The
THE CURRENT REGIME
Under the current regime in the
The provisional liquidation regime is generally seen as effective and flexible, and is frequently used by companies seeking to pursue a restructuring in the
However, there are certain issues that companies in financial distress face with the provisional liquidation regime. The main difficulty under the current regime is that a winding up petition must be issued against the company in order for the company to then bring an application for JPLs to be appointed, in effect piggy- backing on the petition. However, directors of
Therefore, a company that wishes to explore a restructuring with the protection of a moratorium on claims is currently required to find a 'friendly' or 'connected' creditor to issue the winding up petition against the company. The company can then apply (ex parte, in the appropriate circumstances) for the appointment of JPLs on the grounds that the company is or is likely to become unable to pay its debts, and the company intends to present a compromise or arrangement to its creditors. JPLs appointed in this manner are usually appointed on a light-touch basis, with the directors retaining control of the company and its day-to-day operations, subject to the oversight and monitoring of the JPLs. It is also possible for JPLs to be appointed with 'full powers', supplanting the powers of the directors, for example if there are allegations that the directors have acted fraudulently or there are concerns that the company's assets may be dissipated.
However, this approach can be difficult and cumbersome to apply in practice. It requires the cooperation of a friendly creditor from the outset, and runs the risk that other, unfriendly or less cooperative, creditors may seek to take control of the winding up process by substituting into the position of the petitioner. This can give the creditor that is substituted on the petition leverage over the company in negotiations, or even provide a platform for the creditor to seek to place the company into official liquidation if it is not prepared to agree to the restructuring terms on offer. Furthermore, the moratorium on claims only arises once the company has been placed into provisional liquidation, and not upon the filing gof the winding up petition or the provisional liquidation application, which means that the company remains subject to other claims being filed in the meantime.
A CASE STUDY:
As one recent example of how the current regime operates, in the recent
In order to obtain a moratorium on claims and allow the company to explore a restructuring without simultaneously having actively to defend numerous claims across several jurisdictions, in
One of the holders of the convertible bonds was subsequently substituted in as the petitioner on the winding up petition in place of the director. This creditor was able to take control of the petition process while the restructuring negotiations were ongoing, and the hearing of the petition was adjourned on several occasions to allow the negotiations to progress.
Under the supervision and with the involvement of the JPLs, the company was ultimately able to conclude a successful restructuring with the holders of the convertible bonds through a scheme of arrangement sanctioned by the Cayman Islands Grand Court in
CROS: THE NEW REGIME
The new regime will enable a company to seek the appointment of a CRO from the Court to allow the company breathing room to pursue a restructuring. The test for the appointment of a CRO will be substantially the same as for an application for the appointment of JPLs, namely that the company is or is likely to become unable to pay its debts and intends to present a compromise or arrangement to its creditors.
There are two key practical differences with the CRO regime compared to the JPLs regime. First, the company itself will be able to apply to Court for the appointment of a CRO, and a winding up petition does not need to be issued against the company. This removes the difficulty under the provisional liquidation regime of a company needing to find da friendly creditor to bring a winding up petition, or to obtain a shareholder resolution placing the company into liquidation. The new regime may also result in companies being increasingly open to exploring restructuring in the
Second, the moratorium on claims will arise from the point that the company applies for the CRO to be appointed. This will mean that the moratorium commences earlier than under the provisional liquidation regime whereby the moratorium only arises upon the appointment of the JPLs. The moratorium will prevent domestic or foreign proceedings being commenced or continued against the company, including winding up petitions, and no resolutions can be passed for the company to be wound up once the moratorium is in place. As with the moratorium that arises on the appointment of JPLs, as a matter of
There will, however, be several similarities between the CRO regime and the JPLs regime. In particular, both regimes will require an application to Court, and both CROs and JPLs are appointed by the Court. As with restructurings in provisional liquidation, the Court will expect to see some elements of a restructuring plan at the time of the application, but the plan does not need to be overly detailed or developed. Rights of secured creditors will not be compromised by a CRO-led restructuring, which maintains the position that secured creditors of companies in either provisional or official liquidation can enforce their rights outside of the liquidation or restructuring process.
As with JPLs, CROs must be qualified insolvency practitioners, and at least one CRO must be resident in the
ANTICIPATED EFFECTS OF THE CRO REGIME
As the process for appointing CROs may be more streamlined than provisional liquidation and can be commenced by a company itself, the introduction of the CRO regime is expected to lead to an increase in Court sanctioned restructurings. The regime can be used to restructure debt that is governed by either
Originally Published in Volume 19, Issue 4 of International Corporate Rescue and is reprinted with the permission of
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.
Mr
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