Cayman Islands Court lays down entry threshold for PL rescue process and raises comity with Hong Kong Court
In the recent decision of Silver Base Group Holdings in the Grand Court of the Cayman Islands, Justice Doyle has set out the factors to be considered when allowing a debtor company to enter into a PL rescue process, in circumstances where there is an existing winding up petition against the same debtor filed in Hong Kong. The case underscores the importance of comity and cooperation between the Cayman Islands and Hong Kong courts, as conduits for restructuring debt in the modern world.
A flurry of Hong Kong cases (Lamtex  HKCFI 622, Ping An  HKCFI 651, China Bozza  HKCFI 1235, and Victory City  HKCFI 1370) concerned abusive applications in the Hong Kong court for recognition of offshore rescue PLs. Last minute, insincere applications for recognition were dressed up as an excuse to delay the inevitable winding up proceeding in Hong Kong. The cases had a number of ubiquitous discerning features, including: (1) defensive applications by the companies in their Offshore jurisdictions, only after steps towards winding-up were taken by their creditors; (2) the offshore applications were made on little or no notice to the creditors in question; (3) there was little evidence of the viability of any restructuring, or that substantive efforts had been made towards one, including any meaningful engagement with creditors.
The decision in Silver Base Group Holdings expressly refers to this Hong Kong line of authority and the Learned Judge notes that: “I have noted the concerns of Harris J expressed in the judgments I have referred to above. I have considered those concerns prior to deciding to appoint JPLs in this case. I have given the creditors an opportunity to be heard. I have ordered that the documents filed in these proceedings should be filed with the Hong Kong Court. In this case the Board has taken professional advice and sought the assistance of experts. There is a plan and information has been provided about the past and potential future of the Company. The Board are well aware that as the Company has entered the zone of insolvency focus moves to the best interests of the creditors. The JPLs will be able to consult with the creditors and endeavour to take matters forward in their best interests.” The impregnable logic reflects the true threshold entry criteria for any Cayman Islands rescue process, namely that a distressed debtor should show to some extent that there is viability to any proposed compromise. Clearly, in the initial throes of distress, a period of time has to be given to a debtor to formulate its proposals. This is reflected in other Cayman Islands cases such as Midway Resources International.
Further, the notable tact and diplomacy of the passage above, open to judges of common law systems, is to be highly endorsed and encouraged. International insolvency cases require co-operation between courts of different jurisdictions, and their practitioners, to get the best possible return for investors and/or to rescue debtors. The debtor application to enter a rescue PL process was granted and the Learned Judge held that: “Moreover there is good reason to adjourn the [Cayman Islands] winding up petition to give some breathing space in the best interests of the creditors and to enable the JPLs to report back as to whether a restructuring is feasible”. He directed that the Cayman Islands filings should be filed in Hong Kong to ensure transparency of the rescue process.
The case also considers the effect of a Cayman Islands liquidation moratorium on the Hong Kong Court. Pursuant to section 97(1) of the Cayman Islands Companies Act no suit, action or other proceeding, including criminal proceedings, shall be proceeded with or commenced against the Company except with the leave of the Court. As a matter of private international law, it is then a matter for foreign courts as to whether to “recognise” that moratorium, and of course it will depend if the claimant is subject to the jurisdiction of the Cayman Islands Court and can therefore be effectively restrained. However, in this case, the order expressly provided that it was made without prejudice to the jurisdiction of the Hong Kong Court to determine whether to recognise the Cayman Islands moratorium, including in relation to extant winding-up proceedings pending before the Hong Kong Court.
It was further noted that full regard is to be had to the importance of the place of incorporation and the international recognition of light touch provisional liquidators appointed for restructuring purposes. The Learned Judge cited the late Professor Ian Fletcher when he had written about the long accepted fundamental principle that the law of the place of a company’s incorporation is primarily, “possibly immutably”, competent to control all questions concerning a company’s initial formation and subsequent existence. Dicey Rule 179 sets out the common law and private international law position that the authority of a liquidator (and therefore a provisional liquidator) appointed under the law of the place of incorporation should be recognised in other jurisdictions. Lord Sumption (who also sits in the Hong Kong Court of Final Appeal) at paragraph 23 of his much read judgment in Singularis Holdings Limited v PriceWaterhouseCoopers  UKPC 36 also emphasised the importance, in international insolvency cases, of respecting and having full regard to the laws of the relevant company’s place of incorporation.
It was further noted that the Cayman Islands has not adopted the UNCITRAL Model Law on Cross-Border Insolvency and that the Grand Court should place emphasis on the laws of the place of a company’s incorporation. It would appear therefore that a company’s centre of main interests, a Model Law concept, will not be adopted as part of the common law of the Cayman Islands. In any event, it was noted that the Cayman Islands is a jurisdiction of substance. It remains to be seen how this will develop.