On 31 August 2022, the Cayman Islands introduced the restructuring officer regime (‘the Regime’) by making certain amendments to the Cayman Islands Companies Act (‘the Act‘). In this article we consider the benefits of the Regime now that it has been in place for nearly twelve months, and how it is operating in practice. We also consider the impact that the appointment of a restructuring officer has on the directors of affected companies and how, if at all, restructuring officers can review antecedent transactions.
Prior to the Regime
The introduction of the Regime was generally viewed as positive insofar as it sought to streamline and modernise the Cayman Islands’ previous stance on restructurings. Prior to the Regime, the only means by which a company could undertake a restructuring was following the presentation of a winding-up petition. Upon the hearing of that petition, the Cayman Court had the ability (but not the obligation) to give directions which enabled a restructuring to happen.
However, even if the Cayman Court was minded to exercise this discretion, the company was still required to appoint a liquidator if it wanted to have the benefit of a stay on claims and proceedings from third parties, which is generally considered necessary to give the company ‘room to breathe’ while a restructuring is implemented. Not only was the company required to bear the cost of appointing liquidators, but there were also often unintended consequences of following this ‘well-trodden path’, as the appointment of liquidators often triggered ‘termination events’ or ‘events of default’ clauses in agreements to which the company was a party.
The former process was therefore considered to be out of date, inefficient and in need of reform in order to put the Cayman Islands’ approach to restructurings on a broadly equal footing with similar processes that are available in other jurisdictions.
The Regime is set out in Part V of the Act and provides that a petition may be presented by a company for the appointment of a restructuring officer without first obtaining a shareholders’ resolution approving the same, and regardless of whether the company’s articles of association permit this. The grounds for bringing such a petition must be because:
• the company is or is likely to be unable to pay its debts; or
• the company intends to present a compromise or arrangement to its creditors (or classes thereof) by way of a “consensual restructuring”.
It is a requirement of the Act that anyone who is proposed to be appointed as a restructuring officer must be a qualified insolvency practitioner and when so appointed shall be an officer of the Court.
Upon the presentation of a petition for the appointment of a restructuring officer, this automatically creates an immediate moratorium in respect of the company. This means that no suits, actions or other proceedings may be proceeded with or commenced, nor may any winding up resolution be passed or winding up petition be presented against the company, without the leave of the Court.
This is a significant improvement on the previous position under Cayman Islands law described above. The ability for directors to present a petition to appoint a restructuring officer is significant as it removes the requirement for a winding up petition to first be brought against the company.
Notable exceptions to this are that:
• the moratorium does not automatically apply to any criminal proceedings; and
• any creditors who have security over all or part of the company’s assets will nonetheless be able to enforce their security against the company without the leave of the Cayman Court and, crucially, without reference to the restructuring officer. Whilst this is the same approach taken for liquidations, because the purpose of a moratorium is to give the company room for manoeuvre whilst it formulates a restructuring plan, it seems a contradictory step to give secured creditors the ability to take control of assets which might be crucial to the continuation of the business, and the sale of which may well frustrate any proposed restructuring and the viability of the business.
Powers of Directors on Appointment of a Restructuring Officer
The Act does not set out a list of powers or otherwise define the role of restructuring officers. This is instead decided on a case-by-case basis. The Act provides that the restructuring officer shall have “the powers and carry out only such functions as the Court may confer…in the order appointing the restructuring officer”. Similarly, the order is also required to set out the “manner and extent to which the powers and functions of the restructuring officer shall affect and modify the powers and functions of the board of directors.”
This can be contrasted with the approach taken in the Act to liquidation, where:
• specific powers of the liquidators are set out in Schedule 3 of the Act; and
• upon the appointment of a liquidator, all the powers of the directors cease.
Since the introduction of the Regime, so far as we are aware, there have been two Court orders issued for the appointment of restructuring officers by the Court, which relate to Oriente Group Limited and Rockley Photonics Holdings Limited.
In both cases, the order appointing the restructuring officer has been quite gentle to the incumbent directors, particularly when compared with their treatment in the context of a winding up. In both cases the restructuring officers were authorised to “monitor, oversee and supervise the Board in its management of the Company, and take all necessary steps to develop and implement a restructuring of the Company’s financial indebtedness in consultation with the Board”.
The Court orders go on to state that the board of directors is “authorised to continue to manage the Company’s day-to-day affairs in all respects and exercise the powers conferred upon it by the Company’s Memorandum and Articles of Association”. This includes the right to conduct the ordinary day-to-day business of the company’s business operations and to operate the company’s bank accounts in the ordinary course of business. The directors’ powers are not completely unfettered, however, as the restructuring officer has a right of veto over new appointments to the board of directors and on the opening and closing of bank accounts. The restructuring officer may also refer matters to the Court for further directions if the restructuring officer considers that the directors are not acting in the best interests of the company.
The directors of the company are also required to provide such information to the restructuring officer as they may require in order to carry out their duties and monitor the cash-flow of the company, and to provide advance materials and notice of all board meetings.
It will be interesting to observe how practice develops in this area and whether bespoke terms of appointment of restructuring officers are used from case to case or whether a ‘market standard’ set of terms develops. It is perhaps too early to tell at this stage but notably the terms of appointment of the restructuring officers in Oriente Group Limited and Rockley Photonics Holdings Limited are remarkably similar. If bespoke terms do not become the norm, then it appears that liquidation may be the only viable option where the directors cannot be relied upon to perform their duties post appointment.
Directors’ Duties Pre- and Post Appointment of a Restructuring Officer
One of the fiduciary duties of directors of Cayman Islands companies is to act (in good faith) in the best interests of the company. This has historically been interpreted as being the best interests of the shareholders (taken as a whole). However, this paradigm has shifted gradually, and it is now generally accepted jurisprudence that the directors of companies are required to consider the interests of other stakeholders in the company, such as creditors and employees. In BTI 2014 LLC vs. Sequana SA and others (which is persuasive authority in the Cayman Islands), the Supreme Court in the UK held that the directors of companies in financial difficulty are required to consider the interests of creditors, and that the weight to be given thereto increases as such financial difficulty becomes more acute. It therefore follows that the interests of creditors should overtake those of the shareholders in the minds of the directors where the company enters into a formal insolvency process such as liquidation.
It remains unclear where using the Regime to undertake a restructuring falls along this spectrum as this will depend on the severity of the company’s financial position, but clearly the interests of creditors should be towards the forefront of the minds of the directors by the time a restructuring officer is appointed.
Restructuring officers do not, under the Act, have the authority to consider antecedent transactions. When the regime was introduced, it was interesting to note that sections 145 (voidable preference), 146 (avoidance of dispositions made at an undervalue) and 147 (fraudulent trading) were not amended to extend this power to restructuring officers. All these sections remain drafted such that it is only the liquidator of the company that may review such transactions (or official liquidator in the case of section 146 of the Act).
Given the current global economic challenge of high inflation and the impact of the remedies being deployed to control it, it may be that the introduction of the Regime has been very well timed. If economic conditions worsen, it may be that the number of appointments of restructuring officers increases significantly as companies attempt to reinvent themselves as opposed to simply being liquidated.
Gary Smith is a partner of Loeb Smith's Corporate and Investment Funds group. Gary focuses his practise on investment funds, corporate mergers and acquisitions, and capital markets. Chambers & Partners Global has ranked Gary in the top tiers of Investment Funds lawyers in the Cayman Islands and he is described by sources as: "a bright guy, a team player and a hard worker" (Chambers 2014) and appreciated for maintaining "strong client-relationships and is highly regarded by sources in North America and Asia" (Chambers 2017).
Robert Farrell is a Partner in the Corporate, Funds & Finance Group at Loeb Smith. He specialises in investment funds, corporate mergers and acquisitions, and banking and finance. Chambers & Partners has ranked Robert as an “associate to watch” for several years, noting his ability to "handle complex mandates" with one interviewed client commenting that he shows “great prowess as a lawyer". Robert is also noted for his “can-do attitude that brings matters to conclusion swiftly and to the satisfaction of clients”.