INTERNATIONAL INSOLVENCY

Transcription

1 FOURTH EDITION 2015 FOURTH EDITION 2015 FOURTH EDITION 2015 INTERNATIONAL INSOLVENCY Group insolvency and directors duties A GLOBAL GUIDE FROM PRACTICAL LAW General Editor: J William Boone JAMES-BATES-BRANNAN- GROOVER-LLP INTERNATIONAL INSOLVENCY Group insolvency and directors duties A GLOBAL GUIDE FROM PRACTICAL LAW The publication of the fourth edition of International Insolvency: Group Insolvency and Directors Duties (formerly International Insolvency, Jurisdictional Comparison) continues to expand its jurisdictional scope as well as its analysis on directors and officers duties in the zone of insolvency. The recent global financial crisis, which resulted in a number of international companies becoming financially distressed and seeking relief through insolvency filings, has highlighted deficiencies in the current international law and various domestic legislative structures in addressing the multitude of cross-border issues arising in the administration of a distressed global company. With commentary from leading lawyers addressing complex cross-border insolvency issues and rescue provisions, this fourth edition of International Insolvency: Group Insolvency and Directors Duties gives law firms and corporate counsel an insight into the key insolvency issues across numerous jurisdictions. It particularly focuses on recently enacted laws, initiatives or rulings in various countries that touch on the insolvency of corporate groups and the duties directors and officers owe to creditors and other entities in the zone of insolvency. General Editor: J William Boone JAMES-BATES-BRANNAN-GROOVER-LLP A GLOBAL GUIDE FROM PRACTICAL LAW INTERNATIONAL INSOLVENCY Group insolvency and directors duties Preface J William Boone JAMES-BATES-BRANNAN- GROOVER-LLP Foreword Christopher J Redmond HUSCH BLACKWELL LLP Argentina Martín Campbell & Fernando Daniel Hernández MARVAL, O FARRELL & MAIRAL Australia Karen O Flynn CLAYTON UTZ Bahamas Brian M Moree, QC & M Margaret Gonsalves-Sabola MCKINNEY, BANCROFT & HUGHES Belgium Tom Geudens, Pieter Meeus & Xenia Vandenabeele LYDIAN Brazil Thomas Benes Felsberg & Paulo Fernando Campana Filho FELSBERG ADVOGADOS Canada Justin R Fogarty, Pavle Masic & Nicholas Rossi REGENT LAW PROFESSIONAL CORPORATION Cayman Islands Louis Mooney & Christopher Harlowe MOURANT OZANNES Colombia Daniel Posse, Juan Pablo Bonilla & María Carolina Sarmiento POSSE HERRERA RUIZ Finland Pekka Jaatinen & Elina Pesonen CASTRÉN & SNELLMAN ATTORNEYS LTD France Joanna Gumpelson DE PARDIEU BROCAS MAFFEI A.A.R.P.I. Germany Dr Christoph Schotte & Björn Grotebrune NOERR LLP Greece Stathis Potamitis, Eleana Nounou & Alexandros Rokas POTAMITISVEKRIS Hong Kong John Robert Lees JLA ASIA LIMITED India Sakate Khaitan, Satyendra Shrivastava & Jyoti Krishnan KHAITAN LEGAL ASSOCIATES Indonesia Theodoor Bakker, Herry N Kurniawan & Kevin O Sidharta ALI BUDIARDJO, NUGROHO, REKSODIPUTRO Israel Avraham Well, Meirav Bar-Zik & Meiran Sandelson FISCHER BEHAR CHEN WELL ORION & CO. Italy Lucio Ghia & Enrica Maria Ghia STUDIO LEGALE GHIA Japan Michihiro Mori, Toshihide Haruyama & Natsuki Taira NISHIMURA & ASAHI Asia overview Michihiro Mori & Toshihide Haruyama NISHIMURA & ASAHI Malaysia Rabindra S Nathan MESSRS SHEARN DELAMORE & CO The Netherlands Gerhard Gispen & Barbara van Gangelen SIMMONS & SIMMONS LLP Poland Dr Jacek Bąk & Dr Sławomir Morawski NOERR Russia Stefan Weber & Evgeny Lisin NOERR Singapore Patrick Ang & Kwan Kiat Sim RAJAH & TANN SINGAPORE LLP Spain Miguel Torres & Ferran Zaragoza TORRES, MARTÍN & ZARAGOZA ABOGADOS Switzerland Ueli Huber HOMBURGER AG United Kingdom Jatinder Bains, Paul Keddie & Simon Beale MACFARLANES United States J William Boone & Doroteya N Wozniak JAMES-BATES-BRANNAN- GROOVER-LLP General Editor: J William Boone JAMES-BATES-BRANNAN-GROOVER-LLP

2 International Insolvency Group insolvency and directors duties Fourth Edition General Editor: J. William Boone James-Bates-Brannan-Groover-LLP

3 General Editor: J William Boone James-Bates-Brannan-Groover-LLP Commissioning Editor Emily Kyriacou emily.kyriacou@thomsonreuters.com Commercial Director Katie Burrington katie.burrington@thomsonreuters.com Publishing Editor Dawn McGovern dawn.mcgovern@thomsonreuters.com Editor Katie Hillman katie.hillman@thomsonreuters.com Editorial Publishing Co-ordinator Nicola Pender nicola.pender@thomsonreuters.com Published in May 2015 by Thomson Reuters (Professional) UK Limited Friars House, 160 Blackfriars Road, London, SE1 8EZ (Registered in England & Wales, Company No Registered Office and address for service: 2nd floor, Aldgate House, 33 Aldgate High Street, London EC3N 1DL) A CIP catalogue record for this book is available from the British Library. ISBN: Thomson Reuters and the Thomson Reuters logo are trade marks of Thomson Reuters. Crown copyright material is reproduced with the permission of the Controller of HMSO and the Queen s Printer for Scotland. While all reasonable care has been taken to ensure the accuracy of the publication, the publishers cannot accept responsibility for any errors or omissions. This publication is protected by international copyright law. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or stored in any retrieval system of any nature without prior written permission, except for permitted fair dealing under the Copyright, Designs and Patents Act 1988, or in accordance with the terms of a licence issued by the Copyright Licensing Agency in respect of photocopying and/or reprographic reproduction. Application for permission for other use of copyright material including permission to reproduce extracts in other published works shall be made to the publishers. Full acknowledgement of author, publisher and source must be given Thomson Reuters (Professional) UK Limited

4 International Insolvency Contents Preface J William Boone James-Bates-Brannan-Groover-LLP Foreword Christopher J Redmond Husch Blackwell LLP Argentina Marval, O Farrell & Mairal Martín Campbell & Fernando Daniel Hernández 1 Australia Clayton Utz Karen O Flynn 23 Bahamas McKinney, Bancroft & Hughes Brian M Moree, QC & 47 M Margaret Gonsalves-Sabola Belgium Lydian Tom Geudens, Pieter Meeus & Xenia Vandenabeele 67 Brazil Felsberg Advogados Thomas Benes Felsberg & 91 Paulo Fernando Campana Filho Canada Regent Law Professional Corporation Justin R Fogarty 111 Pavle Masic & Nicholas Rossi Cayman Islands Mourant Ozannes Louis Mooney & Christopher Harlowe 131 Colombia Posse Herrera Ruiz Daniel Posse, Juan Pablo Bonilla 153 & María Carolina Sarmiento Finland Castrén & Snellman Attorneys Ltd Pekka Jaatinen & Elina Pesonen 169 France De Pardieu Brocas Maffei A.A.R.P.I. Joanna Gumpelson 191 Germany Noerr LLP Dr Christoph Schotte & Björn Grotebrune 215 Greece PotamitisVekris Stathis Potamitis, Eleana Nounou & Alexandros Rokas 237 Hong Kong JLA Asia Limited John Robert Lees 257 India Khaitan Legal Associates Sakate Khaitan, Satyendra Shrivastava 277 & Jyoti Krishnan Indonesia Ali Budiardjo, Nugroho, Reksodiputro Theodoor Bakker, 301 Herry N Kurniawan & Kevin O Sidharta Israel Fischer Behar Chen Well Orion & Co. Avraham Well, Meirav Bar-Zik 321 & Meiran Sandelson Italy Studio Legale Ghia Lucio Ghia & Enrica Maria Ghia 343 Japan Nishimura & Asahi Michihiro Mori, Toshihide Haruyama & Natsuki Taira 363 Asia overview Nishimura & Asahi Michihiro Mori & Toshihide Haruyama 387 Malaysia Messrs Shearn Delamore & Co Rabindra S Nathan 391 The Netherlands Simmons & Simmons LLP Gerhard Gispen 409 & Barbara van Gangelen Poland Noerr Dr Jacek Bąk & Dr Sławomir Morawski 427 Russia Noerr Stefan Weber & Evgeny Lisin 447 iii vii EUROPEAN LAWYER REFERENCE SERIES iii

5 International Insolvency Singapore Rajah & Tann Singapore LLP Patrick Ang & Kwan Kiat Sim 463 Spain Torres, Martín & Zaragoza Abogados Miguel Torres & Ferran Zaragoza 481 Switzerland Homburger AG Ueli Huber 501 United Kingdom Macfarlanes Jatinder Bains, Paul Keddie & Simon Beale 519 United States James-Bates-Brannan-Groover-LLP J William Boone 535 & Doroteya N Wozniak Contacts 563 iv EUROPEAN LAWYER REFERENCE SERIES

6 International Insolvency Preface J William Boone James-Bates-Brannan-Groover-LLP Effective, uniform, and accessible insolvency laws are important elements of a healthy global legal system and commerce. The creation of uniform insolvency law has been the focus of the United Nations Committee on International Trade Law (UNCITRAL) Working Group V (Insolvency Law) which has recognised the need for uniform insolvency laws for the reorganisation and liquidation of business entities. Due to the divergent insolvency regimes among many countries, the differences in civil and common law countries, the desire of governments to protect their turf, and simple inertia, it will most likely be many years before we see a truly internationally adopted and universally accepted uniform insolvency law. Therefore, in the interim, it is important for both practitioners and leaders of international corporations to be familiar with (or at least have access to) information regarding the insolvency laws of the major jurisdictions surveyed herein. The varying answers to the questions posed in this book are indicative of the importance of a resource of its type. We sincerely hope and believe that this book provides answers to many of the questions that will undoubtedly face these practitioners and leaders. Since the publication of the third edition, there has been a continued emphasis on the obligations of directors and officers of a company that is in the period approaching insolvency, that is the zone of insolvency. Indeed, the topic has continued to be a point of interest during the meetings of the UNCITRAL Working Group V (Insolvency Law). Accordingly, this fourth edition has continued the focus on director and officer liability in the surveyed jurisdictions, including their duties to various interest holders (such as creditors, employees and shareholders), their liability for misappropriating or undervaluing corporate assets, whether a business can continue to operate if they are aware that the company is insolvent, whether their duties change when the company becomes insolvent, whether civil or criminal liability may result from a breach of their duties, whether director and officer liability insurance is available, and related topics. The fourth edition has also included additional jurisdictions and added questions which provide a general overview of the insolvency scheme in each country before delving into the specific issues arising from directors and officers obligations in the zone of insolvency. I am pleased to also note that the fourth edition is now also available in an online and a printed hardback formats. The online version is part of the Practical Law Global Guides. I am deeply grateful to the authors of each chapter of this volume for contributing their time, talent, and professional energies to this project. I am also thankful for the wonderful staff of Thomson Reuters, including Nicola Pender, Katie Hillman, Katie Burrington, Emily Kyriacou, and Dawn EUROPEAN LAWYER REFERENCE SERIES v

7 International Insolvency McGovern, who, through the years, have helped me take this project to an international treatise, grow it in scope, and who continue to provide their invaluable support in preparing and editing this fourth edition. I am confident the reader will find it both useful and informative. I look forward to your comments to assist in expanding future editions, as the international legal and financial community works closely together to further advance this area of law. I am excited to be one of the pioneers in the international insolvency practice, who through diligent and continued efforts and co-operation, will ultimately lead to a widely adopted uniform international insolvency law. April 2015 vi EUROPEAN LAWYER REFERENCE SERIES

8 International Insolvency Foreword Christopher J Redmond Husch Blackwell LLP In the aftermath of the global financial crisis of 2008, the international community clearly recognised the critical role that effective insolvency proceedings contribute to international cross-border financial stability. The explosion of global trade during the last century has elevated the drive to harmonise cross-border insolvency proceedings to the forefront of global harmonisation efforts. The initial attempts at cross-border insolvency harmonisation first emerged with the development of the Concordat by the International Bar Association. The Concordat was an attempt to achieve voluntary co-operation between states with regard to cross-border insolvency proceedings. The Concordat was a catalyst to initiate crossborder co-ordination among states, but advocates quickly realised that a voluntary system was not the solution to the growing problems of the intersection between insolvency law and international trade. Shortly after, the European Union (EU) began work on the development of the European Insolvency Regulations and following this, the United Nations Committee on International Trade Law (UNCITRAL) promulgated the UNCITRAL Model Law on Cross-Border Insolvency with Guide to Enactment and Interpretation. The creation of both of these substantial works on cross-border insolvency law occurred over a very short period of time, and clearly demonstrated the need and desire for co-ordinated cross-border insolvency proceedings. Previously, the initiation of cross-border insolvency proceedings by companies operating in multiple jurisdictions resulted in duplication of administrative expenses, multiple proceedings (that could reach divergent results), a lack of uniformity and consistency in the issuance of distribution to creditors and the general inability to reorganise. This often led to liquidation and the cessation of business activities, creating a loss of jobs and substantial losses to creditors and interested parties. Judges, practitioners and academics recognised that co-ordinated crossborder insolvency proceedings would need to be procedural and not substantive at the outset to be accepted and implemented by states. In 1995 after an initial colloquium sponsored by INSOL, the International Bar Association Committee J and UNCITRAL, strong support emerged to develop an effective mechanism for dealing with cross-border insolvency proceedings in order to promote the objectives of co-operation between courts and competent authorities of states. This was to provide for greater legal certainty in trade and commerce, a fair and efficient administration of crossborder insolvency proceedings to protect the interests of creditors and other parties (including the debtor), and to provide for the further preservation of the value of the debtor s assets and the facilitation of the rescue of financially distressed businesses. EUROPEAN LAWYER REFERENCE SERIES vii

9 International Insolvency After the issuance of a mandate by the UNCITRAL Commission, in the short two-year period between 1995 and 1997, the UNCITRAL Model Law on Cross-Border Insolvency with Guide to Enactment and Interpretation was promulgated and adopted by the General Assembly of the United Nations. Currently over twenty states have enacted and adopted the UNCITRAL Model Law, including Canada, Japan, Mexico, Colombia, the US and the UK, among others. A substantial number of other states are either in the process of adopting or considering adopting the Model Law as part of their overall insolvency law. Considering the success of the creation of the Model Law on Cross-Border Insolvency, UNCITRAL established an exploratory meeting in December of 1999 to determine if there was an interest to develop a legislative guide on insolvency laws for the reorganisation and liquidation of business entities. Following an exploratory meeting (where a comprehensive statement, key objectives and core features were developed) the UNCITRAL Commission issued a mandate to begin work in July 2001 to prepare a legislative guide on insolvency law. Between 2001 and 2004, UNCITRAL Working Group V (Insolvency Law) worked on and completed a Legislative Guide on Insolvency Law. The Legislative Guide on Insolvency Law is currently viewed as the international standard for insolvency law reform by states in addressing both domestic and cross-border insolvency proceedings. In recognising additional needs in the area of cross-border insolvency law, the UNCITRAL Commission issued a mandate for Working Group V to undertake further work on co-ordination and co-operation in crossborder insolvency cases with an emphasis on the use of negotiation of cross-border insolvency agreements. In 2009, the UNCITRAL Practice Guide on Cross-Border Insolvency Co-operation was approved by the UNCITRAL Commission and subsequently endorsed and adopted by the General Assembly of the United Nations. With the approval of the UNCITRAL Commission, additional work to the Legislative Guide on Insolvency Law was authorised, which resulted in Part III: The Treatment of Enterprise Groups in Insolvency and Part IV: Directors Obligations in the Period Approaching Insolvency that were completed in 2012 and 2013 respectively. While the Model Law on Cross-Border Insolvency addressed a single company operating in multiple jurisdictions, UNCITRAL Working Group V (Insolvency Law), pursuant to mandates granted by the UNCITRAL Commission, are now addressing the issue of the development of a model law on enterprise groups, that is, addressing groups of companies operating in different jurisdictions to achieve an overall resolution through co-ordinated insolvency proceedings. Further work mandated by the UNCITRAL Commission is to develop a model law on the recognition of cross-border related insolvency judgments, both projects are now ongoing. The EU has recently undertaken a complete review and analysis of the European Insolvency Regulations and is in the process of promulgating revisions of insolvency laws and procedure within the EU. To put this in perspective, the authors of the 4th Edition of International viii EUROPEAN LAWYER REFERENCE SERIES

10 International Insolvency insolvency: Group insolvency and directors duties have provided an excellent update with regard to the status of insolvency reform and revisions in their respective jurisdictions. When the work, both which has been completed and is ongoing, of UNCITRAL and the European Commission, among others, is compared to the excellent detail and information provided by the chapter authors from the respective jurisdictions, then and only then is the scope and extent of global insolvency reform appreciated. The 4th Edition of International insolvency: Group insolvency and directors duties provides an up-to-date analytical view of the insolvency law in the respective jurisdictions to provide the reader with a comprehensive and thorough analysis of the insolvency law in those jurisdictions. The respective chapter authors have provided an excellent explanation which is readily understandable to the reader and provides an excellent resource for the insolvency professional or parties who are intimately involved with the insolvency process on a cross-jurisdictional basis. EUROPEAN LAWYER REFERENCE SERIES ix

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12 Cayman Islands Mourant Ozannes Louis Mooney & Christopher Harlowe GENERAL OVERVIEW OF INSOLVENCY PROCEEDINGS 1. What are the available out-of-court and court-sanctioned insolvency proceedings? The insolvency law of the Cayman Islands is predominantly found in the Companies Law and Companies Winding Up Rules. This legislation was subject to a major overhaul in 2009 with the introduction of modern options for creditors as well as provisions for providing cross-border assistance in relation to international insolvencies. The Cayman Islands Grand Court is the court with jurisdiction over insolvency matters. Appeals from the Cayman Islands Grand Court are made to the Cayman Islands Court of Appeal, whose decisions are binding on the Grand Court. The ultimate court of appeal is the Judicial Committee of the Privy Council in London, which primarily draws its members from the Supreme Court (formerly House of Lords) of England and Wales. Privy Council decisions on appeals from the Cayman Islands Court of Appeal are binding on the Court of Appeal and the Grand Court. The only insolvency mechanism which does not require a formal court process is voluntary liquidation. All other insolvency mechanisms are court-supervised. These consist of court-supervised voluntary liquidation, compulsory liquidation, provisional liquidation and schemes of arrangements (see Question 2). 2. What are the proceedings for a liquidation of assets and those allowing for a restructuring of the debtor s operations and debts? Liquidation of assets A liquidation (of any type) involves the liquidator collecting and realising the assets of the company and then distributing them as per the statutory priority, before the liquidator is released and the company dissolved. There is no Cayman equivalent to rescue mechanisms such as the Chapter 11 process in the US, administration in the UK or examinership in Ireland. The closest process is a scheme of arrangement whereby a company may place itself into provisional liquidation so as to secure a moratorium on enforcement of claims and then use this breathing space to negotiate with creditors to accept part payment as full discharge of debts due. Voluntary liquidation. Subject to the articles of association of the company, voluntary liquidation may be entered by the passing of a special resolution of the company. It may also be entered if the company resolves, by ordinary resolution, that it should be wound up voluntarily because it is unable to pay its debts as they fall due. EUROPEAN LAWYER REFERENCE SERIES 131

13 There are two circumstances in which a company can be wound up voluntarily without requiring further shareholder approval: Where the period set for the duration of the company by its memorandum or articles expires (fixed duration winding up). On the occurrence of an event specified by the memorandum or articles (event winding up). The liquidator in a voluntary winding up does not need to be an insolvency practitioner or accountant, and may be any appropriate person, such as one (or more) of the directors, shareholders or company accountants. For a liquidation to remain a voluntary liquidation, within 28 days of the liquidator s appointment, the directors must sign a declaration that the company will be able to pay its debts in full within twelve months of the liquidator s appointment. Should the directors not do so, the liquidator must apply to bring the liquidation under the supervision of the court. Voluntary liquidation is not a long-term process as it envisages debtors being paid in full within twelve months of the appointment of a liquidator, otherwise the court steps in (see below, Court-supervised voluntary liquidation). In practice, the process may be used where a company is insolvent to expedite the appointment of a liquidator, prior to an application to have a courtsupervised liquidation. In such cases, an insolvency practitioner may be appointed liquidator from the outset. Court-supervised voluntary liquidation. For a liquidation to remain a voluntary liquidation, within 28 days of the liquidator s appointment, the directors must sign a declaration that the company will be able to pay its debts in full within twelve months of the liquidator s appointment. Should the directors fail to do so, the liquidator must apply to bring the liquidation under the supervision of the court. A court-supervised voluntary liquidator has materially identical powers to a liquidator appointed through a compulsory liquidation process. Compulsory liquidation (which may include provisional liquidation). The Grand Court may wind up a company on a petition from: The company itself. A creditor (including contingent or prospective creditors). A shareholder. The directors (where expressly authorised to do so by the articles). The Cayman Islands Monetary Authority (for specific regulatory breaches). The grounds on which a company may be wound up by the court are: The company has passed a special resolution requiring the company to be wound up. The company does not carry out business for a whole year. A specified date or event set down in the company s articles is reached or occurs (fixed duration or event winding up). The company is unable to pay its debts. Solvency is generally assessed on a cash-flow rather than balance sheet basis. This issue will be heavily dependent on the facts of the case as the court will consider the financial position in the round. Therefore predictions as to future debts and cash flow may be considered. 132 EUROPEAN LAWYER REFERENCE SERIES

14 The court is of the opinion that it is just and equitable for the company to be wound up. Where the court winds up a company on the just and equitable ground, this may include where there has been: serious mismanagement, fraud or breach of fiduciary duty by the company s directors; oppression of minority shareholders, where the company is a quasipartnership and the key internal relationship(s) have irretrievably broken down; or where the company has lost its substratum. That is, it is no longer able to perform the objective(s) for which it was brought into existence. After a petition for a compulsory winding up has been filed, but before it has been considered by the court, the court may immediately appoint a provisional liquidator. This power will only be invoked where there is a prima facie case for a winding up order and the appointment of a provisional liquidator is necessary either to prevent the misappropriation or misuse of company assets, oppression of minority shareholders or mismanagement by the company s directors. Such an application may be made without notice to other interested parties where the circumstances so warrant. Restructuring A scheme of arrangement is a court sanctioned compromise agreement between the company and its creditors or any class of them. As discussed above (see above, Liquidation of assets), this is the closest Cayman law comes to a corporate rescue mechanism. This may be used in tandem with the appointment of provisional liquidators to give a company the benefit of the statutory moratorium, so as to give it the time needed to realise the best value for assets and restructure as appropriate. The application is commenced by petition seeking the court s (preliminary) approval of the scheme, which may be brought by: The company. A shareholder. The company s liquidator. The company s creditors. At the same time as the filing of the petition, the liquidator files an interlocutory summons for an order for directions to convene a meeting of the creditors or class(es) thereof. There will be at least two hearings of the petition. At the first hearing, the Court will determine the constitution of the relevant class(es) for voting purposes and consider whether the explanatory memorandum to be sent to the creditors and/or members contains sufficient information. The company must then send each member of each class a notice summoning a meeting, a copy of the scheme document, a copy of the explanatory memorandum, and a proxy form. The resolution to approve the scheme is then proposed at the creditors meeting(s), as convened by the Court. At the meeting, the scheme must be approved by a majority in number representing 75% in value of the creditors or class thereof who are present, EUROPEAN LAWYER REFERENCE SERIES 133

15 and/or voting by proxy, agreeing to the arrangement. This requirement is sometimes referred to as the double majority or statutory majority. The scheme must then be sanctioned by the Court at a second hearing. The second hearing of the petition is held in open Court and any person who voted at the meeting, or gave voting instructions to a custodian/clearing house who voted at the meeting, is entitled to appear and be heard. Before granting an order sanctioning the scheme, the Court must be satisfied that the interests of all relevant parties have been considered and are not prejudiced. The Court has jurisdiction to impose conditions on the scheme if it sees fit, and indeed may refuse to make an order, particularly if minority rights are being unfairly prejudiced. Once approval is given and filing requirements fulfilled, the scheme is binding on all creditors and all members or all members of the relevant class, as the case may be. If the scheme is being effected by provisional liquidators in the context of a distressed company, it is usual for the scheme to appoint the provisional liquidators as scheme administrators to oversee the distribution of new debt/ equity to shareholders, creditors and so on. Once the effective rights and obligations in and of the company have been dealt with by way of the scheme, the provisional liquidation is no longer required. It is usual that shortly after the scheme has been approved, the provisional liquidators apply for their discharge. 3. What are the general requirements for commencing insolvency proceedings? As discussed in Question 2, voluntary liquidation can be commenced without court oversight on the passing of a special resolution, or ordinary resolution in circumstances where a company is insolvent. The liquidator may subsequently have to apply to the Grand Court for an order that the liquidation continues under the supervision of the Court should the directors not sign a declaration that the company will be able to pay its debts in full within twelve months of the commencement of the liquidation. Otherwise an application for compulsory winding up, or for a scheme of arrangement, is commenced by petition filed with the Grand Court. For the criteria required for commencing voluntary or compulsory winding up, see Question Are there any restrictions on who, or what type of entity, can commence insolvency proceedings? Insolvency procedures under the Companies Law are restricted to those companies formed and registered in Cayman. Winding up does not extend to individuals, in which case their insolvency is referred to as bankruptcy and is governed by the Bankruptcy Law. Similarly, partnerships are dealt with under the Partnership Law. There is judicial authority for winding up the business of a foreign company where Cayman is its principal place of business and it is registered as a foreign 134 EUROPEAN LAWYER REFERENCE SERIES

16 company under Part IX of the Companies Law. Otherwise, proceedings should be commenced in the country of the company s incorporation. DOMESTIC FAMILY OF COMPANIES 5. Are joint proceedings available in insolvency or bankruptcy proceedings that are commenced for the family of companies? Procedure Cayman law does not envisage a consolidated proceeding for a group of companies. While the Court may hear two or more winding up petitions at the same time, it has no authority to make any order for the consolidation of multiple insolvency proceedings. Therefore, if insolvency proceedings are to be commenced for a number of companies within the same group, the proceedings must be commenced by way of separate petitions, under a separate court file. As a matter of practice, it may be possible to synchronise petitions such that they progress in tandem and are heard by the same judge. Location All companies in the Cayman Islands fall under the jurisdiction of the Grand Court of the Cayman Islands, which is the forum for commencing any courtsupervised insolvency proceedings. The Cayman Islands does not consist of member states or federations and so operates a unitary legal system. As such, there is no concept of companies being organised or operating in different legal jurisdictions within the Cayman Islands. 6. Must all members of the corporate family proceed under the same type of bankruptcy or insolvency proceeding? The Court generally recognises the separate legal personality of each company. As such, it is not constrained to applying the same procedure to related companies. The court may recognise that different procedures may suit different companies better, or indeed that a one-size fits all approach may be more prudent as commercial practicalities require. 7. Can a single administrator/trustee/receiver administer the assets and the liabilities of the entire corporate family? Cayman courts recognise that, in appropriate cases, it may be desirable for the same liquidator to wind up related companies within the same corporate family. The court will consider all the factors of the case before appointing one liquidator, including, on the one hand, efficiencies created by avoiding duplication, and, on the other hand, the potential for real or apparent conflicts of interest such as inter-company loans to arise. The views of the creditors will usually carry significant weight. 8. Is a court hearing required to determine whether administration by a single party is appropriate and, if so, must notice be given to creditors? In compulsory liquidation proceedings, the petitioner will nominate a EUROPEAN LAWYER REFERENCE SERIES 135

17 proposed liquidator. This person must be a suitably qualified insolvency practitioner. The identity of the liquidator is decided by the court at the winding up hearing when it determines whether or not the company should be placed into compulsory liquidation. In voluntary liquidations, when the members of a company pass appropriate resolutions for the company to be voluntarily wound up, these resolutions will also include a resolution appointing a liquidator. If the liquidation subsequently requires court supervision because the prescribed declaration of solvency is not signed by the directors, then the liquidator appointed by the members applies to the Court for an order that the liquidation continues under the supervision of the Court. The qualifications requirements for a liquidator in a court-supervised insolvency are greater, so if the voluntary liquidator is not qualified to continue to act, his application should include the nomination of a suitably qualified person to so act. Secured and unsecured creditors are allowed to object and be heard at winding up hearings and the hearings for supervision orders. Creditors views are usually accorded considerable weight and frequently determine any issue relating to the appointment of a liquidator. The court may ascribe less weight to the views of those creditors who are also members, or who are associated with, the former management of the company. 9. Can other professionals work for the entire corporate family? The liquidator in a voluntary winding up need not be an insolvency practitioner or accountant and may be any appropriate person, such as one (or more) of the directors, shareholders or company accountants. Compulsory liquidation and court-supervised voluntary liquidations (including solvent voluntary liquidations) require that a suitably qualified person must act as liquidator of a company. The required qualifications are set out in the Insolvency Practitioners Regulations 2008 (as amended). They must be one of the following: An insolvency practitioner licensed in England and Wales, Scotland, Northern Ireland, the Republic of Ireland, Australia, New Zealand or Canada. A qualified professional accountant with at least five years experience. A person who has been appointed by the court as liquidator within a period of five years preceding 1 March The liquidator must be independent in relation to that company. A person cannot be considered to be independent if, within the three years immediately before the commencement of the liquidation, he, or the firm of which he is a partner or employee, has acted in relation to the company as its auditor. A liquidator must be resident in the Cayman Islands (although it is possible to appoint a non-resident liquidator as a joint liquidator provided he otherwise meets the qualifications and independence requirements to be a liquidator and provided that one joint liquidator is resident in the Cayman Islands). Typically, licensed insolvency practitioners from accountancy firms are appointed as liquidators. 136 EUROPEAN LAWYER REFERENCE SERIES

18 10. If the law does not permit a single administrator/trustee/receiver, are there provisions allowing different administrators to co-ordinate with each other so that values of assets can be maximised? As discussed, in certain situations, the court may consider it commercially prudent that a single liquidator acts as liquidator of a group of companies, bearing in mind the efficiencies created and potential for conflicts of interest (see Question 7). The liquidator s duties are to the court and to the creditors of the individual company over which he has been appointed. Where those duties (particularly the latter) can be best performed by co-ordination of strategies between various liquidators of different related companies, the court may allow this. However the court will be alive to the separate bases for liability between different companies with different creditors, so any such co-ordination strategy ought not to unfairly impinge on an individual liquidator s duties to the creditors to whom he owes duties. 11. Does your jurisdiction encourage or discourage overlapping boards or management teams for separate members of a corporate family? Cayman law is silent on overlapping boards or management teams for separate members of a corporate family. Directors owe fiduciary duties to their company. These duties include a duty not to put themselves in a position where there may be a conflict between their duties to their company and their duties to others. A company s articles of association may waive or modify these duties so as to enable a director to sit on multiple boards. Typically, the articles may provide that a director may be a director of other companies, but still be counted in a quorum and to vote at board meetings, so long as he has first disclosed the nature of any apparent or actual conflicting interest arising from his other commitments. 12. How are directors of a parent company treated if they are not directors of the subsidiary but manage the affairs of the subsidiary? Those persons who undertake the functions of directors and who claim to act as directors, despite not being validly appointed, are recognised by Cayman law as de facto directors. De facto directors have the same equitable and common law duties under Cayman law as validly appointed directors. A shadow director is a person in accordance with whose instructions the directors are accustomed to act. Unlike a de facto director, a shadow director does not claim to be or to act as a director, despite actually directing the directors. However a person instructed in a professional capacity will not be deemed to be a shadow director merely because the directors act on professional advice given by him or her. The extent to which a shadow director has the same equitable and common law duties as those imposed on validly appointed and de facto directors is unclear under Cayman law and, it is thought, will depend on the facts of the case and particularly the extent of control exercised. EUROPEAN LAWYER REFERENCE SERIES 137

19 A director of a parent company who is not a validly appointed director of a subsidiary, but who manages the affairs of the subsidiary, is likely to be considered a de facto director in circumstances where he or she claims to be a director, or he or she has undertaken functions which could ordinarily only have been undertaken by a director of the subsidiary. These functions must go beyond merely taking part in the management of the subsidiary s affairs in a way that could ordinarily be performed by a manager below board level. He or she must be exercising directorial-type functions. A director of a parent company may be a shadow director of its subsidiary if he or she gives instructions to the directors of the subsidiary which those directors generally act upon. However, in circumstances where directors of a parent company acting as a board give instructions to a subsidiary, they are unlikely to be considered individually shadow directors of the subsidiary, although the parent company itself may be considered a shadow director. Cayman law recognises criminal liability for specific offences relating to liquidations which centre on directors. These include: Transactions which defraud creditors. Misconduct in the course of the liquidation. Making relevant omissions from statements of affairs. These offences extend to de facto directors, and also, with the exception of the offence of transactions defrauding creditors, extend to shadow directors. 13. To whom do directors or officers owe duties while the company is solvent? What is the nature of the duties? Shareholders Directors owe their duties to their company (that is, the shareholders collectively). These duties include the duty to act in good faith in the best interests of the company. A person who accepts appointments as a director of two or more companies will owe separate duties to each of those companies. Directors duties to creditors, shareholders, employees, and tax authorities are subsumed in their duties to the company, which require the directors to operate lawfully. As a matter of practice, it will be in the shareholders and company s interests that relationships with those bodies are properly managed. Creditors A director of a company does not, by virtue of his office, owe duties to individual creditors. The duties of a director to his company are enforceable only by that company, and not by its creditors. Government authorities Once a liquidator has been appointed for an insolvent company, the directors no longer have power to manage the affairs of the company and their powers are superseded and exercised by the liquidator under Court supervision. The directors have a statutory duty to co-operate with the liquidator and are subject to the statutory obligations noted above. Directors duties to tax authorities are subsumed in their duties to the company (see above, Shareholders). 138 EUROPEAN LAWYER REFERENCE SERIES

20 Employees Directors duties to employees are subsumed in their duties to the company (see above, Shareholders). 14. Do the duties or responsibilities of the officers or directors of a family of companies change when the companies become insolvent? The interests of a solvent company are generally the interests of its shareholders. If the company is insolvent or of doubtful solvency, the interests of the company will include the interests of its creditors, according to Prospect Properties v McNeill CILR, quoting with approval West Mercia Safetywear v Dodd [1988] 4 BCLC 250. A director will not owe duties to individual creditors. The duties of a director to his company are enforceable only by that company and not by individual creditors. The Cayman Court in Prospect quoted from the New South Wales Court of Appeal decision in Kinsella v Russell Kinsella (1986) 4 ACLC at 223, which stated that in a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of duty of directors arise... But where a company is insolvent, the interests of the creditors intrude. They become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company s assets. It is in a practical sense their assets and not the shareholder s assets that, through the medium of the company, are under the management of the directors pending either liquidation, return to solvency or the imposition of some alternative administration. Therefore, depending on the precise circumstances of the case, the creditors interests may come ahead of the shareholders interests in relation to directors duties. In such case, the directors owe their duties to the creditors as a whole and not to individual creditors. Once a liquidator has been appointed to an insolvent company, the directors automatically relinquish the power to manage the affairs of the company in favour of the liquidator. However, the directors powers are replaced with the statutory duty to co-operate with the liquidator and to provide a statement of affairs. They remain subject to the statutory offences mentioned above (see Question 12). If only one company is insolvent, the duties of its directors in relation to that company will typically be to that company s creditors as a whole. If that director is also a director of a related solvent company and so owes duties to that company s shareholders, he must ensure, through full disclosure, that he avoids putting himself in a position where his duties owed to the solvent and to the insolvent company respectively conflict. 15. How are competing fiduciary duties addressed where officers and directors of various company family members overlap and conflicts of interest between the family members exist? Directors owe fiduciary duties to their company. These duties include a duty not to put themselves in a position where there may be a conflict between EUROPEAN LAWYER REFERENCE SERIES 139

21 their duties to their company and their duties to others, as well as a duty not to obtain secret profit from their position. A company s articles of association may waive or modify these duties so as to enable a director to sit on multiple boards. Typically, the articles may provide that a director may be a director of other companies, but still be counted in a quorum and to vote at board meetings, so long as he or she has first disclosed the nature of any apparent or actual conflicting interest arising from his or her other commitments. 16. Are the rules regarding members of the corporate family transferring assets to one another different when the members are insolvent? There are no specific rules aimed exclusively at the transfer of assets among members of a corporate family. However, transactions entered into by related companies may fall foul of the general rules against transactions at an undervalue or by way of undue preference. This would render them invalid or voidable under Cayman Islands law. Undervalue means that the consideration provided for the transferred property is significantly less than its true monetary value. A conveyance of property or payment obligation made by a company in favour of any creditor at a time when the company is unable to pay debts, with the intention of treating such a creditor more favourably than other creditors, will be invalid if made within six months before the commencement of the liquidation of the company. There is a judicial presumption that a conveyance or payment to a related party of the company is made with the intention of creating a preference. A creditor is treated as a related party of a company if it has the ability to exercise significant influence over the company. This will often be the case between group companies within the same corporate family. The general rules of the Companies Law provide that a disposition of property made at an undervalue by a company with the intent to defraud its creditors, is voidable at the discretion of the liquidator. The reference to fraud in this instance goes to subjective intention to defeat an obligation, including a contingent obligation, owed to a creditor. It is for the liquidator to prove such intent, which, in practical terms, may be a difficult task. For solvent companies, the Fraudulent Dispositions Law contains broadly similar provisions to transactions at an undervalue when a company is not being wound up. In the absence of a liquidator, such a transaction can be set aside only at the instance of a creditor prejudiced by the transaction. 17. How are claims of one member of a corporate family against other members of the corporate family treated? Cayman law recognises the separate legal personality of companies and so does not treat claims between members of corporate families any differently than it would claims between unrelated litigants. Such claims are not invalid or unenforceable. However, a liquidator may be able to assert that transactions between members of a corporate family 140 EUROPEAN LAWYER REFERENCE SERIES

22 are voidable preferences. Claims by members of a corporate family are on an equal footing with those of third party creditors. Substantive consolidation 18. Is pooling of assets and liabilities of some or all members of the corporate family allowed, so that a creditor of one member becomes, in essence, a creditor of all members? Cayman courts have the power to make orders as to the pooling of assets and liabilities of some or all members of the corporate family in limited circumstances. This power stems from the court s inherent jurisdiction to make any such orders that it believes will assist in the just and expeditious winding up of the companies. The pooling of assets and liabilities of member companies of the same corporate family is relatively rarely ordered and will result only through specific application to the court. The separate legal personality of the various member companies will generally be respected. It is only where there are exceptional grounds, usually by reference to the interests of the creditors, that a pooling will be ordered. This could be where there is an intermingling of assets and liabilities as between the member companies and the practicalities of unravelling these arrangements from a cost and time perspective render a pooling approach the most efficient and fairest solution to the creditors as a whole. 19. What proceedings are required for the court to order the pooling of assets and liabilities? Applications for a pooling order are generally made by the liquidator or liquidators of the related companies by way of a summons, which may be with or without notice. 20. Is the partial pooling of assets and liabilities allowed? What conditions apply? As part of the court s inherent jurisdiction, it can make a wide range of orders, including partial pooling, if this is justified by the interests of the creditors generally. 21. If the pooling of assets and liabilities is required, are there any protections for certain types of creditors? Creditors with proprietary security interests may enforce their security without the leave of the court or reference to the liquidator. Such assets do not form part of the property of the company available for distribution. Secured creditors 22. How are secured creditors treated in relation to a family of companies? A secured creditor s claim would generally be considered individually as against each member company or specified assets, and would not be collapsed into one claim against a group of companies. The claim would also not be enforceable EUROPEAN LAWYER REFERENCE SERIES 141