It has been over a year since the Cayman Islands' restructuring officer scheme (the "Scheme") came into effect on 31 August 2022. In that year, there have been only a limited number of applications seeking to appoint restructuring officers ("ROs") and only two successful petitions: Oriente Group Limited (unreported, 8 December 2022) ("Oriente") and Rockley Photonics Holdings Limited (FSD 16 of 2023) ("Rockley Photonics"), although no reasoned judgment was handed down in the latter case. Despite that, the Grand Court of the Cayman Islands (the "Court") has handed down two helpful reasoned judgments in relation to applications made to appoint ROs, namely Kawaley J.'s decision in Oriente and Doyle J.'s decision in Re Aubit International (unreported, 4 October 2023) ("Aubit International").
This article discusses the key takeaways from the Court's application of the law relating to the appointment of ROs under section 91B of the Companies Act (2023 Revision) (the "Companies Act") and the trends that we're seeing in the Cayman insolvency market.
The petitioning companies in Oriente and Aubit International experienced mixed fortunes in their respective applications, with the former being successful and the latter unsuccessful.
Section 91B(1) of the Companies Act requires a company seeking to appoint ROs to demonstrate:
- that the company is or is likely to become unable to pay its debts; and;
- that the company intends to present a compromise or arrangement to its creditors (or any classes thereof).
It is only after the petitioning company has discharged its burden by satisfying both limbs of the statutory tests that the Court has jurisdiction to exercise its discretion to appoint restructuring officers.
In the few decisions of the Court to date, it is the second 'intention' limb of the test that has come under most scrutiny. In Oriente, where the company was successful in appointing ROs in the face of a winding-up petition presented by one of the company's creditors, the Court noted that the company had presented a "compelling" proposal which, although only in outline, demonstrated that "value for creditors would most likely best be served by ensuring that the Company and the Group continued as a going concern rather than being wound-up." In Oriente, the company's proposal was supported by evidence presented by the company's management team, independent accounting evidence and the support of a significant number of the company's creditors.
By way of contrast, in Aubit International, the company failed to satisfy the Court that it intended to present a compromise or arrangement for its creditors. The company sought unorthodox relief from the Court in that it sought an order granting the ROs powers to recover assets and undertake investigation into the company's affairs and, only once those investigations were complete, to undertake a restructuring of the company's affairs. The Court was critical of the company's approach and of the evidence of the restructuring plan that it relied on in its application, noting that it was "devoid of any meaningful detail" and was insufficient to "enable the Court to conclude that it had jurisdiction and that it was appropriate in all the circumstances to appoint ROs."
In Aubit International, Doyle J. emphasised the important role that the Court has in safeguarding the Scheme from potential abuse, which was described as being particularly acute given the effect of the statutory moratorium under section 91G of the Companies Act.
From the two reasoned judgments in Oriente and Aubit International, it is clear that judicial scrutiny will fall upon the analysis of the evidence presented by the petitioning company in applications under section 91B to ascertain whether there is a "realistic, genuine, bona fide held intention on adequate grounds" to appoint ROs and that the restructuring plan is realistic and credible, even if only provided in outline. Abstract or hypothetical restructurings will not be sufficient.
Helpfully, in Aubit International, the Court gave guidance on the matters that it will have regard to in exercising its discretion once the statutory test has been met. They include whether:
- the proposed restructuring is likely to be more beneficial to creditors than a winding-up petition;
- there is a real prospect of a restructuring being effected for the benefit of the general body of creditors; and
- that, in all the circumstances, it is in the best interests of the company's creditors to try and achieve a restructuring.
The Court also gave guidance as to the nature of the evidence that it will expect to see in an application under section 91B:
- evidence of some form of engagement with creditors prior to the petition being presented;
- independent evidence on the benefits of the proposed restructuring as against a winding-up order (and may be sceptical about the views of management);
- updated copies of the company's financial statements (preferably audited or independently verified) and a list of creditors specifying whether they are secured or not and, if secured, the extent of the security and whether the creditors have any connection with the management of the company, their locations, the amounts outstanding and an indication of the extent of the consultation with them and whether they support or oppose the appointment of ROs; and
- evidence in respect of any actual or pending legal proceedings against the company.
The Court warned that petitioners seeking to appoint ROs should "have all their ducks in a row before filing the petition and they should not assume that if their evidence is inadequate the Court will grant them an adjournment". Whilst it appears that this warning spoke to the Court's concerns regarding the unusual application presented by the petitioning company that was relying on inadequate evidence, it is useful guidance in respect of the Court's expectations for the preparations for applications to appoint ROs. It is apparent from the decisions in Oriente and Aubit International that the Court will not allow the Scheme to be misused as a short-term defensive strategy to prevent creditors from presenting (or proceeding with) winding-up petitions.
Why aren't we seeing more RO petitions?
It is notable that there have been a limited number of petitions to appoint ROs and only two appointments made (Oriente and Rockley Photonics) in the year since the Scheme was introduced. But that should be understood in the context where the Court has not been awash with insolvencies and restructurings, with only 47 Cayman entities placed into official liquidation in 2023 and only 29 winding-up petitions and nine court supervision applications being heard in that same period (based on publicly available information as at 24 October 2023). Those statistics indicate that court-supervised restructurings have been relatively quiet in the period since the introduction of the Scheme.
We anticipate that use of the Scheme will increase in the short term as a result of continued challenges in the economic climate, including sustained high interest rates on institutional lending and the difficulties associated with refinancing institutional lending. The current environment makes it difficult for companies to restructure their businesses and increases the attraction of a court-supervised process which provides a moratorium against other proceedings without the spectre of liquidation. Unless the economic climate improves in the short term, we would expect there to be an increase in the use of the Scheme in 2024. The obvious challenge for companies that are facing liquidity issues (and may, therefore, benefit from the Scheme) is whether they are able to invest sufficiently in the financial analysis that, in light of the Court's recent decisions, is necessary to demonstrate that the plan to appoint ROs is a realistic and credible alternative to liquidation.
Bedell Cristin's insolvency and litigation team is highly experienced in all matters concerning corporate restructurings. If you would like further information or require advice in relation to the matters addressed in this briefing, please get in touch with your usual Bedell Cristin contact or one of the contacts listed.