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New Cayman Islands Restructuring Regime: Modern Land And A Modernised Approach – Insolvency/Bankruptcy



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Cayman Islands companies have dominated the
restructuring news cycle of late for a variety of reasons,
including recent judicial commentary as to the effect of obtaining
recognition under Chapter 15 of the U.S. Bankruptcy
Code.

Although there were recent indications by the Hong Kong Court to
the contrary, the U.S. Bankruptcy Court has now clarified that,
provided that a foreign court properly exercises jurisdiction over
a foreign debtor in an insolvency proceeding, and the foreign
court’s procedures are appropriate, a decision of the foreign
court approving a scheme or other restructuring plan that modifies
or discharges New York law governed debt is enforceable and
effective.

This recent clarification comes at a time when significant
amendments to Part V of the Cayman Islands Companies Act (the
“Act”) are due to take effect and revamp the domestic
restructuring regime. Amendments to the Act are set to introduce
the role of a court-appointed “restructuring
officer
” and an originating process by way of a new
restructuring petition”. The commencement
order for the amendments to the Act has been approved, with an
effective date of 31 August 2022.

The restructuring officer regime will provide a clearer
demarcation between distinct winding-up and rescue paths. As
opposed to being required to present a winding-up petition with a
view to then promoting a restructuring, it will be possible to
initiate restructuring efforts using a bespoke method with the
benefit of a statutory moratorium effective from the time of filing
the restructuring petition.

The recent case of Modern Land, involving cross-border
recognition of a Cayman Islands scheme of arrangement, and the
modernised Cayman Islands restructuring framework are discussed
below.

The Recent Example in Modern Land

Modern Land (China) Co., Ltd. (“Modern Land”) is a
company incorporated in the Cayman Islands and has shares listed on
the Hong Kong Stock Exchange. Modern Land is the holding company
for a group that conducts real estate investment and development in
China and the U.S.

When faced with liquidity issues, Modern Land sought to adopt a
conventional approach to restructuring certain major debt by
proposing a scheme of arrangement in its place of incorporation.
New York law- governed notes were the subject debt instrument. Once
the scheme was approved by the Cayman court, Modern Land applied
for recognition of the scheme under Chapter 15 of the U.S.
Bankruptcy Code.

The application was made in the U.S. a short time after a
decision of the Hong Kong court, which involved the recognition of
provisional liquidators and the approval of a scheme of arrangement
for Rare Earth Magnesium Technology Group (“Rare
Earth”), a Bermudian-incorporated company. In that case, Rare
Earth and the provisional liquidators pursued a debt restructuring
which led to a scheme of arrangement being put forward and
sanctioned in Hong Kong.

In the course of delivering reasons in relation to the Rare
Earth sanction order, some obiter dicta  remarks
were made in relation to the effect of recognition via Chapter 15
of the U.S. Bankruptcy Code. It was suggested that, as the Rule
in Gibbs  provides that a debt is treated as
discharged only if it is compromised in accordance with the law of
the jurisdiction which governs the law of the debt, a substantive
proceeding may be required in that jurisdiction to safeguard
against potential attacks elsewhere. It was indicated that Chapter
15 may not be treated as substantive in that it does not itself
operate as a compromise or discharge of U.S. governed debt.

Accordingly, it was said that an “offshore” scheme
of arrangement (e.g., in Bermuda or the Cayman Islands) merely
recognised in the U.S. may not bind a creditor (e.g. in Hong Kong)
who did not participate in the foreign scheme of arrangement
process.

Subsequently, in the context of the Modern Land decision, the
U.S. Bankruptcy Court stated that certain of the Hong Kong
Court’s comments in Rare Earth were not correct as a matter
of U.S. law. The U.S. Bankruptcy Court held in Modern Land that a
Cayman Islands scheme of arrangement recognised as a main
proceeding under Chapter 15 would constitute a substantive
discharge of New York law governed debt. This is an important
clarification for restructuring lawyers and officeholders.

A Potential Benefit of Appointing Officeholders

  It is worth noting that, after receiving
supplemental submissions and evidence on the point, the U.S.
Bankruptcy Court was satisfied that Modern Land had its centre of
main interests (COMI) in the Cayman Islands and that the Cayman
scheme could be recognised as a “foreign main
proceeding.” As a matter of U.S. law, under Chapter 15, the
debtor’s registered office is presumed to be the centre of
the debtor’s main interests, although this presumption can be
rebutted.

As noted in the Modern Land opinion, neither Modern Land nor any
of its creditors had presented a winding up petition in the Cayman
Islands. There were also no independent court-appointed
officeholders overseeing the process. Instead, Modern Land had
negotiated a restructuring support agreement and proceeded with a
consensual scheme of arrangement on that basis.

In determining whether COMI was in the Cayman Islands, the U.S.
Bankruptcy Court observed in Modern Land that the debtor would have
had an “easier case if [officeholders] had been
appointed
” in the Cayman Islands. This is consistent
with the analysis in prior cases involving Cayman Islands companies
before the U.S. Bankruptcy Court, such as Fairfield
Sentry 
and Suntech Power Holdings.
Therefore, aside from the obvious benefits of fiduciary oversight
and court protection, it is clear that, from a U.S. perspective at
least, appointing independent officeholders may help with
establishing a presence and connection to a particular
jurisdiction.

A Modernised Approach

In light of the decision in Modern Land and the current focus on
restructuring the debt of Cayman Islands companies, the new
restructuring officer regime is timely and should form a key part
of the options analysis for directors and advisers to Cayman
Islands companies.

Some of the important features of the new regime are that:

  • A company may seek the appointment of restructuring officers on
    the grounds that (i) the company is or is likely to become unable
    to pay its debts; and (ii) intends to present a compromise or
    arrangement to its creditors

  • The restructuring petition seeking the appointment of a
    restructuring officer may be presented by the directors of a
    company: (i) without a shareholder resolution and/or an express
    power to present a petition in its articles of association; and
    (ii) without the need to present a winding up petition

  • The moratorium will arise on presenting the petition seeking
    the appointment of restructuring officers, rather than from the
    date of the appointment of officeholders

  • The default position is that this will be an inter
    partes 
    process with adequate notice to be given to all
    stakeholders

  • The powers of a restructuring officer will be flexible and will
    be defined by the terms of the appointment order made by the Cayman
    The extent to which the directors will continue to manage the
    affairs of the relevant company will be defined by the order and
    will depend on the facts of the particular case

  • Secured creditors with security over the whole or part of the
    assets of the company will still be entitled to enforce their
    security without the leave of the Court and without reference to
    the restructuring officers

Under the new regime, if there is a feasible proposal to put to
stakeholders and a restructuring officer is appointed, an
application to sanction a compromise or arrangement with creditors
and/or members may be made in the restructuring proceedings without
the need to commence separate proceedings to promote a scheme of
arrangement under section 86 of the Companies Act. If the
restructuring fails and the company is ultimately wound up, the
winding up will be deemed to have commenced from the date of
presentation of the restructuring petition. Accordingly, whether
successful or unsuccessful, there will be an efficient route to a
sensible outcome.

Although legislators around the world sought to give directors
breathing space during the global pandemic, those are not permanent
measures. As the world begins to return to some level of normalcy,
directors would be wise to reassess any cavalier tendencies that
have developed while management has had the benefit of a
“safe harbour” or perceived “free pass.”
The key to a successful restructuring, through the restructuring
office regime or otherwise, will be timely action with the right
advisor team to guide the process.

As highlighted by the decision in Modern Land, a Cayman Islands
restructuring process—together with recognition abroad (as
necessary)—will continue to be a sensible and effective
method by which large, multinational groups may seek to reorganise
their debt and other affairs.

Click to Download

Co-Authored by Sam Cole of Kroll

Originally Published by INSOL
International’s News Update

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.



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