The principle underlying the collective insolvency procedures of liquidation and bankruptcy is, in simple terms, that an insolvent debtor’s available assets should be distributed amongst its creditors fairly. It runs contrary to that principle, and contrary to the interests of a creditor body as a whole, for an insolvent debtor to determine for itself how its assets ought to be applied.
In the Cayman Islands, as elsewhere in the common law world, there is a suite of statutory provisions designed to remedy that mischief by enabling certain transactions to be avoided in favour of a collective pari passu scheme of asset distribution. These provisions, which are found in the Companies Act, concern voidable preferences (under section 145), the avoidance of dispositions at an undervalue (under section 146), and a fraudulent trading provision (under section 147).
The focus of this article is on voidable preference claims under section 145: the requirements that must be met, the differences between section 145 and equivalent provisions in certain other common law jurisdictions, and a review of the surprisingly limited number of legal authorities on the subject (the two most important of which concern redemptions from investment funds suffering catastrophic losses).
This article first appeared in Volume 18, Issue 5 of International Corporate Rescue and is reprinted with the permission of Chase Cambria Publishing - chasecambria.com.