New Cayman Islands Corporate Insolvency Law

As of March 1, 2009, the laws of the Cayman Islands dealing with corporate insolvency were updated by the implementation of amendments to the Cayman Islands Companies Law that were originally enacted in 2007 but lay dormant pending the promulgation of three new sets of procedural rules governing the conduct of insolvency matters and an amendment to the rules of the Cayman Islands Grand Court.

The new rules are the Companies Winding-Up Rules 2008, the Insolvency Practitioners’ Regulations 2008, the Foreign Bankruptcy Proceedings (International Cooperation) Rules 2008, and the Grand Court (Amendment No. 2 Rules) 2008. Previously, insolvency procedures in the Cayman Islands have generally been regarded as haphazard and unsatisfactory.

The new rules and regulations, together with the replacement of Part V of the Companies Law (which deals with insolvency generally) and the introduction of Part XVI (which deals with international cooperation), represent a major milestone in the evolution of the Cayman Islands’ legislative framework by providing the Caymans with a modernized and well-considered insolvency regime specifically tailored to address the needs of those who use the Cayman Islands as a major financial center.

Supplanting the U.K.’s Insolvency Rules 1986, the Companies Winding-Up Rules 2008 are the first procedural rules for insolvency matters specifically adopted for the Cayman Islands. The new rules apply to all insolvency proceedings commenced after March 1, 2009, as well as actions taken in proceedings pending as of that date. The insolvency law now focuses on the rights of creditors of all priorities. There are no formal “corporate rescue” or reorganization provisions similar to chapter 11 of the U.S. Bankruptcy Code or administration in the U.K. Secured creditors retain their rights to enforce their security outside the liquidation process. In addition, contractual setoff and netting provisions will remain enforceable against the liquidators of insolvent Cayman Islands companies. The new provisions also reaffirm the enforceability of multilateral setoff arrangements.

Among the provisions in the new rules is the express duty of official liquidators of Cayman Islands companies that are the subject of parallel insolvency proceedings in another jurisdiction, or whose assets overseas are subject to foreign bankruptcy or receivership proceedings, to consider whether it is advisable to enter into an international protocol for the purpose of coordinating the cross-border proceedings. Other provisions include the elimination of strict deadlines for the payment of distributions to creditors after expiration of the claim submission deadline and the implementation of a specific regime to govern the treatment of unclaimed dividends.

Under the Insolvency Practitioners’ Regulations 2008, insolvency practitioners in the Cayman Islands will for the first time be required to meet defined criteria for appointment as official liquidators, including licensing, minimum experience, residency, conflict-of-interest, and insurance requirements (with certain grandfathering exceptions). New rules regarding remuneration of official liquidators are also covered by the regulations.

The Foreign Bankruptcy Proceedings (International Cooperation) Rules 2008 regulate applications made under the new Part XVI of the Companies Law, which: (i) delineates the procedure to be followed in connection with an application by a foreign representative for a declaration that he or she is entitled to act on behalf of a debtor; (ii) establishes procedures governing applications for ancillary orders such as injunctions, orders for stay of enforcement, or examination or surrender of assets; and (iii) obligates any Cayman Islands company and any foreign company registered in the Cayman Islands that becomes the subject of foreign bankruptcy proceedings to give notice of that fact to the Registrar and advertise it in the Cayman Islands Gazette.