Insolvency: Cayman Islands Avoidance of Antecedent Transactions Updated 2 February 2015 Introduction This short guide addresses the issue of whether, and in what circumstances, pre-insolvency transactions of an insolvent debtor can be set aside by the court. The guide is divided into two parts: 1. Voidable preferences, and 2. Transactions at an undervalue. Voidable preferences A transaction can be set aside if it amounts to a voidable preference. Every transfer of property (or charge thereon) and every payment obligation and judicial proceeding, made, incurred, taken or suffered by any company in favour of any creditor at a time when the company is unable to pay its debts with a view to giving such creditor a preference over the other creditors shall be invalid if made, incurred, taken or suffered within six months immediately preceding the commencement of a liquidation. Unable to pay debts A company is insolvent when it can no longer pay its debts. A company shall be deemed to be unable to pay its debts if-
a. a creditor by assignment or otherwise to whom the company is indebted at law or in equity in a sum exceeding one hundred dollars then due, has served on the company by leaving at its registered office a demand under his hand requiring the company to pay the sum so due, and the company has for the space of three weeks succeeding the service of such demand, neglected to pay such sum, or to secure or compound for the same to the satisfaction of the creditor; b. execution of other process issued on a judgment, decree or order obtained in the Court in favour of any creditor at law or in equity in any proceedings instituted by such creditor against the company, is returned unsatisfied in whole or in part; or c. it is proved to the satisfaction of the Court that the company is unable to pay its debts. Relevant time period The date of commencement of a liquidation is key. A voluntary winding up commences at the date a special resolution is passed by the company in general meeting or when the period fixed for its duration expires (or the event specified in the company s articles occurs) and the company in general meeting passes an ordinary resolution requiring its voluntary winding up. In compulsory winding up proceedings, the liquidation is deemed to have commenced at the date of the presentation of the petition. Intent The dominant intention of the company s directors in executing the transaction must be to give the creditor a preference over other creditors. Decided cases illustrate that this is a high threshold for the applicant to meet.
Related party A payment made as aforesaid to a related party of the company shall be deemed to have been made with a view to giving such creditor a preference. For the purposes of this section a creditor shall be treated as a related party if it has the ability to: a. control the company, or b. exercise significant influence over the company in making financial and operating decisions. Standing The Law does not specify who has standing to apply (for an order setting aside a voidable preference). It is therefore unclear who, other than the liquidator, would have standing to do so. Consequences of successful application If a transaction is set aside as a voidable preference, the creditor will be required to return the payment or asset. He will then have to prove the debt owed in the liquidation process if he wishes to do so. Avoidance of disposition at undervalue Every disposition of property made at an undervalue by or on behalf of a company with intent to defraud its creditors shall be voidable at the instance of its official liquidator. Intent to defraud Intent to defraud means an intention to wilfully defeat an obligation owed to a creditor. Obligation Obligation means an obligation or liability (which includes a contingent liability) which existed on or prior to the date of the relevant disposition.
Undervalue Undervalue in relation to a disposition of a company s property means- (i) the provision of no consideration for the disposition; or (ii) a consideration for the disposition the value of which in money or monies worth is significantly less than the value of the property which is the subject of the disposition. Burden of proof The burden of establishing an intent to defraud for the purposes of this section shall be upon the official liquidator. Time bar No action or proceedings shall be commenced by an official liquidator under this section more than six years after the date of the relevant disposition. Transferee rights In the event that any disposition is set aside under this section, then if the Court is satisfied that the transferee has not acted in bad faith- (a) the transferee shall have a first and paramount charge over the property, the subject of the disposition, of an amount equal to the entire costs properly incurred by the transferee in the defence of the action or proceedings; and (b) the relevant disposition shall be set aside subject to the proper fees, costs, pre-existing rights, claims and interests of the transferee (and of any predecessor transferee who has not acted in bad faith). Fraudulent trading If in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person or for any
fraudulent purpose the liquidator may apply to the Court for a declaration that any persons who were knowingly parties to the carrying on of the business in such a manner are liable to make such contributions, if any, to the company s assets as the Court thinks proper. About Samson & McGrath Samson & McGrath is one of the leading providers of legal services in the Cayman Islands. Our specialist lawyers have considerable experience in restructuring and insolvency, commercial litigation, trusts and private client matters. Please do not hesitate to contact us at the address below for further assistance or to book a private consultation. Address: 5th Floor Genesis Building, P.O. Box 446, Grand Cayman KY1-1106, Cayman Islands Telephone: +1 (345) 949 2740 +1 (345) 623 2740 Email: info@samsonandmcgrath.com