Overview of Laws and Statutory Regimes

The Cayman Islands has a robust common law and statutory regime relevant to financial restructuring, reorganisations, liquidations, and insolvencies. The substantive laws relating to insolvency and restructuring include:

• The Companies Act (2023 Revision);
• The Companies Winding Up Rules (2023 Consolidation) (CWR);
• The Insolvency Practitioners Regulations (2023 Consolidation);
• The Foreign Bankruptcy Proceedings (International Cooperation) Rules (SL 92 of 2017); and
• The Exempted Limited Partnership Act (2021 Revision).

The Cayman Islands legal system is a common law system based on the doctrine of judicial precedent. If there is insufficient local precedent to determine an issue, the Cayman Islands courts will look to English law, which is highly persuasive but not binding. Case law from other Commonwealth jurisdictions will also be persuasive but not binding.

Restructuring Regime

In 2022, the Cayman Islands implemented a free-standing restructuring regime, the key aspects of which include:

• the ability to appoint a restructuring officer;
• an automatic worldwide stay of proceedings upon the filing of the petition; and
• the ability for a company’s directors to petition for the appointment of a restructuring officer without express authority in its articles of association or by a resolution of its members.

As referred to below in 5.1 The Different Types of Liquidation Procedure, the pre-existing light touch provisional liquidation restructuring regime may still be available in addition to the restructuring officer regime.

There are a variety of insolvency, restructuring, and receivership proceedings, including:

• voluntary (solvent) liquidation;
• official liquidation;
• provisional liquidation;
• restructuring through the appointment of a restructuring officer or light touch provisional liquidator;
• scheme of arrangement through Section 86 of the Companies Act, without the appointment of a restructuring officer; and
• court-appointed receivership or receivership pursuant to a contract.

Types of Statutory Officers

One (or more) qualified insolvency practitioner(s) in the Cayman Islands may be appointed as official liquidator, provisional liquidator, or restructuring officer. A foreign practitioner can only be appointed in any of these capacities together with a local qualified insolvency practitioner.

An official liquidator acts as the liquidator of a company that is being wound up under an order of the court or under the supervision of the court.

A restructuring officer may be appointed where a company is unable to pay its debts and intends to present a compromise or arrangement to its creditors (Section 91B(1) of the Companies Act).

Anyone, including a director or officer of the company, may be appointed as its voluntary liquidator, regardless of whether they are resident in the Cayman Islands (Section 120 of the Companies Act).

Statutory Roles, Rights and Responsibilities of Officers

Court-appointed officeholders are officers of the court and are therefore subject to court supervision.

Provisional liquidators are required to carry out the functions conferred upon them by the court and their powers are limited by the order appointing them (Section 104(4) of the Companies Act).

Official liquidators’ duties, powers and responsibilities are set out in 5.2 Course of the Liquidation Procedure.

Voluntary liquidators are officers of the company to which they are appointed. The main purpose of their appointment is to wind up a solvent company’s affairs and distribute its assets (Section 119(1) of the Companies Act).

Selection of Officers

Provisional or official liquidators and restructuring officers may be appointed by the court upon the nomination by the petitioner. Other stakeholders can challenge the identity of the proposed officeholder and nominate a different officeholder.

A voluntary liquidator is appointed pursuant to a company’s memorandum or articles of association or at a general meeting of the company (or as otherwise specified in the memorandum or articles).

The Companies Act permits the removal and replacement of officeholders, as well as the appointment of additional officeholders in appropriate situations (eg, where there is a conflict or perceived conflict).

The waterfall of priorities among various classes of secured creditors, unsecured creditors, and members is as follows:

• secured creditors (fixed charge) rank in priority to all other creditors;
• preferred creditors as described in Schedule 2 to the Companies Act (certain debts due to employees, bank depositors, and taxes due to the government);
• floating charge secured creditors;
• liquidation expenses;
• unsecured creditors;
• non-provable debts;
• statutory interest payable on proved debts;
• subordinated creditors (unpaid redemption proceeds; debts due to members by dividends, profits or otherwise); and
• remaining sums, if any, are payable to shareholders in accordance with their rights and interests at the commencement of the winding-up proceedings.

Section 140(1) of the Companies Act states that the property of a company must be applied in satisfaction of the company’s liabilities on a pari passu basis.

See 2.1 Types of Creditors and 4.2 Statutory Restructuring, Rehabilitation and Reorganisation Procedure.

Employee Severance Claims

Section 40(1) of the Labour Act (2021 Revision) states that in the event of the winding up of an employer, severance pay must be paid in priority to all secured and unsecured debts and should be paid in full unless the company’s property is insufficient to pay the severance pay in full.

Liquidation/Restructuring Expenses

Order 20 of the CWR sets out the general rule for priority of liquidation and restructuring estate expenses, generally:

• costs of petitioner;
• costs incurred by restructuring officer or provisional or official liquidation (procuring indemnity insurance or security bond);
• expenses and disbursements during the term of appointment of restructuring officers;
• remuneration of restructuring officers;
• expenses and disbursements of provisional liquidators;
• remuneration of provisional liquidators;
• expenses and disbursements of official liquidators (including expenses payable to the person required to make a statement of affairs);
• expenses and disbursements of the liquidation committee;
• any costs order made in favour of any creditor or contributory in winding up proceedings or in favour of any other person in proceedings to which the debtor is a party; and
• remuneration of official liquidators.

Litigation Funding

Within liquidation proceedings, litigation funding is treated as a liquidation expense and is given priority over unsecured creditor claims.

Liens/Security

The types of liens and security available in the Cayman Islands include the following.

• A legal mortgage and an equitable mortgage can be used to secure real estate (both freehold and leasehold) and shares.
• Fixed and floating charges are typically used to secure tangible property (including trading stock, shipping vessels and aircraft).
• Liens and pledges are other forms of security interests that are recognised in the Cayman Islands.

The most common forms of security that will apply to shares and other tangible movable property are legal or equitable mortgages. Charges and assignments of the rights attaching to shares may also be used, particularly where intermediaries have custody of those shares.

Security can also be granted in favour of debts and other rights arising from a contract. These debts may be secured by a mortgage or by fixed or floating charges.

As for intellectual property (IP), the most common form of IP which security is granted over are trade marks, which can be mortgaged or charged.

Rights and Remedies

The rights and remedies available to secured creditors will be largely determined by the security documents and will therefore be a matter of contract. Subject to the governing terms, security may be enforced by possession, sale, set-off, or receivership.

Special Procedural Protections and Rights

Secured creditors who elect to enforce their security outside an insolvency process will be entitled to receive the full value of the secured assets.

Pre-judgment Attachments

Pre-judgment attachments are unavailable, but creditors may obtain equivalent relief by applying for a freezing injunction.

Retention of Title and Set-Off

Contractual rights for the retention of title and set-off are enforceable in the Cayman Islands.

Consensual and Other Out-of-Court Workouts and Restructurings

Companies can pursue consensual and out-of-court workouts and restructurings, which may be the preferred strategy to minimise expense and preserve value for all stakeholders. It is common for companies to secure standstill agreements with creditors to pursue out-of-court workouts. However, circumstances may require a company to consider a statutory or court process, particularly where the company is facing increasing creditor pressure and potential winding-up proceedings.

There is no formal requirement for a company to pursue consensual restructuring negotiations before commencing a formal statutory process. However, consensual restructuring negotiations and an initial outline for a restructuring plan may be needed to satisfy one of the grounds a company must prove for the appointment of a restructuring officer – the intention to present a compromise or arrangement to its creditors.

The viability of an out-of-court workout or restructuring and the willingness of banks, credit funds and other lenders to work with distressed companies depends on market conditions and the jurisdiction in which the stakeholders are located. A creditor cannot be forced to co-operate in an out-of-court restructuring.

Given the nature of the financial services industry in the Cayman Islands, the stakeholders will likely be in overseas jurisdictions including the United States, Hong Kong, and the PRC. Stakeholders may be influenced by recognisable international guidance including the INSOL Statement of Principles for a Global Approach to Multi-Creditor Workouts and the Asian Principles of Business Restructuring Guide on Conducting an Out-of-Court Workout in Asia.

An out-of-court workout or restructuring is not generally affected by Cayman Islands insolvency laws. That said, creditors’ rights and remedies will impact a company’s ability to secure new financing.

A formal statutory restructuring may be required to cram-down uncooperative or dissenting creditors, subject to the statutory thresholds being met (see 4.2 Statutory Restructuring, Rehabilitation and Reorganisation Procedure).

Duties on Creditors

Creditors do not owe duties to other creditors during a consensual restructuring unless there are private contractual relationships between the creditors. Creditors are owed a duty when a company is insolvent or bordering on insolvency (see 7.1 Duties of Directors).

In the circumstances where stakeholders enter into contractual relationships based on misrepresentations, the stakeholders may have common law and equitable claims for negligent or fraudulent misrepresentation.

Rights of Shareholders

The Cayman Islands does not have a free-standing oppression and unfair prejudice statutory regime. However, an aggrieved shareholder could present a winding-up petition on just and equitable grounds and apply for alternative relief under Section 95(3) of the Companies Act for an order:

• regulating the conduct of the company’s affairs in the future;
• requiring the company to refrain from doing or continuing to do an act;
• authorising civil proceedings to be brought in the name and on behalf of the company by the petitioner; or
• providing for the purchase of shares of any members of the company by other members or by the company itself.

An out-of-court financial restructuring or workout will require the consent of all creditors. There are no statutory provisions that provide the ability to cram-down non-consenting creditors. If the out-of-court restructuring involves a merger or consolidation, shareholders who dissent from the merger or consolidation may apply to the court to seek fair value for their shares under Section 238 of the Companies Act.

Statutory Process for a Financial Restructuring/Reorganisation

The restructuring officer regime allows a debtor company to restructure including by way of a scheme of arrangement under the supervision of a restructuring officer and with the benefit of a statutory moratorium.

The principal tool for restructuring outside the protection of the restructuring officer regime is a scheme of arrangement under Section 86 of the Companies Act. Section 86 allows for a company, any creditor or member of a company, a restructuring officer or an official liquidator if a company is being wound up to apply for an order to convene scheme meetings.

Appointment of a Restructuring Officer

A company can present a petition seeking the appointment of a restructuring officer under Section 91B(1) of the Companies Act where the company:

• is or is likely to become unable to pay its debts; and
• intends to present a compromise or arrangement to its creditors (or classes thereof) either under the Companies Act, the law of a foreign country, or by way of a consensual restructuring.

The directors of a company may present a petition for the appointment of a restructuring officer without the need for shareholder approval or explicit authorisation within the company’s articles of association (Section 91B(2)).

Automatic Stay

The restructuring officer regime provides for a worldwide automatic stay of proceedings when the petition is presented (Section 91G of the Companies Act).

Procedure for Filing a Scheme

The procedure and rules around filing a scheme are found in both the Grand Court Rules (2023 Revision) (GCR) and the CWR. GCR Order 102, Rule 20 and Practice Direction No 2 of 2010 (PD 2 of 2010). They outline the procedure that should be followed regardless of whether the scheme proceeds under Sections 86 or 91I. They provide for the following.

• A petition seeking sanction of a scheme must be filed together with a summons (which provides for directions) and a supporting affidavit detailing all relevant information required by the court to assess and sanction a scheme, including exhibiting the scheme proposed and an explanatory statement (setting out the timetable of events).
• The court will give directions relating to statutory majorities required at the scheme meeting.
• The directions hearing is held in chambers (the convening hearing) where the court will, among other things, consider the composition of classes in the scheme proposal.
• A scheme meeting is then held (or meetings depending on the number of classes involved) and within seven days following that meeting an affidavit must be filed detailing that the meeting took place and that the court’s directions were adhered to and relevant majorities approved as appropriate.
• The petition hearing is usually held in open court (the sanction hearing) and those who voted at the scheme meeting are entitled to be heard at the sanction hearing. The court also has the discretion to hear any other person who demonstrates a substantial economic interest in the shares or debt to which the scheme relates.

Objections relating to the composition of classes are usually made at the convening hearing.

Scheme of Arrangement

It is possible to cram-down stakeholders, provided the statutory thresholds outlined below are met. There is, however, no ability for a cross-class cram-down.

An “arrangement” under Sections 91I(6) and 86(5) of the Companies Act includes a reorganisation of the share capital of the company via the consolidation of shares of different classes or by the division of shares into shares of different classes, or by a combination of both.

Shareholder Threshold

Under Sections 86(2A) and 91I(3) of the Companies Act, there is a new threshold requirement for approval by shareholders of a proposed scheme of arrangement. The “head count” test has been removed in relation to shareholder schemes and the new threshold requirement is as follows:

• 75% in value of the members or class of members, as the case may be, present and voting either in person or by proxy at the meeting. If approved by shareholders holding 75% in value and sanctioned by the court, the scheme will then be binding on all members or classes of members and on the company.

Creditor Threshold

Under Sections 86(2) and 91I(2) of the Companies Act, a creditor scheme must receive support of more than 50% in number and 75% in value of creditors and be sanctioned by the court to be binding on all creditors or class of creditors and on the company.

Restructuring or Reorganisation Agreement

Once the requisite threshold approvals have been obtained from various classes involved in the restructuring, the court will determine at the sanction hearing whether:

• the scheme complied with the convening order and statutory requirements;
• each class was fairly represented at the scheme meeting and whether the majority acted in a bona fide matter; and
• the scheme is one in which an intelligent and honest creditor could reasonably approve.

A company or a restructuring officer cannot disclaim onerous contracts.

Non-debtor Parties

Non-debtor parties such as guarantors may be released from liability under a scheme of arrangement in some cases where there is a close connection between the release and the subject matter of the scheme (In Re SPhinX Group [2010] (1) CILR 452). In the matter of Re La Seda de Barcelona SA [2010] EWHC 1364 (Ch), the English High Court approved the release of a third-party guarantor because the release gave rise to a “give and take” between the company and scheme creditors and because the release benefited the scheme creditors as it improved the financial position of the company and other companies within the corporate group.

New Money

A company may borrow money during the restructuring process, which will require court sanction. There are no specific statutory provisions providing for debtor-in-possession financing or new money. A new money lender can be given priority over existing lenders under a scheme of arrangement.

Successful Restructuring

When a scheme of arrangement has been completed, the restructuring officer appointment can be discharged, and the company will continue its business in the normal way.

Unsuccessful Restructuring

If a scheme has been unsuccessful, the court can discharge the restructuring officer under Section 91E of the Companies Act. These applications will likely be made by the restructuring officer (where they consider it improbable that a scheme can be achieved) or creditors or contributories who seek to make a winding up petition.

If a restructuring fails and a winding-up order is obtained before the discharge of the order appointing a restructuring officer, the winding up of a company is deemed to commence on the date of the presentation of the petition to appoint a restructuring officer (Section 100 of the Companies Act).

Outcome of a Scheme

At the sanction hearing, the court will either sanction the scheme as proposed and voted upon or refuse sanction. The scheme is treated as effective once the court order sanctioning the scheme has been filed with the Registrar of Companies.

Depending on various factors, it may take two to three months or more from the start of the scheme proceedings until a sanction order is made.

Failure to Observe Terms of Restructuring Plan

The implications of the debtor company or creditor failing to observe the terms of a scheme of arrangement or restructuring plan depend on the circumstances. A company’s failure to comply with the terms could result in the company being subjected to a winding-up petition. Court intervention may be required to remedy any breaches.

Position of the Company

A debtor can continue to operate while engaging in a restructuring process. The automatic moratorium under the restructuring officer or light touch provisional liquidation regime will afford the debtor with breathing space.

The restructuring officer will either act in an advisory capacity supervising a debtor-in-possession (management remains in place) or potentially a more invasive role depending on the appropriateness of this as provided for in any order made by the court.

Use of a Restructuring Procedure to Reorganise a Corporate Group

A corporate group can be restructured through the scheme of arrangement process, but this will require separate scheme proceedings and court approval for each entity in the group. That said, the court and parties can benefit from efficiencies if the scheme proceedings are dealt with at the same time (eg, combined hearings).

Restrictions on a Company’s Use of its Assets

There are restrictions on the company’s use of its assets. The court would need to approve any such use or disposition of assets, which can be done in the initial appointment order or in later orders.

Asset Disposition and Related Procedures

In a restructuring outside the restructuring officer regime (under Section 86 of the Companies Act), the directors of a company can execute the sale of any company assets. Such a sale will be subject to the terms of the scheme.

Within the restructuring officer or light touch provisional liquidation regime, the disposition of company assets will require court sanction, whether in the appointment order or subsequent order. The purchaser of a company’s assets will only acquire the rights and interests which the company had, subject to any existing claims against those assets, unless such claims were extinguished under the scheme.

There are no specific legislative prohibitions on credit bidding and stalking horse bidding.

Appropriate sales processes and bidding requirements will be determined by the officeholder, and the sale process or sale will be subject to court approval. There are also no statutory provisions providing for a pre-packaged restructuring, but the court can approve a pre-packaged restructuring in appropriate circumstances.

Role of Restructuring Officers

Restructuring officers must be qualified insolvency practitioners similarly to official liquidators and can be appointed jointly and will be officers of the court. A foreign restructuring officer can only be jointly appointed with a Cayman Islands qualified practitioner.

The scope of a restructuring officer role will depend on the level of oversight required or deemed appropriate. The restructuring officer could take on a more advisory role with the directors remaining in place in a debtor-in-possession style restructuring or have more authority over the management and control of the company.

The directors of the company may retain some powers and can continue with the day-to-day operation of the company. This will be subject to any directions by the court as to the manner and extent to which the powers and functions of the restructuring officer shall affect and modify the powers and functions of the board of directors, and any other conditions the court considers appropriate to impose on the board of directors. The board is required to provide the restructuring officer with such information as the restructuring officer reasonably requires.

Powers of Restructuring Officers

The powers of a restructuring officer and the functions to be carried out by them are conferred by the court in the appointment order. This includes the power to act on behalf of the company to which they are appointed.

Other powers may include the power:

• to monitor, oversee, and otherwise liaise with the board of directors in effecting a compromise or arrangement of the company under the supervision of the courts;
• to draft any appropriate scheme of arrangement;
• to seek to enter into any protocols deemed appropriate for the co-ordination of legal proceedings and the restructuring of the company;
• to assist the company in foreign bankruptcy proceedings;
• to review and approve regulatory or government filings;
• to seek out investors and financiers; and
• review the financial position of the company.

Unless the directors’ powers are completely removed, the board of directors of the company will continue to manage the company’s affairs in all respects.

The order appointing the restructuring officer may give the restructuring officer the power to report to the court including on whether the restructuring officer considers at any time that the board of directors is not acting in the best interests of the company.

Roles of Shareholders and Creditors

The roles and approval thresholds for shareholders and creditors are described in 4.2 Statutory Restructuring, Rehabilitation and Reorganisation Procedure.

Class composition and the court’s approval of the class composition is an important procedure in scheme proceedings because an incorrect composition of the classes may prevent the court from sanctioning a scheme (In re Ocean Rig UDW Inc. 2017 (2) CILR 495).

At the convening hearing, the court will consider the proposed scheme and any objections to the scheme or composition of classes where contested. When considering class composition, the court will consider the similarity and dissimilarity of legal rights against the company (In re Ocean Rig UDW Inc. 2017 (2) CILR 495).

The members of a class should be able to consult effectively together regarding their similar legal rights against the company.

There are no provisions under the scheme or restructuring regime contained within the Companies Act or rules that state that a committee must be formed. However, the court could approve the formation of an ad hoc committee.

Shareholders and creditors are provided with scheme documents and can participate throughout the scheme approval process. They can object to scheme approval at a sanction hearing. Typical objections at the sanction hearing include the company’s failure to comply with notice and other procedural requirements, improper class composition, and the unfair treatment of stakeholders.

Rights and Remedies for Secured Creditors

A scheme could include a release of secured creditor liens and security arrangements. However, there is no stay of proceedings against secured creditors in respect of restructuring proceedings, and a secured creditor can enforce its security without leave of the court and without reference to a liquidator or restructuring officer.

Rights and Remedies for Unsecured Creditors

In the restructuring context, an automatic worldwide stay of proceedings is granted upon the presentation of a petition for the appointment of a restructuring officer. An unsecured creditor (or creditor group) could influence the viability of a scheme of arrangement if that unsecured creditor (or group) holding more than 25% of the company debt, in any class, opposes the scheme.

The payment of unsecured trade creditors during the restructuring process will depend on the nature of the restructuring and will vary case by case. A company can, in its petition for the appointment of a restructuring officer, seek the court’s approval of ongoing payments to trade creditors. Trade creditors may rely on retention of title clauses to ensure payment of their debts.

Claims of Dissenting Creditors

It is possible to cram-down dissenting creditors within a particular class as long as the majority in number and 75% in value thresholds are met. There is no ability for a cross-class cram-down under Cayman Islands law.

Trading of Claims Against a Company

There is generally no restriction on trading claims. Claims can therefore be traded throughout the restructuring process. To ensure effectiveness of the transfer of any claims, notice of the assignment or transfer would have to be provided to the company.

Evaluating Claims and Creditors

There are no statutory provisions for evaluating claims. The proposed scheme can include provisions addressing the value of claims and disputes related to claims.

Rights of Set-Off

In a restructuring proceeding, the rights of set-off (or offset or netting) could be compromised or altered under a scheme of arrangement.

Existing Equity Owners

Existing equity owners can receive or retain ownership under the scheme.

Cayman Islands insolvency legislation provides for three types of liquidation proceedings:

• voluntary liquidations;
• official liquidations; and
• provisional liquidations.

Voluntary Liquidations

Overview and commencement

A voluntary liquidation is used to wind up a solvent company and is carried out independently, without sanction of the court. A company incorporated or registered under the Companies Act may be placed into voluntary liquidation:

• if by a special resolution, the company resolves to be wound up voluntarily;
• if by an ordinary resolution in a general meeting it resolves to be wound up voluntarily because it is unable to pay its debts; or
• upon the expiry of the period for the duration of the company or the occurrence of the event specified in the company’s memorandum and articles of association.

The company stops carrying on its business, save for matters beneficial for its winding up, from the commencement of the voluntary winding-up, but maintains its corporate status and powers until it is dissolved.

One or more voluntary liquidators (in the latter case, acting jointly and severally) may be appointed to wind up the company and distribute its assets and, at that time, the directors’ powers are displaced, unless the company resolves in a general meeting or the liquidator sanctions the directors’ continuance.

Winding up under court supervision

It is a statutory requirement for a voluntary liquidation to proceed that the director(s) of the company must, within 28 days of the commencement of a voluntary liquidation, sign a declaration of solvency attesting that a full enquiry into the company’s affairs has been made and that the director believes the company will be able to pay its debts in full with interest within a period not exceeding 12 months from the commencement of the winding-up. A voluntary liquidator must apply to the court within 35 days of the commencement of the voluntary liquidation for an order that the voluntary liquidation be placed under the supervision of the court if the company’s director(s) have not signed a declaration of solvency.

Official Liquidation

Overview and commencement

An official liquidation is the principal regime for the winding up of companies. There are no obligations for companies to commence formal insolvency proceedings. There are also no wrongful or insolvent trading provisions that would penalise directors for allowing an insolvent company to continue operating.

Directors of Cayman Islands companies owe a common law fiduciary duty to act in good faith and in the best interests of the company. This duty shifts in favour of the company’s creditors at the point where the directors know, or ought to know, that the company is insolvent or bordering on insolvency, or that an insolvent liquidation is probable.

When an insolvent liquidation is inevitable, this duty towards the company’s creditors crystallises. Under those circumstances, and as detailed in 7.1 Duties of Directors, directors should consider whether to commence insolvency proceedings where it is in the best interests of the creditors to do so.

Section 94 of the Companies Act states that a petition to wind up a company can be presented by:

• the company;
• any creditor or creditors (including contingent and prospective creditors);
• any contributory; or
• the Cayman Islands Monetary Authority (CIMA) (in certain circumstances).

The court may grant a winding-up petition on the grounds below, as set out under Section 92 of the Companies Act where:

• a company has passed a special resolution requiring the company to be wound up by the court;
• the company does not commence business within a year from its incorporation or suspends its business for a whole year;
• the company’s articles of association require the company to be wound up;
• the company is unable to pay its debts (insolvent); or
• the court is of the opinion that it is just and equitable for the company to be wound up.

The court has jurisdiction to make winding-up orders in respect of:

• a company incorporated under the Companies Act;
• a body incorporated under any other law in the Cayman Islands;
• a foreign company which:
1. has property located in the Cayman Islands;
2. carries on business in the Cayman Islands;
3. is the general partner of a limited partnership; or
4. is registered as a foreign company under Part IX of the Companies Act.

Under Section 93 of the Companies Act, a company is unable to pay its debts if:

• a creditor serves on the company a statutory demand and the company neglects to satisfy the debt within 21 days of the date on which the statutory demand was served;
• execution of other process issued on a judgment, decree or order obtained in the court in favour of any creditor is unsatisfied in whole or in part; or
• it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due (the “cash flow test” of insolvency).

The cash flow test includes debts that are immediately due and debts that will become due in the reasonably near future.

Provisional Liquidation

Overview and commencement

A provisional liquidation is generally intended to “hold the ring” pending the determination of a winding-up petition.

An application for the appointment of a provisional liquidator under Section 104 of the Companies Act can be made at any time after the presentation of a winding-up petition but before the court makes a winding-up order. This type of application can be made ex parte in appropriate circumstances.

A creditor, contributory or CIMA (in certain circumstances) can apply for the appointment of a provisional liquidator on the following grounds:

• there is a prima facie case for making a winding-up order; and
• the appointment is necessary in order to:
1. prevent the dissipation or misuse of the company’s assets;
2. prevent the oppression of minority shareholders; or
3. prevent mismanagement or misconduct on the part of the company’s directors.

Under Section 104(3) of the Companies Act, the court may grant a company’s application for the appointment of a provisional liquidator if the court considers it appropriate to do so. Notwithstanding the recent introduction of the restructuring officer regime, which was intended to replace the prior light touch provisional liquidation restructuring regime, the Grand Court of the Cayman Islands recently confirmed that the light touch provisional liquidation restructuring regime remained available under the broader revised wording of Section 104(3) of the Companies Act (In the Matter of Kingkey Financial International (Holdings) Ltd). This decision effectively leaves the door open for two separate judicial restructuring proceedings.

Voluntary Liquidation Process

Within 28 days of the commencement of the voluntary liquidation, the voluntary liquidator must publish the notice of the winding-up and file the following with the Registrar:

• a notice of the winding-up;
• the liquidator’s consent to act; and
• a declaration of solvency.

If a company is a regulated business, notice of the winding-up must be served on CIMA. If these requirements are not complied with, the liquidator can be liable for a fine of KYD10,000. Creditors are then paid in full in voluntary liquidations, and there are no provisions for setting-off or netting-off.

The voluntary liquidator must comply with various reporting requirements (generally to shareholders). Once the affairs of the company have been fully wound up, the voluntary liquidator must prepare a final report and accounts and send them to the company’s members.

The voluntary liquidator must then hold a final general meeting to seek approval of the final resolutions. The voluntary liquidator must file the final return with the registrar within seven days of the final meeting. The company is deemed to be dissolved three months from the filing of the final return.

Official Liquidation Process

Roles, duties and powers

The main role of an official liquidator is to:

• realise, collect and distribute the company’s assets for the benefit of its creditors and others where appropriate; and
• investigate the affairs of the company.

The official liquidator’s powers are set out in Section 110 and Part I of Schedule 3 (powers exercisable with court sanction) and Part II of Schedule 3 (powers exercisable with or without court sanction) of the Companies Act.

The official liquidator will use a liquidation committee as a sounding board in relation to important decisions, but the official liquidator does not have to follow their views. Once a winding-up order is made, the directors are displaced.

Treatment of claims

Creditors can submit a proof of debt to the official liquidator who will adjudicate the claim in a quasi-judicial capacity. The official liquidator can accept, reject or partially reject the proof of debt. If the official liquidator rejects a proof of debt, the creditor can appeal the rejection, which will be heard by the court as a de novo adjudication of the proof of debt. See 2.1 Types of Creditors and 2.2 Priority Claims in Restructuring and Insolvency Proceedings for a discussion on priorities of claims.

An official liquidator must account for set-off and netting rights that arose before the commencement of the liquidation.

There are no claims bar dates in the Cayman Islands. The official liquidator will provide stakeholders with a notice of their intention to make interim and final distributions. If a creditor fails to submit a proof of debt before an interim or final distribution, they will miss out on the distributions.

An official liquidator cannot reject or disclaim onerous contracts.

Distressed disposals

A liquidator is only permitted to sell company property by public auction or private sale with the sanction of the court under Section 110(2)(a) of and Part I of Schedule 3 of the Companies Act. The court will give considerable weight to the views of the liquidator unless the evidence reveals substantial reasons for not accepting a liquidator’s commercial judgment.

A liquidator’s primary duty is to “take reasonable care and obtain the best price possible in the circumstances” (Re Trident Microsystems (Far East) Ltd [2012] (2) CILR 414). Depending on the circumstances of the liquidation, a liquidator can seek initial approval of a sale before beginning the process, or a liquidator can first undertake the sales process and seek court sanction once a sale is tentatively agreed.

The purchaser of a company’s assets will only acquire the rights and interests that the company had, subject to any existing claims against those assets.

Whilst the circumstances of an official liquidation and a provisional liquidation would not ordinarily give rise to a pre-negotiated sales transaction, there are no statutory provisions that would prohibit a pre-negotiated sale. However, the court will be concerned with whether a robust sales process was followed and whether the liquidator has obtained the best price in the circumstances.

Liquidation Committees

A liquidation committee must be appointed in an official liquidation unless the court directs otherwise. Under the CWR, the liquidation committee will comprise of at least three but not more than five creditors (if the company is insolvent) or contributories (if the company is solvent) elected at the first meeting of creditors (CWR Order 9, Rule 1(4)) or contributories (CWR Order 9, Rule 1(5)), respectively.

If a company is of doubtful solvency, the liquidation committee must comprise of at least three but not more than six members, the majority of whom must be creditors elected at a creditors’ meeting and at least one contributory elected at a meeting of contributories.

The liquidation committee does not have any express powers save as to act as a sounding board for the liquidator and to review the liquidator’s remuneration. The liquidation committee may instruct legal counsel, and its legal fees and expenses reasonably and properly incurred will be paid out of the assets of the liquidation estate as a liquidation expense.

Travel expenses and telephone charges reasonably and properly incurred in attending committee meetings will be reimbursed. Unless the liquidation committee or the liquidator approves it, no other expenses incurred by any committee member in connection with the liquidation will be reimbursed.

There is no express requirement for a liquidation committee in a provisional liquidation, but the court may order that one be formed. There are no requirements for the formation of a liquidation committee in a voluntary liquidation.

Conclusion of Official Liquidation

Once the official liquidator has completed any investigations, collected the company’s assets, made distributions to creditors, and paid surplus funds to members (if any), the official liquidator can proceed with a dissolution application and seek to be discharged.

Conclusion of Provisional Liquidation

A provisional liquidation is terminated upon the court making a winding-up order if the petitioner withdraws the winding-up petition or if the provisional liquidator is discharged upon the application of the petitioner, creditor, contributory, the company acting by its directors, CIMA (in certain circumstances), or the provisional liquidator.

Rights and Remedies for Secured Creditors

The rights of secured creditors are unaffected by the stay of proceedings and secured creditors can enforce their rights at any time without reference to the liquidator. If a secured creditor’s debt exceeds the value of its security, the secured creditor can submit a proof of debt for the unsecured portion of debt.

Rights and Remedies for Unsecured Creditors and Shareholders

After a winding-up petition is filed but before a winding-up order is granted, a creditor or shareholder could seek to have the petition conditionally or unconditionally dismissed or adjourned.

When a provisional liquidator is appointed or a winding-up order is made, all proceedings against the company are stayed and no fresh proceedings or actions can be commenced without leave of the court.

A creditor or shareholder can become involved and influence the liquidation process by seeking a role on the liquidation committee.

Section 111 of the Companies Act permits a liquidator or any creditor or contributory to apply to the court for an order staying winding-up proceedings entirely (see Re World Properties Ltd (FSD 49 of 2018, Kawaley J) (Unreported, 28 March 2024)) or for a short time.

Interested stakeholders may apply to court for an order directing the official liquidator to exercise or refrain from exercising any of the official liquidator’s powers in a particular way.

As discussed in 5.2 Course of the Liquidation Procedure, liquidation committees have the ability to influence an official liquidator’s actions or activities.

The Cayman Islands relies on common law principles, hard law instruments (local legislation) and soft law instruments (practice directions and the incorporated guidelines for court-to-court communications).

The statutory rules, standards, guidelines and best practices for cross-border insolvency matters in the Cayman Islands are best summarised by the decision of Justice Kawaley in the case In re LATAM Finance Limited et al (FSD 104, 106 and 154 of 2020 (IKJ)) (Unreported, 24 August 2020) (the “LATAM case”), which involved the court approving the first court-to-court communications protocol, confirming the court’s jurisdictional basis to grant such relief.

The Cayman Islands courts deal with insolvency matters in a pragmatic, sensible and collaborative manner. The overriding objective under the GCR is to deal with matters in a just, expeditious and economical way. Comity is the overarching principle for cross-border insolvency proceedings.

In the LATAM case, Kawaley J outlined that:

• the rules of private international law, or the conflict of laws, have not been codified and cannot be discerned in a single set of statutory rules; and
• the co-operation and co-ordination between the Grand Court and foreign insolvency proceedings has generally been grounded in the Grand Court’s common law duty to assist foreign courts and promote the economic and efficient administration of transnational insolvency cases.

The general rule is that companies incorporated in the Cayman Islands should be subject to primary insolvency or restructuring proceedings before the courts in the Cayman Islands. The courts also have jurisdiction to wind up or appoint restructuring officers over foreign companies.

The court has confirmed the ability to recognise primary insolvency and restructuring proceedings in respect of companies incorporated in the Cayman Islands commenced in foreign proceedings in limited circumstances including where there is a strong connection between the debtor and the foreign jurisdiction such that interested stakeholders could legitimately expect the locus of the primary insolvency proceedings to shift to the foreign jurisdiction; the foreign court has appointed officeholders; and there are no competing proceedings in the Cayman Islands or there are no reputational, regulatory or policy reasons requiring a local proceeding in the Cayman Islands.

The general rule is that matters of procedure in insolvency and restructuring proceedings are governed by Cayman Islands law. In the cross-border insolvency context, when the court recognises foreign insolvency or restructuring proceedings, the scope of the powers and relief sought will be limited to the similar powers and relief available under Cayman Islands law.

Recognition or Relief in Connection with Overseas Proceedings

The Cayman Islands has not adopted the UNICTRAL Model Law on Cross-Border Insolvency. However, the court has an inherent jurisdiction at common law to recognise and assist foreign insolvency proceedings and officeholders, including liquidators, appointed by an order of a competent court (Singularis Holdings Ltd v PriceWaterhouseCoopers [2014] UKPC 36). Common law assistance is based on the principles of comity and modified universalism.

There is also statutory jurisdiction under Section 241 of the Companies Act to make orders ancillary to a foreign bankruptcy proceeding to:

• recognise the right of the foreign representative to act in the Cayman Islands on behalf of, or in the name of, a debtor;
• enjoin the commencement or stay proceedings against the debtor;
• stay the enforcement of any judgment against a debtor;
• require a person in possession of information relating to the business or affairs of a debtor to be examined by or produce documents to the foreign representative; and
• order that any property belonging to a debtor be turned over to the foreign representative.

When making an ancillary order, the court will exercise its statutory discretion in a manner that will assure an economic and expeditious administration of the debtor’s estate, consistent with:

• the just treatment of holders of claims against or interests in a debtor’s estate;
• the protection of claim holders in the Cayman Islands against prejudice and inconvenience in the processing of claims in the foreign bankruptcy proceedings;
• the prevention of preferential or fraudulent dispositions of property;
• the distribution of the debtor’s estate among creditors substantially in accordance with the order of priority prescribed by the Companies Act;
• the recognition and enforcement of security interests created by the debtor;
• the non-enforcement of foreign taxes, fines, and penalties; and
• comity.

This statutory jurisdiction is only available where the foreign representative is appointed in the place of incorporation (per the definition of “debtor” under Section 240 of the Companies Act).

The recognition of foreign appointed receivers falls outside the statutory recognition or modified universalism routes. That said, the court has the inherent common law jurisdiction to recognise a receiver appointed by a foreign court where there is a sufficient connection between the subject of the receivership and the foreign jurisdiction (In the Matter of Silk Road Funds Ltd (FSD 234 of 2017 (ASCJ)) (Unreported, 8 February 2018).

Recognition and Enforcement of Foreign Judgments

Foreign judgments may be enforceable in accordance with the Foreign Judgments Reciprocal Enforcement Act (1996 Revision) (the “Foreign Judgments Act”) or under English common law principles. The Foreign Judgments Act has only been extended to certain Superior Courts of Australia and its external territories.

For a foreign judgment to be enforced at common law it must be final and conclusive on the merits, made by a court of competent jurisdiction, for a definite sum of money (in respect of a foreign money judgment), not contrary to public policy, and the principles of comity require enforcement (in respect of a foreign non-money judgment – see Bandone v Sol Properties Incorporated [2008] CILR 301).

The grounds for recognition and enforcement under the Foreign Judgments Act require the foreign judgment to be:

• final and conclusive (notwithstanding a pending appeal, or if it is subject to an appeal in the courts of the foreign jurisdiction);
• for a debt or definite sum of money (not in respect of taxes, fines or other penalties);
• handed down after the Foreign Judgments Act came into force on 22 October 1996;
• delivered by one of the jurisdictions to which the Foreign Judgments Act applies; and
• at the date of the application to the court, the foreign judgment must not already be satisfied or enforced and must still be capable of enforcement in the country where it was made.

Once a foreign judgment is recognised by the court (and it is not set aside), the judgment creditor can take enforcement actions including:

• appointing a receiver;
• obtaining a charging order or garnishee order; and
• seeking to wind up the judgment debtor.

Officeholders and parties are encouraged to enter into protocols or other arrangements with foreign courts to co-ordinate cross-border proceedings.

Under CWR Order 21, Rule 1, an official liquidator has a duty to consider whether to enter into an international protocol with any foreign officeholder to promote the orderly administration of the estate of the company and avoid duplication of work and conflict between the official liquidator and the foreign officeholder.

Practice Direction No 1 of 2018 (PD 1 of 2018) describes the use and adoption of two main sets of guidelines for court-to-court communications and co-operation in the Cayman Islands.

• The American Law Institute/International Insolvency Institute Guidelines Applicable to Court-to-Court Communications in Cross-Border Cases.
• The Judicial Insolvency Network (JIN) Guidelines for Communication and Co-operation between Courts in Cross-Border Insolvency Matters (collectively, the “Guidelines”).

While CWR Order 21, Rule 1 is only directed at official liquidators, PD 1 of 2018 encourages other Cayman Islands officeholders or companies subject to restructuring proceedings supervised by the court to enter into a protocol incorporating the Guidelines or may apply for an order adopting them (at which time PD 1 of 2018 will apply).

Practice Direction No 2 of 2019 adopts the JIN Modalities for Court-to-Court Communications, which provides a practical guide for facilitating communications between judges in cross-border insolvency cases.

Past co-operation and co-ordination between the Cayman Islands court and foreign courts has been grounded in the court’s common law duty to assist a foreign court. In the LATAM case, the court approved the first court-to-court communications protocol, confirming the court’s jurisdictional basis to grant such relief.

A foreign creditor is treated the same as a domestic creditor. They are required to prove their debt just like a locally domiciled creditor.

Directors have a duty to act in good faith and in the best interests of the company, whether the company is doing well financially or experiencing financial difficulty. Directors’ duties are governed by the common law, the Companies Act, any other regulatory law, and the company’s memorandum and articles of association.

When a company is insolvent or bordering on insolvency, or insolvency is probable, the directors must consider the interests of creditors and “the more parlous the state of the company, the more interests of creditors will predominate, and the greater the weight which should therefore be given to their interests …” (BTI 2014 LLC v Sequana SA and Others [2022] UKSC 25).

An official liquidator can bring claims in the name of the company against the directors for breaches of fiduciary duties.

Directors may breach their duty to act in the best interests of the company and could be held personally liable by causing the company to take steps that are not in the best interests of the creditors when a company is insolvent or bordering on insolvency, or insolvency is probable.

Directors can face criminal and civil liability for their actions leading up to a company’s insolvency, including in circumstances involving fraudulent trading under Section 147 of the Companies Act which could result in the court directing that the directors contribute to the company’s assets, and fraud in anticipation of a winding up and transactions in fraud of creditors under Sections 134 and 135 of the Companies Act, respectively, both of which are criminal offences and are punishable by a fine or imprisonment.

A director (the company or a manager) can be found liable on summary conviction to a fine of KYD15,000 and imprisonment for five years if they cause a distribution or dividend to be paid to members out of the share premium account at a time when the company is insolvent.

When a company is being wound up, whether by the court or voluntarily, it is a criminal offence under Section 136 of the Companies Act for the directors to not fully disclose to the liquidator, inter alia, all of the company’s property or documents in the directors’ custody or control except the company’s property that was disposed of in the ordinary course of business.

In an official liquidation, the official liquidator will be able to pursue breach of fiduciary duty claims against the directors. In appropriate circumstances, creditors or contributories could be granted permission to pursue litigation on behalf of the company where a liquidator refuses to act (Re SPhinX Group [2014] (2) CILR 131). Creditors or contributories have to establish that the prospective claim has a solid foundation and gives rise to a serious issue to be tried, and they would have to indemnify the company regarding costs.

Like a director, a manager could also be fined and imprisoned for causing the company to make a distribution or pay a dividend out of the share premium account at the time the company is insolvent (see 7.2 Personal Liability of Directors).

Officers (including a shadow director) and employees of the company are required by Section 137 of the Companies Act to submit a statement of affairs to the liquidator setting out their knowledge of the assets and liabilities of the company. A material omission in the statement of affairs made with the intent to defraud the company’s creditors or contributories is punishable by a fine or imprisonment for five years.

It is common for a company’s articles of association and for directors’ services contracts to contain exculpation and indemnity clauses, so claims against directors are rare. Even so, a director will remain liable for breaches of duties and for fraud, wilful neglect or gross negligence.

If the directors of a company voluntarily assumed a duty to a creditor, then that creditor could bring a claim directly against the directors.

Historical Transactions

Various provisions of the Companies Act permit the court to set aside or annul historical transactions, including Section 99 (validation orders), Section 145 (voidable preferences) and Section 146 (undervalue/fraudulent dispositions).

Validation Orders

Section 99 of the Companies Act is intended to preserve the status quo and prohibit the disposition of a company’s property, the transfer of shares or the alteration in the status of the company’s members without sanction of the court after the commencement of the winding-up. A validation order enables a company to continue to operate in the ordinary course of business prior to the hearing of the winding-up petition and appointment of a liquidator.

Voidable Preferences

A company’s liquidator can apply to the court under Section 145 of the Companies Act to set aside any conveyance or transfer of a company’s property, or charge thereon, in favour of a creditor at a time when the company was insolvent, with the view (the dominant intention) to giving that creditor a preference over other creditors. A payment to a related party (a creditor who has the ability to control or exercise significant financial and operational influence over a company) is deemed to have been made with the view of giving a creditor a preference.

Undervalue/Fraudulent Dispositions

Section 146 of the Companies Act provides that every disposition of property made at an undervalue by or on behalf of a company with intent to defraud its creditors will be voidable at the instance of its official liquidator. The liquidator has the burden of proving the intention to defraud a creditor but is not required to prove that the dominant or sole intention was to defraud a company’s creditors.

If a disposition is set aside, a transferee of the company’s property (if they did not act in bad faith) will be given a first charge over the property (subject of the disposition) in an amount equal to the entire costs properly incurred by the transferee in defence of the set aside proceedings.

Look-Back Period

Section 145 (voidable preference) applies to transactions made within the six-month period preceding the commencement of the company’s liquidation. Section 146 (undervalue or fraudulent dispositions) permits a liquidator to apply to the court to set aside an undervalue disposition within six years of the disposition.

Outside the liquidation context, a creditor may bring an application to set aside a fraudulent disposition under the Fraudulent Dispositions Act (1996 Revision). An action to set aside a fraudulent disposition must be commenced within six years of the disposition.