What A Creditor Needs To Know About Liquidating An Insolvent Cayman Company
Published date | 14 January 2021 |
Subject Matter | Finance and Banking, Corporate/Commercial Law, Debt Capital Markets, Financial Services, Corporate and Company Law |
Law Firm | Mourant |
Author | Mr Christopher Harlowe, Hector Robinson, Justine Lau, Nicholas Fox, Peter Hayden and Simon Dickson |
Introduction
This guide examines what a creditor needs to know about liquidating an insolvent Cayman company under the Companies Act (2020 Revision) (the Act) and the Companies Winding Up Rules, 2018 (the Rules).
A brief anatomy of a creditor initiated liquidation process is included at the end of this guide.
When is a company insolvent?
The Act provides a number of grounds on which a company may be wound up, including that the company is unable to pay its debts. This is typically the ground relied upon by creditors seeking to wind up an insolvent company.
A company will be deemed to be unable to pay its debts if:
- it fails to satisfy a statutory demand exceeding CI$100;
- execution of a judgment is returned unsatisfied in whole or in part; or
- it is proved to the satisfaction of the court that the company is unable to pay its debts. The court will apply a cash flow insolvency test for this purpose.
The cash flow test of solvency is not confined to consideration of debts that are immediately due and payable but also permits consideration of debts that will become due and payable 'in the reasonably near future'1.
What is a statutory demand?
A statutory demand is a formal written request for the payment of a debt given by a creditor to a debtor.
Is it essential to serve a statutory demand?
It is not essential for a creditor to serve a statutory demand before applying to appoint a liquidator because it may demonstrate by other means that a company is unable to pay its debts. In most cases however, it is advisable to serve a statutory demand first because the company will be presumed to be insolvent if it does not satisfy or compound the debt within 21 days of the date of service of the statutory demand.
If a creditor has an unsatisfied judgment against the company, it may prefer to apply to appoint a liquidator on the grounds of insolvency using the unsatisfied judgment as evidence of the company's inability to pay its debts as they fall due. However, to avoid a potential argument being raised by the judgment debtor that, notwithstanding its failure to satisfy any order or judgment for payment of a liquidated sum, it remains able to pay its debts as they fall due, it is advisable that a statutory demand for the judgment sum be issued as a preliminary step.
What must a statutory demand say?
A statutory demand must comply and be served in accordance with the Rules.
It must:
- be in the form prescribed by the Rules;
- be for a debt which is not less than the...
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