Contingent Liabilities: A Director's Responsibility?

Co-authored with Margot MacInnis and Prudence Pryce from Grant Thornton

In a previous article titled, contingent liabilities points for the Cayman Islands voluntary liquidator to consider, Grant Thornton explored the challenges and risk of contingent liabilities from a liquidator's perspective. Directors also face similar challenges and risks when preparing to place a company into voluntary liquidation.

In the Cayman Islands, all directors must swear a Declaration of Solvency (DofS) in a voluntary liquidation

In a Cayman Islands voluntary liquidation, a DofS is required to be sworn by each person who was a director of the company on the date on which its voluntary winding up was commenced (Companies Winding Up Rules, 2018 (CWR) O.14, R1(1)). A DofS means a declaration or affidavit in the prescribed form (CWR Form No. 21) to the effect that a full enquiry into the company's affairs has been made and that to the best of the directors' knowledge and belief the company will be able to pay its debts in full together with interest at the prescribed rate, within such period, not exceeding twelve months from the commencement of the winding up, as may be specified in the declaration (sec. 124(2) Cayman Islands Companies Law (2018 Revision)) ("Cayman law").

The identification of or existence of contingent liabilities at the time of swearing a DofS is particularly important where directors conduct pre-liquidation distributions and hand over the shell of the company to a liquidator for a statutory winding up, or where the directors themselves conduct the voluntary winding up, which is permissible under Cayman statute.

Contingent liabilities pose a risk and potentially serious consequences for its directors in terms of liability and breach of duty if missed and later crystallise, particularly in circumstances where the directors are signing a DofS.

A person who knowingly makes a DofS without having reasonable grounds commits an offence under Cayman law (sec. 124(3)). The reference to due enquiry will clearly leave the directors in a difficult position if reasonably ascertainable contingent liabilities crystallise and cannot be settled.

On the other hand, if the directors fail to swear a DofS within 28 days of the commencement of the voluntary liquidation, the liquidators will be obliged to apply to the Cayman court for an order that the liquidation continue under the supervision of the court (sec. 124(1)), a process which will prove more costly and take...