'What Say Ye?': The Importance Of Creditors' Views In Restructurings ' An Offshore Perspective

• Published date: 04 August 2023
• Law Firm: Walkers
• Author: Ms Fiona MacAdam and Joanne Collett

Introduction

In two relatively recent offshore cases, the differing views of creditors and shareholders (and management) have been considered in the context of winding up pro- ceedings, including the criteria for the appointment of a restructuring officer under the regime in the Cayman Islands ('Restructuring Officer') which commenced operation on 31 August 2022. In the Cayman Islands, Walkers acted as company counsel in the first of these applications before the Grand Court of the Cayman Is- lands (In re Oriente Group Limited¹) where the need for reasonable prospects of success and creditor support has been confirmed. In Bermuda, Walkers has acted for a creditor seeking a winding up order and opposing the continuing appointment of light touch provisional liquidators for restructuring purposes appointed upon an application by the company, and ultimately ob- tained a winding up order on behalf of a creditor from the Court of Appeal in Bermuda (In re NewOcean Energy Holdings Limited²).

The approach in these cases highlights the impor- tance of the views of the creditors, and the need to consider each case where a restructuring is being con- templated on its merits - and in particular, whether any restructuring process is likely to preserve value and result in a better outcome for creditors, or whether a winding up order should be made, which is analysis which should be undertaken by the professional advi- sors involved in consultation with the directors on an ongoing basis.

The cases from the Cayman Islands and Bermuda should give comfort as to the approach of the offshore Courts going forward and the weight that will be given to the views, and interests, of creditors; a restructuring process will be permitted to proceed only where a re- structuring is contemplated, the process has sufficient creditor support, and there are real and reasonable prospects of a successful restructuring process being implemented.

While directors have a duty to consider the interests of creditors in a restructuring scenario, it is not always easy for directors to discharge this duty in practice. This is particularly so where, for example, they have an interest in the equity of the business and/or have founded the business and there are reputational and emotional ties. Where a business is experiencing a cash flow shortage (but is balance sheet solvent) directors may see equity value in a future restructured business but creditors may not share this view.

From a creditor perspective, the starting point is that an unpaid creditor is entitled to a winding up order ex debtito justitiae - virtually as of right. Where there is a difference of views amongst creditors as to whether a winding up order should be made upon the application of a creditor, it is then a balancing act by the relevant court in the exercise of its discretion whether to make the order, dismiss or adjourn the petition, or make some other order.

Light Touch provisional liquidation

In the absence of a formal rescue mechanism offshore (noting that the Cayman Islands has introduced a Re- structuring Officer regime which commenced on 31 August 2022), historically a common strategy offshore has been to seek the appointment of provisional liqui- dators on a 'light touch' basis for the purposes of re- structuring ('Light Touch PL') which, in both Bermuda and the Cayman Islands, resulted in a moratorium, giving the company some necessary breathing space to formulate and (ideally) implement a restructuring plan.

In this process, which is still utilised in Bermuda (and has been done at least once in the British Virgin Islands), the directors work together with independent profes- sional liquidators, with the power of management shared. Usually the directors retain responsibility for the day to day management of the company, with the Light Touch PLs empowered to work with management to formulate and implement a restructuring plan. The necessary winding up petition filed to commence that process is...