Cayman Islands’ New Restructuring Regime: Modern Lands and a Modernized Approach | Conyers
[co-author: Sam Cole]*
Cayman Islands companies have dominated the restructuring news cycle recently for a variety of reasons, including recent court commentary on the effect of obtaining recognition under Chapter 15 of the US Bankruptcy Code.
Although the Hong Kong court recently ruled otherwise, the US bankruptcy court has now clarified that, provided a foreign court properly exercises jurisdiction over a foreign debtor in a proceeding insolvency and the foreign court’s proceedings are appropriate, an order of the foreign court approving a scheme or other restructuring plan that modifies or cancels debt governed by New York law is enforceable and effective.
This recent clarification comes at a time when significant amendments to Part V of the Cayman Islands Companies Act (the “Act”) are due to come into force and revamp the national restructuring regime. Amendments to the law are planned to introduce the role of a “restructuring agent” and an original process through a new one “restructuring petition ». The effective ordinance for the amendments to the law has been approved, with an effective date of August 31, 2022.
The restructuring agent regime will provide a clearer demarcation between separate liquidation and salvage routes. Instead of being required to submit a liquidation request in order to then promote a restructuring, it will be possible to initiate restructuring efforts according to a tailor-made method with the benefit of a legal moratorium from the filing of the request. of restructuring.
The recent case of Modern Land, involving cross-border recognition of a Cayman Islands plan of arrangement, and the modernized Cayman Islands restructuring framework are discussed below.
Modern Land (China) Co., Ltd. (“Modern Land”) is a company incorporated in the Cayman Islands and whose shares are listed on the Hong Kong Stock Exchange. Modern Land is the holding company of a group that carries out real estate investments and developments in China and the United States.
Faced with liquidity problems, Modern Land wished to adopt a conventional approach to restructuring certain major debts by proposing a plan of arrangement at its place of incorporation. Notes governed by New York law were the debt instrument in question. After the plan was approved by the Cayman Court, Modern Land filed for recognition of the plan under Chapter 15 of the US Bankruptcy Code.
The petition was filed in the United States shortly after a Hong Kong court ruling, which involved recognizing provisional liquidators and approving a plan of arrangement for Rare Earth Magnesium Technology Group (“Rare Earth” ), a Bermudian company. incorporated company. In this case, Rare Earth and the Provisional Liquidators pursued a debt restructuring that led to the proposal and sanctioning of a Hong Kong Scheme of Arrangement.
During the explanatory memorandum to the Rare Earth Approval Order, some obiter dictated remarks were made regarding the effect of recognition via Chapter 15 of the US Bankruptcy Code. It has been suggested that, as the Rule in Gibbs provides that a debt is considered discharged only if it is compromised in accordance with the law of the jurisdiction which governs the law of debt, substantive proceedings may be required in that jurisdiction to guard against possible attacks elsewhere . It has been indicated that Chapter 15 cannot be considered substantial insofar as it does not itself function as a US-governed compromise or debt relief.
Accordingly, it has been said that an “offshore” arrangement (e.g. in Bermuda or the Cayman Islands) merely recognized in the United States cannot bind a creditor (e.g. in Hong Kong) that did not participate to the foreign arrangement process.
Subsequently, in the context of the Modern Land decision, the US bankruptcy court ruled that some of the Hong Kong court’s comments in Rare Earth were not correct under US law. The United States Bankruptcy Court ruled in Modern Land that a Cayman Islands plan of arrangement recognized as a main proceeding under Chapter 15 would constitute a substantial discharge of debt governed by New York law. This is an important clarification for lawyers and restructuring office holders.
It should be noted that after receiving submissions and additional evidence on this point, the U.S. Bankruptcy Court was satisfied that Modern Land had its center of primary interests (COMI) in the Cayman Islands and that the Cayman Project could be recognized as a “foreign project”. main proceedings”. In US law, under Chapter 15, the debtor’s head office is presumed to be the center of the debtor’s main interests, although this presumption can be rebutted.
As noted in Modern Land’s notice, neither Modern Land nor any of its creditors had filed for liquidation in the Cayman Islands. There were also no independent, court-appointed agents to oversee the process. Instead, Modern Land negotiated a restructuring support agreement and made a consensual arrangement based on it.
In determining whether COMI was in the Cayman Islands, the U.S. Bankruptcy Court observed in Modern Land that the debtor would have had a “case easier if [officeholders] had been appointedin the Cayman Islands. This is consistent with analysis of previous cases involving Cayman Islands companies in US bankruptcy court, such as Fairfield Sentinel and Suntech Power Holdings. Therefore, in addition to the obvious benefits of fiduciary oversight and court protection, it is clear that, at least from a U.S. perspective, the appointment of independent officials can help establish a presence and a connection to a particular jurisdiction.
In light of the decision in Modern Land and the current focus on debt restructuring of Cayman Islands corporations, the new restructuring agent regime is timely and should be a key part of the options analysis for directors and advisers of Cayman Islands companies.
Some of the important features of the new regime are:
- A company may seek the appointment of restructuring officers on the grounds that (i) the company is or may become unable to pay its debts; and (ii) intends to present a compromise or arrangement to its creditors
- The Restructuring Petition for the appointment of a Restructuring Officer may be brought by the directors of a corporation: (i) without a shareholder resolution and/or express power to petition in its articles of association; and (ii) without the need to file a liquidation petition
- The moratorium will occur from the presentation of the motion requesting the appointment of restructuring agents, rather than from the date of appointment of office holders
- The default position is that it will be a inter partes process with sufficient advance notice to be given to all stakeholders
- The powers of a restructuring agent will be flexible and will be defined by the terms of the appointment order made by the Cayman Court. The extent to which the directors will continue to manage the affairs of the relevant company will be defined by the order and will depend on the facts of the particular case.
- Secured creditors with a security on all or part of the company’s assets may always assert their security without authorization from the court and without referral to the corporate officers.
Under the new regime, if there is a workable proposal to submit to stakeholders and a restructuring manager is appointed, a request for sanction of a compromise or arrangement with creditors and/or partners can be made as part of the restructuring procedure without the need to initiate a separate procedure. to promote a plan of arrangement under section 86 of the Companies Act. If the restructuring fails and the company is ultimately dissolved, the liquidation will be deemed to have commenced from the date of submission of the restructuring application. Accordingly, whether successful or not, there will be an efficient path to a reasonable outcome.
Although lawmakers around the world have sought to give administrators a break during the global pandemic, these are not permanent measures. As the world begins to return to some level of normalcy, directors would be wise to re-evaluate any cavalier tendencies that have developed while management has been granted a “safe harbor” or “free pass”. “. The key to a successful restructuring, through the Restructuring Office scheme or otherwise, will be prompt action with the right team of advisors to guide the process.
As the decision in Modern Land underlined, a Cayman Islands restructuring process – coupled with overseas recognition (if necessary) – will continue to be a sensible and effective method by which large multinational groups can seek to reorganize their debt and other affairs.
*Sam Cole, director, Kroll.