Written by Nick Dixey and Colm Flanagan

Automatic Stay

In the Cayman Islands, the winding-up of a company is governed by the Companies Law (“2013 Revision”) (“the Law”) and the Companies Winding Up Rules 2008 (as amended) (“the Rules’).

On the making of a winding‐up order, an automatic stay is imposed, pursuant to Section 97 of the Law, prohibiting any suit, action or other proceeding from being proceeded with or commenced against the company without the leave of the Grand Court.

Additionally, when a winding up order has been made, any attachment, distress or execution put in force against the estate or effects of the company after the commencement of the winding up is void.

The Company as Plaintiff

Where the company is the plaintiff in an action commenced prior to the winding-up, (and there is no counter-claim made by the Defendant), there is no automatic stay, the liquidator of the company may choose either to continue the action, or to discontinue.  In such circumstances, the liquidator will often take advice as to whether proceedings commenced prior to the beginning of the winding-up are likely to be successful.  Typically, the decision of the liquidator is influenced by the state of the company’s assets and available funds, as well as the prospects of success in the action.

If, after taking advice, the liquidator is still unsure how to proceed he may seek the sanction of the Court as to a particular course.   The exercise of the liquidator’s powers is subject generally to the control of the Cayman Islands’ Grand Court.

Part I of Schedule 3 to the Law sets out those powers which the liquidator may not exercise without the specific sanction of the Court which include, amongst other things:

power to bring or defend any action or other legal proceeding in the name and on behalf of the company;
Power to carry on the business of the company so far as may be necessary for its beneficial winding up;
Power to make any compromise or arrangement with creditors or persons claiming to be creditors or having or alleging themselves to have any claim (present or future, certain or contingent, ascertained or sounding only in damages) against the company or for which the company may be rendered liable;
Power to compromise on such terms as may be agreed all debts and liabilities capable of resulting in debts, and all claims (present or future, certain or contingent, ascertained or sounding only in damages) subsisting, or supposed to subsist between the company and a contributory or alleged contributory or other debtor or person apprehending liability to the company;
Power to deal with all questions in any way relating to or affecting the assets or the winding up of the company, to take any security for the discharge of any such call, debt, liability or claim and to give a complete discharge in respect of it;

Role of Liquidator in pending proceedings

If the liquidator makes a decision to continue proceedings commenced prior to the winding-up, or has obtained the leave of the Court to bring or defend proceedings then, in accordance with his general obligations and duties he must act in the interests of the creditors and contributories generally.

Any action or proceeding brought or continued by the liquidator in the name of the company proceeds in the same way as that of an action by any other claimant. Depending on the type of proceeding, the company may be ordered to give security for costs in light of the fact that the company is in liquidation which is considered  prima facie evidence that there is reason to believe that it will be unable to pay the defendant’s costs if ordered to do so.

A liquidator will usually engage counsel to provide advice in respect of the particular proceeding.  In some instances, the liquidator may seek the sanction or direction of the court for a particular course of action he wishes to take in any pending proceedings.  This is particularly so where the creditors or contributories do not agree or have concerns about the course of action the liquidator wishes to embark upon.

The Company as Defendant 

In circumstances where a company is a Defendant to proceedings (or where counter-claims have been made in proceedings brought by the company), the effect of a winding-up order being made against a company is to impose an automatic stay. The proceedings may not be continued except by the leave of the court and on such terms as the court thinks fit.

An application for leave to continue proceedings may be brought by the liquidator, or by the other party to the proceedings concerned.  Leave would ordinarily be sought by making an application to the Court (and Judge) that has conduct of the winding-up proceedings.

In exercising its discretion to grant leave to continue proceedings against a company, the court will be concerned to ensure that no creditor gains an advantage over other creditors in the same class. The essential object of a winding up is to ensure an equal distribution of the company’s assets to the ordinary creditors after payment of any preferential claims.

The court will not conduct a detailed examination of the merits of the claim. In considering whether or not to lift a stay of proceedings, the court has a broad and unfettered discretion to do what is right and fair in the circumstances of the particular case. This may include in some circumstances granting leave on condition that no judgment obtained may be enforced without the further leave of the court.

Creditors Claims

In the Cayman Islands it is the function of the official liquidator to collect, realise and distribute the assets of the company to its creditors, and any surplus to those entitled to it.  The Law provides for the organisation of creditors claims and ultimately for the manner and order in which any realized assets of the company are to be distributed.

Secured creditors rank in priority and notwithstanding that a winding up order has been made, a creditor who has security over the whole or part of the assets of a company is entitled to enforce his security without the leave of the Court and without reference to the liquidator.

Unsecured creditors (which include secured creditors with claims in excess of their security) must lodge a proof of debt with the liquidator for the amount of their claim. All debts payable on a contingency and all claims against the company whether present or future, certain or contingent, ascertained or sounding only in damages, shall be admissible to proof against the company. The liquidator will consider whether to admit or reject the proof.

The expenses of the liquidation are payable out of the company’s assets in priority to all other claims.

The Law provides through s141 and Schedule 2 for three categories of preferred debts.  After the expenses of the liquidation are paid in full, these debts must be paid in priority to all other debts. Such preferential debts shall rank equally amongst themselves and be paid in full unless the assets available, after having exercised any rights of set-off or netting of claims, are insufficient to meet them in which case they shall abate in equal proportions. So far as the assets of the company available for payment of general creditors are insufficient to meet them, the preferential debts have priority over the claims of holders of debentures secured by, or holders of any floating charge created by the company, and are paid accordingly out of any property comprised in or subject to that charge

After expenses and the preferred creditors have been paid the remaining unsecured creditors of the company are next in the order of priority. Their debts rank equally between themselves.

After the preferential debts, they shall be paid in full unless the assets are insufficient for meeting them, in which case they shall abate in equal proportions between themselves. Any surplus remaining after payment of these debts is used to pay interest accruing on those debts since the start of the liquidation.

Next in priority are the preferred shareholders.  These are any shareholders in the company whose shares carry rights relating to capital or income which are preferred under the company’s articles of association to the rights of the other classes of shareholders.

Whatever remains after payment of the above categories of creditor belongs to the remaining shareholders. Any surplus will be distributed between the shareholders of the company in accordance with their respective shareholding, the articles of association and/or any shareholders agreement.

Awards made against the Company

A party who obtains an order for costs against a company in liquidation will be able to recover those costs out of the assets of the company before the general costs of the liquidation including the liquidator’s own costs.

If an award or judgment for damages is made against the company (in an action or proceeding in which the automatic stay referred to above has been lifted) then the judgment creditor will usually join the ranks of ordinary unsecured creditors and the judgment will be paid in accordance with the principles set out above.