BVI, Bermuda and Cayman Islands Restructuring & Insolvency Guide

Transcription

1 BVI, Bermuda and Cayman Islands Restructuring & Insolvency Guide

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3 Insolvency BVI Insolvency Guide in 60 seconds 17 Bermuda Insolvency Guide in 60 seconds 21 Cayman Islands Insolvency Guide in 60 Seconds 25 Restructuring Restructuring in the BVI 29 Restructuring in Bermuda 37 Restructuring in the Cayman Islands 43 Schemes of Arrangement Main English Cases 51 BVI Schemes of Arrangement 57 Bermuda Schemes of Arrangement 58 Cayman Islands Schemes of Arrangement 59 Alternative Company Driven Restructuring Bermuda 68 Cayman 71 Migration Why migrate 74 How to migrate 75

4 Editor s Message Ian Mann Head of Offshore Restructuring & Insolvency, Asia Ian.mann@harneys.com I am delighted to provide you with a personal copy of Harneys BVI, Bermuda and Cayman Islands Restructuring & Insolvency Guide. It is intended to spur debate, stimulate ideas and build friendship amongst our valued professional clients. Harneys is a tenacious, driven and fiercely ambitious firm conscious of its role as a thought-leader in this genuinely thrilling developing area of the law. The Guide is also a show of appreciation a big thank you for your support of Harneys, which we do not take for granted. We truly value and appreciate your business. Harneys has been involved in every major Offshore insolvency/restructuring of recent times: Alibaba, Axiom, Birmingham City Football Club, Centaur, China Fisheries, China Shanshui, Greens Holdings, China Lumena, LDK Solar, L Oreal/Magic Holdings, Mongolian Mining Corporation, Rightway, Titan Petrochemicals and Suntech. We are fortunate therefore to be able to say that our depth of experience and knowledge is simply second to none. We can proudly say that we are responsible for driving and developing new cutting edge offshore law, with particular reference to parallel schemes of arrangement and cross-border common law co-operation. Check out our Offshore litigation blog: a hip new blog written in a refreshing style dedicated to the world of Offshore litigation including exciting legal developments, the appointment of new Judges, Offshore Court lists, video content, interviews with Liquidators, Court staff/company Registrars; and a slice of our island life and culture. November 2016

5 Harneys Restructuring & Insolvency Practice Harneys have acted in some of the largest and most complex cross-border restructurings and insolvencies of recent times. Our client base is diverse, encompassing leading international accountancy practices, onshore law firms, financial institutions, insolvency office holders, official and unofficial creditors committees, private equity sponsors, hedge funds, debtor in possession lenders, directors, trustees, shareholders and corporate debtors. We frequently advise lenders and investors at all levels of the capital structure, corporates and insolvency officeholders on the use of offshore schemes of arrangement when used in parallel with other jurisdictional processes, such as Chapter 11 of the U.S. Bankruptcy Code or parallel schemes of arrangement in the common law jurisdictions. Others areas of expertise include: Debt and equity rescheduling and refinancing Schemes of arrangement Distressed mergers and acquisitions Security enhancement and prioritisation Distressed funds advice and Debt recovery Debt for equity swaps Formal insolvency proceedings and office holders conduct, powers and regulation Out-of-court restructurings and refinancings Recognition and joint protocol proceedings Workouts and enforcement of security Contingency planning and implementation Directors duties and claims against auditors, fund administrators and other service providers a go-to for insolvency, restructuring and disputes Chambers Asia-Pacific 5

6 Experience Restructuring and Insolvency Acting in Suntech provisional liquidation and restructuring Acting in China Shanshui Scheme of Arrangement in Alibaba Acting for Ad Hoc Committee of Bond Holders in LDK Solar Proposing scheme of arrangement in L Oreal/Magic Holdings Restructuring of Axiom Acting in China Fisheries and Mongolian Mining Corporation Restructuring through a scheme of arrangement in PRC real estate giant, Rightway Advising and acting for the Trustee of Lehman Brothers Inc. (in liquidation) appointed under the US Securities Investor Protection Act 1970 in proceedings relating to assets held by various Lehman Brothers entities in Hong Kong Advising an international commercial bank in High Court proceedings arising out of the debt restructuring arrangements for a large property development and investment group in Hong Kong Advising Commerzbank in a US$40 million claim against the collapsed Peregrine Group, which was one of the first cases of its kind to examine Herstatt Risk Advising a Hong Kong main board listed company, its subsidiaries and directors in defending more than 10 claims and proceedings brought by an ex-subsidiary which went into liquidation, including complex issues of set-off on inter-company transactions and fraudulent preference claims Advising a petitioning creditor, Bankers Trust, in relation to an ex-parte application for the appointment of provisional liquidators over Carrian Investments, the largest insolvency in Hong Kong s corporate history at the time Advising a majority shareholder of a Hong Kong joint venture in relation to an application for winding up the joint venture on just and equitable grounds, as well as a separate derivative action to recover loss arising from the unauthorised acts undertaken by the other shareholder Advising liquidators of a shipping company which held properties in the PRC which were subject to execution orders granted by PRC courts pursuant to judgments obtained by creditors in the PRC. The liquidation involves issues of cross-border insolvency, disposition after winding up and PRC legislation Advising Bank of St Petersburg in a highly complex asset trace through South America, Cyprus, BVI and Russia Advising the majority creditors of the Rightway Group in opposing applications to appoint liquidators over Rightway entities. The applications arose out of a US$500 million syndicated loan to Rightway and were made simultaneously in the BVI, Cayman and Hong Kong. In the BVI the application was successfully dismissed, on the ground of lack of standing Advising the US Receiver, Brick Kane, in proceedings in the BVI and Hong Kong to seek the recovery of assets globally, following an alleged multi-million dollar fraud perpetrated against individuals and 6

7 institutional investors. The case involves complex issues of cross-border recognition arising from regulatory appointments and local Insolvency Act appointments, as well as international asset tracing Advising a large Puerto Rican Bank in a multi-jurisdictional receivership case in a $100+ million dollar security enforcement claim against Scrub Island Resort. This addressed cross-border implications of an interim receiver s powers to hold the ring between competing creditors and debtors over BVI assets. It also considers a debtor s attempt to avoid enforcement by US Chapter 11 proceedings, judicial comity and the role of a BVI receiver in US Chapter 11 proceedings Advising the successful party in an application to terminate the liquidation of a BVI company. The company was converted from a voluntary solvent liquidation based on the assessment of the liquidator. All applications as far as the Privy Council have been successfully resisted Advising Huawei in the BVI and Cayman with respect to their entire West African telecommunications networks. The coordinated effort through Hong Kong has already yielded two successful heavily contested applications in Cayman and the BVI Acting in relation to the separate liquidations arising out of the fraudulently run (i) K1 Funds, (ii) JJM Fund and (iii) Ark Diversified Funds that affected investors across Europe. These have involved recovery actions against wrongdoers such as directors and third party advisors in a number of jurisdictions Worked to successfully obtain ex parte freezing and other relief over disputed assets held in a number of complex BVI structures. Instructed by the heirs of Badri Patarkatsishvili, a Georgian oligarch who formerly shared a business empire with Boris Berezovsky. The injunctive relief was successfully obtained on an extremely urgent basis. The litigation was particularly complex due to the wide variety of issues, including the fast-developing jurisdiction of "Black Swan" injunctions, complex questions of conflict of laws and renvoi, shareholder disputes, probate, trusteeship, and locus under foreign and local laws Acting as BVI counsel to the joint administrators of the Estate of Nina Wang Advising on the scheme of arrangement in the Titan Petrochemicals Group 7

8 The Team Ian Mann PARTNER HONG KONG Joanne Verbiesen PARTNER HONG KONG James Noble PARTNER HONG KONG

9 Chai Ridgers COUNSEL HONG KONG Adrienne Chan SENIOR ASSOCIATE HONG KONG Lilla Zuill ASSOCIATE HONG KONG

10 Deirdre MacNamara ASSOCIATE HONG KONG Paula Kay ASSOCIATE HONG KONG Natalie Lee ASSOCIATE HONG KONG

11 Why offshore? Neutrality Common law system - final appeal to the Privy Council in London No direct tax (e.g. capital gains tax) No stamp duty for share transfers Light but effective regulatory constraints Lack of prohibition on financial assistance Streamlined and flexible process for various corporate actions (e.g. share buy-back, distributions, migration) Creditor friendly 11

12 Typical North Asia-Pacific Group Structure Guarantee Founder Guarantee Warrants Listco (Cayman) HK Bank Debt US$500M unsecured bond issue Singapore Co BVI Offshore Investors HK Co Security over offshore assets Offshore Assets Offshore Onshore Banks WFOE Onshore Onshore Loans Guarantee Operating Companies Security interest in onshore assets Onshore Assets 12

13 The Stages of Financial and Operational Corporate Insolvency and Restructuring Shock Moving on Denial Blame Time 13

14 14 Insolvency

15 British Virgin Islands 15

16 The British Virgin Islands is a leading international finance centre with a strong domestic economy driven by high-end real estate developments. As a British Overseas Territory, the British Virgin Islands is a tax neutral, politically stable and economically secure jurisdiction. This reputation, together with a legal system based on English common law, tight control policies and modern legislation has resulted in British Virgin Islands companies being both recognised and accepted as reputable investment vehicles worldwide. The British Virgin Islands is renowned as the growing jurisdiction for joint venture entities, hedge funds, captive insurance registrations and trusts for use in commercial transactions. 16

17 British Virgin Islands Insolvency Guide in 60 seconds Insolvency law in the British Virgin Islands (BVI) is almost entirely codified in the Insolvency Act 2003 and supplemented by the Insolvency Rules The Act was modeled largely on the United Kingdom s Insolvency Act 1986, but with a number of key differences. The following guidance is a summary only. 1. Under BVI law a company will be deemed to be insolvent if it is cash-flow insolvent, balance sheet insolvent or "technically" insolvent (ie it has failed to satisfy a judgment debt or statutory demand letter). Insolvency on any of these bases will enable a creditor to petition the court for the appointment of a liquidator, and may also have other consequences (for example, when a company is insolvent, directors owe their duties to the company's creditors and not its shareholders). A company can also voluntarily appoint a liquidator by passing a qualifying members' resolution. 2. Liquidation is a class right under BVI law, and any petition must be advertised so that members of the class are given notice and may support or oppose the making of an order. If a liquidator is appointed, then the liquidator's primary duty is to collect in all of the company's assets and then distribute them pari passu to the company's creditors, and the legislation confers upon the liquidator wide powers to enable him to do so. 3. Once a liquidator is appointed, unsecured creditors cannot commence legal proceedings against the company without leave, and any rights of action against the company are converted into claims in the liquidation process. Secured creditors generally do not participate in the liquidation process, and may continue to proceed with any enforcement action directly against their collateral pursuant to a valid security interest. A liquidator has a right to disclaim onerous property and unprofitable contracts (but this cannot remove third party rights once they have vested). BVI law only provides for a very small class of preferential creditors, and these are rarely commercially significant in insolvent liquidations. Liquidation commences on the making of an order, and does not "relate back" to the time of the petition. 4. When a company goes into insolvent liquidation, any mutual debts between the company and a creditor intending to prove in the liquidation will be set-off. However, the right of set-off is not mandatory, and can be waived by a creditor provided this does not prejudice other creditors. Any creditor who extended credit to the company at a time when it had notice of the company's insolvency (excluding balance sheet insolvency) cannot set-off. The Insolvency Act has incorporated ISDA Model Netting legislation (pre-2007 form) and so any contractual netting provisions relating to financial contracts will prevail over the statutory insolvency set-off provisions. 5. A liquidator may challenge transactions entered into in the twilight period prior to insolvency where such transactions constitute either an unfair preference, undervalue transaction, voidable floating charge or extortionate credit transaction. In each case (except for extortionate credit transactions) the company must have been insolvent (excluding balance sheet insolvency) at the relevant time, or the transaction caused it to become insolvent. The relevant vulnerability period is two years for connected 17

18 persons, or six months in all other cases. In each case, the statute contains relevant "safe harbours" to protect bona fide arm's length transactions. Under BVI law it is not necessary to demonstrate an "intention to prefer" to challenge a transaction as an unfair preference. 6. A liquidator can also pursue former directors (including shadow or de facto directors) and officers of the company for either misfeasance or insolvent trading. If the directors knew or ought to have concluded that a company could not avoid insolvent liquidation then the directors will be liable except to the extent they took every step reasonably open to them to minimise loss to creditors. A liquidator can also pursue any person involved where the company has been engaged in fraudulent trading. 7. The Insolvency Act also regulates receiverships, including administrative receiverships. Under BVI law it is possible to appoint an administrative receiver pursuant to a floating charge over all or substantially all of a company's assets and undertaking. 8. Although the Insolvency Act also makes provision for administration orders, these provisions have not yet been brought into force. There has been recent talk about potentially bringing them into force (the Government's earlier position had been that they would never be brought into force), and it is unclear at this time what decision is likely to be taken. The provisions in the BVI do differ in some key respects from the English legislation that they were modelled on. Administration orders may be blocked by the holder of a floating charge. An administration order creates a moratorium on enforcing claims against the company, including secured creditor's claims. 9. It is also possible for an insolvent company to enter into a creditor's arrangement under a supervisor, and thereby restructure the company's debts. Such arrangements cannot affect the rights of secured creditors or preferential creditors without their consent. Such arrangements have not yet proved popular in the BVI. 10. The Insolvency Act also has two parts dealing with cross-border issues. Part 18 sets out the UNCITRAL model law on cross-border insolvency, and this has not been brought into force. Part 19 deals with orders in aid of foreign proceedings, and broadly provides for the cooperation of the BVI court in a foreign liquidation. Part 19 contains an express qualification that assistance cannot be rendered in such a way as to interfere with the rights of a secured creditor under their security. 11. In order to act as a liquidator in an insolvent liquidation, administrative receiver (but not a simple receiver), supervisor of an arrangement or administrator (if administration is ever brought into force) a person must be a licensed insolvency practitioner. A practitioner must be resident in the BVI to obtain a licence. However, it is possible for a foreign insolvency practitioner to be appointed jointly with the BVI resident licensed insolvency practitioner. 18

19 19 Bermuda

20 Bermuda is a respected international finance centre recognised for its sophisticated financial, legal and professional services. The world s largest captive domicile, Bermuda is also one of the top three reinsurance centres and the leading market for insurance-linked securities. While Bermuda is best known for its insurance sector, the island offers international businesses a number of other advanced offshore solutions including asset management products, shipping and aircraft and company incorporation. 20

21 Bermuda Insolvency Guide in 60 seconds Insolvency law in Bermuda is principally regulated by the Companies Act 1981 and the Companies (Winding-Up) Rules 1982, supplemented by a wide body of case law. The following guidance is summary only. 1. Under Bermuda law a company may be wound up on the basis of insolvency if it is unable to pay its debts as they fall due. A company is treated as unable to pay its debts if it fails to satisfy a valid statutory demand, execution on a judgment is returned wholly or partly unsatisfied, or it is otherwise proved to the satisfaction of the court that the company is unable to pay its debt. The courts are also prepared to wind up a company if it is shown that the value of company's liabilities is greater than the value of its assets. 2. Upon making an order for the appointment of a liquidator, the commencement of the winding-up is deemed to relate back to the time of the presentation of the petition, and all dispositions of the company's property between the date of the petition and order are void unless the Court otherwise orders. 3. Establishing insolvency will enable a creditor to petition the court for the appointment of a liquidator, and may also have other consequences (for example, when a company is insolvent, directors must exercise their powers in the best interests of the company having regard to the interests of its creditors rather than its members). The members of a company can also voluntarily appoint a liquidator by passing a resolution of members, and if the company is unable to pay its debts as they fall due then the voluntary winding-up will be conducted subject to the control of the creditors. 4. Liquidation is a class right under Bermuda law. Once appointed, the liquidator's primary duty is to collect in all of the company's assets and then distribute them pari passu to the company's creditors in accordance with the statutory scheme of distribution, and the legislation confers upon the liquidator wide powers to enable him to do so. Once a liquidator is appointed, unsecured creditors cannot commence legal proceedings against the company in Bermuda without the permission of the court and rights of action against the company are converted into claims in the liquidation process. Secured creditors generally do not participate in the liquidation process, and may continue to proceed with any enforcement action directly against their collateral pursuant to a valid security interest. Bermuda law only provides for a relatively small class of preferential creditors. 5. Under Bermuda law, a liquidator has the power to disclaim onerous property or unprofitable or unsaleable contracts with the approval of the Court. Any person who suffers a loss as a result of the disclaimer shall be deemed to be a creditor and may prove in the liquidation the amount of the debt. 6. When a company goes into winding-up, any mutual debts between the company and a creditor will be mandatorily setoff. However, any creditor who extended credit to the company at a time when it had notice that the company was in difficulties cannot set-off. There are no supplementary provisions under Bermuda law relating to contractual netting. 7. A liquidator may challenge transactions entered into in the twilight period prior to insolvency where such transactions constitute a fraudulent preference. The company must have been unable to pay its debts at the relevant time, or the transaction caused it to become unable to pay its debts. In the case of fraudulent preferences, the relevant period is within six months of the commencement of the windingup. To set aside such payments, it is necessary to show that there was a dominant "intention to prefer" the relevant creditor(s). There is no separate avoidance regime for undervalue transactions. A floating charge granted in the 12 months prior to the commencement of winding-up may also be set aside if 21

22 granted for no consideration. Further, any eligible creditor may challenge a transaction entered into by a company if the dominant purpose of the transaction was to put assets beyond the reach of creditors. 8. A liquidator can also pursue former directors (including shadow or de facto directors) and officers of the company for either misfeasance or fraudulent trading. If it appears that any person has been carrying on the business of the company to defraud creditors or for any fraudulent purpose the liquidator may apply to the court for an order that such persons make a contribution to the company's assets. 9. It is also possible for an insolvent company to enter into a scheme of arrangement to try and restructure its debts. Companies proposing to implement a scheme of arrangement will often apply to the Court for the appointment of a provisional liquidator to stay claims by any unsecured creditors whilst they try to implement the scheme, however, this does not affect the rights of secured creditors. A majority in number and representing 75 per cent in value of those present and voting at each class meeting must vote in favour of a scheme of arrangement. 10. There is no licensing requirement under Bermuda law in relation to acting as the liquidator of a company. 11. There are no statutory provisions in Bermuda relating to the conduct of cross-border insolvency proceedings or for cooperation with foreign office holders. However, there are various judicial decisions which provide guidance in this area and show that cross-border cooperation will be carefully considered. 22

23 The Cayman Islands 23

24 The Cayman Island is the fifth-largest banking centre in the world and one of the world s leading international financial centres. The Cayman Islands is a highly regulated and politically stable jurisdiction which offers a wide array of services including mutual funds, company management, structured financing, shipping registration, insurance, and securities listings on the stock exchange. Since the introduction of the Mutual Funds Law in in 1933, which has been emulated by jurisdictions around the world, the Cayman Islands have become the world s leading offshore investment funds jurisdiction. 24

25 Cayman Islands Insolvency Guide in 60 Seconds Insolvency law in the Cayman Islands is principally regulated by the Companies Law (2016 Revision) and the Companies Winding Up Rules 2008, and they are supplemented by a wide body of case law. The following guidance is summary only. 1. Under Cayman Islands law a company may be wound up on the basis of insolvency if it is unable to pay its debts as they fall due. A company is treated as unable to pay its debts if it fails to satisfy a valid statutory demand, execution on a judgment is returned wholly or partly unsatisfied, or it is otherwise proved to the satisfaction of the court that the company is unable to pay its debt. The courts are also prepared to wind up a company on the just and equitable ground if it is shown that the value of company's liabilities is greater than the value of its assets. 2. Upon making an order for the appointment of a liquidator, the commencement of the winding up is deemed to relate back to the time of the presentation of the petition, and all dispositions of the company's property between the date of the petition and order are void unless the court otherwise orders. 3. Establishing insolvency will enable a creditor to petition the court for the appointment of a liquidator, and may also have other consequences (for example, when a company is insolvent, directors must exercise their powers in the best interests of the company having regard to the interests of its creditors rather than its members). The members of a company can also voluntarily appoint a liquidator by passing an special resolution (or an ordinary resolution if the company is insolvent), and if the company is unable to pay its debts as they fall due then the voluntary winding up will be conducted subject to the supervision of the court. "Non-petition" clauses have statutory force in the Cayman Islands. 4. Liquidation is a class right under Cayman Islands law. Once appointed, the liquidator's primary duty is to collect in all of the company's assets and then distribute them pari passu to the company's creditors in accordance with the statutory scheme of distribution, and the legislation confers upon the liquidator wide powers to enable him to do so. Once a liquidator is appointed, unsecured creditors cannot commence legal proceedings against the company in the Cayman Islands without the permission of the court; rights of action against the company are converted into claims in the liquidation process. Secured creditors generally do not participate in the liquidation process, and may continue to proceed with any enforcement action directly against their collateral pursuant to a valid security interest. Cayman Islands law only provides for a very small class of preferential creditors, and these are rarely commercially significant in insolvent liquidations. 5. A liquidator has no right to disclaim either onerous property or unprofitable contracts under Cayman Islands law. 6. When a company goes into winding up, any mutual debts between the company and a creditor will be set-off. Any creditor who extended credit to the company at a time when it had notice of the winding up petition cannot set-off. The Companies Law also includes provisions which provide that any netting agreement relating to financial contracts (including multi-lateral netting) will prevail over the statutory insolvency set-off provisions. 25

26 7. A liquidator may challenge transactions entered into in the twilight period prior to insolvency where such transactions constitute either a preference or a disposition at an undervalue. There is no separate avoidance regime for floating charges. In each case the company must have been unable to pay its debts at the relevant time, or the transaction caused it to become unable to pay its debts. The relevant vulnerability period is six months prior to the commencement of winding up in the case of preferences, and six years in the case of dispositions at an undervalue. In relation to preferences it is necessary to show an "intention to prefer" on the part of the insolvent company to challenge a transaction as a preference, but if the preferred party is a related party there is presumed to be an intention to prefer. 8. A liquidator can also pursue former directors (including shadow or de facto directors) and officers of the company for either misfeasance or fraudulent trading. If it appears that any person has been carrying on the business of the company to defraud creditors or for any fraudulent purpose the liquidator may apply to the court for an order that such persons make a contribution to the company's assets. 9. It is also possible for an insolvent company to enter into a scheme of arrangement to try and restructure its debts. Companies proposing to implement a scheme of arrangement will often apply to the court for the appointment of a provisional liquidator to stay claims by any unsecured creditors whilst they try to implement the scheme, however, this does not affect the rights of secured creditors. Any scheme of arrangement must be approved by each class of creditors by three quarters of creditors by value and a majority in number. 10. In order to act as a liquidator winding up an insolvent company a person must be a licensed insolvency practitioner. A practitioner must be resident in the Cayman Islands to obtain a licence. However, it is possible for a foreign insolvency practitioner to be appointed jointly with the Cayman Islands resident licensed insolvency practitioner. 11. The Companies Winding Up Rules 2008 make provision for the liquidator of a company to enter into protocols with a foreign officeholder appointed by a foreign court in another jurisdiction to promote the orderly winding up of the company's affairs and to avoid conflict between the winding up proceedings the Cayman Islands and the foreign jurisdiction. 26

27 Insolvency and Restructuring Procedures BVI Cayman Bermuda Schemes of Arrangement Yes Yes Yes Plans of Arrangement Yes No No Creditors Arrangements Yes No No Administrative Receivership Yes Yes Yes Administration No No No Appointment of Provisional Liquidator Yes Yes Yes 27

28 Restructuring 28

29 Restructuring in the British Virgin Islands 1 INTRODUCTION The BVI has two statutes that, between them, provide a comprehensive insolvency and restructuring regime: the Insolvency Act 2003 (the IA) and the BVI Business Companies Act 2004 (the BCA). For companies seeking to reorganise a company s capital or debts there are three main routes available: 1 Plans of arrangement; 2 Schemes of arrangement; and 3 Creditors arrangement. Plans and schemes of arrangement are governed by the BCA and creditors arrangements are governed by the IA. None of these routes is directly analogous either to the English regime relating to company voluntary arrangements under Part 1 of the Insolvency Act 1986 or to that concerning company reorganisation under Chapter 11 of the United States Bankruptcy Code. Unlike other offshore jurisdictions, such as the Cayman Islands and Bermuda, the BVI does not use provisional liquidators for restructuring; rather, provisional liquidators tend to be appointed simply to preserve assets until the application for the appointment of a full liquidator can be heard. The options listed above provide a useful and flexible mechanism for those companies seeking to reorganise or restructure their debts and liabilities. 2 FORMAL RESTRUCTURING PROCEDURES 2.1 Plans of arrangement In contrast to schemes of arrangement and creditors arrangements which are based on English law, plans of arrangement were developed under Canadian law and first introduced into the BVI by the International Business Companies Act Section 177 of the BCA defines the term arrangement as including the following: (a) an amendment to the memorandum or articles; (b) a reorganisation or reconstruction of a company; (c) a merger or consolidation of one or more companies that are companies registered under this Act with one or more other companies, if the surviving company or the consolidated company is a company incorporated under this Act; (d) a separation of two or more businesses carried on by a company; 29

30 (e) any sale, transfer, exchange or other disposition of any part of the assets or business of a company to any person in exchange for shares, debt obligations or other securities of that other person, or money or other assets, or a combination thereof; (f) any sale, transfer, exchange or other disposition of shares, debt obligations or other securities in a company held by the holders thereof for shares, debt obligations or other securities in the company or money or other property, or a combination thereof; (g) a dissolution of a company; and (h) any combination of any of the things specified in paragraphs (a) to (g). 1 This definition is clearly very broad. If a company s directors determine that it is in the best interests of the company, or the creditors or members of the company, they may approve a plan of arrangement. The plan must contain details of the proposed arrangement, and once the directors have approved the plan, the company must apply to the court for approval. If the company is in voluntary liquidation, the voluntary liquidator may approve a plan of arrangement and apply to the court for approval; if, however, the company is in insolvent liquidation, the liquidator must authorise the directors to approve the plan and take the other steps set out in the BCA. On hearing an application for approval, the court may make a variety of directions as to how the plan is to proceed, including requiring the company to give notice of the plan to specified persons or classes of persons, determining whether or not the approval of another person or class of person must be obtained, determining whether or not any shareholder or creditor of the company is entitled to dissent from the plan, conducting a hearing in relation to the adoption of the plan, and deciding whether to approve or reject the plan. If the court determines that a shareholder is entitled to dissent from the plan, that shareholder is permitted to demand payment of the fair value of his shares. If the fair value of shares cannot be agreed between the shareholder and the company, there is a statutory framework for referral of the question to a panel of appraisers, whose decision is binding. Once the plan has been approved by the court, the directors (or voluntary liquidator) must then confirm the plan and comply with the court s directions relating to notice and obtaining the approval of specified parties. Once this has been done and the necessary approvals have been obtained, the company must execute articles of arrangement, which must contain the plan, the court s order, and details of the manner of approval. These articles must then be filed with the Registrar of Corporate Affairs, who will issue a certificate. The arrangement comes into effect when it is registered. There is no statutory moratorium available in relation to plans of arrangement; therefore, throughout the devising, proposing, and approval phases of a plan of arrangement, the company remains vulnerable to creditors claims. In the case of In re B&A Fertilisers Ltd; In re Rio Verde Minerals Development Corp, 2 a plan of arrangement was used as an alternative to the merger provisions under sections 170 to 173 of the BCA. B&A Brazil wished to take over Rio Verde with the consent of the board of Rio Verde. The parties 1 2 Section 177 BCA. In this regard, section 177 of the BCA provides a restructuring route similar to that available in England under section 900 of the Companies Act BVIHC (COM) 132 of 2012 (unreported) 22 January

31 therefore proposed a plan of arrangement under section 177 whereby each member of Rio Verde would have its shares in Rio Verde exchanged for an equivalent number of redeemable shares in B&A which would be redeemed by B&A at the same share price as Rio Verde s then share price the next business day. The effect of the plan of arrangement would be to achieve the takeover of Rio Verde by B&A. This route was chosen by the parties as a means of enabling Rio Verde to divest itself of its obligations to the holder of some 18 million warrants. The original plan of arrangement had proposed that upon the merger each of the warrants were to be repurchased and cancelled by B&A for no consideration. The Commercial Court judge however rejected this proposal on the basis that it amounted to forfeiture, saying [T]here is nothing in section 177 which permits a company to promote an arrangement under which property of any person is forfeited or confiscated and the Court could not approve an arrangement which purported to have any such effect. The court gave directions that any plan would have to be subject to the approval of the warrant holders and that any plan affecting warrant holder must entitle members and warrant holder of Rio Verde to dissent in accordance with the provisions of section 179. Rio Verde is significant for several reasons: 1 Firstly, section 177 of the BCA does not provide that a threshold number of shareholders must approve the plan. This is in contrast to the majority in number and 75 per cent in value test under a scheme of arrangement (see below). Under section 177(2) it is the directors of the company that determine whether or not the proposed plan is in the best interests of the company; however, the Court will not merely rubber stamp a plan of arrangement which has been proposed by the board under section 177(2) but will assess it critically. 2 Secondly, section 177 does not provide an automatic right to dissent. Under section 177(4)(c), the Court has a discretion to allow any holder of shares, debt obligations or other securities to dissent under section 179. The judge considered that warrant holders would be within the ambit of section 179 as holders of other securities under section 177(4)(c). Once a final order is made, it cannot be appealed except on a point of law. If a party does wish to appeal on a question of law, the notice of appeal must be filed within 20 days immediately following the date of the order. 2.2 Schemes of arrangement Section 179A of the BCA deals with schemes of arrangement between a company and its creditors and/or members, or any class or classes of them. The section does not use the term scheme of arrangement specifically in the body of the text but rather refers to compromise or arrangement and further provides that arrangement includes a reorganisation of the company s share capital by the 31

32 consolidation of shares of different classes or by the division of shares into shares of different classes or by both of them. 3 Section 179A does not contain a great deal of detail with regard to the procedure for obtaining the court s sanction of a scheme of arrangement. The BVI court has therefore tended to adopt the practice followed by the English courts and, in particular, in the Chancery Division s Practice Statement (Companies: Schemes of Arrangement) [2002] 1 WLR Whereas plans of arrangement may be very broad, schemes of arrangement specifically relate to the company s relations with its shareholders and/or creditors. Schemes are aimed at facilitating an agreement that can enable the company to continue as a going concern and avoid formal insolvency proceedings. They are only available in relation to companies that have been formed under the BCA or companies incorporated under earlier BVI legislation or incorporated in another jurisdiction but continued under the BVI legislation, including companies in solvent or insolvent liquidation. If the company proposes to enter into an arrangement with its creditors or members (or a class of either of those groups), the company will apply to court for an order that it should convene a meeting of creditors or members, as the case may be, to vote on whether or not to approve the scheme (the Convening Hearing). An application for such an order may be made by the company, a creditor, a member, an administrator if the company is in administration, or a liquidator (if one has been appointed, whether solvent or insolvent). 4 At the Convening Hearing the court will consider issues concerning class composition and jurisdiction. As with an English scheme of arrangement, members and creditors are divided into classes depending on the respective rights that exist between them and the company, and the extent to which those rights stand to be varied by the scheme. The result is that often different classes of creditors and members are treated differently and a separate scheme meeting will be required for each different class. If, at the meeting(s), a majority in number representing 75 per cent in value of the company s creditors or shareholders (or class thereof) present or by proxy vote to approve the scheme, the scheme will bind 1 all creditors or shareholders (as the case may be), 2 the company, 3 any liquidator that has been appointed, and 4 any contributory, subject only to the court s approval. If the majority rejects the scheme, it will not be approved. 5 If the creditors and/or shareholders vote to approve the scheme, then an application must be made for the court s approval. 6 The court will not then rubber-stamp the scheme simply because it has been Section 179A(6) BCA. Section 179A(2) BCA. Section 179A(3) BCA. Section 179A(3) BCA. 32

33 approved at the scheme meeting(s): it will have to be sure that the scheme is fair and reasonable, and that it will be efficacious. Once a scheme has been sanctioned it must be filed with the Registrar of Corporate Affairs. The scheme takes effect from the moment of filing, and from that date onwards every copy of the company s memorandum issued after that date must have a copy of the order annexed to it. 7 As with plans of arrangement, there is no moratorium available in the context of schemes of arrangement, so they remain liable to upset by creditors claims until sanctioned by the court. If an order is made approving a scheme of arrangement, the provisions of the BCA relating to mergers and consolidations of companies, plans of arrangement, disposition of large assets, redemption of minority shareholdings, and the rights of dissenters cease to apply. 8 In 2010 Harneys acted for Amber Petroleum Ltd in the first scheme of arrangement to be approved in the BVI. This case involved a reverse takeover of AIM listed AfNat Resources Limited. In that case, each Amber shareholder was invited to vote on a scheme which allowed them to exchange each Amber share they held for six new shares in AfNat. It thereby provided an efficient means to conduct a takeover without the complicating factor of statutory rights for dissenters. Harneys was also involved in the case of Sport Financiera SA v Olympic Gold Holdings Limited. 9 This involved a scheme of arrangement over a holding company whose subsidiary held a licence to operate the Ukrainian National Lottery. It had a number of loan creditors and one of the creditors was Sport Financiera SA (SFS), which was owed substantial damages that had been awarded in its favour pursuant to an arbitration award. The scheme had been approved by the court in 2010 and it differentiated between preferred and non-preferred creditors. The court was prepared to differentiate between creditors for commercial reasons. Three years after the scheme had been approved, no payments had been made to SFS and it argued that the scheme was not being administered according to its terms. The court was asked to deal with three main Questions: 1 Did the scheme entitle SFS to be paid by a certain date? 2 Could the scheme be amended after it had been sanctioned by the court? 3 Could the scheme could be administered under the supervision of the Court? Addressing the first question, the court held that the terms of the scheme did not give rise to a binding promise that SFS s debt would be repaid by a certain date; rather, it was entitled to a pro rata share of funds available for distribution on a monthly basis. Since no funds were available for distribution, the scheme administrator was not obliged to make any payment. In relation to the second question, the judge said that Section 179A(5) BCA. Section 179A(8) BCA. BVIHC (COM) 452 of 2009 (unreported) 3 October

34 [I]n the absence of an express provision contained within a court sanctioned scheme for variation after sanction, no scheme approved under section 179A can be varied otherwise than through the mechanism of a further Court sanctioned scheme[.] This conclusion was consistent with the express provisions of the scheme. As to the third question, the court held that there was neither precedent nor machinery that enabled the court to supervise the scheme. This case highlights the fact that although a scheme of arrangement may result in a better recovery for a creditor than they might expect in liquidation, the terms of the scheme should make clear whether there is a binding agreement to make payment by a certain date. Additionally, if the parties are likely to want to vary to the scheme after it has been court approved, then an express provision to this effect ought to be included in the scheme. 2.3 Creditors arrangements Part II of the IA creates a route by which companies in financial trouble can enter into arrangements with their unsecured creditors in order to stave off or mitigate the risk of insolvency. It is designed to be a simple process without any court involvement. A company may enter into a creditors arrangement even where it is in liquidation. 10 A creditors arrangement may affect all or part of the company s debts and liabilities and may affect the rights of creditors to receive all or only part of the debts they are owed with the exception that the rights of secured creditors cannot be compromised without their written consent. Also, a creditors arrangement cannot result in a preferential creditor receiving less than he would in liquidation without their written consent. 11 The arrangement may be proposed by any person, but a majority of 75 per cent of the company s unsecured creditors by value must vote in favour of the arrangement in order to approve it and bind dissenters. 12 A supervisor must be appointed to oversee the arrangement, and the supervisor must be a licensed insolvency practitioner. A disgruntled creditor or member may apply to the court for relief on the basis that their interests have been unfairly prejudiced. By contrast with plans and schemes of arrangement under the BCA, it should be noted that a creditors arrangement does not require the court s approval or registration with the Registrar of Corporate Affairs. This appears to be in order to make it a quicker and simpler procedure to invoke; however, there have been relatively few creditors arrangements in the BVI since the provisions were enacted. One way in which creditors arrangements are similar to plans and schemes of arrangements is that there is no moratorium that arises on the commencement of plan; however, as stated above, the effect of the decision by the majority of the company s unsecured creditors to adopt a plan is to cram down any creditors who may have dissented, even where they did not receive notice of the meeting at which Section 17(4) IA. Section 15(4) IA. Insolvency Rules 2005, rule

35 the arrangement was considered (although in such a case they may be able to bring a claim for unfair prejudice). 3 CROSS BORDER RESTRUCTURING Part XVIII of the IA adopts the UNCITRAL Model Law on Cross-Border Insolvency for giving and seeking assistance in insolvency proceedings; however, this Part has not been brought into force, and the generally held view is that it is unlikely to come into force in the near future. Schemes of arrangement are being used more and more in offshore jurisdictions, including in the BVI. One way in which they may be applied is in parallel with schemes in other jurisdictions, in particular in England. The reason a BVI scheme may be necessary in such a situation is because the foreign scheme might otherwise be undermined: notwithstanding the approval of a scheme in England, for example, a dissentient creditor could still apply to the BVI court for a liquidation order, which would frustrate the English scheme. A parallel scheme is often used in this situation because it far from clear that foreign schemes can be recognised under BVI insolvency law. 4 CONCLUSION It can be seen that a number of different restructuring tools are available in the BVI. Whereas the most commonly utilised procedure for restructuring has been the scheme of arrangement, it may well be that the other options are utilised more frequently in the future. It is clear, however, that companies which are incorporated in the BVI have a number of options and if they find themselves in difficulties and they will not be left with no option but to place themselves (or be placed) into liquidation. 35

36 Outline of Steps: BVI Scheme of Arrangement Timing Event File fixed date claim form, draft order, affidavit and exhibit and certificate of urgency (if necessary). As soon as possible after the court documents have been filed. As soon as possible Dispatch Practice Statement Letter outlining the terms of the scheme, to the scheme creditors. Dispatch details of the convening hearing to the scheme creditors. File supplemental affidavit exhibiting scheme documents in final form (if not already done). 1 day before hearing or two days before hearing depending on anticipated length of hearing If possible at least 14 days after filing so as to enable scheme creditors enough time to take advice and decide whether or not to attend the hearing. 13 Lodge hearing bundle, authorities bundle and skeleton argument at court for convening hearing Convening hearing. Day of convening hearing or following day. Procure sealed order from Commercial Registry. 14 As soon as possible after court order has Dispatch copies of scheme circular, court order, been obtained. instructions/proxy forms to scheme creditors Due date for return of forms of proxy for use at the scheme meeting Meeting of scheme creditors to vote on scheme File affidavit confirming outcome of meeting of scheme creditors. This will need to exhibit the Chairman s report. 1 day before hearing or two days before hearing depending on anticipated length of hearing Lodge hearing bundle, authorities bundle and skeleton argument at court Sanction Hearing Procure sealed order from Commercial Registry and file order with BVI Registrar of Corporate Affairs. This will be the scheme s effective date. 13 The exact amount of notice which the court will consider reasonable will depend on the circumstances of the case. If the scheme is complex and there has not been a great deal of consultation with scheme creditors beforehand then more notice is likely to be necessary. 14 The process to obtain a sealed order involves (i) the Judge signing a Minute of Order, (ii) the approved Minute being typed up, and (iii) copies being sealed by the Registrar/Deputy Registrar at the Commercial Registry. Given these different components involving different persons it is often a challenge arranging for an order to be sealed on the same day as the hearing. 36

37 Restructuring in Bermuda 1 INTRODUCTION Bermuda prides itself on its reputation as a blue-chip, offshore financial centre. Boasting a sound regulatory regime and favourable operating conditions, Bermuda has come to be the jurisdiction of choice for the world s captive reinsurers and numerous international holding companies. Consequently the small island nation enjoys exceptional levels of commercial activity. As one would expect though, this activity is not always successful and Bermuda has seen its fair share of insolvent liquidations and restructurings. The statutory framework that exists for both the liquidation and restructuring of companies is found in the Companies Act 1981 (CA 1981) and the Companies (Winding-Up) Rules 1982 (the Winding-Up Rules). Bermuda does not have a separate insolvency act equivalent to the UK Insolvency Act Having long maintained a sound statutory framework by which to conduct liquidations, the Executive and Legislature have been slow to adapt to the rise in prominence of the rescue mentality that has come to dominate modern insolvency theory. As such no statutory framework exists akin to the UK administration process or Chapter 11 of the US Bankruptcy Code, by which to formally restructure a Bermuda incorporated company or to assist the global restructuring of an international group of companies. Legal practitioners and the judiciary have, however, in reliance upon the common law, creatively provided an informal, but effective, ad hoc restructuring regime. They have done this by combining the schemes of arrangement section of the CA 1981 with the court s broad power to appoint provisional liquidators. In doing so they have devised a court sanctioned restructuring process that takes place under the protection of an automatic stay on proceedings as soon as provisional liquidators have been appointed over the restructuring company. 2 BERMUDA INSOLVENCY AND RESTRUCTURING FRAMEWORK 2.1 Schemes of Arrangement Under section 99 of the CA 1981, companies are able to promote a compromise or arrangement between their creditors and/or members (or any class of them) that, if agreed to by a majority in number and value, and subsequently sanctioned by the court, will bind all creditors and/or members whether they consented to the compromise or not. The power to compromise with creditors or members under section 99 CA 1981 is extremely flexible and in essence allows for any form of compromise or arrangement that the particular circumstances require. Schemes of arrangement can be used for a host of objectives outside of a pure restructuring, including mergers and acquisitions, group reorganizations, squeezing out minority shareholders and so on. Despite the fact that schemes of arrangement are not strictly an insolvency restructuring tool, this broad power has become associated with insolvent companies and is commonly used to implement a range of circumstance-specific insolvency restructurings. The main deficiency in relying on schemes of arrangements as a restructuring tool however is the lack of an automatic stay preventing claims against the restructuring company while the scheme is going through the court sanctioning process. As such it is possible for the entire scheme/restructuring to be undermined at any stage before its completion by dissenting party simply issuing liquidation proceedings 37

38 against the company. The remedy to this problem has however been found in the robust use of section 170 of the CA 1981 and the court s power to appoint provisional liquidators. Restructuring Provisional Liquidation Traditionally speaking, when one thinks of the appointment of a provisional liquidator one thinks of them in the traditional dissipation of assets sense, i.e. the appointment is made to ensure that the target company does not dispose of the company s assets prior to a winding up order being made and the appointment of an official liquidator. In these circumstances it is generally always the intent that the target company will ultimately be liquidated. In recent times however a contemporary concept of the provisional liquidator has arisen, namely that of a light touch or restructuring provisional liquidator (Restructuring Provisional Liquidator). When a Restructuring Provisional Liquidator is appointed, the intent is not that the provisional liquidator will prevent the dissipation of assets, but that he will oversee the company s restructuring process (via a scheme). The idea is that the provisional liquidation will remain in place while the restructuring is affected and the Restructuring Provisional Liquidator will be dismissed, without a winding up order ever being made. This will allow the company to return to solvency and resume trading as normal. The benefit to the Restructuring Provisional Liquidator approach is that during the period of the provisional liquidation, the target company will benefit from an automatic stay of proceedings against it. Section 167(4) of the CA 1981 provides that when a provisional liquidator has been appointed, no action or proceeding shall be proceeded with or commenced against the company except by leave of the Court and subject to such terms as the Court may impose. The combined use of a Restructuring Provisional Liquidator in conjunction with the promotion of a scheme of arrangement was first employed in the 1999 seminal restructuring of ICO Global Communications (Holdings) Ltd and has been employed with regularity ever since. Recent examples include the restructurings of British American Insurance Company Ltd, Contel Corporation Limited and Titan Petrochemical Group Ltd, and Energy XXI. 2.2 Implementing a Restructuring through a Scheme of Arrangement and Provisional Liquidation An established practice has developed by which the ad hoc restructuring process described above is typically employed. The first step generally involves the company (although it may be the company s creditors in some instances) presenting a winding up petition in the Supreme Court of Bermuda that does not contain the standard request that the company be wound up. Rather the primary purpose of presenting the petition is to appoint the Restructuring Provisional Liquidator in order to obtain the benefit of an automatic stay of proceedings. As such the winding up petition will usually be accompanied by an application seeking the appointment of one or more Restructuring Provisional Liquidators. At some point after the presentation of the winding up petition, if not at the same time, the company will present a further application for permission to convene a scheme meeting (or meetings if there are different classes of creditor), pursuant to the requirements of section 99(1) of the CA 1981 (the Convening Hearing). At the Convening Hearing the court will not concern itself with the fairness of the terms of the scheme: that will come later. The purpose of the Convening Hearing is two-fold. First, the court will determine whether or not the scheme has sufficient general prospects of success to be worth pursuing, and second, the court will consider whether the composition of classes of creditors is appropriate. The commercial terms of the scheme will generally have been negotiated and documented 38

39 well in advance so they will be presented to the court to inform its decision. If the court is satisfied in both respects outlined above, it will order that a scheme meeting should be convened. At the scheme meeting the terms of the scheme will be put to the creditors and/or members so as to be able to vote on the scheme. The scheme will not automatically become binding upon obtaining the necessary consent of creditors and members at the scheme meeting. Accordingly, after the scheme meeting has concluded, and provided the requisite number of approvals have been obtained, the company will apply to the court for the scheme to be sanctioned. The court will not automatically sanction the scheme but at this hearing the court will scrutinize the terms of the scheme to ensure that the scheme is reasonable and for the benefit of all stakeholders. In this respect the court is typically guided by the views of the majority and will normally only refuse to sanction a scheme that has achieved the necessary approvals if there is some pressing reason to discount the views of the majority. After sanction of the scheme has been obtained, the terms of the scheme will then be implemented. This will usually be done by the company itself with oversight from the Restructuring Provisional Liquidator. Section 99(3) of the CA 1981 also states that a copy of the order sanctioning the scheme must be sent to the Registrar of Companies. The Restructuring Provisional Liquidation will remain in place until the scheme has been fully implemented. Once the terms of the scheme have been fully implemented and the restructuring has essentially been completed, a further and final application will be made to the court seeking the dismissal of the winding up petition. This application will generally be made on the grounds that it is in the best interests of all the stakeholders that the company be allowed to continue trading. The dismissal of the winding up petition generally signifies the end of the restructuring process. 2.3 Assistance in Global Restructurings The above practice has also been used to assist with global restructurings when primary restructuring proceedings are taking place outside of Bermuda but where the restructuring company is incorporated in Bermuda. In this regard schemes are often proposed in Bermuda in parallel to schemes in other jurisdictions. This is done to prevent applications being made in Bermuda by dissenting creditors who are subject to a scheme of arrangement in another jurisdiction, to place the scheme company into liquidation. This is necessary because Bermuda has not adopted the UNCITRAL Model Law on Cross- Border Insolvency or any similar cross-border initiatives. As such, it is not clear that a foreign scheme of arrangement would be recognised in Bermuda. In the ICO Global restructuring mentioned above, the primary purpose of the appointment of Restructuring Provisional Liquidators was to allow the company to pursue a Chapter 11 restructuring in the United States. Chief Justice Ward expressly recognized that in such circumstances [the Bermuda courts] should co-operate with Courts in other jurisdictions which have the same aim in relation to the affairs of the company describing it as a harmonization of effort. 3 CONCLUSION Despite the fact that Bermuda s statutory regime with respect to insolvent companies is undoubtedly due for reconsideration and modernisation, it is clearly possible to restructure companies through the use of schemes of arrangement in Bermuda. The development of the common law to create a Restructuring Provisional Liquidator has also proved remarkably effective in achieving a moratorium on claims against the company while a scheme is being 39

40 implemented. The process is not without it criticisms, which can include its lack of certainty or the negative stigma attached to the term provisional liquidation, however companies incorporated in Bermuda or seeking to incorporate, can take comfort in the fact that should they fall upon hard times, they will have access to an effective and reliable process for restructuring its affairs. 40

41 Outline of Steps: Bermuda Creditors Restructuring Pg 1 Timing Event File winding-up petition and summons (and supporting affidavits) seeking appointment of joint provisional liquidators (JPL Application). As listed by the court, often within 7 to 10 days of the application being filed. 15 As soon as possible. 16 As listed by the court, often within 7 to 10 days of filling of summons (as above). As soon as practicable after court gives directions. Attend hearing of Petition and JPL Application. If the court is satisfied, it will adjourn the petition to a future date, and appoint the joint provisional liquidators. Files originating summons seeking leave to convene scheme meetings, directions for a sanction hearing in the event that the scheme is approved by meetings, and directions that a report of the scheme meetings be filed with the court. Attend hearing of Meeting Application. If satisfied, Court will make directions for the convening of scheme meetings. Circulate scheme document and notice of meetings to creditors/members in accordance with court order. Scheme documents will generally comprise the formal scheme of arrangement, notices convening the scheme meetings, and the explanatory statement and supporting material. Generally 28 days after circulation of the notice of the meeting (though a longer or shorter period may be appropriate in some cases). Scheme meeting is held The Supreme Court (Commercial Division) is generally quite accommodating with applications and will seek to list the hearing quickly, though exactly how soon the matter can be listed will depend upon the urgency of the particular case and the court s availability. It is not uncommon for applications to be listed for hearing in a much shorter timeframe. The explanatory memorandum may be complex, in which case it may take longer to prepare. 41

42 Outline of Steps: Bermuda Creditors Restructuring Pg 2 Timing As soon as practicable after the meetings. Event Company files an affidavit in support of sanction hearing. Affidavit will generally contain chairman s report, which inter alia sets out the voting results, and evidence of compliance with court directions re notice of meetings, etc. As listed by the court, often within 7 to 10 days of filling of summons (as above). Attend sanction hearing. At the hearing the court will sanction the scheme if satisfied the meetings were duly held, the requisite majority has been obtained, and the scheme is such that an intelligent honest person acting in respect of his interest might reasonably approve it. It is often the case that the Court will also dismiss the winding-up petition and remove the JPLs from office at this hearing, though this may occur at a later stage depending on the terms of the scheme. Usually the same day the order is made by the Supreme Court. 17 Subject to the terms of the scheme. At the Company s discretion, but generally shortly after completion of the implementation of the scheme. Deliver the order sanctioning the scheme to the Registrar of Companies. This becomes the effective date of the scheme. Scheme is implemented in accordance with its terms. If the Winding-up Petition has not already been dismissed, the Company will file a Summons seeking the discharge of the Petition and the removal of the JPLs. 17 Because this will be the effective date of the scheme, there may be reasons for delaying sending the Order to the Registrar of Companies. 42

43 Restructuring in the Cayman Islands The increase in restructuring activity in the Cayman Islands in recent years is a testament to the resilience of the Cayman Islands as an offshore financial centre. The Cayman Islands financial sector, the fifth largest banking centre in the world, has 184 banks licensed in the jurisdiction as of June 2015, including 40 of the world s top 50 banks. While the Cayman Islands have also long been the leading offshore investment jurisdiction for funds 18, with 11,019 funds authorised as at 30 June 2016, the jurisdiction has also become a popular domicile in the global structured finance market for the incorporation of special purpose vehicles, likely due to the flexible and regulator-friendly nature of the jurisdiction. In the insolvency and restructuring space, the Cayman Islands saw a 22% increase in insolvency petitions in , in contrast with a general decline in petition filings across most offshore jurisdictions. The increased activity in this sector reflects the robust insolvency framework in place in the Cayman Islands, which not only offers a creditor-friendly winding up regime, with flexible and effective procedural rules for insolvency practitioners, but also provides companies with an avenue for flexible and protected light touch restructuring by way of appointment of provisional liquidators. 1. FORMAL RESTRUCTURING PROCEDURES Insolvency and restructuring law in the Cayman Islands is principally regulated by the Companies Law (2016 Revision) (Companies Law) and the Companies Winding Up Rules 2008 (Winding Up Rules). There is no formal debtor-in-possession rehabilitation currently available in the Cayman Islands for distressed companies akin to Chapter 11 of the US Bankruptcy Act. The principal restructuring tools available in the Cayman Islands are schemes of arrangement and provisional liquidations. There is also consideration being given by the profession to potentially introduce restructuring officer appointments, with a view to encouraging further Chapter 11 style restructuring arrangements. 1.1 Schemes of Arrangement Section 86 of the Companies Law provides for the approval of schemes of arrangement, compromise and reconstruction agreed between a company and its members or a company and its creditors. The application may be made by the company, a creditor or, if the company is in liquidation, by the liquidator. The Grand Court Rules 20 also provide a clear procedural pathway and directions for the sanction of such schemes. A scheme will be binding if a majority in number representing 75% in value of the creditors or members present, either in person or by proxy, and entitled to vote at the meeting agree to the terms of an arrangement 21. While the scheme is being promoted the directors remain in control of the company and can formulate the terms of the proposed scheme (although in the context of restructuring, this is ordinarily done in conjunction with insolvency practitioners). It is important to note, however, that section 86 of itself does not confer the benefit of a statutory moratorium on the company during the period of negotiation or presentation of 18 OIL, Offshore 2020 Report 2015: the New Normal, p Appleby Lawyers, Snapshot: 2015 Offshore Company Petition Filings & Court Orders. 20 Grand Court Rules, Order 102, rule Companies Law, section 86(2). 43

44 the scheme. Accordingly, many companies tend to use the light touch restructuring tool available under section 104(3) of the Companies Law, by appointing one or more provisional liquidators. 1.2 Provisional Liquidation Section 104 of the Companies Law governs the appointment and powers of a provisional liquidator, who may be appointed by the Court at any time after the presentation of a winding up petition but before the making of a winding up order. 22 Section 104(3) of the Companies Law provides that an application for the appointment of a provisional liquidator may be made by the company on the grounds that the company intends to present a compromise or arrangement to its creditors. In order for a company to make an application under section 104(3) of the Companies Law, the company must establish that it is, or is likely to become, insolvent. Once an application has been made under section 104(3), the company benefits from the statutory moratorium on proceedings being continued or commenced against it, during which time it can formulate and promote a scheme under section 86 of the Companies Law (or some other creditor arrangement). Although the initial intention of this provision was to prevent fraudulent dissipation of assets, section 104(3) is now commonly used to enable companies to pursue a scheme of arrangement under section 86 of the Companies Law, without the risk of winding up proceedings being commenced by an aggressive and dissatisfied creditor. At present, section 104(3) only provides for an application for the appointment of a provisional liquidator to be made by the company itself and does not confer the same benefit on creditors, contributories or the Cayman Islands Monetary Authority (CIMA). While creditors, contributories and CIMA may apply for the appointment of provisional liquidators under section 104(2) of the Companies Law, they must, under that provision, also demonstrate that there is a prima facie case to wind up the company and that the appointment is necessary to prevent dissipation of assets, oppression of minority shareholders or misconduct by the company s directors. In light of the breadth of powers that may be granted to a provisional liquidator by the Grand Court and the interests of the Grand Court in obtaining the best outcome for creditors, it is possible that a provisional liquidator appointed under section 104(2) could subsequently promote a scheme of arrangement. As far as we are aware, however, this question has yet to come before the Grand Court for determination SCHEMES OF ARRANGEMENT The Companies Law provides for a company to enter into a scheme or arrangement, which is where a compromise or arrangement is proposed between the company and its creditors or any class of them, or between the company and its members and any class of them. The court may on the application of the company or any member or creditor (or the liquidator if the company is being wound up), order a meeting of creditors or members. If a majority representing 75 per cent in value of creditors or members, voting either in person or by proxy at the meeting, agrees to any compromise or arrangement it shall, subject to the court s approval, be binding on creditors or members and against the company itself, or if the company is in liquidation the liquidator and contributories of the company. 22 Companies Law, section 104(1). 23 Hong Kong authority suggests that the power to oversee a scheme of arrangement could well be provided to a provisional liquidator appointed in such circumstances; see in Re Legend International Resorts Ltd [2006] 2 HKLRD

45 The scheme only becomes effective when a copy of the order is delivered to the registrar of companies for registration. Schemes of arrangement can be costly to implement, and, since there is no moratorium and therefore protection from action be creditors or investors while proposals are being put forward, a scheme of arrangement can only be realistically be considered as a means of exiting an insolvent liquidation. 3. LAW REFORM The Grand Court decision in Re China Shanshui Cement Group Limited 24 identified what some have suggested is a lacuna in the present drafting of the Companies Law, which prevents company directors from unilaterally affecting a restructuring without shareholder support. Section 94(2) of the Companies Law presently provides that company directors may present a winding up petition without a resolution passed at a general meeting where this entitlement is expressly conferred by the articles of association of the company. In reliance on this provision, two shareholders of China Shanshui successfully argued that the directors did not have standing to present the winding up petition on behalf of the company, in circumstances where they did not have a resolution of the company to do so and where the articles of association did not expressly entitle them to present a winding up petition without consent of the shareholders in general meeting. The decision of the Grand Court in China Shanshui departed from the earlier decision of Re China Milk Products Group Ltd 25, in which the Grand Court had adopted a purposive approach in permitting directors of an insolvent company to present a winding up petition without shareholder consent. The Cayman Islands Court in China Shanshui has instead followed the English authority in Re Emmadart Ltd 26 in holding that the company within the meaning of section 94 of the Companies Law means the directors with the consent of the shareholders in general meeting. While the Cayman Islands now have two conflicting decisions on this issue, it is likely that the persuasive dicta in China Shanshui will be preferred in future determinations. It is unlikely, however, that the decision in China Shanshui will have serious implications for the restructuring efforts of Cayman Islands domiciled companies. Companies are at liberty to amend their articles of association to include express permission to present a winding up petition, should the directors consider it prudent to do so. Moreover, in most cases shareholders will be in favour of any restructuring proposal that is likely to give them a return on their investment, in contrast to an insolvent winding up in which they have no economic interest. Additionally, notwithstanding section 94(2) and the decision in China Shanshui, it also remains open to a friendly creditor to put the company into a section 104(2) provisional liquidation, consistent with the position in Bermuda and in England in relation to Administration pursuant to section 12(1) of the Insolvency Act Nevertheless, Cayman Islands insolvency and restructuring professionals are currently discussing possible revisions to the Companies Law, which would have the effect of introducing restructuring 24 In the matter of China Shanshui Cement Group Limited, Unreported, Grand Court, 25 November 2015, Mangatal J, FSD 178 of Re China Milk Products Group Ltd [2011] (2) CILR Re Emmadart Ltd [1979] 1 Ch

46 officers. It is hoped, however, that any amendments will maintain the present balance in Cayman Islands restructuring provisions between the rights of all interested parties. 4. CROSS BORDER RESTRUCTURING IN THE CAYMAN ISLANDS 2.1 UNCITRAL Model Law The Cayman Islands has elected not to adopt the UNCITRAL Model Law on Cross-Border Insolvency. However, the Grand Court frequently applies the common law principles of cross border insolvency in the course of international restructuring. 2.2 Recognition of Foreign Restructurings The Cayman Islands court is frequently called upon to recognise and/or facilitate the foreign restructuring of companies which are either domiciled or hold assets in the Cayman Islands. To this end, Part XVII of the Companies Law provides for international cooperation in insolvency proceedings. Section 241 of the Companies Law entitles the Grand Court to provide recognition and ancillary relief to a foreign representative who has been appointed to a debtor in the course of a foreign bankruptcy proceeding. Section 240 of the Companies Law defines a debtor as a foreign corporation or other foreign legal entity subject to a foreign bankruptcy proceeding in the country in which it is incorporated or established. These provisions are commonly used for local recognition of extant Chapter 11 proceedings in relation to companies incorporated in and subject to the laws of the United States. The Winding Up Rules also provide for an official liquidator in the Cayman Islands to enter into an international protocol regime with a foreign office holder (which could include a liquidator or trustee) when a company subject to Part V proceedings in the Cayman Islands has assets located in other jurisdictions. The Grand Court has extended the application of these international protocol provisions from official liquidators to joint provisional liquidators who may be overseeing a restructuring. In Re Trident Microsystems (Far East) Ltd 27, Cresswell J expressly found that the principles in the Companies Winding Up Rules 2008, O.21 concerning international protocols applied equally to provisional liquidations such as the present. In respect of companies incorporated in the Cayman Islands which are subject to Cayman Islands law and subject to overseas insolvency proceedings (which are not governed by section 241 of the Companies Law 28 ), the Grand Court commonly draws on common law cross border insolvency principles to recognise overseas attempts to effect a restructure. In Re Lancelot Investors Fund Ltd 29, Quin J emphasised that the Cayman Islands Grand Court embraces the concept of facilitation of co-operation and co-ordination in cross-border insolvency proceedings. Accordingly, the Grand Court has on numerous occasions appointed provisional liquidators to companies in the Cayman Islands (at the 27 Unreported, Smellie CJ, 30 October As they are not subject to a foreign bankruptcy proceeding in the country in which they are incorporated within the meaning of Part XVII CILR 7 46

47 behest of either the company itself or creditors) where they are subject to extant Chapter 11 proceedings in the United States CONCLUSION It is likely that, having regard to the flexible and efficient restructuring regime available in the Cayman Islands, the volume of restructuring activity in the jurisdiction will continue increase. 30 See Re Fruit of the Loom Ltd (in provisional liquidation), where the Cayman-domiciled company filed for protection under Chapter 11 in Delaware contemporaneously with an application for the appointment of provisional liquidators in the Cayman Islands. 47

48 Schemes of Arrangement 48

49 What is a Scheme of Arrangement? Available in different ways, in all of BVI, Bermuda and the Cayman Islands, a scheme of arrangement is a court approved compromise or arrangement entered into between a company and its creditors or members (or any class of them). Generally, this is interpreted widely covering almost every type of legal transaction so long as there is some element of give and take and it has the approval of the company concerned it can include a reduction or reorganisation of share capital, relate to the merger of two or more companies, or a transfer of business to a NewCo. Who can implement a Scheme? The Company itself can propose a scheme to restructure its existing debt obligations. Creditors or Members of the Company can commence winding up proceedings against the Company and force or to enter into a scheme. A scheme can be entered into with all or only some of the members or creditors of the Company (or any class thereof), as such the scope for using a scheme is wide. A liquidator can develop and put forward a scheme proposal to bring a commercial resolution to disputes between stakeholders. Upon sanction all members of the relevant class concerned are bound Courts have flexibility to address complex restructuring Stay of proceedings allows company time to reach compromise with stakeholders It avoids uncertainty of bankruptcy / insolvency proceedings Why use a scheme? Management are not restricted in ability to manage day to day affairs Disclosure requirements can be less onerous Does not require 100% approval of creditors May be possible to obtain release of certain claims under the scheme Could be recognised in US as foreign proceeding for US bankruptcy purposes 49

50 Schemes of Arrangement Indicative Offshore Timetable (NB: * actual timing will depend on the court availability) Day 1: Company finalises Scheme documentation and issues the Petition and Summons Day 7: Hearing of the Summons Court gives directions Day 9: Give notice to the Court meetings and post scheme documents Day 30-35: Hold Court convened meetings Day 32-37: File Chairman s affidavit Day 47-52: Substantive hearing of the Petition Order sanctioning Scheme made Day 48-53: File Court Order with Registrar of Companies. Scheme is effective 50

51 Main English Cases on schemes of arrangement applied variously in the BVI, Bermuda and Cayman Islands Sovereign Life Assurance Company v Dodd [1892] 2 QB 573 (CA) A class is a group of persons (or companies) whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest. In re Anglo Continental Supply Co Ltd [1922] 2 Ch 723 A scheme will be sanctioned if the court considers that the provisions of the statute have been complied with, the class was fairly represented by those who attended the meeting and the majority were acting bona fide and not coercing the minority, and the arrangement is such that an intelligent and honest man who was a member of the class concerned might reasonably approve it. UDL Argos Engineering & Heavy Industries Co Ltd and others v Li Oi Lin and others [2001] 3 HKLRD 634 (CFA) When determining whether or not one meeting or several meetings of creditors or members is required, the following principles should be borne in mind: If the company was entering into a single composite arrangement that affected all the creditors/members in the same way, one meeting might be held; if the company was in effect entering into a number of interdependent arrangements with different classes of creditors/members, separate meetings should be held. The company should decide whether one or more meetings should be held. If this decision were taken incorrectly, the meetings might be improperly constituted and creditors/members might object at the sanction hearing. If two groups interests were so dissimilar that they could not sensibly together for their common interests, they must be given separate meetings. When considering whether interests are similar or dissimilar, the test is concerned with their legal rights as against the company, not the interests derived from their legal rights. The fact that individuals might have differing views because of the interests they derive from their rights does not alter this fact or provide a ground for separate meetings. If right as against the company that fell to be released or varied under the scheme were carried between the creditors/members such that the scheme should be treated as being concerned with separate but related compromises or arrangements between the company and the creditors/members, separate meetings should be held. The court does not have jurisdiction to sanction a scheme that does not have the approval of the requisite majority of creditors/members voting at each meetings properly constituted. Even where the court had jurisdiction to sanction a scheme that had been properly approved, it was not bound to do so and retained discretion. If the court formed the view that the results of one or more 51

52 meetings did not fairly reflect the views of the class, it could refuse to sanction the scheme. Insofar as members of a class had such personal or special interests in supporting the proposals that their views could not be regarded as fairly representative of the class in question, those views and votes might be discounted or disregarded altogether. Practice Statement (Companies: Schemes of Arrangement) [2002] 1 WLR 1345 (Ch D) This practice statement is concerned with matters to be raised at the convening hearing. It is only expressed as applying to proposed schemes between companies and their creditors. 31 The object of the practice statement is to save costs and make the process more efficient by facilitating the identification of different classes of creditor so that the composition of meetings can be determined and the meetings themselves convened. The practice statement sets down the following rules of practice: The applicant should determine whether or not more than one meeting of creditors is necessary. If multiple meetings are needed, the applicant should ensure that those meetings are properly constituted by a class of creditor so that each meeting consists of creditors whose rights against the company are sufficiently similar that they are able to consult together with a view to their common interest. Applicants may make their applications to a judge or a registrar; however, substantial schemes will be listed before a judge and a registrar may opt to adjourn cases so that they can be resumed before a judge. The judge before whom a scheme first appears should where possible retain carriage of the matter. The applicant must file evidence identifying as soon as possible any issues that may arise in relation to the constitution of meetings of creditors or the conduct of the meetings. The applicant should take all reasonable steps to notify people likely to be affected by the scheme of the fact that the scheme is being promoted, the purpose the scheme is intended to achieve, the various creditors meetings the applicant believes will be necessary, and the composition of the meetings. At the convening hearing, the court will consider whether or not more than one meeting is required and, if so, what the appropriate compositions of the meetings are. If an issue above is drawn to the court s attention, the court will consider whether or not to give directions for the resolution of that issue, including, if necessary, directions for the postponement of meetings until the issue is resolved. Such directions might include orders giving affected persons a limited period in which to apply to the court to vary or discharge the order convening meetings. If such an order is made, affected persons might still apply to the court for relief at the sanction hearing; however, they would need to show good reason why their issue was not raised earlier. 31 It is conceivable that it might apply by analogy to schemes between companies and their members, but this is not made explicit. 52

53 Re Marconi PLC; Re Marconi Corporation PLC [2003] EWHC 633 (Ch) Schemes in respect of two companies had been approved by the necessary majorities at meetings of the companies creditors. They came back before Lindsay J for approval. It was contemplated that the schemes would take effect in the USA, where a number of the creditors were based. In order for this effect should be given, sanction would have to lie in office to give time for the US bankruptcy court to consider and, if appropriate, grant a permanent injunction in support of the scheme. An early application had been arranged to the relevant US court, and a draft order was before the court. The question of reserves had been raised, and the judge concluded both (i) that there was little chance that an unknown scheme creditor would emerge, and (ii) that there was adequate provision for this eventuality. The judge noted that not all of the companies creditors were scheme creditors and that nothing in the scheme prevented such creditors from exercising their normal rights. The judge noted that while this was not ideal, the petitioners and their advisors had excluded claims only where in each case that had been the necessary price of obtaining a fair and reasonable scheme. On that basis, he was content to approve the scheme. Re Telewest Communications PLC (No 1); Re Telewest Finance (Jersey) Ltd (No 1) [2004] EWHC 924 (Ch), [2005] 1 BCLC 752 It was not appropriate to raise questions as to the merits and fairness of the scheme on the hearing of the application to convene meetings to consider the scheme. The primary focus of that hearing is whether or not the court has jurisdiction to order that meetings be convened, which will generally turn on the composition of the classes. An application for an order convening meetings would not, therefore, be refused on a question that went to the merits of the scheme, in this case, the assertion that a different conversion rate should be used in the scheme documents. When determining the composition of classes, the court was concerned with differences in the nature of rights as against the company, not the extent of the interests, and it was the extent to which the rights differed as between members of a class that determined how classes should be constituted. The nature of the rights of members in a single class did not need to be identical, but should not differ to such an extent as to make it impossible for the members to consult together in relation to their common interest. The fact that some creditors had already bound themselves to vote in favour of the scheme by way of a lock-up agreement did not necessarily make them a separate class of creditors, as long as the creditor would not reasonably have voted differently had they not bound themselves prior to the meeting. Lock-up agreements do not create a separate class, though they may be relevant to the court s exercise of discretion at the sanction hearing. The position might be different if a creditor who 53

54 entered into a lock-up agreement received some benefit from that agreement that other creditors would not, because that would lead to unequal treatment. In such a situation, creditors who had entered into an agreement could not be in the same class as creditors who had not. Re Telewest Communications PLC (No 2); Re Telewest Finance (Jersey) Ltd (No 2) [2004] EWHC 1466 (Ch), [2005] 1 BCLC 772 This case emphasised the importance of the question whether or not the scheme, taken as a whole, was one that an honest and intelligent bondholder could approve, having regard to his interests. The court will consider whether or not there is any inherent unfairness in the scheme. The fact that fluctuations in currency exchange rates might give rise to different results depending on which day the valuation was to take place did not mean that the result was necessarily unfair. In this case, the scheme sought to manage the uncertainty by replacing a fluctuating rate with an average exchange rate calculated over a period. Re British Aviation Insurance Co Ltd [2005] EWHC 1621 (Ch), [2006] 1 BCLC 665 The extent of notification given to creditors of the convening hearing need not be as great as the notification given to them of the scheme meeting. In addition, the notification requirement in relation to the convening hearing was not absolute and may not apply where there were good reasons for notice not having been given. Re Lehman Brothers International (Europe) (in administration) (No 2) [2009] EWCA Civ 1161, [2010] Bus LR 489 The court s jurisdiction to approve a creditors scheme was subject to the requirement that the scheme be an arrangement between a company and its creditors. In order for it to satisfy this requirement, the scheme had to deal with the creditors rights against the company as debtor. This did not prevent a creditors scheme from dealing with releases against third parties, if this were necessary to give effect to the arrangement for the disposition of debts and liabilities to the company s creditors; however, a scheme could not deal alter creditors rights over their own property that was in the possession of the company, as opposed to company property in which a creditor had a security interest. Therefore, a creditor who was the beneficial owner of property held on trust by the company was not a creditor of the company in respect of that property, because a beneficiary is not a creditor of his trustee. Accordingly, the power of the court to sanction a creditors scheme did not enable the court to approve a scheme providing for the release of a creditor s beneficial interest in property held on trust by the company. 54

55 DX Holdings Ltd and other companies [2010] EWHC 1513 (Ch) It is not every difference in the rights of members that would mandate the creation of a separate class: it is only if the different is sufficiently great to make consultation between persons with a view to their common interest impossible that they will need to be in separate classes. This requires the court and the petitioners to consider the nature of the rights involved, the extent to which those rights are materially different, and the extent to which the rights are common. The fact that some creditors have entered into a lock-up agreement does not mean that those creditors form a different class from creditors who have not yet consented. The court referred to Re Telewest (No 1) [2004] EWHC 924 (Ch) and found that although creditors who entered into the lockup agreement had been entitled to fees that other creditors would not receive, all creditors had been given the opportunity to participate and it was unlikely that the availability of the fees would have been a determining factor in any creditor s decision. The use of the lock-up agreement, coupled with a deadline for participation and the small incentive, were an efficient way of focusing the process. Creditors who raise class issues at the sanction hearing will have to explain why their concerns were not raised earlier. Primacom Holdings GmbH v Credit Agricole and others [2011] EWHC 3746 (Ch), [2013] BCC 201 When determining whether or not creditors should be in a different class, the court s focus must be exclusively on rights as distinct from interests. The essential requirement was that the class be composed only of persons whose existing rights as against the company and the rights offered in replacement were sufficiently similar to enable them properly to consult and identify their true interests together. If the rights of members of a class were so dissimilar as to make it impossible for them to consult together, separate meetings should be convened. For the purposes of a scheme of arrangement between a company and its creditors or members (as opposed to a reconstruction or amalgamation of a company) the definition of a company extended to any company that might be wound up under the Insolvency Act 1986, and therefore extended to a German company in appropriate circumstances. If the company could not achieve and implement the scheme without reference to section 900 of the Companies Act 2006 (reconstruction or amalgamation), the court had no jurisdiction to approve the scheme. In the present case, all the creditors claims were governed by English law, which provided a sufficient connection to the jurisdiction to warrant the exercise of powers by the English court. Expert evidence indicated that this would be given effect in Germany. Under the Judgments Regulation 44/2001, Article 2, the appropriate forum for determination of a dispute was ordinarily the forum of the domicile of the defendant. In the present case, there were no creditors domiciled in the UK; however, the court concluded that the Regulation had no application in the context of a scheme of arrangement, and it was artificial to characterise any of the parties as 55

56 defendants. If that view was incorrect, Articles 23 and 24 were satisfied, conferring jurisdiction on the English court: the agreements were expressly governed by English law and nominated the English courts as the appropriate forum; and a majority of creditors had submitted to the jurisdiction. Therefore the scheme was an appropriate one for the English court to approve, notwithstanding that it was in relation to a foreign company s arrangement with its creditors, none of which were domiciled within the jurisdiction of the court. AI Scheme Limited [2015] EWHC 1233 (Ch) This case provides a useful summary of the general principles in relation to the convening hearing. The convening hearing is not the occasion to consider the merits of the proposed scheme, unless it is clear that the scheme has no real prospect of success. It was also noted that it is clear from the authorities that the scheme does not have to include all creditors within its scope. In this regard the excluded creditors are not debarred from exercising their rights. It was also held that even though the relevant company may have been deliberately created for the purpose of the scheme this does not affect the court s jurisdiction although it may affect the exercise of the court s discretion at the sanction stage. Finally, it was stated that the general policy is to avoid a proliferation of classes. In order to establish dissimilarity, it is necessary to look at the rights the creditors had before the scheme and the rights which they will have under the scheme. In re Van Gansewinkel Groep BV and others [2015] EWHC 2151 (Ch), [2015] Bus LR 1046 The scheme had a sufficient connection with England where the governing law of the debt instrument was English law. If, however, the scheme company proposes to raise issues about jurisdiction at the convening hearing then it needs to indicate this and give proper information to the scheme creditors and the judge in advance of the convening hearing. Greater detail about the alternative to a scheme (generally insolvency) should also be provided in the explanatory statement. Re Indah Kiat International Finance Co BV [2016] EWHC 246 (Ch), [2016] BCC 418 What is adequate notice to scheme creditors of the convening hearing will depend on all of the circumstances of the case. The more complex or novel the scheme and the less consultation that has taken place beforehand, the longer the notice period will need to be. In this case, however, fourteen days notice was not sufficient where the scheme was not simple or straightforward. The explanatory statement was also materially deficient as regarded full and frank disclosure: companies are required to exhibit the utmost candour. The explanatory statement also needs to contain a full analysis of the alternative to the scheme. 56

57 BVI Schemes of Arrangement Part 179A of the BVI Business Companies Act, 2004 When to use a BVI scheme? Cram down: when a minority group of creditors or shareholders become bound by a scheme which they have rejected, but which the majority of creditors or shareholders have approved; Spin off: a separation of a company s business through the creation of one or more companies; Acquisitions: a scheme can provide a simpler alternative to a straightforward takeover offer for a company. It can also assist remove minority shareholders. 1 Pre-Step Scheme documents to be agreed and finalised 2 Commencement File Fixed Date Claim Form; and Supporting Affidavit 3 Hearing of the first part of FDCF and rest adjourned Directions given by Court to convene the meeting(s) 6 File Chairman s affidavit confirming the result of the meeting(s) 5 Court convened meeting(s) are held 4 Provide scheme documents and give notice of the meeting(s) to those concerned 7 Hearing of the remainder of the FDCF Court sanctions the scheme 8 File Court order with the Registrar of Companies The Scheme becomes effective 57

58 Bermuda Schemes of Arrangement Part 99 of the Companies Act 1981 When to use a Bermuda scheme? Cram down: when a minority group of creditors or shareholders become bound by a scheme which they have rejected, but which the majority of creditors or shareholders have approved; Spin off: a separation of a company s business through the creation of one or more companies; Acquisitions: a scheme can provide a simpler alternative to a straightforward takeover offer for a company. It can also assist remove minority shareholders. 1 Pre-Step Scheme documents to be agreed and finalised 2 Commencement File Petition Summons; and Supporting Affidavit 3 Hearing of the Summons Directions given by Court to convene the meeting(s) 6 File Chairman s affidavit confirming the result of the meeting(s) 5 Court convened meeting(s) are held 4 Provide scheme documents and give notice of the meeting(s) to those concerned 7 Hearing of the Petition Court sanctions the scheme 8 File Court order with the Registrar of Companies The Scheme becomes effective 58

59 Cayman Islands Schemes of Arrangement Part V of the Companies Law When to use a Cayman Islands scheme? Cram down: when a minority group of creditors or shareholders become bound by a scheme which they have rejected, but which the majority of creditors or shareholders have approved; Spin off: a separation of a company s business through the creation of one or more companies; Acquisitions: a scheme can provide a simpler alternative to a straightforward takeover offer for a company. It can also assist remove minority shareholders. 1 Pre-Step Scheme documents to be agreed and finalised 2 Commencement File Petition Summons; and Supporting Affidavit 3 Hearing of the Summons Directions given by Court to convene the meeting(s) 6 File Chairman s affidavit confirming the result of the meeting(s) 5 Court convened meeting(s) are held 4 Provide scheme documents and give notice of the meeting(s) to those concerned 7 Hearing of the Petition Court sanctions the scheme 8 File Court order with the Registrar of Companies The Scheme becomes effective 59

60 Alternative Company-Driven Restructuring Only presently available in Bermuda and the Cayman Islands Bermuda - Light Touch Provisional Liquidation Overview: To allow a company to buy time and restructure by appointing provisional liquidators. This invokes the statutory moratorium on any proceedings, including winding up proceedings by a disgruntled creditor, being brought against the Company. The court in Bermuda has a very wide discretion as to the basis on which to appoint a provisional liquidator, resulting in the flexible manner of a provisional liquidation in this jurisdiction. There is no restructuring process equivalent to US Chapter 11 or UK administration in Bermuda. However, for a number of years, the Supreme Court has used provisional liquidation as a mechanism by which to implement financial or operational restructurings in order to effect corporate rescues, preserve value in the business for stakeholders, and ensure the company/group in question is able to continue as a viable enterprise going forward. This contrasts with the approach taken by a number of other legal systems (including Hong Kong) where provisional liquidation operates to preserve assets that are at risk of dissipation as a pre-curser to full liquidation proceedings, and ultimately the dissolution of the company. A company with assets outside the jurisdiction of its place of incorporation can be subjected to lighttouch insolvency processes within the jurisdiction of incorporation where the primary proceedings take place in the jurisdiction in which the assets are located. In these circumstances, the light-touch process will assist the progression of the foreign restructuring: As per Ward CJ (as he then was) in Re ICO Global Communications (Holdings) Ltd: I do not accept that because the company is a Bermuda registered company therefore the Bermuda Court should claim primacy in the winding-up proceedings and deny the joint provisional liquidators the opportunity of implementing a US Chapter 11 re-organisation. Nor do I accept that a Chapter 11 re-organisation will, of its very nature, destroy the rights of creditors and contributories under the regime being established. Such an approach would be to deny the realities of international liquidations where action must be taken in many jurisdictions simultaneously... Under such circumstances this Court should co-operate with Courts in other jurisdictions which have the same aim in relation to the affairs of the company. It is not a question of surrendering jurisdiction so much as harmonisation of effort In Re ICO Global, joint provisional liquidators were appointed in Bermuda over a Bermuda registered company to advance a Chapter 11 restructuring. In this case, the directors remained in office with management powers, subject to the supervision of the joint provisional liquidators and the Bermuda court. It made no difference in that case that a scheme of arrangement had yet to be proposed: those complaints were said to be premature at a time where the group was seeking to arrange refinancing. Thus, joint provisional liquidators were appointed on a very light-touch basis with the sole remit, at that stage, of giving a Chapter 11 restructuring a chance. 60

61 In Re Titan Petrochemicals, the Supreme Court referred to the appointment of provisional liquidators with soft powers to monitor a foreign restructuring process as being that Court s tried and tested approach. Such an outcome was ordered even though the Chapter 11 restructuring proposals were not far advanced in that case. In Energy XXI Ltd, dated 18 August 2016, Kawaley CJ, of the Bermuda Supreme Court, granted a provisional liquidator s (PL) application for a prospective Recognition Order with respect to an eventual US Bankruptcy Plan. In his decision, Kawaley CJ clarified the grounds and authority for granting such orders, while emphasizing the importance of cross-border harmonisation, in addition to the need for judicial efficacy. The decision provides some certainty on these topics for parties with parallel restructuring proceedings in Bermuda and a US Bankruptcy Court. Lord Sumption s view in Singularis was that the Courts of the company s incorporation have an ability: to conduct an orderly winding... up on a worldwide basis, not that the Court in the jurisdiction of incorporation was the only forum in which the necessary steps should be taken. If another forum would be more appropriate for orderly insolvency processes, the Court of the company s incorporation is free to recognise as much and provide assistance to enable the foreign process to continue. In Re Sea Containers Ltd, in relation to an application by the Joint Provisional Liquidators for a letter of request to seek assistance from a foreign Court, Kawaley CJ considered the court s jurisdiction for so doing. The court acknowledged that there was no statutory basis on which to order that a letter of request be issued, but that the underlying jurisdictional basis for the Court s sanctioning the decision to commence or continue proceedings abroad is statutory in nature, and derives from section 175(1)(a) of the Companies Act 1981, which provides that (1) The liquidator in a winding-up by the court shall have power, with the sanction either of the Court or of the committee of inspection (a) to bring or defend any action or other legal proceeding in the name and on behalf of the company. The court noted that: The concept of issuing letters of request to foreign courts to facilitate task of the liquidator who seeks assistance from a foreign court appears to be a creature of the common law. The Court considered that such applications should be determined in line with pragmatic case management and granted the application. 61

62 Bermuda - Provisional Liquidation v Winding Up Whilst the powers of a provisional liquidator are wider tanging and essentially similar to those which may be bestowed on official liquidators, the effect of a winding up order is drastically different to the appointment of provisional liquidators. A winding up order would simply lead to an insolvent liquidation of the company, and the diminution in asset value that any such course of action would inevitably give rise to (which will undoubtedly adversely affect the position of creditors), whereas provisional liquidators would at least attempt to restructure the debts of the company in order to potentially increase the return to creditors. 32 In order to appoint provisional liquidators with soft powers, for example to monitor the management while restructuring takes place, it is first necessary to present a winding-up petition to the Court, which is provided for under section 161 of the Companies Act The Company can then make an ex parteapplication to appoint a provisional liquidator with limited powers, based on the Court s powers under sections 164 and 170 of the Companies Act The benefits of Light-Touch Restructuring to the Company are: -It can be agreed with the proposed provisional liquidators (in advance of their appointment) which powers are to remain with the directors and which will vest in the provisional liquidators i.e. the directors can remain in control of the day-to-day management of the Company, which is subsequently approved by the Court. -The appointment of provisional liquidators invokes the statutory moratorium protecting the Company from any proceedings, including winding up proceedings by a disgruntled creditor, being brought by the Company. -The procedure is recognisedas a robust, flexible restructuring tool that can allow the Company time to put in place, for example, new funding, negotiate the cram down of debts with its creditors, release of claims and to ultimately continue as a going concern Upon the appointment of provisional liquidation, the hearing of the winding-up petition will most likely be adjourned. 32 If all options in respect of a restructuring failed, the provisional liquidators would report to the Court and the Court could then make a winding up order. 62

63 Cayman Islands Light Touch Provisional Liquidation There is no restructuring process equivalent to US Chapter 11 or UK administration in the Cayman Islands. However, for a number of years, the Grand Court in the Cayman Islands ( Grand Court ) has used provisional liquidation as a mechanism by which to implement financial or operational restructuring in order to effect corporate rescues, preserve value in the business for stakeholders, and ensure the company/group in question is able to continue as a viable enterprise going forward. This contrasts with the approach taken by a number of other legal systems (including Hong Kong) where provisional liquidation operates to preserve assets that are at risk of dissipation as a pre-curser to full liquidation proceedings, and ultimately the dissolution of the company. Section 104(3) of the Cayman Islands Companies Law allows a company to present a winding up petition and, at the same time, make an application to the Grand Court to appoint provisional liquidators where: (a) the company is, or is likely to become unable to pay its debts; and, (b) the company intends to present a compromise or arrangement to its creditors. A debtor that is proposing to enter into Chapter 11 proceedings is likely to meet this threshold. The Grand Court has appointed provisional liquidators in support of US Chapter 11 proceedings. 33 A key feature of the light touch provisional liquidation regime in the Cayman Islands is that an automatic moratorium, that is similar in concept and effect to the automatic stay that is a feature of Chapter 11, arises immediately upon the making of the provisional liquidation order by the Grand Court, meaning no proceedings may be proceeded with or commenced against a company without the leave of the Grand Court, and subject to such terms as the Grand Court may impose. Notably, the automatic stay does not prohibit secured creditors from enforcing their security. As well as the protection of the court, of particular benefit to companies is section 104(3), which permits a company to make an application ex parte. The company can apply to court without notifying its creditors to protect itself to provide time to restructure its business; this is of particular benefit where refinancing, and sale as a going concern, is a real possibility and is likely to be more advantageous to creditors than realizing and distributing the assets on a compulsory liquidation. To the extent that the provisional liquidator is nominated by the company on its application to the Grand Court, the process of provisional liquidation in the Cayman Islands is considered one which is driven by the company. 34 Moreover, section 104(4) of the Companies Law gives directors comfort that, notwithstanding the appointment of provisional liquidator(s), the directors can retain some control over the management and day to day affairs of the company. Specifically, section 104(4) states that a provisional liquidator can only carry out such functions conferred on him and his powers may be limited by the order appointing him; meaning a company, working closely with its legal advisers, can draft the order in such a way that the directors of the company, subject to suitable court supervision, remain key 33 Re Fruit of the Loom [2000] CILR N-7; Trident Microsystems (Far East) Ltd [2012] 1 CILR The only restriction is that the application must be supported by (inter alia) evidence of the provisional liquidator s qualifications and consent to act in that role. In this regard, the provisional liquidator must be a qualified insolvency practitioner licensed to practice in the Cayman Islands. The company may also seek to appoint a foreign insolvency practitioner jointly with the appointment of the Cayman Islands-based provisional liquidator, and this approach is commonly adopted in multi-jurisdictional enforcement and restructuring scenarios. 63

64 to managing the company s affairs and giving effect to any proposed restructuring, and the provisional liquidators powers can be tailored to the company s needs. Cayman Islands - Provisional Liquidation v Winding Up Whilst the powers of a provisional liquidator are wide tanging and essentially similar to those which may be bestowed on official liquidators, the effect of a winding up order is drastically different to the appointment of provisional liquidators. A winding up order would simply lead to an insolvent liquidation of the company, and the diminution in asset value that any such course of action would inevitably give rise to (which will undoubtedly adversely affect the position of creditors), whereas provisional liquidators would at least attempt to restructure the debts of the company in order to potentially increase the return to creditors. 35 In order to appoint provisional liquidators with soft powers, it is first necessary to present a winding-up petition to the Court, which is provided for under section 94 of the Companies Law (2016 Revision). The Company can then make an ex parteapplication to appoint a provisional liquidator, based on the Court s powers under sections 104(1) and (3) of the Companies Law (2016 Revision), in circumstances where the company is, or is likley to become, unable to pay its debts and the company intends to present a compromise or arrangement to its creditors. The benefits of Light-Touch Restructuring to the Company are: -It can be agreed with the proposed provisional liquidators (in advance of their appointment) which powers are to remain with the directors and which will vest in the provisional liquidators i.e. the directors can remain in control of the day-to-day management of the Company. The provisional liquidators only have such powers as given to them by the Court. -The appointment of provisional liquidators invokes the statutory moratorium under section 97 of the Companies Law (2016 Revision), protecting the Company from any proceedings, including winding up proceedings by a disgruntled creditor, being brought against the Company. -The procedure is recognisedas a robust, flexible restructuring tool that can allow the Company time to put in place, for example, new funding, negotiate the cram down of debts with its creditors, release of claims and to ultimately continue as a going concern. Upon the appointment of provisional liquidation, the hearing of the winding-up petition is normally adjourned (and ultimately dismissed if the restructure is successful). 35 If all options in respect of a restructuring failed, the provisional liquidators would report to the Court and the Court could then make a winding up order. 64

65 Alternative Investor-Driven Restructuring Typical Deal Structure: Private equity sponsor Share subscription / investor loan notes Key management Share subscription Parent Vendor Vendor notes Purchaser Senior loan Senior lenders Target Mezzanine loan Mezzanine lenders Sub Sub Sub 65

66 Migration to a Company-Driven Restructuring Jurisdiction Example: A BVI company migrating to the Cayman Islands There is no stamp duty on the transfer of shares and companies have considerable flexibility in the repurchase or redemption of shares There is no statutory prohibition on Cayman companies providing financial assistance with regards to acquisition of shares in a company To take advantage of the favourable tax treatment of companies Cayman companies can merge with other corporate entities from jurisdiction having comparable merger concepts To take advantage of the evolving restructuring options available in the Cayman Islands and to perhaps enter into a scheme of arrangement Why migrate? There are a number of reasons companies would want to migrate to the Cayman Islands To avoid cumbersome company laws, excessive formalities, filing obligations and/or red tape other jurisdictions enforce A company incorporated in the BVI, subject to its constitutional document, and assuming it is in good standing, may, upon receiving director and shareholder approval, continue in a jurisdiction outside the BVI such as the Cayman Islands i.e. migrate there. A BVI incorporated company may want to migrate to the Cayman Islands to make use of structuring options not available in the BVI, for example provisional liquidation under section 104 of the Companies Law and the statutory protections that offers. To give effect to the migration, the registered agent of the company will file a notice with the Registrar of the Companies Act have been complied with, will strike the name of the company off the register of companies. Upon successful migration to the Cayman Islands, the BVI company will continue to be liable for its liabilities and obligations prior to the migration, but will be subject to the laws of the Cayman Islands. As such, should the company be unable to pay its debts and wish to put itself into provisional liquidation pursuant to section 104(3) of the Companies Law it will be eligible to apply to the Cayman Court. 66

67 How to Migrate Pre-requisites: The Registrant must ensure: The transfer is bona fide and not fraudulent; It has the ability to transfer out of its existing jurisdiction and has obtained all necessary consents and complied with its own constitution; The company s business will operate outside the Islands (unless it has a valid license to operate within the Islands) It tells the Registrar its proposed new address in Cayman, and delivers the relevant documents and pays the relevant fee. The company is solvent and will notify its secured creditors of the transfer; It is the type of company that can be registered in the Cayman Islands and its name is acceptable to the Registrar; It will cease to exist in its current jurisdiction; Many of the above requirements will be satisfied by a director of the Registrant filing a declaration or affidavit to the effect that the requirements have been met. The affidavit will include a statement of current assets and liabilities of the Company. Upon registration the Registrant shall continue as a body corporate and shall be treated as any other company incorporated in the Cayman Islands; the company does not become a new legal entity. Post migration the Registrant has 90 days to make any required changes to its constitutional documents via special resolution and file those changes with the Registrar. The Registrar then gives notice in the Gazette of the registration. 67

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