Financial turmoil from the pandemic pushes global companies to restructure their debt cross-border, where advanced regimes in offshore jurisdictions provide viable options
Cross-border restructuring with parallel proceedings in different jurisdictions is inevitable for large business groups with complex, integrated and multinational corporate and debt structures – and courts in the British Virgin Islands (BVI) and Cayman Islands courts are at the forefront of these latest legal developments in insolvency and restructuring law.
Despite both similarities and divergences between their respective restructuring laws, courts in both jurisdictions have shown ingenuity and strength assisting distressed companies to overcome challenges of the current uncertain economic climate.
BVI’S SOFT TOUCH
A distinctive future of the BVI’s debt restructuring law is that, following the celebrated Constellation case, courts can exercise their general powers under section 170 of the BVI Insolvency Act, 2003 to sanction “soft touch” provisional liquidation in aid of restructuring.
Compared to traditional liquidation, ”soft touch” provisional liquidation allows a BVI company to continue to be managed by its directors – and restructure debts with the assistance and supervision of provisional liquidators. By soft-touch provisional liquidation, it is hoped that companies can continue as viable going concerns; while providing creditors with a better outcome than they could otherwise expect in traditional liquidation.
The appointment of provisional liquidators does not come with an automatic moratorium. But courts can grant a blanket statutory moratorium for a stay of proceedings on claims on application from the company. Once granted, this provides the company essential breathing space to implement restructuring without creditors taking action against it.
As a result of these developments, the BVI is now in line with other common law jurisdictions, promoting the concept of debt restructuring as an alternative to liquidation.
In “soft touch” provisional liquidation, a BVI company can restructure debts by way of a scheme of arrangement under section 179A of the BVI Business Act, 2004. This is a statutory tool which, if sanctioned by the court, enables the implementation of a debt restructuring plan approved by the prescribed percentage of creditors – in short, an arrangement between the company and creditors in relation to debt. To be sanctioned by the court, the scheme needs approval by the majority in number, representing 75% in value of the scheme creditors present and voting.
In the recent Rongxinda Development (BVI) case, while it was unclear if the scheme in question would be enforced everywhere internationally, Justice Adrian Jack found issues of international recognition to be of little weight – and no reason for the court not to sanction the scheme.
For completeness, there is also the ‘plan of arrangement’ regime in the BVI. It can be approved by a director of a company, for application to the BVI court for approval. However, such an application can be challenged by dissenting creditors and thus provides less certainty.
The most notable development in the Cayman Islands restructuring regime is the recent announcement of reforms to part V of the Cayman Islands Companies Act by way of the Companies (Amendment) Act, 2021.
This amendment allows a company to petition the court for the appointment of a restructuring officer on the grounds that it is or it is likely to become unable to pay its debts – and intends to present a compromise or arrangement to its creditors.
It is hoped this will modernise the existing regime, bringing greater certainty and protection to companies seeking debt restructuring under the supervision of the Grand Court of the Cayman Islands.
When in force, most likely during the latter half of 2022, directors of a company can file a petition for the appointment of a restructuring officer to keep the company afloat without having to present a winding-up petition.
This is an even more user-friendly process than provisional liquidation. Under the current regime, a company needs to present a winding-up petition before applying for the appointment of provisional liquidators.
A repeated issue in litigation is whether or not directors of a company are authorised to present a winding-up petition in circumstances where they are not duly authorised by their shareholders or articles of association.
By contrast, with the new regime, directors have the option to file a petition for the appointment of a restructuring officer without shareholder resolution, regardless of whether directors have express power to do so under the company’s articles.
As an added layer of advantage, an extraterritorial moratorium automatically occurs at the time of filing the petition for the appointment of the restructuring officer. Hence the company becomes protected from creditor actions against it in Cayman or any other jurisdiction, removing the threat of creditors seeking to liquidate the company. In addition, no resolution can be passed for the company to be wound up, except with leave of the Cayman court.
Once appointed, restructuring officers will be able to perform a similar role currently played by provisional liquidators – assisting and facilitating distressed companies to negotiate and restructure their financial indebtedness with fewer costs and regulatory obstructions by way of a scheme of arrangements. The amendment applies to compromise and arrangement both under the act, the law of a foreign country or consensual restructuring.
Many mainland China business groups listed in Hong Kong raise USD-denominated debt, with relevant debt instruments to be governed by New York law. For debt restructuring purposes, a common technique in practice is to compromise such debt by introducing a scheme in an offshore jurisdiction where the company is registered, or centres its main interest. This is followed by an application in ancillary proceedings for recognition in the US under chapter 15 of the US Bankruptcy Code. But latest case law shows this may not be suitable for all companies, depending on their own circumstances.
Recognition under chapter 15 operates procedurally to prevent action by a creditor against a debtor’s property in the US – but does not discharge the debt. In other words, the recognition is limited in territorial effect only to the US.
If a company needs to discharge debt governed by New York law and prevent creditors who did not participate in the scheme from winding up the company in another jurisdiction, the proper procedure should be an application under chapter 11 of the US Bankruptcy Code, which purports to have a worldwide effect.
Many common law jurisdictions adopt the English “rule in Gibbs”, where a debt is treated as discharged only if compromised in accordance with the law of the jurisdiction governing the instrument giving rise to the debt. It follows that a scheme sanctioned by the court of an offshore jurisdiction compromising debt governed by foreign law, for example, New York or Hong Kong law, will be treated as binding on a creditor, who submitted to the foreign jurisdiction.
However, it may not bind a creditor who did not participate in the scheme proceedings or any associated insolvency process in the foreign jurisdiction. Thus, in addition to the scheme in the BVI or Cayman where the company was registered, or where the asset holding entities of the business is incorporated, it may sometimes also be necessary to have parallel schemes in the jurisdiction where the law governs the debt – to remove the risk of a disgruntled creditor claiming against the company in that foreign jurisdiction.
In the current economic climate, liquidity is important. For creditors and distressed companies, it is advisable to start conversations about debt restructuring early, before liquidity runs out.
The BVI’s soft-touch provisional liquidation and upcoming restructuring officer regime in the Cayman Islands bring extra options to businesses with offshore entities restructuring group indebtedness and help them restore business viability.
As demonstrated in the recent success in Luckin Coffee, these processes, if deployed properly, can protect distressed companies from predatory creditors and distressed investors while providing breathing space to improve business and avoid liquidation. In most cases, they also offer creditors better recovery than in liquidation.
Business groups with main foreign insolvency proceedings may also wish to consider using these protective procedures to ward off opportunistic creditors from taking satellite ex parte actions against companies in their registered jurisdictions of incorporation in the BVI and Cayman Islands – as the case may be to steal a march on other creditors. This would be disruptive to any rescue package that might otherwise be available to the company for the benefit of its creditors and contributories.
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