Vol 16 (2019) - Issue 4

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Down the Rabbit Hole and through the Looking Glass: The Cayman Islands Scheme of Arrangement under the Magnifying Glass

Synopsis

The Cayman Islands has long established itself as a leading offshore financial centre which offers a sophisticated and flexible restructuring toolkit by which to implement cross-border restructurings. With a robust common law legal system based on English law (with ultimate recourse to the Privy Council of the United Kingdom) providing legal certainty and predictability, a highly sophisticated, dedicated financial services division of the Grand Court of the Cayman Islands (the 'Cayman Court') and an experienced network of judges, practitioners and advisors in the insolvency and restructuring sector, it is not surprising that the jurisdiction has a proven track record for constantly delivering complex and high-value restructurings.
Although the Cayman Islands has no formal rehabilitation process for companies in financial distress similar to US Chapter 11 proceedings or English administration, the Cayman Islands scheme of arrangement is often utilised to deliver not only debt restructurings but also corporate reorganisations, acquisitions, mergers and takeovers in circumstances where it is not possible or practical to obtain the consent from all affected stakeholders. Accordingly, a Cayman scheme is not a formal insolvency process as such but where it is utilised in connection with a protective provisional liquidation wrapper or official liquidation, the Cayman scheme company would have the benefit of an automatic stay on any unsecured creditor action.
One aspect of the Cayman Islands’ scheme of arrangement – the headcount test – which is the statutory requirement that a Cayman Islands scheme of arrangement has to be approved by a majority in number in addition to being approved by at least 75% in value of those voting at the scheme meeting(s) before the Cayman Court has jurisdiction to sanction such scheme – has however been the subject of much debate. Many commentators query its relevance in the context of modern restructurings.
Whilst originally implemented as a minority protection mechanism aimed at protecting smaller shareholders from decisions pushed through by larger shareholders with more significant stakes (and more significant financial resources), there is an argument that in today’s world, the headcount test is no longer fit for purpose.
This article examines the concerns with respect to the continued application of the headcount test and considers whether, in comparing the approaches taken in certain other jurisdictions, it is now time for reform in the Cayman Islands.