Cayman Islands Insolvency Law in 60 Seconds
21 Mar 2023
Insolvency law in the Cayman Islands is principally regulated by the Companies Act (2023 Revision) (the Companies Act) and the Companies Winding Up Rules (2023 Consolidation), and they are supplemented by a wide body of case law.
The following guidance is a summary only.
- Under Cayman Islands law a company may be wound up on the basis of insolvency if it is unable to pay its debts. A company is treated as unable to pay its debts if it fails to satisfy a valid statutory demand, execution on a judgment is returned wholly or partly unsatisfied, or it is otherwise proved to the satisfaction of the court that the company is unable to pay its debt. The courts are also prepared to wind up a company on the just and equitable ground if it is shown that there is a break down in trust and confidence between the company and its creditors and shareholders.
- Upon making an order for the appointment of a liquidator, the commencement of the winding up is deemed to relate back to the time of the presentation of the petition, and all dispositions of the company's property between the date of the petition and order are void unless the court otherwise orders.
- Establishing insolvency will enable a creditor to petition the court for the appointment of a liquidator, and may also have other consequences (for example, when a company is insolvent, directors must exercise their powers in the best interests of the company having primary regard to the interests of its creditors). The members of a company can also voluntarily appoint a liquidator by passing a special resolution (or an ordinary resolution if the company is insolvent), and if the company is unable to pay its debts then the voluntary winding up will be conducted subject to the supervision of the court. "Non-petition" clauses have statutory force in the Cayman Islands.
- Liquidation is a class right under Cayman Islands law. Once appointed, the liquidator's primary duty is to collect in all of the company's assets and then distribute them pari passu to the company's creditors in accordance with the statutory scheme of distribution, and the legislation confers wide powers upon the liquidator to do so. Once a liquidator is appointed, unsecured creditors cannot commence legal proceedings against the company in the Cayman Islands without the permission of the court; rights of action against the company are converted into claims in the liquidation process. Secured creditors generally do not participate in the liquidation process, and may continue to proceed with any enforcement action directly against their collateral, pursuant to a valid security interest. Cayman Islands law only provides for a very small class of preferential creditors and these are rarely commercially significant in insolvent liquidations.
- The court will look at the purpose of the petition. In the case of Tianrui (International) Holding Company Limited v China Shanshui Cement Group Limited  (1) CILR 481, applying section 92(e) of the Companies Act, the Court of Appeal confirmed that a shareholder’s just and equitable winding-up petition does not need to advance a class remedy for the benefit of all shareholders as was previously held in Ctrip Investment Holding Ltd v eHi Car Services Limited  (1) CILR 641. The Court of Appeal held that a lack of a class remedy, at most, may support an argument that the petition is brought for an improper purpose. While a shareholder’s petition will likely include complaints particular to that shareholder, which may not be relevant to other shareholders. A shareholder must be able to petition against acts of the company promoted by other shareholders, the remedy to which will clearly not seek to benefit those very shareholders behind those acts.
- A liquidator has no right to disclaim either onerous property or unprofitable contracts under Cayman Islands law.
- When a company goes into liquidation, any mutual debts between the company and a creditor will be set-off. Any creditor who extended credit to the company at a time when it had notice of the winding-up petition cannot apply setoff. The Companies Act also includes provisions which provide that any netting agreement relating to financial contracts (including multi-lateral netting) will prevail over the statutory insolvency set-off provisions.
- A liquidator may challenge transactions entered into in the twilight period prior to insolvency where such transactions constitute either a preference or a disposition at an undervalue. There is no separate avoidance regime for floating charges. In each case the company must have been unable to pay its debts at the relevant time or the transaction caused it to become unable to pay its debts. The relevant vulnerability period is six months prior to the commencement of the winding up in the case of preferences, and six years in the case of dispositions at an undervalue. In relation to preferences it is necessary to show an "intention to prefer" on the part of the insolvent company to challenge a transaction as a preference, but if the preferred party is a related party there is presumed to be an intention to prefer.
- A liquidator can also pursue former directors (including shadow or de facto directors) and officers of the company for either misfeasance or fraudulent trading. If it appears that any person has been carrying on the business of the company to defraud creditors or for any fraudulent purpose the liquidator may apply to the court for an order that such persons make a contribution to the company's assets.
- The Companies Act provides a broadly equivalent separate regime in the Court appointment of a receiver over a segregated portfolio (which unlike a segregated portfolio company (SPC) itself does not constitute a legal entity and is not subject to the company winding up process), whose task is to manage the orderly closing down of the business of the portfolio and the distribution of its assets to those entitled to them. A creditor, shareholder or the company itself can apply for the appointment of a receiver where the assets of the portfolio are or are likely to be insufficient to discharge the claims of creditors in respect of that portfolio on a cash flow test of insolvency.
- It is also possible for an insolvent company to enter into a scheme of arrangement to try to restructure its debts. Any scheme of arrangement must be approved by each class of creditors by a majority in number representing 75 per cent in value of the creditors or members present. It should be noted that for a members’ scheme, as of 31 August 2022, the headcount test does not apply.
- As of 31 August 2022, a new restructuring office regime came into effect, a legislative rescue regime allowing for the restructuring of a company under the supervision of a restructuring officer and providing for an automatic stay of creditors actions when a company is undergoing a restructuring.
- In order to act as a liquidator of an insolvent company or a restructuring officer a person must be a licensed insolvency practitioner. A practitioner must be resident in the Cayman Islands to obtain a licence. However, it is possible for a foreign insolvency practitioner to be appointed jointly with the Cayman Islands resident licensed insolvency practitioner. The governing provisions are contained in the Insolvency Practitioners’ Regulations 2018.
- The Companies Winding Up Rules (2023 Consolidation) makes provision for the liquidator of a company to enter into protocols with a foreign officeholder appointed by a foreign court in another jurisdiction to promote the orderly winding up of the company's affairs and to avoid conflict between the winding-up proceedings in the Cayman Islands and the foreign jurisdiction.