Pandemics And Pursuing Principled Practice: Avoiding The Pitfalls In Troubled Times

• Published date: 27 May 2020
• Author: Mr Ben Hobden and Róisín Liddy-Murphy
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Insolvency/Bankruptcy/Re-structuring, Coronavirus (COVID-19), Financial Restructuring, Corporate and Company Law, Corporate Governance, Trials & Appeals & Compensation, Securities, Shareholders, Operational Impacts and Strategy
• Law Firm: Conyers

As governments and economies respond to the macroeconomic impact of the latest global pandemic COVID-19, so too companies and individuals must respond to the microeconomic impact, making decisions that will affect both decision-makers and stakeholders alike.

During times of uncertainty, anxiety and financial pressures officers of a company making financial and operating decisions may enter into transactions that could ultimately become subject to claw-back claims in an insolvency situation or could find themselves digging into their own pockets to make contributions to the company's assets for its creditors.

The challenges facing directors who might be making choices about which creditors/suppliers to pay and decisions relating to production and ongoing operations is that they could later find those being viewed through a lens of insolvent trading.

So too, stakeholders (including creditors) ought to be alert to sins that could be committed by the minds behind the companies in which they have an economic interest, as there are certain remedies available to stakeholders through the appointment of an official liquidator.

Thou shalt not make payments that prefer certain creditors over others: a cause for voidable preference claims [The Companies Law (2020 Revision) (the "Law"), sec.145]

At a time when a company is unable to pay its debts within the meaning of section 93 of the Law, every conveyance or transfer of property, or charge thereon, and every payment obligation and judicial proceeding, made, incurred, taken or suffered by that company in favour of any creditor with a view to giving such creditor a preference over other creditors will be invalid if made, incurred, taken or suffered within six months immediately preceding the commencement of its liquidation.

In such circumstances, a liquidator may be able to claw-back transfers made during those six months prior to commencement of the liquidation by way of a voidable preference claim enforced through the Cayman Grand Court for the benefit of aggrieved stakeholders.

Preference in this context also captures related parties. In that, any payment made to a related party of that company will be deemed to have been made with a view to giving such creditor a preference. For the purposes of section 145 a creditor is treated as a "related party" if it has the ability to control the company or exercise significant influence over the company in making financial and operating decisions.

The decision of the Privy...