Cayman Collaboration: Using The Cayman Islands Provisional Liquidation Procedure In Support Of US Chapter 11 Proceedings

Introduction

Cross border insolvencies can pose significant challenges to practitioners aiming to conduct an orderly and cost efficient wind down or restructuring process. A single insolvency process is rarely sufficient to protect assets located outside the local jurisdiction because foreign creditors will not necessarily be bound by the decisions of the local court or subject to any stay on litigation that may be imposed. This can quickly disrupt the universal distribution of the company's estate, with creditors seizing assets or commencing litigation in other jurisdictions. Seeking to implement parallel insolvency proceedings to avoid such consequences is not without its own difficulties. For example, in jurisdictions that have adopted the Model Law, identifying COMI can take considerable time and effort and in general, practitioners often face conflicting insolvency rules and procedures, or worse, antagonistic office holders, with no clear route forward.

Against this backdrop, the Cayman Islands provisional liquidation procedure has proven to be a very useful and flexible tool to assist in cross border liquidations and restructurings, particularly in the context of Cayman Islands incorporated debtors that have entered into Chapter 11 proceedings in the US. As discussed further below, commencing a provisional liquidation of a Cayman Islands incorporated debtor, in conjunction with a Chapter 11 proceeding, will limit the risk of creditors that are not subject to the jurisdiction of the US seeking to disrupt or avoid the Chapter 11 proceedings by taking incompatible steps in the Cayman Islands, as the debtor's country of incorporation.

The provisional liquidation procedure and working in parallel

In the Cayman Islands, there is no restructuring process equivalent to Chapter 11 in the US or administration in the UK. Accordingly where an insolvent Cayman Islands company intends to seek a restructuring, the provisional liquidation procedure is commonly used. In this regard, section 104(3) of the Cayman Islands Companies Law (2013 Revision) allows a company to present a winding up petition and, at the same time, make an application to the Grand Court of the Cayman Islands ('Cayman Court') to appoint provisional liquidators where: (a) the company is, or is likely to become unable to pay its debts; and, (b) the company intends to present a compromise or arrangement to its creditors. A debtor that is proposing to enter into Chapter 11 proceedings will generally meet these requirements and the Cayman Court has appointed provisional liquidators in support of Chapter 11 proceedings on a number of occasions.1

If provisional liquidators are appointed, the winding up petition is adjourned out (either indefinitely or from time to time) and the provisional liquidators are afforded an appropriate period of time to seek to carry out a restructuring. The Cayman Court is flexible in respect of the time period that will be granted, particularly at the outset, where it is acknowledged that the provisional liquidators will necessarily need some time to determine whether a restructuring will be possible. However, if it becomes apparent that a restructuring is not a realistic prospect, then the Cayman Court is likely to list the winding up petition for hearing and make an order winding up the company and appointing official liquidators.

The provisional liquidators must be qualified insolvency professionals, at least one of whom must be resident in the Cayman Islands. However, it is possible to appoint foreign practitioners as provisional liquidators to act jointly with the Cayman Islands practitioners. As such, a chief restructuring officer appointed in Chapter 11 proceedings could be appointed as a joint provisional liquidator. A provisional liquidator is an officer of the Cayman Court and is an agent of the company. He/she owes fiduciary duties to the company to act for proper purposes, in good faith and in the interests of the company as a whole. A provisional liquidator does not represent any creditor or class of creditors or any shareholder or class of shareholders; is required to be independent of the former management of the company and its stakeholders and is required to behave in an even-handed fashion between stakeholders or groups of stakeholders amongst themselves.

However, there are very few statutorily prescribed powers for provisional liquidators and their powers are normally set out in the court order appointing them. This gives the Cayman Court real flexibility to create a suite of powers that is appropriate in any given circumstance.

In particular, the Cayman Islands Companies Winding Up Rules2 expressly acknowledge that the appointment of provisional liquidators need not necessarily displace the powers of the directors. The order appointing the...