FOURTH
EDITION
2015
FOURTH
EDITION
2015
General Editor: J William Boone
JAMES-BATES-BRANNANGROOVER-LLP
INTERNATIONAL
INSOLVENCY
Group insolvency and directors’ duties
A GLOBAL GUIDE FROM PRACTICAL LAW
INTERNATIONAL INSOLVENCY
General Editor: J William Boone
JAMES-BATES-BRANNAN-GROOVER-LLP
Group insolvency and directors’ duties
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.”
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.
FOURTH
EDITION
2015
INTERNATIONAL
INSOLVENCY
Group insolvency and directors’ duties
A GLOBAL GUIDE FROM PRACTICAL LAW
Preface
J William Boone
JAMES-BATES-BRANNANGROOVER-LLP
Finland
Pekka Jaatinen & Elina Pesonen
CASTRÉN & SNELLMAN
ATTORNEYS LTD
Foreword
Christopher J Redmond
HUSCH BLACKWELL LLP
France
Joanna Gumpelson
DE PARDIEU BROCAS MAFFEI
A.A.R.P.I.
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
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
General Editor: J William Boone
JAMES-BATES-BRANNAN-GROOVER-LLP
SPINE WIDTH 33MM. GUTTER 8MM EACH SIDE OF SPINE
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-BRANNANGROOVER-LLP
International Insolvency
Group insolvency and directors’ duties
Fourth Edition
General Editor:
J. William Boone
James-Bates-Brannan-Groover-LLP
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
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International Insolvency
Contents
Preface J William Boone James-Bates-Brannan-Groover-LLP
iii
Foreword Christopher J Redmond Husch Blackwell LLP
vii
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 & M Margaret Gonsalves-Sabola
47
Belgium Lydian Tom Geudens, Pieter Meeus & Xenia Vandenabeele 67
Brazil Felsberg Advogados Thomas Benes Felsberg & Paulo Fernando Campana Filho
91
Canada Regent Law Professional Corporation Justin R Fogarty
Pavle Masic & Nicholas Rossi
111
Cayman Islands Mourant Ozannes Louis Mooney & Christopher Harlowe 131
Colombia Posse Herrera Ruiz Daniel Posse, Juan Pablo Bonilla & María Carolina Sarmiento
153
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 & Jyoti Krishnan
277
Indonesia Ali Budiardjo, Nugroho, Reksodiputro Theodoor Bakker, Herry N Kurniawan & Kevin O Sidharta
301
Israel Fischer Behar Chen Well Orion & Co. Avraham Well, Meirav Bar-Zik & Meiran Sandelson
321
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 & Barbara van Gangelen
409
Poland Noerr Dr Jacek Bąk & Dr Sławomir Morawski 427
Russia Noerr Stefan Weber & Evgeny Lisin 447
EUROPEAN LAWYER REFERENCE SERIES
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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 & Doroteya N Wozniak
535
Contacts
563
iv
EUROPEAN LAWYER REFERENCE SERIES
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
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
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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.
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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
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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.
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ix
Cayman Islands
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.
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Cayman Islands
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.
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•
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,
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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 2.
4. 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
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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
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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 2009.
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.
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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.
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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).
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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 1990-91 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
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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
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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
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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?
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 CrossBorder 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 officeholder, as well as granting the control of the company’s assets to that officeholder. 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
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:
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•
•
•
•
•
•
•
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.
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.
27. Under what conditions, if any, can the courts communicate and
co-ordinate with courts of a foreign jurisdiction in an effort to coordinate 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
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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 CourtTo-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.
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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.
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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.
• 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
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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.
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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.
Misappropriation of corporate assets. This would be in breach of the
duties and responsibilities of officers and directors.
Undervaluation of corporate assets in a preference or other transaction
to the detriment of creditors. This would be in breach of the duties and
responsibilities of officers and directors.
Failure to inform creditors of insolvency. Directors have no obligation
to inform creditors of insolvency before the commencement of a formal
insolvency process, but could expose themselves to potential personal liability
for breach of fiduciary duty if they took further credit when they knew or
ought to have concluded that insolvency was unavoidable.
Preferring payment to one creditor as opposed to another when
insufficient monies are available to pay both. This would be in breach of
the duties and responsibilities of officers and directors.
Continuing to trade when there is little prospect of being able to pay
when due. 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.
For other types of conduct that are in breach of the duties and
responsibilities of officers and directors, see Question 28.
30. What duties do officers and directors have to key creditor groups
before the company becomes financially distressed?
Creditors
See Questions 14 and 28.
Shareholders
See Questions 14 and 28.
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Government authorities
See Questions 14 and 28.
Employees
See Questions 14 and 28.
31. How do officers’ and directors’ duties change after the company
becomes financially distressed or insolvent?
Financially distressed
See Question 28.
Insolvent
See Question 28.
32. What civil and criminal liability exists for the officers and directors
if they breach their duties and responsibilities?
If a director breaches his fiduciary duties or duties of skill and care, he may be
personally liable to the company for damages.
Offences for which a director may be liable under the common law include
negligent misstatement and deceit.
A range of specific duties are 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 include those relating to:
• payment of distributions/dividends;
• payment out of capital for the redemption or purchase of company
shares; and
• maintaining the company’s registers.
• The Proceeds of Crime Law. The Proceeds of Crime Law contains a
number of money laundering offences of which directors need to be
aware. In respect of mutual funds and securities investment businesses,
requirements for director registration or licensing, see Question 28.
Additionally, the directors of entities licensed by the Cayman Islands
Monetary Authority (CIMA) to carry out financial services business have
to satisfy CIMA of their fitness and propriety.
For more information see Questions 28 and 29.
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33. Are officers and directors exposed to civil claims by creditors,
shareholders, government authorities or employees?
Before insolvency
Prior to insolvency, the directors’ duties may be enforced on behalf of the
shareholders through a claim by the company, either acting by majority, or
a minority in a derivative action (which is available when a fraud has been
committed on the minority, and the company is in the wrongdoer’s control).
After insolvency
After insolvency, creditors will not have a direct right of action against
directors for not considering their interests. Rather, the company itself,
through the liquidator, can bring an action for breach of duty.
34. Is the existence of potential personal civil or criminal liability
a factor in officers and directors deciding when and if to put the
company into a formal insolvency/reorganisation procedure?
To avoid potential personal liability, directors should take steps to place
the company into liquidation pre-emptively to incurring credit when the
company is in a position of dubious solvency.
35. Is insurance available to protect officers and directors from claims
that arise while operating a financially distressed company?
Directors’ and officers’ insurance cover is available, but reliance is more
commonly placed on exculpation clauses in the company’s articles of
association and/or the director’s service contract which contractually relieve
directors of liability for the consequences of their actions. Unlike the position
in England and certain other offshore jurisdictions, such exculpation clauses
are permissible in the Cayman Islands. Most of these clauses will not protect a
director against liability caused by fraud, wilful neglect or default.
36. Can officers and directors resign from their positions once the
company becomes financially distressed?
A director may resign by giving written notice of resignation to the company
in accordance with the terms of the company’s articles of association and/or
the director’s service agreement. Such resignation will not, however, relieve the
director of liability for any acts or omissions which pre-date the resignation.
37. How common is litigation against officers and directors for
violation of their duties after the commencement of an insolvency/
reorganisation procedure? Is the litigation typically successful?
Such actions are relatively rare in the Cayman Islands, primarily because of
the ubiquity of exculpation clauses (see Question 35).
Anecdotally, the majority of such claims are settled rather than being
pursued to trial.
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38. What defences against civil and/or criminal sanctions are available
to directors and officers under general corporate law?
Good faith might be a relevant consideration in civil claims, and in particular
in relation to breach of fiduciary duty claims. It is likely to be a relevant
consideration in the interpretation of any applicable exculpation clause
(see Question 35). In criminal claims, good faith tends to be a less relevant
consideration, save possibly to evidence a lack of the necessary criminal intent.
The depth and extent of due diligence is likely to be relevant in civil
claims. It is likely to be a relevant consideration in the interpretation of
any applicable exculpation clause (see Question 35). Its relevance to criminal
claims will be fact-dependent.
Directors can delegate functions to suitably qualified third parties to enable
the director to discharge his or her duties, but cannot delegate to absolve him
or herself for personal responsibility for his or her directors’ duties.
The exercise of reasonable judgment with intent to preserve the “on going
value” of the enterprisemay be a ground for defence, although will be highly
fact-dependent. It is likely to be a relevant consideration in the interpretation
of any applicable exculpation clause (see Question 35).
39. If it appears that the “going concern values” will result in a higher
return to creditors than a liquidation of the assets, can officers and
directors be protected if they decide to continue operations to protect
the values for the benefit of all creditors?
It is likely to be a relevant consideration in the interpretation of any
applicable exculpation clause (see Question 35). In the absence of an
exculpation clause, this may not prevent a claim, but may provide the
director with a defence to that claim.
The answer is the same if the result is an increase of debt owed to creditors,
even though the officers and directors were acting in good faith.
40. Are there any other defences available to directors and officers
under bankruptcy or insolvency laws?
See Questions 38 to 40.
41. What provisions in your jurisdiction’s bankruptcy or insolvency
laws are specific to the duties and sanctions for officers and directors?
See Questions 28 to 32.
SUBSEQUENT RESTRICTIONS ON OFFICERS AND DIRECTORS
42. If a company becomes insolvent, is an officer or director of the
insolvent company legally restricted from acting as an officer or
director in another company?
The Cayman Islands currently does not have a directors’ disqualification
regime restricting directors acting as such after a corporate insolvency (see
Question 44).
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43. If an officer or director becomes personally insolvent, is he legally
restricted from continuing to act as an officer or director of his current
company or another company?
Current company
See Questions 42 and 44.
Another company
See Questions 42 and 44.
44. If a company becomes insolvent, is an officer or director of
the insolvent company legally restricted from obtaining credit as a
promoter of a second company?
See Question 42.
The Cayman Islands Monetary Authority (CIMA) licenses regulated funds,
banks, insurance companies and other providers of financial services. CIMA
will only grant such licences to companies that are controlled by “fit and
proper” persons. The personal bankruptcy of an individual or the previous
insolvency of a company are circumstances which are highly likely to
result in CIMA withholding approval, unless exceptional circumstances are
forthcoming. Furthermore, most financial services companies are listed on
recognised exchanges outside of Cayman, so will be subject to a further layer
of national regulation in relation to the fitness of its directors.
ONLINE RESOURCES
Cayman Islands Judicial Administration Search System
W www.judicial.ky/Search/index.php
Description. The website includes reported cases, unreported cases and the
laws in force. The contents of the website are provided by the Cayman Islands
Judicial Administration who do their best to keep it up-to-date. Unlimited access
requires a paywall, although access to some resources can be free of charge.
Cayman Islands Monetary Authority
W www.cimoney.com.ky
Description. The website of the Cayman Islands Monetary Authority that
provides various resources and statistics.
Mourant Ozannes
W www.mourantozannes.com/publications.aspx
Description. The page provides up-to-date reporting and analysis of
important legal and market developments in the Cayman Islands, as well as
related offshore jurisdictions.
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Contact details
GENERAL EDITOR
J William Boone
James-Bates-Brannan-Groover-LLP
Buckhead Tower at Lenox Square
3399 Peachtree Road NE
Suite 1700
Atlanta, Georgia 30326
United States
T: +404 997 6020
F: +404 997 6021
E:bboone@jamesbatesllp.com
W:www.jamesbatesllp.com
ARGENTINA
Martín Campbell & Fernando Daniel
Hernández
Marval, O’Farrell & Mairal
Av. Leandro N. Alem 928
(C1001AAR) Buenos Aires Argentina
T: +54 11 4310 0100
F: +54 11 4310 0200
E:mcam@marval.com
E:fh@marval.com
W:www.marval.com.ar
AUSTRALIA
Karen O’Flynn
Clayton Utz
Level 15, 1 Bligh Street
Sydney, New South Wales, 2000
Australia
T: +61 2 9353 4000
F: +61 2 8220 6700
E: koflynn@claytonutz.com
W:www.claytonutz.com
BAHAMAS
Brian M Moree QC &
M Margaret Gonsalves-Sabola
McKinney, Bancroft & Hughes
Mareva House
4 George Street
P.O. Box N-3937
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Nassau, Bahamas
T: +1 (242) 322-4195
F: +1 (242) 328-2520
E:bmmoree@mckinney.com.bs
E:mgonsalves-sabola@mckinney.
com.bs
W:www.mckinney.com.bs
BELGIUM
Tom Geudens
Lydian
Havenlaan 86c b113
Avenue du Port
1000 Brussels
Belgium
T: +32 2 787 90 08
F: +32 2 787 90 99
E:tom.geudens@lydian.be
W:www.lydian.be
BRAZIL
Thomas Benes Felsberg &
Paulo Fernando Campana Filho
Felsberg, Advogados
Avenida Paulista 1,294, 2nd floor
Cerqueira César
São Paulo 01310-915
Brazil
T: +55 11 3141 9100
F: +55 11 3141 9150
E:thomasfelsberg@felsberg.com.br
paulocampana@felsberg.com.br
W:www.felsberg.com.br
CANADA
Justin R. Fogarty
Regent Law Professional Corporation
180 Bloor Street W, suite 1000,
Toronto ON, M5S 2V6
T: +416 840 8991
F: +416 363 7610
200 Elgin St, suite 600,
Ottawa Quebec, K2P 2BO
563
Contact details
T: +416 214 4209
M:+416 722 0123
E:justin.fogarty@regentlaw.ca
CAYMAN ISLANDS
Louis Mooney & Christopher
Harlowe
Mourant Ozannes
94 Solaris Avenue
Camana Bay
PO Box 1348
Grand Cayman, KY1-1108
Cayman Islands
T: +1 345 949 4123
F: +1 345 949 4647
E:louis.mooney@mourantozannes.com
christopher.harlowe@
mourantozannes.com
W:www.mourantozannes.com
COLOMBIA
Daniel Posse, Juan Pablo Bonilla &
María Carolina Sarmiento
Posse Herrera Ruiz
Carrera 7 No. 71-52
Tower A Floor 5th.
Bogotá, Colombia
T: +57 1 325 7300
F: +57 1 325 7313
E:daniel.posse@phrlegal.com
juanpablo.bonilla@phrlegal.com
carolina.sarmiento@phrlegal.com
W:www.phrlegal.com
FINLAND
Pekka Jaatinen, Elina Pesonen,
Castrén & Snellman Attorneys Ltd
PO Box 233 (Eteläesplanadi 14)
FI-00131 Helsinki
Finland
T: +358 (0)20 7765 765
F: +358 (0)20 7765 001
E: pekka.jaatinen@castren.fi
elina.pesonen@castren.fi
W:www.castren.fi
564
FRANCE
Joanna Gumpelson
De Pardieu Brocas Maffei A.A.R.P.I.
57 avenue d’Iéna - CS 11610
75773 Paris Cedex 16
France
T: +33 1 53 57 71 71
F: +33 1 53 57 71 70
E:gumpelson@de-pardieu.com
W:www.de-pardieu.com
GERMANY
Dr Christoph Schotte
Noerr LLP
Brienner Str. 28
80333 Munich
Germany
T: +49 89 28628-196
F: +49 89 280110
E:christoph.schotte@noerr.com
W:www.noerr.com
GREECE
Stathis Potamitis, Eleana Nounou &
Alexandros Rokas
PotamitisVekris
9 Neofytou Vamva str. 10674
Athens
Greece
T: +30 210 3380000
F: +30 210 3380020
E:stathis.potamitis@
potamitisvekris.com
eleana.nounou@potamitisvekris.com
alexandros.rokas@potamitisvekris.com
W:www.potamitisvekris.com
HONG KONG
John Robert Lees
JLA Asia Limited
20/F Henley Building
5 Queen’s Road Central
Hong Kong
T: +852 2842 5010
F: +852 2526 0771
E:jrlees@jla-asia.com
W:www.jla-asia.com
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INDIA
Sakate Khaitan & Jyoti Krishnan
Khaitan Legal Associates
Century Bhavan, 1st Floor,
771, Dr. Annie Besant Road,
Worli,
Mumbai – 400 030
India
T: +91 22 6140 0000
F: +91 22 6140 0099
E:sakate.khaitan@khaitanlegal.com
E:jyoti.krishnan@khaitanlegal.com
W:www.khaitanlegal.com
Satyendra Shrivastava
Khaitan Legal Associates
Ground Floor, 29 Gloucester Place,
London, W1U 8HX
UK
T: +44 20 7034 1430
F: +44 20 7034 1431
E:satyendra.shrivastava@
khaitanlegal.com
W:www.khaitanlegal.com
INDONESIA
Theodoor Bakker, Herry N Kurniawan
& Kevin O Sidharta
Ali Budiardjo, Nugroho, Reksodiputro,
Counsellors At Law
Graha Niaga 24th Floor
Jl. Jendeal Sudirman Kav. 58
Jakarta 12190
Indonesia
T: +62 21 250 5125/5136
F: +62 21 250 5001/5121/5122/5392
E:tbakker@abnrlaw.com
hkurniawan@abnrlaw.com
ksidharta@abnrlaw.com
W:www.abnrlaw.com
ISRAEL
Israel
T: +972 3 694 4111
F: +972 3 609 1116
E:awell@fbclawyers.com
mbarzik@fbclawyers.com
msandelson@fbclawyers.com
W:www.fbclawyers.com
ITALY
Lucio Ghia
Studio Legale Ghia
Via delle Quattro Fontane 10
00184 Rome
Italy
T: +39 06 420 12618
F: +39 06 420 01968
E:lucioghia@studiolegaleghia.it
Enrica Maria Ghia
Studio Legale Ghia
Via Filippo Corridoni n. 1
20122 Milano
Italy
T: +39 02 763 90887
F: +39 02 760 25932
E:enricaghia@studiolegaleghia.it
W:www.studiolegaleghia.it
JAPAN
Michihiro Mori, Toshihide Haruyama
& Natsuki Taira
Nishimura & Asahi
Ark Mori Building
1-12-32 Akasaka, Minato-ku,
Tokyo 107-6029, Japan
T: +81-3-5562-8500
F: +81-3-5561-9711
E:m_mori@jurists.co.jp
t_haruyama@jurists.co.jp
n_taira@jurists.co.jp
W:www.jurists.co.jp/en/
Avraham Well, Meirav Bar-Zik &
Meiran Sandelson
Fischer Behar Chen Well Orion & Co.
3 Daniel Frisch St.
Tel Aviv 6473104
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MALAYSIA
RUSSIA
Rabindra S Nathan
Messrs Shearn Delamore & Co
7th Floor, Wisma Hamzah-Kwong
Hing
No.1, Leboh Ampang
50100 Kuala Lumpur, Malaysia
T: +603 202 72871
F: +603 203 42763
E:rabindra@shearndelamore.com
W:www.shearndelamore.com
Stefan Weber & Evgeny Lisin
Noerr
1-ya Brestskaya ul. 29
125047 Moscow
Russian Federation
T: +7 495 7995696
F: +7 495 7995697
E:stefan.weber@noerr.com
evgeny.lisin@noerr.com
W:www.noerr.com
THE NETHERLANDS
SINGAPORE
Gerhard Gispen
& Barbara van Gangelen
Simmons & Simmons LLP
Claude Debussylaan 247
1082 MC Amsterdam
The Netherlands
T: +31 20 722 2500
F: +31 20 722 2599
E:gerhard.gispen@simmonssimmons.com
E:barbara.vangangelen@
simmons-simmons.com
W:www.simmons-simmons.com
Patrick Ang & Kwan Kiat Sim
Rajah & Tann Singapore LLP
9 Battery Road, #15-00
Straits Trading Bldg
049910 Singapore
T: +65 6232 0400
F: +65 6225 9630
E:patrick.ang@rajahtann.com
kwan.kiat.sim@rajahtann.com
W:www.rajahtann.com
POLAND
Dr Jacek Bąk & Dr Sławomir
Morawski
Noerr Sp. z o.o. Spiering Sp. k. Al.
Armii Ludowej 26
00-609 Warsaw
Poland
T: +48 22 579 3086
F: +48 22 579 3070
E:jacek.bak@noerr.com
slawomir.morawski@noerr.com
W:www.noerr.com
566
SPAIN
Miguel Torres & Ferran Zaragoza
Torres, Martín & Zaragoza
Av. Diagonal 435, Principal 2ª
08036 Barcelona
Spain
T: +34 93 362 31 28
F: +34 93 667 34 03
E:mtorres@tmzabogados.com
fzaragoza@tmzabogados.com
W:www.tmzabogados.com
SWITZERLAND
Ueli Huber
Homburger AG
Prime Tower, Hardstrasse 201
CH-8005 Zurich
Switzerland
T: +41 43 222 10 00
F: +41 43 222 15 00
E:ueli.huber@homburger.ch
W:www.homburger.ch
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UNITED KINGDOM
UNITED STATES
Jatinder Bains, Paul Keddie &
Simon Beale
Macfarlanes LLP
20 Cursitor Street
London EC4A 1LT
T: +44 (0) 20 7831 9222
F: +44 (0) 20 7831 9607
E:jatinder.bains@macfarlanes.com
paul.keddie@macfarlanes.com
simon.beale@macfarlanes.com
W:www.macfarlanes.com
J William Boone &
Doroteya N Wozniak
James-Bates-Brannan-Groover-LLP
Buckhead Tower at Lenox Square
3399 Peachtree Road NE
Suite 1700
Atlanta, Georgia 30326
United States
T: +404 997 6020
F: +404 997 6021
E:bboone@jamesbatesllp.com
dwozniak@jamesbatesllp.com
W:www.jamesbatesllp.com
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