Checking the Lifeboat - Cayman Islands Consensual Restructuring Strategies
29 July 2020
The Cayman Islands is the preeminent offshore jurisdiction for corporate, fund and finance vehicles. It is also a creditor friendly jurisdiction, where properly constituted security has statutory protection from the reach of liquidators. We explore some of the options available to lenders and companies when navigating troubled waters.
In order for a Cayman Islands entity to avoid the risk of being wound up on the ground it is insolvent, it must be able to pay its debts as they fall due in the ordinary course of business. The cash flow solvency test involves having some regard to debts which fall due for payment in the reasonably near future as well as debts which have already fallen due.1 As to what future debts are deemed as falling due in the 'reasonably near future', that is a question to be determined on a case-by-case basis depending on all of the circumstances, and with reference to the underlying business of the company. This is ground zero for any Cayman Islands restructuring strategy, outside of formal insolvency proceedings.
If it is not possible to satisfy the cash flow solvency test, it may be necessary to resort to formal insolvency proceedings to provide sufficient breathing space to explore and negotiate a potential restructuring. The Cayman Islands has a sophisticated statutory scheme of arrangement process which can be used in these circumstances.
This update focuses on restructuring outside of formal insolvency proceedings. The strategy adopted, and combination of tools that are appropriate obviously varies depending on the particular fact pattern. Some of the key tools available are addressed below, with further options discussed in Part 2 of this update.
2 Keeping Afloat – Super Priority Financing
A distressed business may well need access to additional working capital to stay afloat. This 'new money' when forthcoming, tends to be provided by a subset of lenders (often the key relationship lenders). From a Cayman Islands perspective, those lenders ought to consider:
• Desired priority ranking: to minimise the risk of 'throwing good money after bad', the lenders will typically require this new money financing to be super-senior secured, that is, ranking ahead of existing (pre-restructuring) senior debt. The default position under Cayman Islands law is that unsecured and unsubordinated debt obligations rank pari passu on a debtor company's insolvency – which is unlikely to be acceptable. As a result, an intercreditor agreement is key as Cayman Islands law permits the default position to be modified by contract;
• Collateral agency: Cayman Islands law allows for a single collateral agent under an intercreditor agreement to hold the benefit of any common security on trust for multiple secured parties (ie, there is no requirement for 'parallel debt' provisions as is the case in some jurisdictions);
• Reliance on existing security: it is not always the case that the existing security package can support the new debt obligations without amendment or replacement. When a lender is considering loan extensions or variations and the new loan obligations are different in nature or purpose to what the security package was originally intended to support, it is important to consider putting in place a new security package - even where the existing security documentation is expressed to extend to amendments or replacements; and
• Perfection of new security: any new security interests granted with respect to Cayman Islands situated collateral must be properly perfected. The Cayman Islands has no public registration regime equivalent to the UCC in the United States or Companies House in England and Wales. Rather, specific steps will be required depending on the asset type in question. These may include registration at a specific register (for moveable assets such as ships and aircraft) or notice to counterparties (in the case of intangible assets such as contractual rights).
3 Standstill agreements
Negotiated standstill agreements with key financial creditors are a common feature of out-of-court restructuring processes. These may be critical to the business continuity strategy, and are relevant in the Cayman Islands context as follows:
• Automatic stay: under Cayman Islands law, an automatic stay imposed by a foreign bankruptcy regime (such as U.S. Chapter 11) will not generally extend to Cayman Islands debtors, unless that relief is specifically sought from the Cayman courts. Further, even if a stay is granted by the Cayman court, it will not prevent secured creditors enforcing security over the debtor's collateral;
• Insolvency set off: Cayman Islands law provides for automatic set-off of mutual debts upon insolvency and will also recognise and enforce contractual netting arrangements. Therefore, in a scenario where the parties wish to modify this basic position or prevent certain creditors (such as hedge counterparties) from taking full advantage of mutual set off or netting arrangements, that will need to be addressed in the relevant standstill agreement; and
• No cram down: in an out-of-court context, there is no statutory 'cram down' mechanism which can be used to bind unwilling creditors (this option only being available pursuant to a Court supervised scheme of arrangement). This means that any given standstill agreement must work for all creditors who have been identified as crucial to the viability of the restructuring.