Group insolvency, consolidation of debt and directors' duties and liabilities in the Cayman Islands

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1 GLOBAL GUIDE 2015/16 INTERNATIONAL INSOLVENCY: GROUP INSOLVENCY AND DIRECTORS' DUTIES Country Q&A Group insolvency, consolidation of debt and directors' duties and liabilities in the Cayman Islands Louis Mooney and Christopher Harlowe Mourant Ozannes global.practicallaw.com/ 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 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 courtsupervised 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. 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, Courtsupervised 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 court-supervised 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). Thomson Reuters 2015 This article was first published in the International insolvency: Group insolvency and directors' duties Global Guide 2015/16 and is reproduced with the permission of the publisher, Thomson Reuters. The law is stated as at 1 April 2015.

2 Country Q&A 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. 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 quasi-partnership 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, 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 company" under Part IX of the Companies

3 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 court-supervised 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 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. 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). Country Q&A

4 Country Q&A 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 coordination 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 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? 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. 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. 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). 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

5 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 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 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. Country Q&A

6 Country Q&A 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 against other group companies, without specific agreements to that effect. Such security can be enforced without reference to the court or liquidator. Where the secured creditor is the beneficiary of a guarantee from a group company, the question as to whether he or she can claim under the guarantee without first enforcing his or her security, depends on what the guarantee provides. INTERNATIONAL FAMILY OF COMPANIES 23. What extra considerations are necessary if one or more members of the corporate family is incorporated under or governed by the laws of another jurisdiction? conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties. Instead, Cayman law adopts a potentially more internationally fragmented approach and, in recognising an insolvency proceeding, requires only that the company in question is a foreign company subject to a foreign insolvency proceeding in the jurisdiction in which it is incorporated or established. Cayman courts can make orders ancillary to, or in assistance of, foreign bankruptcy proceedings, so long as the foreign office-holder can demonstrate to the Court that such relief is appropriate. In exercising this discretion, the Court is to be guided by matters which will best assure an economic and expeditious administration of the foreign company's estate, consistent with the following principles: The just treatment of all holders of claims against or interests in the entity's estate, wherever they may be domiciled. The protection of claim holders in the Cayman Islands against prejudice and inconvenience in the processing of claims in the foreign bankruptcy. The prevention of preferential or fraudulent dispositions of property in the foreign company's estate. The distribution of the foreign company's estate among creditors pari passu in accordance with the order of priority prescribed by Cayman law. The recognition and enforcement of security interests created by the foreign company. The non-enforcement of foreign taxes, fines and penalties. The desire for international comity. For companies incorporated under the laws of the Cayman Islands, the answer remains the same as for previous questions. Where a company is incorporated under the laws of another jurisdiction, the laws of that jurisdiction will govern its insolvency proceedings. As an exception, it is possible to wind up a foreign company under Cayman law to the extent of its assets and liabilities in the Cayman Islands, if that company has property in, or is carrying on business in, the Cayman Islands. 24. If insolvency/restructuring proceedings are instituted for corporate family members in different countries, do any international treaties or EU legislation apply to govern this situation? The Cayman Islands has not adopted the UNCITRAL Model Law on Cross-Border Insolvency (Model Law). However, many of the core principles of the Model Law are found in the Companies Law. For example, the Court has power to recognise the right of a foreign office-holder (such as a foreign court-appointed liquidator) to act within the Cayman Islands on behalf of the foreign company, and to require the disclosure of information relating to that company's business to that office-holder, as well as granting the control of the company's assets to that office-holder. The court may also recognise a moratorium and so stay proceedings against the company in the Cayman Islands. An important distinction with the Model Law is that Cayman law does not recognise the "centre of main interests" (COMI) test in determining how cross-border insolvency proceedings are conducted. In broad terms, the COMI test provides that an insolvency proceeding in relation to an international company should take place in the country where the company in question 25. Do domestic courts typically attempt to exercise jurisdiction over all the assets of the company filing domestically (regardless of where the assets are located) or do they limit their jurisdiction to domestically located assets? Where a Cayman company has its assets located in a foreign country, the law of that country determines the ability of the Cayman courts to exercise jurisdiction over assets located there, and the authority of the Cayman liquidator generally in respect of those assets. In addition, the Court has power to make winding up orders in respect of a foreign company if: It has property located in the Cayman Islands. It is carrying on business in the Cayman Islands. It is registered under Part IX of the Companies Law as a foreign company with an established place of business in, or carrying on business in, the Cayman Islands. 26. Do the courts enforce court orders from foreign jurisdictions that attempt to exercise jurisdiction over assets located in your jurisdiction but owned by the company that is subject to the foreign insolvency proceedings? The Cayman courts have the power to make orders in support of foreign bankruptcy proceedings. The burden of proof is on the foreign office-holder to satisfy the court that it is appropriate for the court to exercise its discretion by granting the relief sought in the foreign representative's application. For the factors that the Court will consider in exercising its discretion whether to grant the relief, see Question 24.

7 27. Under what conditions, if any, can the courts communicate and co-ordinate with courts of a foreign jurisdiction in an effort to co-ordinate the administration of assets of family members? Where there are simultaneous foreign insolvency proceedings, official liquidators in the Cayman Islands are obliged to consider whether it is appropriate to enter into an international co-operation agreement with the office-holder of the foreign proceedings. In reaching this decision, a liquidator will consider whether to do so promotes the orderly administration of the estate of the company in liquidation and avoids duplication of work and conflict between the various liquidators. Any such agreement would likely define the responsibilities between the Cayman Islands liquidator and the foreign liquidator in respect of various assets, including the prosecution of causes of action on behalf of the company outside the Cayman Islands, as well as protocols for the exchange of information between the office-holders. The Cayman Islands have not adopted the Guidelines Applicable to Court-To-Court Communications in Cross-Border Cases adopted and promulgated by The American Law Institute and The International Insolvency Institute. RESPONSIBILITIES OF OFFICERS AND DIRECTORS 28. What is the specific nature of the duties and responsibilities of officers and directors of a company? How do those duties and responsibilities change when the company becomes financially distressed? The duties and liabilities of the directors of a company under Cayman Islands law arise from: The common law. The Cayman Islands have developed their own body of case law interpreting Cayman Islands statutory provisions (see below), and to the extent that those authorities do not provide a comprehensive answer, reference may be made to analogous English or Commonwealth authorities. Cayman case law in this regard has followed the English model, having developed primarily out of the principles applied to the legal relationships between principal and agent and between trustee and beneficiary. Statute. This is principally the Companies Law, but also the Penal Code (as amended) (Penal Code), the Proceeds of Crime Law 2008 (Proceeds of Crime Law) and, where appropriate, the Mutual Funds Law (as amended) (Mutual Funds Law). Regulation. Regulatory provisions such as the Cayman Islands Monetary Authority (CIMA) Statement of Guidance for Regulated Mutual Funds published in December 2013 specify certain minimum standards of conduct that CIMA expects of directors of Cayman Islands Regulated Mutual Funds. Although such regulations are typically neither exhaustive nor prescriptive, CIMA expects directors to follow and comply with them and any failure to do so is likely to be relied upon by any subsequently appointed liquidator as prima facie evidence of a failure by a director properly to discharge his duties. The memorandum and articles of association of the company. This is its constitution, within the limits of which the directors are obliged to operate. Directors' service contracts. These will specify the scope and extent of a director's duties. Common law duties and liabilities of directors Under common law, directors owe fiduciary duties and certain duties of skill and care. Fiduciary duties. Fiduciary duties go to a director's honesty and loyalty, not to competence. An individual director must act in good faith in his dealings with or on behalf of the company and exercise the powers and fulfil the duties of his office honestly. The scope of fiduciary duties is deliberately kept undefined in scope by the courts, but include: A duty to act in good faith in what the director considers are the best interests of the company. A duty to exercise powers in the company's interests and only for the purpose or purposes for which they are given. A duty not to put himself in a position where there is an actual or potential conflict between his duty to the company and his personal interests. A duty not to misuse company property. A duty not to improperly fetter the exercise of the director's present or future discretion. Duties of skill and care. In addition to discharging his or her fiduciary duties, a director acting in the company's interest must exercise whatever skill he or she possesses with reasonable care. This duty encompasses both subjective and objective elements. He or she must exercise the "reasonable care an ordinary man might be expected to take in the same circumstances on his own behalf" (Re Brazilian Rubber Plantations and Estates Ltd [1911] 1 Ch 425) (subjective test), and the reasonable care, skill and diligence that might reasonably be expected of someone carrying out that director's functions in the company (objective test). The duty to exercise reasonable care, skill and diligence encompasses: A duty to acquire and maintain a sufficient knowledge and understanding of the company's business to enable the director to properly discharge his duties. A duty to attend diligently to the affairs of the company. However, a director is entitled to rely on his fellow directors and the other officers of the company and can delegate power to others where it is reasonable to do so. A director who breaches his fiduciary duties or duties of skill and care may be held personally liable to the company (or in the case of insolvency, the liquidator on behalf of the company) for damages. Statutory duties and liabilities of directors The general principles governing a director's conduct set out above are augmented by a range of specific duties imposed by statute. The Companies Law. The Companies Law places certain duties on the directors of Cayman Islands companies, some of which are sanctioned by criminal penalties. Many of these duties are specifically imposed on the directors. In addition, in a number of instances the Companies Law provides that where a company is in breach of a particular statutory obligation, any "officer" of the company (which includes a director) who is "in default" shall be liable to a penalty as well as the company. The Companies Law states that for this purpose the expression "officer who is in default" means any officer of the company who knowingly and wilfully authorises or permits the default, refusal or contravention mentioned in the enactment. Among the most important statutory provisions that are sanctioned in this way are the following: Every company must keep a written register of its members. Any company which fails to do so, shall incur a penalty of KYD10 (as at 1 March 2015, KYD1 was about US$1.21) for every day during which the default continues, and every director of the company who knowingly and wilfully authorises such contravention shall incur the same penalty. Country Q&A

8 Country Q&A Every company must keep a written register at its registered office of all mortgages and charges specifically affecting property of the company, which must include a short description of the property mortgaged or charged, the extent of the charge created and the names of the mortgagees or persons entitled to such charge. The director of a company who knowingly or wilfully allows a company to fail to maintain such details shall incur a penalty of KYD100. Every company must: - keep at its registered office a register containing the names and addresses of its directors and officers; - send to the Registrar of Companies in the Cayman Islands (Registrar) a copy of such register; and - within 30 days, notify the Registrar of any change that takes place in such directors or officers. Any company which fails to comply with these provisions will incur a penalty of KYD10 for every day during which the default continues, and every director and manager of the company, who knowingly and wilfully authorises or permits such default, will incur the same penalty. Every year, each exempted company must furnish to the Registrar a declaration (Declaration) that, since the previous return or since registration as the case may be: - there has been no alteration in the memorandum of association, other than an alteration in the name of the company or an alteration already reported; and - the operations of the exempted company have been mainly outside the Islands. Every director and officer of a company who knowingly makes or permits the making of the Declaration referred to above knowing it to be false is guilty of an offence and liable on summary conviction to a fine of KYD1,000 and to three months' imprisonment. An exempted company must not trade in the Islands with any person, firm or corporation except in furtherance of the business of the exempted company carried on outside the Islands. If an exempted company carries on any business in the Islands in contravention of the provision of the Companies Law relating to exempted companies, then, without prejudice to any other proceedings that may be taken in respect of the contravention, the exempted company and every director, provisional director and officer of the exempted company who is responsible for the contravention is guilty of an offence and liable on summary conviction to a fine of KYD100 for every day during which the contravention occurs or continues, and the exempted company shall be liable to be immediately dissolved and removed from the register. The Penal Code. The Penal Code provides that an officer of a body corporate or unincorporated association (or person purporting to act as such) is guilty of an offence and liable to imprisonment for seven years if he or she: Intentionally deceives members or creditors of the body corporate or association about its affairs. Publishes, or concurs in publishing, a written statement or account which to his or her knowledge is, or may be, misleading, false or deceptive in a material particular. The Proceeds of Crime Law. The Proceeds of Crime Law contains a number of money laundering offences which are of general application and which therefore also apply to directors. The offences, punishable by a fine and/or imprisonment, include: Assisting another to retain the benefit of criminal conduct. The acquisition, possession or use of property representing the proceeds of criminal conduct. The concealing or transferring proceeds of criminal conduct. Other offences include: Being concerned in an arrangement whereby the retention or control by, or on behalf of another ("X"), of property which is the proceeds of X's criminal conduct is facilitated (whether by concealment, removal from the jurisdiction, transfer to nominees or otherwise), or property which is the proceeds of X's criminal conduct is used: - to secure that funds are placed at X's disposal; or - for X's benefit to acquire property by way of investment, knowing or suspecting that X is a person who is or has been engaged in criminal conduct. Knowing that any property is, or in whole or in part directly or indirectly represents, another person's proceeds or criminal conduct, a person acquires or uses that property or has possession of it. Knowing or having reasonable grounds to suspect that any property is, or in whole or in part directly or indirectly represents, another person's proceeds of criminal conduct, and a person: - conceals or disguises that property; or - converts or transfers that property or removes it from the jurisdiction, with intent to assist any person to avoid prosecution for an offence or to avoid the making or enforcement of a confiscation order. In connection with mutual funds, directors must put in place appropriate procedures to allow the administrators on behalf of the company to identify the subscribers to the shares and the source of funds. Satisfactory references should be obtained regarding the intended beneficial owners of the shares from a recognised professional firm or financial institution such as a bank, a legal firm or an accounting firm. If a subscription application is received from a professional intermediary, the company should obtain a written agreement from the intermediary that he or she has verified the identity and carried out a due diligence check in respect of the intended beneficial owner. While the company is solvent, directors owe their duties to their company (that is, the shareholders collectively). A director of a company does not, by virtue of his or her office, owe duties to individual shareholders or creditors, and the duties of a director to his or her company are enforceable only by that company and not by its shareholders or creditors. Where a company is in an insolvent or potentially insolvent position, the directors' duties extend to the company's creditors (as a whole) (see Question 14). Once a liquidator has been appointed for an insolvent company the directors no longer have the power to manage the affairs of the company. Their powers are superseded and exercised by the liquidator under court supervision. However, the directors have a statutory duty to co-operate with the liquidator. 29. What specific types of conduct are in breach of the duties and responsibilities of officers and directors? Failure to take reasonable steps to minimise losses to creditors. There are no express wrongful trading provisions in the Cayman law, but directors who fail to minimise losses to creditors could, in appropriate circumstances, expose themselves to potential personal liability if in so doing, they are acting in breach of their fiduciary duties owed to the company.