cayman Islands has proved to be an attractive restructuring jurisdiction, not least because the Cayman Islands courts have considerable experience with efficient management of large debt restructurings. Common law principles apply which will be familiar to practitioners in common law jurisdictions such as England, Hong Kong and Singapore. Debt restructurings in the Cayman Islands often involve cross-border issues, and there is a wealth of precedent for successful applications for recognition under Chapter 15.
Debt can be restructured in the Cayman Islands in relation to Cayman Islands companies, as well as foreign companies that are redomiciled to, or registered as foreign companies in, the Cayman Islands for the specific purpose of restructuring debt.
For example, Ocean Rig, the oil services group, recently transferred and shifted the COMI of four group companies from the Marshall Islands to the Cayman Islands, and successfully restructured over US$3.6 billion of debt through four inter-related Cayman Islands schemes of arrangement. The COMI shift was necessary for the successful application for Chapter 15 recognition.
The principal debt (and equity) restructuring tool in the Cayman Islands is the scheme of arrangement. Cayman schemes are based on English schemes, and so the law and at least some of the procedure will be familiar to practitioners experienced in English restructurings.
The scheme process is a Court process that is initiated by the filing of a scheme petition. There is then a directions hearing, followed by one or more meetings where creditors consider and vote on the restructuring plan, and (if approved at all meetings) a second hearing where the Court considers whether or not to sanction the scheme. If sanction is granted by the Court, the scheme takes effect on the filing of the order and the scheme terms are then implemented, usually without further reference to the Court.
For group debt, each individual company with debt that needs to be restructured must be the subject of separate scheme proceedings and meetings. In order to streamline the process, however, the Cayman Court manages the related proceedings together. Scheme terms are often inter-conditional so that one does not take effect unless all are sanctioned by the Court.
The restructuring can be completed quickly. It is possible for the process from filing of the scheme petition to sanction being granted to be achieved within 12 weeks. The more complex the scheme or the more vocal any dissent, the more likely it would be that the process would run its course over a longer period of time.
Schemes in the Cayman Islands often take place within a provisional liquidation in order to take advantage of the statutory moratorium on claims that arises once provisional liquidators are appointed. The moratorium prevents creditors seeking to wind up or bring any claim against the company in the jurisdiction.
A winding up petition must be presented, coupled with an application by the company for an order appointing provisional liquidators on the grounds that the company is or is likely to become unable to pay its debts (on a cash flow basis) and intends to present a compromise or arrangement to its creditors, and directions adjourning the hearing of the petition. The provisional liquidators’ powers are derived from the order appointing them and their function is to act as restructuring officers, in substance but not in name (but see further below). In some cases they are given full powers by the Court and effectively displace the directors for the duration of the restructuring. In others they are given “light touch” powers and work alongside or oversee the directors in promoting the restructuring.
The moratorium provides breathing space for the company to negotiate or continue negotiations with key creditors for the purposes of developing and drawing up a restructuring plan. It is only once that plan is fully formed that a scheme petition can be presented to the Court.
Once the Court approves the scheme the provisional liquidators are discharged and (subject to the scheme terms) the winding up petition is dismissed and the company continues as a going concern.
A bill is currently being considered by the legislature which would amend the law so that a winding up petition will no longer be needed to take advantage of a moratorium. A company looking to restructure its debt would instead be able to present a petition seeking the appointment of restructuring officers (as opposed to provisional liquidators) and a moratorium on claims against the company would arise on presentation of that petition (rather than on the appointment of the officeholders).
The creditors’ meetings are central to the scheme process. Dissenting creditors in a given class can be crammed down by the majority, but approval must be obtained at all meetings convened in respect of a given scheme company. There is no cross-class cram down.
The threshold for approval at any given meeting is a majority by number and 75% by value, although this takes into account only the votes actually cast in person or by proxy (and not the whole body of creditors if some did not vote). As turnouts at meetings can be low, it is possible to obtain approval with votes representing a minority of the issued debt.
Dissenting creditors who are outvoted at a class meeting may seek to challenge the restructuring at one or both of the two court hearings, principally on the bases that the classes were not properly constituted or that the scheme was unfair because the majority did not act in good faith or did not fairly represent the views of the class.
As noted above, the attractiveness of the Cayman Islands for restructuring has led to instances where companies and groups of companies have shifted COMI to the Cayman Islands for the purpose of restructuring debt.
In order for the Cayman Islands Court to have jurisdiction over a foreign company whose debt is to be restructured, it may need to be re-domiciled or registered as a foreign company:
- If a company is solvent, it may be possible to re-domicile the company to the Cayman Islands using a process known as a “transfer by continuation”. This is a swift and administrative process; but it must be possible under the laws of the company’s existing jurisdiction. In the recent Ocean Rig restructuring, one of the Marshall Islands companies was continued in the Cayman Islands as a Cayman Islands company.
- If a company is insolvent or of doubtful solvency, it cannot be transferred by continuation but it may still be registered in the Cayman Islands as a foreign company. That is sufficient for the Cayman Court to have jurisdiction for the steps set out above. In the recent Ocean Rig restructuring, three Marshall Islands companies were registered as foreign companies in the Cayman Islands.
Re-domiciling the company or registering it as a foreign company is relevant to the Cayman Islands Court’s jurisdiction. But to shift COMI for the purposes of any future Chapter 15 application, additional steps are required, including (for example) holding company meetings in the Cayman Islands.
Campbells offers legal services in the Cayman Islands, British Virgin Islands and Marshall Islands. Over the years, we have acted in a large number of the leading restructuring cases, advising the company, creditors and restructuring officeholders. Some examples are outlined below.
Case Study 1: Cross Border Issues
Most companies trading internationally will have assets or some form of corporate presence in a number of jurisdictions. The long-standing rule in Gibbs (see Anthony Gibbs & Sons v La Societe Industrielle et Commerciale des Metaux (1890) 25 QBD 399) requires that debts are compromised in the jurisdiction of the obligation. A single-jurisdiction solution will not protect a corporate group with an international presence from adverse creditor action in every jurisdiction. In those cases, a coordinated approach between restructuring advisers in multiple jurisdictions may be necessary to achieve effective protection.
In the case of LDK Solar, a major producer of photovoltaic products, a successful restructuring of substantial debt was achieved through two Cayman schemes of arrangement, three Hong Kong schemes of arrangement, Chapter 15 recognition of the schemes and Chapter 11 plans of reorganization with respect to US subsidiaries.
Case Study 2: Formulation of a Compromise or Arrangement:
In these uncertain times, it may not necessarily be the case that the need to restructure debt was foreseen and there may not be firm proposals in place for the compromise or arrangement which is to be offered to creditors. However, it is clear from the language in section 104(3)(b) of the Companies Law that the Court may appoint provisional liquidators even where there are no fully formulated restructuring plans, as was the case in CW Group Holdings (unreported, 3 August 2018, Parker J). In that case, consistent with the approach of the Court in various previous cases, provisional liquidators were appointed on a “light touch” basis to work with existing management in formulating the details of a proposal to creditors.
For those without a firm proposal to put to creditors already in place, the provisional liquidation process provides a flexible mechanism for securing the breathing-space necessary to work with advisors in formulating a restructuring plan. The interests of creditors are protected by the appointment of court-supervised, independent fiduciaries, the extent of whose precise powers are determined on a case-by-case basis depending on the circumstances.
Case Study 3: Assistance From a “friendly” Creditor:
In ordinary circumstances, the question as to whether a company should take steps to place itself into a liquidation process is a matter for the shareholders in general meeting. Directors of a company cannot present a petition in the name of the company without the assent of the shareholders, unless the company is incorporated after 1 March 2009 and its articles expressly authorize the directors to petition without the shareholders’ approval (see Re Emmadart Ltd  1 Ch. 540 and Re China Shanshui Cement Group Limited [2015 (2) CILR 255]).
However, in circumstances where shareholder assent cannot (or cannot easily) be obtained, a practice has developed by which a creditor is encouraged to present a creditor’s petition for liquidation so that the company may then make a cross-application for the appointment of provisional liquidators for the purpose of a restructuring. This approach received judicial approval in the case of Re CHC Group Ltd (unreported, 24 January 2017, McMillan J), which provides further confirmation of the flexibility of the restructuring regime in Cayman and the pragmatic approach of the Cayman judiciary.
Some aspects of the current Cayman restructuring regime are the subject of proposed legislative changes which are expected sometime this year and Campbells will keep clients updated on any developments in this regard.