Investment Fund series - Informal restructurings
If faced with the real possibility of having to plan for a future insolvency event, it is prudent for directors and investment managers to explore out of court options and seek professional assistance at an early stage. While investors are ordinarily contractually entitled to regular financial updates on their investments and are usually sophisticated actors, the investment managers are naturally best placed to predict or foresee potential threats to asset value and to plan accordingly. From our experience, the likelihood of implementing a consensual restructuring is underpinned by forward thinking and prudent decision making on the timing of open dialogue with stakeholders. While a run-on redemptions or the triggering of any suspension clauses are not fatal to an ability to effect a consensual restructuring, the knock-on effects - from reputational impact or even just practical issues - can reduce the likelihood of reaching an agreement with stakeholders if not managed properly.
The redemption and suspension processes are determined by the company’s constitutional documents. A redemption request might be instantaneous and immediately require satisfaction or may not require satisfaction until a later period of time e.g. three months. Whatever time period is specified or whatever suspension rights can be triggered, investment managers should consider the delicate balance of creating a potential restructuring within a timeframe that ensures they are acting sensibly in the commercial sense and ensuring that the timing of the dialogue process does not materially and negatively impact investors’ faith in the existing decision-making structure or management more generally.
There are numerous other points for investment managers to consider in the formulation of an informal restructuring plan and include issues such as classes of shares, voting rights, director obligations, forbearance agreements and gating provisions. A successful plan will ordinarily have each of these points considered before dialogue with the investors commences.
While the terms of any plan will be too varied to condense in a short piece such as this, we have seen a multitude of different scenarios proposed and agreed. Indeed, that is the primary advantage of an informal restructuring: the flexibility of the plan to accommodate the fund and stakeholders’ commercial objectives. It is not uncommon for investors to agree to a separation of bad versus performing assets and in some instances, the investors may accept shares in new vehicles. Investors may alternatively agree not to submit redemption requests, withdraw redemption requests and / or permit grace periods to attempt to “work-out” whatever issue may have caused asset values to drop. Investment managers and indeed all stakeholders must carefully review the constitutional documents before considering any side pocket or in specie distribution mechanism.
It remains to be seen whether informal workouts will become less common in the Cayman Islands due to the new restructuring officer regime which came into force in the Cayman Islands in mid-2022. Under this new legislative regime, the company will enjoy an instant extra-territorial moratorium against unsecured action upon filing for the appointment of the restructuring officer and the company is no longer required to appoint provisional liquidators to enjoy a mortarium. It is a stand-alone regime. The appointment of a restructuring officer generally requires some evidence that the company's affairs are capable of being restructured. Evidence of having already conducted some consensual negotiations will usually be helpful in this respect, but is not necessarily a prerequisite. This modernised approach to restructuring may reduce any “stigma” previously associated with attempts to restructure via the provisional liquidation route. However, and while the restructuring regime is modernised and might be considered a more business friendly model, it is still a formal court process that will be subject to the Court’s scrutiny and ultimate discretion in appointing a restructuring officer.