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Corporate insolvencies in offshore jurisdictions can involve complex disputes over the rights of stakeholders with regards to


company property, their statutory order of priority or the ranking of their claims. George Weru and Scott Andersen explain.


Liquidators can use schemes of arrangement to obtain a binding


agreement whereby the rights of stakeholders are modified or adjusted so that there will be an ultimate financial benefit to stakeholders which could not otherwise have been obtained.


Schemes are particularly appealing to liquidators where their adoption


might avoid the need for costly litigation to resolve complex disputes among stakeholders. They can, for example, be used to achieve a compromise of rights where there are uncertainties regarding ranking of claims.


Overview of schemes of arrangement A scheme affords a mechanism for stakeholders in a company to


approve a compromise or arrangement of their rights against the company according to the terms embodied in the scheme. Section 86 of the Cayman Islands Companies Law is the authority that broadly governs the process by which a scheme is implemented.


Process for implementing a scheme


of arrangement Usually, it will be a liquidator who will develop and put forward a


scheme proposal, although creditors or investors may initiate a scheme to bring a commercial resolution to disputes between stakeholders. Regardless of the originator, the liquidator is responsible for ensuring that the scheme properly embodies the terms of the proposals, and for providing stakeholders with all the information reasonably necessary to enable them to make an informed decision about the merits of the proposed scheme.


The prudent liquidator will want to ascertain whether there is


sufficient underlying stakeholder support to warrant developing the proposed scheme. At that point, if he has not already done so, the prudent liquidator will engage specialist legal counsel to help produce the necessary documents. It can be helpful for stakeholders to be circulated with a draft of the proposed scheme documentation comprising the scheme itself, and an explanatory memorandum. The purpose of the latter is to explain the effect of the scheme on the company and those stakeholders whose rights are affected by it, and to provide stakeholders (or, more accurately, the persons with the ultimate economic interest) with all the information reasonably necessary to enable them to consider the merits of the scheme. This should enable stakeholders both to understand how disputes relating to company property and obligations will be dealt with, and to consider how their own commercial interests will be affected.


The Cayman Islands Companies Law provides for the court to order meetings at which stakeholders will vote on the scheme.


It is at the hearing for this order that the court will consider the proposals for the constitution of the classes to consider the scheme. Stakeholders are constituted in separate classes to ensure that each meeting consists of shareholders or creditors whose rights against the company which are to be released or varied under the scheme, or whose new rights against the company which the scheme gives in their place, are not so dissimilar as to make it impossible for them to consult together with a view to their common interest. Correct constitution of the classes is essential because the court will not have jurisdiction to sanction a scheme approved by incorrectly constituted meetings. It is also at this hearing that the liquidator must satisfy the court that the scheme documentation provided to stakeholders will provide all the information reasonably necessary for a decision on the merits of the scheme.


Once it is satisfied on these matters, the court will order that court


meetings be convened for the stakeholders to consider, and vote on, the scheme. A quorum of at least two people, each of whom is either a member or a creditor who is attending in person (or their corporate representative), or a person who is attending as a proxy for a member or a creditor, must be present at each of the court meetings. The persons with the ultimate economic interest may not be the same as the persons who, by virtue of having their names in the records of shareholder or creditor information, are the shareholders or creditors entitled to vote at the meetings.


The scheme must be approved at each of the court meetings by the


requisite majorities (a majority in number of those voting, and 75 percent in value of those voting), otherwise the proposed scheme will fail.


If the statutory majorities are attained at each of the court meetings,


the scheme is put forward to be sanctioned by the court as it has discretion whether or not to sanction the scheme. At the sanction hearing the court will consider the fairness of the scheme, whether it is inconsistent with Cayman Islands Law, or whether there is any other reason not to sanction the scheme.


Once the scheme has been sanctioned by the court, it will bind


all stakeholders, including those who did not vote on the scheme, and those who voted against the scheme. At that point the scheme takes effect and the liquidator or, if a scheme supervisor is to be appointed, the scheme supervisor, will begin to conduct the affairs of the company in line with the terms of the scheme.


Common obstacles Schemes can be time-consuming and cost-intensive to implement,


particularly where the compromises embodied in them are complicated and resolve a multitude of disputes which span a number of classes affected by the scheme. A liquidator proposing a scheme


CAYMAN FUNDS | 2012 55


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