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Obtaining a Moratorium in Support of a Cayman Islands Restructuring

8 March 2017

In CHC Group Ltd ("CHC") the Cayman Islands Grand Court has determined that, in certain circumstances, directors of a company can commence Cayman Islands restructuring provisional liquidation proceedings ("RPL Proceedings") without the need for a shareholders' resolution or authorisation in the company's articles of association.  This decision allows greater access by companies to the Cayman Islands restructuring regime by confirming a practical solution to the so-called Emmadart issue. 

The Cayman Islands Restructuring Regime and the Emmadart Issue 

The opening of RPL Proceedings prevents creditors from commencing legal proceedings against the company in the Cayman Islands.  The moratorium does not, however, prevent secured creditors from enforcing their security.  RPL Proceedings therefore grant the company a breathing space within which to negotiate and implement a restructuring with its creditors (either by way of a Cayman Islands scheme of arrangement or other foreign restructuring regime such as Chapter 11).  If the restructuring is successful, then the company can continue in business. 

However, a feature of Cayman Islands law is that before RPL Proceedings can be commenced, a winding up petition must be filed.  Under the Companies Law (as interpreted most recently by the Grand Court in the case of China Shanshui), directors of a Cayman Islands company cannot present a petition for the winding up of a company unless expressly authorised to do so under the company's articles of association or by a shareholders' resolution.  This is known as the Emmadart rule, because the relevant provisions of the Companies Law appear to provide statutory recognition of the principles set out in the English court's Emmadart decision.  In China Shanshui the company's directors had presented a winding-up petition (without a shareholders' resolution or authorisation in the company's articles of association) and applied for RPL Proceedings.  The Grand Court refused to commence the RPL Proceedings on the basis that the directors had no authority to present the winding-up petition, which was a prerequisite. 

The rationale for the Emmadart rule is that directors only have the authority to manage the business.  While the object of management is continuing the company's business, winding-up causes the death of the company.  Directors therefore need additional authority to commence a procedure that terminates the company's business. 

CHC Confirms the Emmadart Work-around 

CHC is the Cayman Islands registered holding company of a multinational helicopter group that is subject to Chapter 11 proceedings in the United States.  In connection with the restructuring of the group, RPL Proceedings in respect of CHC were considered necessary.  However, CHC's articles of association did not authorise CHC's directors to present a winding-up petition nor had a shareholders' resolution been obtained.  The proposed solution was for a subsidiary of CHC (who was owed money by CHC) to file a creditor's winding-up petition, followed by CHC's directors causing CHC to apply for RPL Proceedings. 

In these circumstances, the Grand Court held that the Emmadart rule did not apply and the directors could apply for RPL Proceedings following the filing of a winding up petition by a creditor, not the company.  The Grand Court's reasoning was that the rationale underpinning the Emmadart rule had nothing to do with the restructuring of companies, the aim of which is to ensure that the company's business continues - restructuring proceedings are not terminal proceedings.  While this work-around (i.e.  having a creditor file the petition underpinning the RPL Proceedings, not the company) has, for some time, been recognised by the profession as potentially being available, the CHC case is the first time that the Grand Court has provided a judgment confirming its validity.  While the short judgment paints some of the issues as clear cut, this may not always be the case.


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