Primer: Cayman Islands' restructuring officer scheme
IFLR explores the plan's benefits, how firms and creditors should prepare, and potential implementation challenges
What’s new about the restructuring officer scheme?
The Cayman Islands has introduced a new restructuring officer scheme under the Companies Amendment Act 2021, effective August 31 2022. Under this new scheme, debtors can seek the appointment of a restructuring officer. Furthermore, additional powers are provided for the directors of a company, letting them present a winding up petition on the company's behalf without the sanction of a special resolution at a general meeting, unless these rights are removed or modified by the company's articles.
What benefits will the new scheme bring?
The key benefit of the new regime is that it uncouples the ability to restructure a company's debts from the winding up and liquidation process. Previously, the only way to appoint a provisional liquidator to rescue a company was to file a winding up petition – a step that is typically linked to the liquidation and demise of a company.
According to James Noble, partner at Carey Olsen, the new standard creates a role for a dedicated restructuring officer. “These changes will therefore free the company from any negative stigma associated with a winding up petition and permit more expedient access to a reorganisation of its affairs,” he said.
Nick Stern, partner at Maples Group, agreed: “Company boards are unsurprisingly wary of the stigma involved in a winding up process even where it is connected to the ability to restructure. Breaking that link and creating a free-standing regime should make the new regime more palatable and therefore more widely used when needed.”
An automatic moratorium is triggered upon the presentation of a petition to appoint a restructuring officer. “This would prevent the continuation or commencement of any proceedings (except criminal proceedings) against the company without the leave of the court, including all foreign proceedings and any proceedings to wind up the company,” said Noble.
The rules also remove the headcount requirement for member schemes, meaning a scheme will require the approval of only 75% in nominal value of members present and voting at the relevant meeting.
What should companies and creditors be mindful of under the new regime?
For a court to order the appointment of a restructuring officer, a company will need to demonstrate that it is (or is likely to become) unable to pay its debts, and that it intends to present a compromise or arrangement to its creditors either under the provisions of the Companies Act, the law of a foreign jurisdiction, or by way of a consensual restructuring.
“On the hearing of a petition the court may make any other orders as it thinks fit, except an order placing the company into official liquidation,” said Paul Christopher, managing partner at Mourant Ozannes (Hong Kong). “A winding up petition cannot be presented until after the restructuring officer petition has been withdrawn, dismissed or discharged.”
Market participants believe that the strengths of the old regime have been retained, but with some additional helpful refinements. “This is evolution, not revolution,” said Stern. The key elements of the restructuring provisional liquidation regime remain, including a stay on creditor action and a bespoke appointment order so that restructuring officers' powers can be tailored to specific circumstances. Court oversight of the process means creditors' interests can be properly protected.
“There is also no need for a winding up petition to be filed to access the regime, and the stay on creditor action will be stated to have extra-territorial effect and will now 'bite' on any entities over which the Cayman Islands court has jurisdiction,” said Stern.
While it may appear at first that the amendments will benefit a company in distress, Noble said there are safeguards to ensure creditor interests remain well-protected. “Among other things, the petition for the appointment of a restructuring officer must still be heard on an inter-partes basis, and the company’s creditors may apply to court to seek either a variation or discharge of the order appointing a restructuring officer, or for the officer's removal or replacement,” he said.
What implementation challenges may be expected?
It will still be possible to appoint provisional liquidators over companies on a restructuring basis. “While there is a long-standing practice of provisional liquidators appointed by the Cayman court successfully obtaining recognition of their appointment in key financial jurisdictions such as the US, UK and Hong Kong SAR, it remains to be seen whether these jurisdictions will recognise the appointment of restructuring officers in the same way,” said Christopher.
There is no specific reason to doubt that courts in these jurisdictions will grant this regime the same recognition as other debtor-in-possession restructuring processes, such as US Chapter 11 proceedings. But any regulatory change has an adjustment period during which other jurisdictions consider whether it satisfies all of their criteria for recognition.
Are there any areas that lack clarity?
The restructuring officer's powers are not provided for in the legislation, and the extent of those powers will likely depend on the facts in each case. “However, it is anticipated that the restructuring officer's role will be light-touch, with management continuing the day-to-day operations of the company and the restructuring officer having oversight of the restructuring process,” said Amelia Tan, senior associate at Carey Olsen.