New Insolvency Rules in the Cayman Islands

Second installment

This is the second article in a two-part series dedicated to discussing the recent reforms impacting the Cayman Islands’ insolvency regime as a result of the Companies Amendment Law 2007, the Companies Winding Up Rules 2008, the Insolvency Practitioners Regulations 2008 and the Foreign Bankruptcy Proceedings (International Co-operation) Rules 2008 coming into effect on 1 March 2009.

Powers and duties of official liquidators

An official liquidator is an officer of the Court whose function is to collect, realise, maintain, manage, and distribute the company’s assets. In order to carry out his duties and functions, an official liquidator relies on specific powers granted to him. Section 110 now makes a distinction about powers that fall automatically to an official liquidator in contrast to other powers that may only be exercised with the sanction of the Grand Court. Powers that may be exercised automatically include, inter alia, to:

  • take possession and collect the company’s property, including taking any necessary proceedings;
  • promote a scheme of arrangement;
  • do all acts and execute deeds,
  • receipts and other documents on behalf of the company.

Powers that may only be exercised with sanction include, inter alia, to:

  • initiate/defend any action or legal proceeding on behalf of the company;
  • carry on the business of the company;
  • dispose/sell property of the company to any related party;
  • pay any class of creditors in full;
  • engage staff (whether or not as employees of the company) and attorneys to assist the official liquidator

Traditionally, many of the powers available only with sanction have formed part of the draft order submitted at the winding up hearing and have become powers of the official liquidator from the date of appointment. Given an official liquidators’ need for some of these powers from the outset, such as the ability to retain attorneys who provide necessary legal support and advice to a liquidator in carrying out his duties, we expect that this practice will continue.

Investigations and examinations

Official liquidators have always enjoyed the ability to apply to the Grand Court for examination of various parties in relation to the affairs of a company in liquidation. Section 103 provides official liquidators with the ability to apply to the Grand Court for examination, either by way of sworn affidavit in response to written interrogatories and/or by oral examination, of:

  • persons having sworn or concurred with the Statement of Affairs;
  • directors and officers of the company;professional service providers of the company;
  • controllers, advisors , liquidators, or receivers of the company;
  • anyone, not falling into the above categories, who has been concerned with or taken part in the promotion or management of the company

The predecessor language provided that official liquidators could apply to the Grand Court to examine ‘anyone’ who was;

  • known or suspected to have company effects;
  • a debtor of the company; or
  • capable of giving information on the company’s trade, dealings, estate or effects.

While the new provision replaces ‘anyone’ with specified parties, in most circumstances the specified parties cover those persons who are most likely to be requested to be deposed. However, the liquidator may wish to examine other parties such as creditors or bankers, for which he may be required to seek approval from the Grand Court.

Section 103 also introduces an ability for the company’s creditors or contributories to require a liquidator to make an application for examination if requested by at least 50% in value.
The Law provides liquidators with enhanced powers to investigate and report to the Grand Court on the affairs of the company, including (in an Official Liquidation), the causes of the failure of the company and its promotion, business dealings and affairs. Section 102 allows the liquidator to obtain directions from the Grand Court to either assist the Royal Cayman Islands Police Service to investigate the conduct of directors, management and professional service providers, or to initiate and conduct criminal proceedings against any of these persons.

Section 102 also strengthens the capacity to investigate and prosecute fraudulent activity. It demonstrates the Cayman Islands Government and its regulators desire to amend legislation to create a financial industry with both a level playing field and a regulatory and legal infrastructure that is competitive on the global stage. However, criminal prosecution in fraud and other financial crimes is lengthy, costly and requires significant resources over extended periods. Whilst the Law provides for the costs of a prosecution pursued by the liquidator to be paid from the assets of the company, we believe this would only occur where the liquidator is able to demonstrate a potential benefit to the estate in pursuing the prosecution of the wrongdoers. The Grand Court is likely to take into account the views of creditors prior to issuing directions for a liquidator to pursue a criminal prosecution, particularly where there may be limited assets available to fund such an exercise.

Statement of affairs

Section 101 provides that a Liquidator may require a Statement of Affairs (SoA), outlining the financial position of the company at the date of liquidation, the details of any person in possession of any assets of the company (and the nature of those assets), the nature of any security held by creditors, details of all creditors of the company and any other information the liquidator may specify. A SoA may be required from: a director or officer, a professional service provider, or a person who was an employee of the company within one year prior to the date of liquidation. A professional service provider is defined in Section 89 as ‘a person who contracts to provide general managerial or administrative services to a company on an annual or continuing basis.’ Previously there was no ability for a liquidator to require a SoA, although we note that the new provision does allow the liquidator some discretion in whether he requires one or not.

The discretion provided also allows the liquidator to select the person(s) he believes are in the best position to provide an accurate and meaningful statement. He may also choose to request specific information from specific parties; for example, a liquidator would want to fully understand an investment company’s portfolio before making any decisions regarding its liquidation. In this regard the investment manager may have valuable information on hedged positions, which should be viewed mutually rather than independently, or information on markets for illiquid positions.

Interestingly, where a liquidator does require a SoA the notice providing the request must be delivered personally, which could lead to logistical difficulties in cases where the nominated person resides in another jurisdiction.

The SoA must be verified by affidavit and lodged with the liquidator within twenty one days. Non compliance can result in a penalty of CI$10,000.

Voluntary liquidations

Companies can reach the end of their natural lives for any number of non-contentious reasons. When this happens, the shareholders often pass a resolution appointing a voluntary liquidator. The Rules and Law are now clear that voluntary liquidations are only appropriate where the company is solvent. Section 124 now requires that voluntary liquidators file with the Register of Companies a declaration of the company’s solvency signed by all of the directors, failing which, voluntary liquidators must apply to the Grand Court for a supervision order. It should be noted that Section 124 also makes it an offence for any director to complete a declaration of solvency without having reasonable grounds or basis for confirming that the company can pay its debts in full. Penalties for this offence include fines of CI$10,000 and possible imprisonment for up to two years.

The declaration of solvency must be completed and filed with the Registrar of Companies in order for the liquidation to continue as a voluntary liquidation. This may impact who is authorised to act as liquidator, as liquidations under court supervision must be conducted by qualified insolvency practitioners, pursuant to the Regulations, whereas anyone including a director or an officer of the company may be appointed as a voluntary liquidator. The impact of the declaration of solvency is clearly significant and may therefore be something a liquidator considering a voluntary appointment would want some assurance that the declaration will be executed prior to the company being placed into liquidation.

Endnotes

Throughout this article, references to the Law and Rules are made by citing specific ‘Sections’ and ‘Orders’ respectively

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Mathew Clingerman

Mathew Clingerman has worked on cross-border insolvency and hedge fund cases in the Cayman Islands where he has been responsible for management and oversight of complex investor/creditor issues, forensic/investigative reviews and asset recovery through third-party litigation. He worked as a manager in the corporate recovery department of RSM Cayman Islands and in Chicago and Dublin, managing audit engagements of hedge fund and broker-dealer clients.

Mathew Clingerman
Senior Manager
KRyS Global
Governors Square, Building 6, Second Floor
23 Lime Tree Bay Ave
PO Box 31237
Grand Cayman KY1-1205
Cayman Islands

 

T. +1 (345) 815 8408
E. mathew.clingerman@KRyS-Global.com
W. www.KRyS-Global.com

Tim Le Cornu

Tim Le Cornu has more than 15 years’ experience in insolvency administrations, corporate restructuring and financial consulting to companies in financial distress. He specialises in formal insolvency administrations and corporate reorganisations in Australia and has also worked in Indonesia, Malaysia and Papua New Guinea. He has a bachelor’s in accounting and is a member of the Institute of Chartered Accountants in Australia.

Timothy Le Cornu
Director
KRyS Global
Governors Square, Building 6, 2nd Floor
23 Lime Tree Bay Ave
PO Box 31237
Grand Cayman KY1-1205
Cayman Islands

 

T. +1 (345) 815 8409
E. timothy.lecornu@KRyS-Global.com
Wwww.KRyS-Global.com