Insolvency 2023

• Published date: 12 January 2024
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Financial Restructuring, Corporate and Company Law, Directors and Officers, Insolvency/Bankruptcy
• Law Firm: Baker & Partners
• Author: Mr Adam Crane, Nicosia Lawson, Shula Sbarro and Nia Statham

Law and Practice

1. State of the Restructuring Market

1.1 Market Trends and Changes

In 2022, there were about 32 winding-up petitions filed in the Financial Services Division of the Grand Court of the Cayman Islands. From publicly available records, there have been five petitions for the appointment of a restructuring officer from the adoption of the new regime on 31 August 2022 until October 2023.

Restructuring Officer Regime - One-Year Update

Just over one year on from the introduction of the restructuring officer regime, it is interesting to note the developments that have taken place and how the court has dealt with certain aspects of the new regime. There have been a handful of applications made under the Companies Act (2023 Revision) (the 'Companies Act') since the introduction of the new restructuring officer regime. The initial case, In the Matter of Oriente Group Limited (FSD 231 of 2022 (IKJ)) (Unreported, 8 December 2022) (Oriente), was the first application made seeking the appointment of a restructuring officer under Section 91B of the Companies Act on the grounds that:

'(a) it was presently unable to pay its debts and is therefore insolvent under section 93 of the Companies Act; and

(b) the company intends to present a compromise or arrangement to its creditors (or classes thereof) pursuant to section 86 and/or section 91I of the Companies Act, the law of a foreign country or by way of a consensual restructuring.'

The court gave a lengthy and considered ruling, granting the first-ever restructuring officer appointment. Since Oriente, the court has dealt with several other restructuring officer petitions, and has recently refused an application in the case, In the Matter of Aubit International (FSD 240 of 2023 (DDJ)) (Unreported, 4 October 2023) (Aubit) because Aubit International failed to establish a credible intention to present a plan at the time of the presentation of the petition and at the time of the hearing.

In Oriente and Aubit, the court considered the applicability of case authorities under the previous 'light touch' provisional liquidation restructuring regime under Section 104(3) of the Companies Act. The court found these cases to be both relevant and persuasive, noting that the grounds for appointing provisional liquidators for restructuring purposes are 'expressed in the same terms' under the new restructuring officer regime.

Global Real Estate Crisis

One of the biggest developments globally, which has impacted and likely will continue to impact the Cayman Islands financial services industry, is the growing global real estate crisis, especially in China. The world has seen the Chinese real estate crisis escalate over the past few years, which has resulted in various restructuring efforts and insolvency proceedings involving Chinese real estate and property developers, including Evergrande, one of China's largest real estate groups. In August 2023, Evergrande filed for Chapter 15 protection in New York to undergo a debt restructuring exercise through scheme of arrangement proceedings commenced in the Cayman Islands, British Virgin Islands and Hong Kong.

Global real estate restructuring trends will be of particular interest as some analysts and commentators suggest that a commercial real estate crash may be on the horizon. There have already been several scheme proceedings in the Cayman Islands resulting from the Chinese real estate crisis. It would be reasonable to expect a steady flow or uptick in insolvency and restructuring instructions if conditions in China continue to worsen, because many of the Chinese real estate companies utilise Cayman Islands entities in their corporate structures.

Digital Asset Insolvencies

Cryptocurrency-related insolvencies and litigation have remained fairly quiet in the Cayman Islands compared to other jurisdictions such as England, Singapore, and the British Virgin Islands. But, in early to mid-2023, the Cayman Islands experienced its first liquidation of a cryptocurrency enterprise, when two retail investors petitioned for the winding up of Atom Holdings, the Cayman Islands domiciled holding company of the defunct centralised cryptocurrency exchange, Atom Asset Exchange (AAX).

AAX offered cryptocurrency services to about two to three million investors worldwide (including the sale of its native token, the AAB token) and reportedly had a spot trading volume of USD57.2 billion in July 2022 and USD71.1 billion in September 2022. AAX abruptly shuttered its operations following the collapse of FTX on 11 November 2022. AAX sought to reassure customers that their deposits were not exposed to any risk as a result of FTX's collapse but did not resume operations and customers have been unable to withdraw any of their deposits.

It was alleged that one of AAX's former directors absconded with the private keys to cryptocurrency wallets holding AAX users' assets (at least USD30 million but likely more) and two top AAX executives were arrested by Hong Kong law enforcement. On 7 July 2023, the court granted the petition to wind up Atom Holdings because (i) Atom Holdings was insolvent, and (ii) it was just and equitable to wind up Atom Holdings based on the need for an investigation and because the company had lost its substratum.

2. Statutory Regimes Governing Restructurings, Reorganisations, Insolvencies and Liquidations

2.1 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 insolvencies and restructurings include:

• Companies Act;
• Companies Winding Up Rules (2023 Consolidation) (CWR);
• Insolvency Practitioners Regulations (2023 Consolidation);
• Foreign Bankruptcy Proceedings (International Cooperation) Rules (SL 92 of 2017); and
• 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 (although not binding).

New Restructuring Regime

In 2022, the Cayman Islands implemented a freestanding restructuring regime. The key aspects of the new restructuring regime 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.

2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership

The Cayman Islands has a variety of insolvency, restructuring and receivership proceedings, including:

• voluntary (solvent) liquidation;
• official liquidation;
• provisional liquidation;
• restructuring through the appointment of a restructuring officer and scheme of arrangement;
• 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.

2.3 Obligation to Commence Formal Insolvency Proceedings

There are no obligations for companies to commence formal insolvency proceedings. Nor are there any wrongful/insolvent trading provisions which 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. Where an insolvent liquidation is inevitable, this duty towards the company's creditors crystalises. Under those circumstances, and as detailed in 10.1 Duties of Directors, directors should consider whether to commence insolvency proceedings where it is in the best interests of the creditors to do so.

In the circumstances where a company is placed into voluntary liquidation, 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.

2.4 Commencing Involuntary Proceedings

Official Liquidation

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...