The new Insolvency Legislation
As all insolvency practitioners and most lawyers on Island will be aware, 1 March 2009 marked a new chapter for insolvency in Cayman. On that date, the amendments to the Companies Law, which were enacted in 2007, finally came into force together with new Companies Winding Up Rules (replacing the UK 1986 Insolvency Rules), the Insolvency Practitioners Regulations, the Foreign Bankruptcy Proceedings (International Cooperation Rules) and the Grand Court (Amendment No. 2) Rules. Although, this article is not intended to provide a specific list of all the changes to Part V of the Companies Law (2007), the main changes are summarised below. Alex Horsbrugh-Porter, with Ritch & Conolly discusses in this second of a two-part series.
Antecedent transactions and fraudulent trading
There have been wholesale changes in this section of the Law to bring the Cayman Islands law more in line with the UK when it comes to challenging transactions that were carried out by the company in advance of the commencement of the liquidation. Section 145 of the Law now deals with preferences that can be set aside. The time limit for challenging a preference is still six months immediately preceding the commencement of the liquidation (as in the old law), but importantly, it is now to be inferred (under Section 145(2)) that a payment was made with a view to giving a creditor a preference over other creditors where it is made to a related party of the company. This is equivalent to Section 239(6) of the UK 1986 Insolvency Act. It is also notable that the Fraudulent Dispositions Law has, to a large extent, now been imported into Section 146 of the Companies Law which is titled avoidance of dispositions at undervalue. This Section specifically enables an Official Liquidator to set aside a transaction at undervalue.
There is now a section (147) dealing with fraudulent trading which is almost identical to Section 213 of the UK 1986 Insolvency Act. Under Section 147 the Liquidator will have to prove intent to defraud creditors. However, there is no section in the new law (as there is in the UK) dealing with wrongful trading where a company carries on trading when it’s directors knew or ought to have known that there was no reasonable prospect of that company avoiding going into insolvent liquidation. This may give directors in Cayman slightly more breathing space when a company is close to becoming insolvent.
Sections 134 to 137, which deal with fraud in anticipation of winding up, transactions in fraud of creditors, misconduct in the course of winding up and material omissions from a statement relating to company affairs are all taken wholesale from Sections 206, 207, 208 and 210 of the Insolvency Act 1986.
Collecting in property and demanding documents and information
Under Section 138(2) of the Law, which is similar to Section 234 of the Insolvency Act 1986, the Liquidator now has a release from liability for seizing property which does not belong to the company, except where any loss and damage to that property is caused by the Liquidator’s own negligence. The powers available to the Liquidator to demand documents and information from directors, professional service providers or persons involved in the promotion or management of the company are now set out, in greater detail than under the old law, at Section 103 of the new law. This new Section closely mirrors Sections 235 to 237 of the UK Insolvency Act. The difference with the UK legislation appears to be that the Cayman Court can make orders in relation to persons who reside outside the Islands, and can also send a letter of request to a foreign Court for assistance in obtaining evidence from certain parties. These powers were available to the Court previously under its inherent jurisdiction but had not been codified.
Sanction by the Court
Schedule 1 of the new Law now sets out clearly which powers are available to the Liquidator without sanction from the Court as well as the powers for which Liquidators must seek sanction from the Court before they can exercise them. This Schedule replaces Sections 109 and 110 of the old law. Once again, they almost exactly replicate the provisions under Schedule 4 of the Insolvency Act 1986 in the UK although it appears that Liquidators in Cayman will be forced to seek sanction from the Court for the power to sell company property, raise security and engage professionals, whereas in the UK no such sanction is needed. In the UK sanction can also be sought from the Liquidation Committee whereas under Section 110(2) it appears sanction can only come from the Court.
The big change in relation to Voluntary Liquidations is that the directors are now obliged to sign a declaration of solvency, in the prescribed form, within 28 days of the commencement of the Voluntary Liquidation. The directors must be able to declare that the company will be able to pay its debts together with interest at the prescribed rate within at least 12 months from the date of the declaration. If the director knowingly makes such a declaration without having reasonable grounds for the opinion that the company will be able to pay its debts, he/she may be liable on summary conviction to a fine of CI$ 10,000 or to imprisonment for a term of two years or both. There are similar provisions in Section 89 of the UK Insolvency Act 1986. Not surprisingly, this will be of great concern to directors who must ensure that they have reasonable grounds for declaring that the company will be able to pay its debts in a Voluntary Liquidation. If it subsequently transpires that the company is insolvent or if it is apparent that a liquidation under the supervision of the Court will be more effective than a Voluntary Liquidation of the company, then an application can be made to the Court for the winding up to be made subject to the supervision of the Court.
The new Companies (Amendment) Law 2007 has modernised the Cayman Insolvency Law and brought it in line with the prevailing legislation in many Commonwealth jurisdictions. Whilst many of the provisions have been imported from the UK 1986 Insolvency Act, there are several provisions that have been modified to take account of the realities of liquidating companies in the Cayman Islands. This legislation provides reassurance to all those involved in the Insolvency profession in Cayman, and abroad, that the Law is now up to date and able to respond to the demands of international insolvency.