A masterclass in “light touch” – PL restructuring proposals face scrutiny before appointment
In a recent case before the Grand Court of the Cayman Islands, In the Matter of Midway Resources International, Justice Segal granted an application to appoint "light touch" restructuring provisional liquidators (PLs) in order to assist with and facilitate restructuring negotiations, to give the company and the PLs the opportunity to stabilise the position, and to seek constructive discussions with the creditors and the funder - whose continued support was critical to the process.
The order granted permits the company’s directors to retain the power to act with respect to matters within the ordinary course of the company’s business, without the prior consent of the PLs, but requires that the directors obtain the prior consent of the PLs for matters outside the ordinary course of business, including – importantly – the restructuring negotiations. This form of order has, over many decades, evolved to become known by industry experts as “light touch”, since the Court intervention viz the management’s powers is “light” for the purpose of facilitating an effective modern restructuring and rescue. Where management is able, and seen by creditors as integral to a successful recovery, a “light touch” order will be appropriate.
Each case is different, and in circumstances where there are credible allegations of fraud or mismanagement against the former management, then only a “hard touch” or complete removal of the former management will do, even if a restructuring is a credible option. The firmness of “touch” is all to do with the residual management power. Any Court needs to weigh the viability of a restructuring proposal in order to justify appointing a restructuring PL, and then also has to consider whether, even if a restructuring appears viable, the management should have any part in it. Creditor views will be of paramount importance. This is to avoid the issue identified in the recent Hong Kong judgment of Li Yiqing v Lamtex Holdings Ltd where Mr Justice Harris wound-up a foreign Bermudian company, listed on the HKEX, that had already been placed into “light touch” provisional liquidation in Bermuda, by reason of a “scanty in the extreme” restructuring proposal used as a means to avoid a winding up.
The Learned Judge in Midway Resources International noted that: “I would reiterate my plea to substitute ‘light-touch’ for ‘soft touch’, since the latter expression has always seemed to me to bring with it associations of someone being duped and defrauded!” This echoes the same observations made by Harneys in its light-hearted January 2021 podcast, From content to community: the evolution of the Offshore Litigation Blog, admonishing the use of “soft touch” as a misunderstanding of the history of the relevant jurisprudence.
It was held that (citing Sun Cheong Creative Development Holdings Limited) in light touch restructuring cases, it was appropriate for the Court to rigorously scrutinise the restructuring proposal: “[There] is a three-stage test…: (i) that the [PLs] should be satisfied that a refinancing and/or sale of the [company’s business] as a going concern is likely to be more beneficial to the creditors that a liquidation realisation of the [company’s] assets; (ii) that there is a real prospect of a refinancing and/or a sale as a going concern being effected for the benefit of the general body of the creditors; and (iii) that in the circumstances it is in the best interest of creditors to try to achieve such a refinancing and/or sale as a going concern.” And “Where the Court is in any doubt as to the viability of such a restructuring plan, it is also well accepted that it can appoint [PLs] for the purpose of preparing a report on the prospects of success of a restructuring plan.”
In this case, the judge was satisfied that “the evidence now shows both that the Company intends to present a compromise or arrangement to its creditors and to promote a restructuring of the Group and that the Restructuring Proposals are coherent and appear to offer [the] creditors an apparently attractive alternative to an insolvent liquidation of [the company]. There appears to be a rational basis for accepting the Restructuring Proposals, provided that the assumptions on which they were based were validated; in particular, that the Investor proves to be reliable and of substance and prepared to commit the further funds required to allow the necessary further exploration of and work to be done … and work would result in sufficient revenues and value creation to provide the Investor with a satisfactory return and other creditors with a material recovery. There would also appear to be reasonable basis for putting in place a restructuring of the Company’s debt and balance sheet, if the Restructuring Proposals are approved and implemented, to allow the Company’s creditors and shareholders to access and have the benefit of the recoveries to be made…”
This line of case law is not new, but it is a timely reminder to practitioners to be prepared for a tough ride before restructuring PLs will be appointed in the Cayman Islands.