Restructuring & Insolvency Comparative Guide

• Published date: 21 May 2020
• Author: Mr Guy Manning
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Financial Restructuring, Corporate and Company Law, Directors and Officers, Insolvency/Bankruptcy, Shareholders
• Law Firm: Campbells

1 Legal framework

1.1 What domestic legislation governs restructuring and insolvency matters in your jurisdiction?

Corporate insolvency in the Cayman Islands is governed by Part V of the Companies Law (2018 Revision) and the Companies Winding-up Rules 2018. Those provisions apply both to the winding up of companies - including certain foreign companies - as defined by the law, and (pursuant to Section 36 of the Exempted Limited Partnership Law (2018 Revision)) to the winding up of Cayman Islands exempted limited partnerships.

The Cayman Islands insolvency regime is based on many of the same underlying principles as the corresponding regime in England and Wales (and other Commonwealth countries), although there are some fundamental differences. These include the test for insolvency, which is assessed solely by reference to cash-flow insolvency.

The principal tool used for financial restructurings is the scheme of arrangement under Part IV of the law. Schemes procedure is governed by Grand Court Practice Direction 2/2010.

The doctrine of judicial precedent applies in the Cayman Islands. The structure of the court system is hierarchical, with the courts being bound by the rationes decidendi of decisions of the courts above. The rationes decidendi of decisions of the Privy Council are therefore binding on the Court of Appeal and the Grand Court. The rationes decidendi of decisions of the Court of Appeal are similarly binding on the Grand Court. The Grand Court will generally follow the rationes decidendi of its previous decisions, unless the judge is convinced that the earlier judgment is plainly wrong.

There is a comparatively small body of reported case law in the Cayman Islands, contained in the Cayman Islands Law Reports. In the absence of binding Cayman Islands case law, the Cayman Islands courts will look to English authorities, which are highly persuasive, but not binding. As a general rule, the Cayman Islands courts follow English authorities to the extent that they are not inconsistent with either Cayman Islands statutory provisions or Cayman Islands authorities, and to the extent that they do not relate to English statutory provisions which have no equivalent in the Cayman Islands. Decisions of courts in other Commonwealth jurisdictions are also of persuasive, but not binding authority.

1.2 What international / cross-border instruments relating to restructuring and insolvency have effect in your jurisdiction?

The Cayman Islands is not a signatory to any international treaties relating to bankruptcy or insolvency. However, there are two main sets of guidelines for court-to-court communications and cooperation, which may be used and adopted in cases pending before the Grand Court where the insolvency or restructuring proceedings are being supervised by, or involve related applications to, courts in more than one jurisdiction:

• the American Law Institute/International Institute Guidelines Applicable to Court-to-Court Communications in Cross-Border Cases; and
• the Judicial Insolvency Network ("JIN") Guidelines for Communication and Cooperation between Courts in Courts in Cross-Border Insolvency Matters. JIN adopted the Modalities of Court-to-Court Communications on 25 July 2019 and the Financial Services Division of the Grand Court adopted them by was of a Practice Direction with effect from 1 August 2019.

The guidelines cover:

• communications and mechanics for communications between the courts involved;
• the appearance of counsel in each court;
• notification to parties in parallel proceedings;
• the acceptance as authentic of official documents or orders made in the foreign jurisdiction or court; and
• joint hearings.

The guidelines are to be applied either through incorporation in a protocol between the respective office holders, which is then approved by the Grand Court and the applicable foreign court or authority, or by a separate order of the Grand Court and the applicable foreign court without a protocol.

1.3 Do any special regimes apply in specific sectors?

Generally no, but the Cayman Islands Monetary Authority (CIMA) does have certain powers in respect of companies carrying on licensed and regulated business. The extent of those powers will depend on the regulated sector, factual circumstances, and include the right to present a winding-up petition or to appoint a person to assume control of the licensee's affairs.

1.4 Is the restructuring and insolvency regime in your jurisdiction perceived to be more creditor friendly or debtor friendly?

The Cayman Islands has traditionally been regarded as a creditor-friendly jurisdiction and that remains the case. Creditors of the same class are treated equally irrespective of where they are domiciled.

1.5 How well established is the legal regime and infrastructure relevant to restructuring and insolvency in your jurisdiction (e.g. extent of recent legislative changes, availability of specialist judges / courts / advisers)?

The Cayman Islands has a globally recognised and comprehensive regime which governs domestic and cross-border insolvencies and restructurings. The Companies Law and the Companies Winding-up Rules are regularly updated and amended, and the jurisdiction has a globally renowned legal system and insolvency framework.

The Financial Services Division (FSD) of the Grand Court was created in 2009, recognising the need for special procedures and skills in dealing with the more complex civil cases that arise from the financial sector in the Cayman Islands.

The procedures of the FSD reflect the need for urgent action to be taken in some cases, and are designed to balance the need for justice to be administered in public with the potential harm to businesses if sensitive information is publicly available at too early a stage. The jurisdiction is constantly adapting; video conferencing is now widely used (with the leave of the court) in response to the global spread of parties doing business in the Cayman Islands and to allow litigation to be conducted in the most cost-efficient way.

The FSD is served by seven judges, including the chief justice, who together bring a high level of practical experience and judicial expertise.

2 Security

2.1 What principal forms of security interest are taken over assets in your jurisdiction?

The most common types of security are as follows.

Mortgage: A mortgage is a transfer of an interest in a property subject to redemption rights. Historically, a mortgage required a transfer of the property that was subject to the mortgage. Today, however, a transfer is not always required. Where property is the subject of a mortgage but is not transferred to the lender, an equitable mortgage is created which can be defeated by a third-party buyer with no notice of the lender's interest.

Charge: A charge conveys nothing and merely gives the person entitled to the charge certain rights over the property as security for debt. A charge given by a company over its assets is generally created by debenture. It is also possible to take fixed or floating charges over assets held by a company borrower:

• Fixed charges. These are attached to specified assets which then cannot be disposed of by the borrower.
• Floating charges. These can be used when the borrower holds a number of assets which it needs to be able to deal with freely (eg, shares in a portfolio and trading stock). The borrower can deal with those assets despite the charge. On default, the charge crystallises over the assets that are held by the borrower at the time of default. The charge then becomes a fixed charge, entitling the creditor to sell the assets to recover the amount owed.

Lien: A lien can be used when a creditor has lawful possession of an asset and moneys are due to the creditor for services provided. For example, where a repairer has possession of property to repair it, he or she is automatically entitled to keep possession until the account is paid. A lien arises by operation of law based on lawful possession. If possession is relinquished, so is the lien. No rights in the property are created in the creditor's favour. Therefore, the retained property cannot be sold to obtain funds for payment of the debt.

Pledge: In a contract to pawn or pledge, goods are deposited as security for the debt and the right to the property vests in the creditor to the extent necessary to secure the debt. The creditor can sell the goods if the borrower defaults on its obligations.

2.2 How can those security interests be enforced (and what factors could complicate or prevent this process)?

A legal mortgage can be enforced by the appointment of a receiver, exercise of the power of sale, foreclosure or enforcement of an immediate right to possession. An equitable mortgage does not confer a right to possession, so an application to court will normally be required. A pledge can be enforced by exercising the power of sale.

Creditors must ensure that the company granting security undertakes appropriate formalities. This generally requires a directors' resolution approving the granting of the security, subject to any special requirements in the company's articles of association. Creditors should obtain legal advice to ensure adequate protection.

There are central ownership registers for land, ships, aircraft and motor vehicles. Creditors' mortgages or charges over the asset can be noted on the relevant register. A third-party buyer is deemed to have notice of any interest that is registered at the time of purchase and acquires the asset subject to the creditor's interest as the holder of the registered mortgage or charge. In practice, transfers of these assets cannot be registered without the creditor's consent.

There is no central register for other types of immovable property or for charges over company assets (other than the company's internal register of mortgages and charges). Therefore, the creditor must ensure it has sufficient control over the asset to prevent a third party from buying...