Frequently Asked Questions

All Liquidations

Q. What laws are applicable to liquidations in the Cayman Islands?
A. Although there are no Insolvency Laws per se the law pertaining to liquidations, both voluntary and compulsory are contained in the Companies Law (2007 Revision). The English Winding-up Rules 1986 apply so far as practicable and insofar as they are not inconsistent with the Companies Law.

It should be noted that the Companies law does not distinguish between a Creditors Voluntary Liquidation and a Members Voluntary Liquidation.

Q. What Courts govern liquidation proceedings?
A. The Grand Court of the Cayman Islands is the Court with jurisdiction with regard to companies incorporated in the Cayman Islands. Appeals from the Grand Court lie to the Court of Appeal, a traveling Court which meets quarterly in the Cayman Islands. Appeals from this Court lie with the Privy Court in England.

Q. What are insolvency proceedings?
A. These are formal measures taken to deal with company debt. There are many different types of company insolvency proceedings.

Q. What types of liquidation are there?
A.

• Voluntary liquidation – this is when the shareholders of a company decide to put it into liquidation, whether or not there are sufficient assets to pay all the debts of the company.
• Compulsory liquidation (or Court liquidation) – this is when the Court makes an order for the company to be wound up (a ‘winding-up order) on the petition of an appropriate person.

Q. Do all companies have to go through insolvency proceedings before being dissolved?
A. No. If the Registrar has reason to believe that a company is not carrying on business or is not in operation, its name may be struck off the register and dissolved without going through liquidation.

Q. Where can I get advice about liquidation?
A. Before you take any action to put a company into liquidation, you should obtain your own legal or financial advice about this insolvency procedure and any other options available to you. You can get advice from your lawyer, a qualified accountant, an authorized and licenced insolvency practitioner or any reputable financial adviser.

Q. Is there an alternative to a Court or compulsory liquidation?
A. An informal arrangement whereby the company could consider writing to all its creditors to see if a mutually acceptable agreement can be reached. It is advisable to include a timetable of when payments will be made.

Q. What is the role of a liquidator?
A. Chiefly these are:

• To advise and to establish a strategy,
• To act upon that advice professionally and to take appointments,
• To look after the interests of creditors,
• To act impartially at all times.
• To follow the ethical guidelines as set out by the licensing bodies,
• To fulfill statutory obligations placed on him by the appointment

Q. What are the primary duties of a liquidator?
A. The liquidator is appointed to wind up the company’s affairs. The liquidator does this by realising all the company’s assets and distributing them to its creditors. If anything is left over, the liquidator distributes it among the members of the company.

Q. What are the powers of a liquidator?
A. A liquidator’s powers are extensive and briefly include:

• Powers to dispose of the company’s assets.
• To bring and defend legal proceedings and to agree creditors' claims and,
• To pay dividends to the company’s creditors.

Q. What laws if the Cayman Islands govern the liquidation of the Cayman Islands companies?
A. The primary law that relates to the winding up of a Cayman Islands company is the Companies Law (2007 Revision). However certain statutory laws relating to companies regulated by CIMA enable them to be wound up. The Winding-up Rules (1996) supplement the Companies Law insomuch that they are not in conflict with the laws.

Q. Are there any preferential creditors under the laws of the Cayman Islands?
A. Section 162 of the Companies Law (2007 Revision) notes companies of debts to be paid in priority to others.

Q. Does a liquidator have to advertise for creditors?
A. Yes, in the Cayman Islands Gazette. It is also recommended that advertisements are placed in a periodical of any country in which a company has transacted a substantial amount of business.

Q. Does a liquidator need to notify anyone of his or her appointment?
A. Yes. Following the liquidation resolution and the liquidators’ appointment, he must publish a notice of appointment in the Cayman Islands Gazette www.gov.ky and notify the Registrar of companies within 15 days.

Q. What happens when the company’s affairs are fully wound up?
A. The liquidator presents a final account at the final meetings of creditors or members of the company. He or she must also advertise the meetings in the Cayman Islands Gazette.

The company is dissolved three months after notice has been given to the Registrar of Companies of the final meeting. At this time a certificate of dissolution is issued.

Q. Can a company be taken out of liquidation?
A. No, unless there are exceptional circumstances.

Q. Can a company distribute its assets in specie to shareholders or creditors?
A. Yes; provided it is outlined in the Company’s Articles of Association or by passing a special resolution of the shareholders.

Q. Who pays the liquidator?
A. The liquidator is paid out of the individual‘s or the company’s assets in agreement with either the shareholders or the liquidation committee or the Grand Court if the company is insolvent.

Q. Can freezing orders be obtained by a liquidator?
A. Yes, by way of obtaining a Court order known as a mareva injunction.

Q. Can additional information be obtained by a liquidator following the serving of a mareva junction?
A. Yes, by way of obtaining a Court order known as an Anton Pillar order.

Voluntary Liquidations

Q. What is the effect of the commencement of a voluntary liquidation?
A. The effect of a commencement of a voluntary liquidation is that the company ceases to carry on its business insofar as may be required for its ‘beneficial winding-up’. In addition, all transfers of shares except those made to or with the sanction of the liquidator are valid from the commencement of the liquidation.

Q. When can a company go into voluntary liquidation?
A. This can take place when the director of a company believes that the company is solvent. However the directors must still recommend a liquidation even though the company is insolvent. Unlike the United Kingdom laws and those of many other countries there are no separate creditors voluntary liquidations. A creditors only means of action is to take out legal proceedings for the company to be wound up by the Grand Court.

Q. When does the liquidation actually commence?
A. The liquidation commences when the shareholders pass special resolutions convened at an extraordinary meeting to wind up the company voluntarily at which time a liquidator is appointed. In the even that there is only one shareholder, a resolution of the shareholder is necessary.

Schemes of Arrangement and Provisional Liquidation

Q. How can a company commence a re-organization?
A. Sections 86 to 89 of the Companies Law relate to ‘arrangements’ and reconstructions’ which enables a company to compromise its debts with its members and creditors.

Q. Can a Provisional Liquidation be used to accommodate reorganization?
A. Yes. This is a common procedure that has been used in cross border re organizations. This enables the company to trade whilst insolvent under supervision of the Court as long as it is in the best interest of the creditors and in addition it allows the company breathing space during the implementation of a Scheme of Arrangement.

Compulsory or Court Liquidations

Q. What is a ‘compulsory or Court liquidation’?
A. Compulsory or Court liquidation of a company occurs when a company is ordered to be wound up by the Court.

Q. Which Court orders a compulsory liquidation?
A. The Grand Court of the Cayman Islands. Frequently this is on the petition of a creditor or creditors on the grounds that the company cannot pay its debts.

For Example:
A company is regarded as unable to pay its debts if, for example, a creditor:

• is owed more than CI$100;
• presents a written demand in prescribed form (known as a statutory demand) to the company; and
• the company fails to pay, secure or agree a settlement of the debt to the creditor’s reasonable satisfaction.

There are other situations where a company is deemed unable to pay its debts. Please read the relevant legislation.

The Court may also order the company to be wound up on the petition of:

• the company itself
• the company’s directors or one or more members

In certain circumstances a licenced entity may be wound up on a petition from the Government or the Cayman Islands Monetary Authority ("CIMA").

Q. What are the consequences of winding up petition?
A. The company’s bankers will usually freeze the company’s bank account on receipt of the petition. Any disposal of the company’s property, or payments to creditors, after the date of the petition may be recoverable by a liquidator. Customer contracts may be cancelled. The petition is advertised in the Government Gazette. A winding up order may be made if the petition debt is not paid.

Q. What are the consequences of a winding up order?
A:

• The director’s powers cease as from the date of the order.
• The contracts of employment are automatically severed.
• All enforcement procedures (other than those taken by a landlord) are stopped.
• It is likely that the company will cease to trade.
• The winding up order is advertised in the Government Gazette and a local paper.
• The Official Receiver is receiver and manager of the company’s affairs.
• A report on the director’s conduct will be submitted to the Department of Trade & Industry.

Q. Can a company continue to trade even if it is insolvent?
A. Yes. Only as a part of a formal insolvency procedure or restructuring plan agreed by all creditors. In these circumstances directors should not continue to trade until expert advice has been received from an Insolvency Practitioner.

A director should be aware that he may become personally liable for any debts incurred after a time when he knew or ought to have known that the company was insolvent.

Q. Must the petition be advertised?
A. Unless the Court directs other arrangements, the petition must be advertised in the Cayman Islands Gazette. Where the company is carrying on business outside the Cayman Islands, the liquidation is likely to be advertised in the jurisdiction of which the company was trading.

Q. What appears on company record held by the Register of Companies?
A. If the petition is successful, the liquidator must notify the Registrar of the liquidation immediately after their appointment and it will be placed on the company’s public record.

Q. Who acts as the liquidator when an order is made to wind up the company?
A. The nominated insolvency practitioner becomes liquidator on the making of a Wind-Up order against a company by the Court. On his appointment his title is ‘Official Liquidator’.

The official liquidator has the duty to investigate the affairs of the company and to investigate the cause of its failure and report to the Court thereon.

Additionally, is his duty to realize the assets of the company, to pay creditors and where there are surplus monies, to pay shareholders. He is obliged to call meetings or creditors and circulate periodic reports.

Q. What happens when the winding-up is complete?
A. The official liquidator presents his final report to the Court, and seeks his discharge and the dissolution of the company.

Q. Is an insolvency practitioner required to be resident of the Cayman Islands?
A. Practice Direction No. 2/03 issued by the Grand Court of the Cayman Islands determines the procedures by which fees charged by Official Liquidators are approved. In the event that a liquidation committee is established, it is charged with determining the scale of hourly rates and the appropriateness of the amount charged.

If there is no committee or the committee does not make the requisite determination, the official liquidator’s remuneration may be fixed by a resolution of creditors or shareholders in the case of a solvent company.

Q. To whom does the official liquidator report?
A. The official liquidator is an officer of the Grand Court of the Cayman Islands and must report on a timely manner to the Court as determined in the Order containing his appointment, The official liquidator must also form a committee or creditors with whom he should meet every six months and furnish creditors with periodic reports.

Q. What is a liquidation committee and what are its powers?
A. A liquidation committee can be appointed at the creditors’ meeting if, at least three and not more than five in number wish to act. The liquidator must periodically report to the committee and the committee approves such items as the liquidator’s remuneration.

The committee also sanctions the exercise of some of the powers of the liquidator and acts also in the interests of all creditors.

Q. What are the duties and responsibilities of the liquidation committee?
A. To advise and to establish a strategy. To act upon that advice professionally and to take appointments. To look after the interests of the creditors. To act impartially at all times. To follow the ethical guidelines as set out by the licensing bodies. To fulfill the statutory obligations placed on him by the appointment (See Guide to Liquidation Committees).

Q. How is a claim against a company dealt with?
A. A creditor must submit a ‘Proof of Debt’ form containing details of the claim accompanied by documentary proof. Should the liquidator wish to do so he may request further particulars and evidence.

The time limit for the production of the proof is at the discretion of the liquidator who will arrange for the Gazetting of a notice.

The liquidator may admit the debt in whole or in part or may reject it with a statement of reasons. Any creditor who is dissatisfied with the decision of the liquidator may apply to the Court within 21 days for the decision to be reversed or modified.

Q. If a company is without available funding to enable a liquidator to realize assets or claims are there any remedies available to him?
A. In circumstances where there are insufficient monies available to realize assets or pursue claims the creditors or certain creditors may be persuaded to advance funds to assist the liquidator. Such funding is an expense of the liquidation and consequently the lenders would be repaid out of the assets recovered prior to the declaration of any dividend.

The liquidator may as an alternative and with the sanction of the Court assign the benefit of any chose in action to a third party who would be entitled to bring actions in their name. This type of action became prevalent in recent years and one which has been utilized by Chris Johnson Associates on several occasions.

Q. How can a liquidator be removed from office?
A. In a compulsory liquidation the liquidator has a duty to summon a meeting of creditors forthwith when required to do so by notice in writing given by creditors to whom is owed not less than 25% of the total amount owed to all creditors of the company.

The liquidation committee can also call a meeting of creditors.

Section 107 of the Companies Law (2007 Revision) provides that any liquidator may be removed by the Court on due cause shown and any vacancy in the office of an official liquidator appointed by the Court shall be filled by the Court. In practice where creditors wish to replace a liquidator they should discuss the matter with the liquidator. In theory, a liquidator should derive little satisfaction in remaining in office when he/she is not wanted. Hopefully, the liquidator will not resign then one of the other options will have to be used as a last resort.

Directors

Q. The Company is in financial difficulties. What procedures or assistant other than liquidation are available?
A. Informal restructuring businesses may be rescued without requirement for any formal insolvency procedures. It may be possible to arrange a scheme for the restructuring or refinancing of the company with the agreement of creditors including making agreements with company’s bankers, asset financiers, crown creditors and factors. The degree of complexity required for these schemes will depend upon the circumstances prevailing at the time.

Voluntary Liquidation – This may also permit the reorganization and restructuring of corporate debt and can allow a Company to continue trading whilst maintaining a structured repayment plan with its creditors. The procedure may also allow the company to compromise its debts.

Receivership – The appointment of receiver may also permit the continuance of trade, the restructuring of the business and potentially the sale of the business assets and undertaking.

Q. As a Director can he become personally liable for the debts of the company?
A. If the company goes into insolvent liquidation and a director is found guilty of wrongful trading, fraudulent trading or in the misapplication of the company funds, he may be required to make payment. Even actions undertaken in good faith or honesty may still lead to a director being guilty. It is extremely important to take professional advice as to when, and if, the company should stop trading or when by continuing he may become personally liable.

If a director has guaranteed any of the company’s debts it is likely that once the company cannot pay, the creditor will demand payment from the director under the terms of the guarantee.

Although a director may not actually become personally liable for certain transactions entered into before a formal insolvency he may become guilty of an ‘Insolvency Offence; which leads to legal action or possibly may form the basis of a director disqualification application. Such offences are:

• Preferences – Where the position of one creditor is improved in comparison to other creditors.
• Transactions at an Undervalue – where the company receives significantly less value or no value for assets/services that it provides.
• Transactions Defrauding Creditors – Similar to transactions at an undervalue where fraudulent intent is proven. There are no time restrictions in which the transaction must have occurred prior to the onset of insolvency for an individual to be found guilty of this offence.

Q. As a director; what are my duties once a liquidator is appointed?
A. A director is required to co-operate fully with the liquidator in all matters relating to the business. All books, records and cheques received must be handed over to the liquidator.

Q. Can assets be sold by the liquidator to directors?
A. The liquidator can sell the assets to any interested party. His duty is to maximize the value of the assets.

Q. Can a director of a company that has gone into liquidation, still be a director of other companies?
A. Provided that there is no Court Order precluding a director from acting, he may continue acting as a director of other companies in the Cayman Islands. There are no director’s disqualification laws in the Cayman Islands.

Q. Can those companies purchase the assets of the company in liquidation?
A. A director or any company in which he is director may purchase asset of a company in liquidation. It is likely that the official liquidator will seek Court direction for this.