A Welcome Stay In The Islands: Moratoriums In The Cayman Islands

Winston Churchill once said, "to improve is to change so to be perfect is to change often". With that in mind and with many high profile cross-border restructurings, such as the recent Ocean Rig restructuring, taking advantage of the already sophisticated restructuring regime offered by the Cayman Islands, the jurisdiction is determined to remain at the forefront of cutting edge cross-border restructurings.

One hotly anticipated area of legislative reform is the proposed introduction of a court supervised restructuring moratorium. The proposed regime would allow a company to petition for the appointment of restructuring officers to obtain a stand-alone restructuring moratorium, separate from the winding up regime. Whilst the legislative draftsman considers the proposed amendments to bring in effect the new restructuring moratorium process, companies can continue to utilise the provisional liquidation process to obtain an automatic stay on claims under Cayman Islands law whilst implementing a debt restructuring.

This article focuses on the current provisional liquidation regime in the Cayman Islands and how a moratorium can be obtained in a restructuring context.

Provisional liquidation

The purpose of the appointment of provisional liquidators is typically to preserve and protect a company's assets pending the hearing of a winding up petition in respect of the company where there is evidence of potential dissipation or misuse of the assets. However, the Cayman Islands provisional liquidation procedure has proven to be a very useful and flexible tool to assist in the context of complex and cross- border restructurings.

In the Cayman Islands, there is presently no equivalent restructuring process such as the UK administration procedure or US Chapter 11 proceeding. Where a Cayman Islands company intends to effect a financial restructuring, provisional liquidators are often appointed in order to protect the company from creditor enforcement action or proceedings being commenced or continued without the leave of the Grand Court of the Cayman Islands.

The moratorium that is triggered on the appointment of provisional liquidators provides breathing space for a debtor to negotiate with its stakeholders and propose and implement a restructuring without the risk of the process being derailed by the actions of one or more dissenting creditors.

Pursuant to section 104(3) of the Cayman Islands Companies Law (2018 Revision), following the presentation of a winding up petition, a company may at the same time make an application seeking the appointment of 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 compromise or arrangement can include a Cayman Islands' scheme of arrangement, a Chapter 11 restructuring or a foreign scheme of arrangement.

The presentation of a winding up petition against a company is a necessary pre-requisite to the application to open provisional liquidation proceedings. However, whilst that winding up petition is the gateway to accessing the Cayman Islands provisional liquidation regime, provisional liquidation does not necessarily result...