The Complications Involved with Cross-Border Restructuring
Cross-border restructurings often present a variety of challenging issues, not only for the entity involved, but also for the practitioners engaged to steer the process. This is often due to circumstances where the jurisdiction of incorporation of the company in financial difficulty does not have an efficient or sophisticated restructuring regime in place. It is standard practice for these companies to look to other jurisdictions for a clearer path forward or to seek to utilize parallel processes, such as (i) commencing Chapter 11 or Chapter 15 proceedings in the US bankruptcy courts or (ii) using one of many restructuring tools available in England—provided the company can demonstrate it has a sufficient connection to England. However, it is clear that utilizing these US- or UK-based restructuring alternatives is not always appropriate. For example, it may be difficult to establish the nexus to the relevant jurisdiction, or there may be adverse tax consequences associated with the proposal.
Cayman Schemes of Arrangement
A Cayman Islands scheme of arrangement is a court-supervised process that allows for the rights of creditors or members to be varied by forcing the relevant non-consenting creditors and/or members into the compromise or arrangement. Although often used for financial restructuring involving external debt, a Cayman Islands scheme of arrangement is a flexible tool and can also be utilized to facilitate (i) intra-group restructurings and reorganizations, (ii) mergers, or (iii) take-private transactions. Helpfully, a scheme can also be used to implement a “pre-pack,” where all the stakeholders involved in the process agree on the key terms of the restructuring proposal.
That said, a scheme is not a formal insolvency process, and, in the absence of liquidation proceedings, the directors remain in control of the company while negotiating the terms of and promoting a scheme to stakeholders. Importantly, with respect to the Cayman Islands, a scheme of arrangement utilized outside of a formal insolvency process would not be able to benefit from the automatic stay from unsecured creditor claims that a liquidation or restructuring officer procedure offers. However, it can be utilized either with or without a court-imposed moratorium.
Recent amendments to the Cayman Islands Companies Act (As Revised) abolished the “headcount test” for member’s schemes so that approval only requires an affirmative vote of 75 percent in value. The “headcount test” still applies to creditor schemes of arrangement, meaning that the approval threshold is a majority in number representing 75 percent in value of the creditors or class of creditors (as the case may be) who are present and voting either in person or by proxy at the relevant creditors’ meeting.
The Scheme Objective
The relevant Cayman Islands statutory framework broadly reflects the regime in England (and in other Commonwealth jurisdictions such as Canada and Australia). The Cayman court’s jurisdiction is broad, and in addition to effecting a scheme in relation to any company that is liable to be wound up in the Cayman Islands, it is possible to shift a company’s center of main interests to the Cayman Islands in order to ground that jurisdiction in appropriate circumstances.
The objective of a scheme of arrangement Is to allow the company to enter into an agreement with its members and/or creditors (or any class of them) to either:
- restructure its affairs so that it can continue to trade and avoid a liquidation process; and/or
- reach a compromise or arrangement with creditors or members (or any class of them).
In assessing a scheme, the Cayman court will consider the interests of the relevant class of creditor or member and seek to ascertain whether the class as a whole will benefit from the proposal. Whether such benefit is sufficient is a commercial matter for the creditors or members to approve, and the Cayman court will not generally seek to interfere with that part of the process. Accordingly, so long as the requisite statutory majority (discussed below) of each class of creditors or members (as appropriate) supports the scheme, all creditors or members will be bound by it and forced to accept its terms irrespective of whether they voted in favor of the proposal or not.
A Cayman Islands scheme requires the approval of each class of affected stakeholder in order for the scheme to ultimately be sanctioned by the Cayman court. The threshold approval requirement is prescribed by statute, which provides that at least 75 percent in value of those voting, in person or by proxy, need to vote in favor of and approve the terms of the proposed scheme. So, while the level of consent for a Cayman Islands scheme is higher than that required to approve a plan of reorganization in Chapter 11 proceedings, the scheme remains an effective company restructuring and rescue tool, especially when used in conjunction with parallel US proceedings.
Adding to the above, unlike in Chapter 11 proceedings, where a plan can sometimes be confirmed in circumstances where there is a non-accepting class of stakeholder (subject to certain controls, such as the “absolute priority rule”), if any class of stakeholder that would be affected by a proposed Cayman Islands scheme does not approve the terms under which the scheme proposes the restructure, then the scheme as a whole will not be able to be sanctioned by the Cayman court and will fail. That said, subject to the circumstances of the restructure, it may be that the scheme class composition can be structured to avoid this situation derailing the proposal.
All stakeholders affected by a scheme, including those who oppose the proposal, have the right to attend the sanction hearing and have their objections to the scheme heard by the Cayman court. As noted above, the Cayman court will be reluctant to tamper with or take a view on the commercial aspects of a proposal. Therefore, although the sanction hearing provides a forum for open opposition to a proposed scheme, provided the scheme procedures have been followed and the requisite statutory majorities have been achieved at the scheme meeting, the Cayman court is likely to consider that the affected stakeholders are the best judges of their own commercial interests and will, except in very specific circumstances, ordinarily approve the scheme.
Recent amendments to Part V of the Cayman Islands Companies Act (As Revised) have been introduced to implement a new restructuring officer regime available to companies in financial difficulty. Under the new regime, it is now possible to petition the Cayman court to appoint “restructuring officers” and, from the time of filing, for the company to take the benefit of an automatic moratorium (akin to a US Chapter 11 stay or English administration moratorium). Once initiated, with the benefit of breathing space and expert guidance, the relevant company may endeavor to promote and implement a restructuring (e.g., via a scheme of arrangement, a parallel process in a foreign jurisdiction, or a consensual compromise).
Some key features of the new regime follow.
- The petition seeking the appointment of a restructuring officer may be presented by the directors of a company: (i) without a shareholder resolution and/or an express power to present a petition in its articles of association; and (ii) without the need to present a winding up petition.
- The moratorium will arise on presenting the petition seeking the appointment of restructuring officers, rather than from the date of the appointment of officeholders.
- The powers of restructuring officers will be flexible and will be defined by the terms of the appointment order made by the Cayman court.
- Secured creditors with security over the whole or part of the assets of the company will still be entitled to enforce their security without the leave of the cayman Court and without reference to the restructuring officers.
The Cayman Islands restructuring regime, including the use of a Cayman scheme of arrangement, is routinely used to support Chapter 11 proceedings.
This involves a petition to the Cayman court seeking to appoint provisional liquidators or restructuring officers, who are qualified insolvency practitioners. If required, a foreign qualified practitioner can also be appointed jointly with the Cayman Islands provisional liquidators or restructuring officers. As mentioned above, appointing officeholders results in a stay on proceedings brought by unsecured creditors in the Cayman Islands, and this limits the risk of dissenting creditors derailing the main Chapter 11 proceedings.
Where necessary (such as where there is debt not governed by US law), a Cayman Islands scheme of arrangement might be used to compromise the debt of the Cayman Islands debtor to mirror the terms of the Chapter 11 plan. The Cayman court, Cayman insolvency practitioners, and Cayman attorneys are well-versed in dealing with parallel proceedings, which may give rise to issues of comity, conflict of laws, and cooperation.
Utilizing a Cayman Scheme
A restructuring of US law–governed debt ordinarily requires recognition pursuant to US law. Helpfully, a Cayman Islands scheme of arrangement is able to be recognized under Chapter 15 procedures and is likely to be significantly cheaper to implement than the US alternatives. There are now many examples of US bankruptcy courts giving full force and effect to the terms of a Cayman Islands scheme. As noted above, this ultimately prevents dissenting creditors from taking action, seizing US property of the debtor, and attempting to derail liquidation proceedings.
This article is not intended to be a substitute for legal advice or a legal opinion. It deals in broad terms only and is intended to merely provide a brief overview and give general information.