The Scheme
Under Sections 86 and 87 of the Companies Law (2007 Revision) an application to the Court can be made for the sanctioning of a compromise or arrangement between a company and its creditors and/or members or any class of them. This memorandum sets out the procedural steps required to be undertaken to obtain the Court's sanction of the proposed Scheme.
The parties draft the Scheme document.
Petition
The Applicant (usually the company or, if the company is in liquidation, the liquidator) issues a petition at Court commencing the court proceeding and seeking sanction of the Scheme.
The Court will allocate a date for the hearing of the petition. The date will usually be eight to twelve weeks (depending on the case) from the filing of the petition.
At the same time, the Applicant issues an ex-parte Summons at Court for directions convening the meetings set out below ("the Order for Directions").
Explanatory Statement
The Applicant prepares a draft Explanatory Statement explaining the effect of the Scheme in plain English on all of the various classes along with the commercial reasons why the Scheme is to the benefit of those concerned. The commercial case for the Scheme must be put clearly and unambiguously with justifications, by way of example, for the swap ratio between shares and debt (if necessary by reference to relevant financial information on the companies). The text of the Scheme itself ("the Scheme Document") is also usually included.
The Explanatory Statement should also include a declaration of any material interests that the Directors may have whether as Directors, members or creditors of the company or otherwise in the Scheme. The Explanatory Statement should set out any impact upon those interests that the Scheme may have.
The return date for the hearing of the petition must also be stated.
Draft notice and proxies
The company settles a draft of the notice calling the meetings, proxy forms and voting instructions for use by custodians (if applicable) for consideration by the Court.
File affidavit
A Director of the company or, in the case of an insolvent company's Scheme, the liquidator, files an affidavit in support of the ex-parte Summons stating:
- the need for the proposed Scheme; and
- who should be appointed Chairman of the meetings.
The exhibits to the affidavit include:
- the Certificate of Incorporation;
- a copy of the Memorandum and Articles of
Association;
- a copy of the proposed Scheme;
- a copy of the Explanatory Statement; and
- a copy of the proposed notices calling the various
meetings of each company and the associated proxy
forms.
File expert's report
Further, if the proposed Scheme relates to shares or debt instruments which are listed on a stock exchange, an affidavit or expert report is to be provided to the Court setting out the relevant listing rules and practice and explaining the steps which have been or will be taken to comply with such listing rules or practice.
In addition, if all or substantially all of the shares or debt instruments to which the proposed scheme relates are registered in the name of one or more custodians or clearing houses, the Court, in its discretion, may direct that such custodian or clearing house may cast votes both for and against the proposed scheme in accordance with the instructions of its clients, and specify the number of votes cast in favour of the Scheme and the number of clients or members on whose instructions they are cast. In effect, this is a "look through" provision so that the Court may ascertain the wishes of those with the real economic interest in the class.
Court settles form of notice and proxy
The Court settles the form of the notices and proxy form and orders the various class meetings to be held.
Notice of meeting issued
The company sends to each member of each class the notice summoning the meeting along with:
- a copy of the Scheme document;
- a copy of the Explanatory Memorandum; and
- a copy of the proxy.
Directors' meeting
The transferee company (if the Scheme is a merger or an amalgamation) calls a Directors' meeting to consider the terms of the Scheme and to resolve in favour of its sanction. A resolution should also be passed to authorise any new equity/debt issue and to authorise someone to appear, if necessary, at the hearing to approve the Scheme and to be bound by any orders the Court makes.
If applicable, the transferee company prepares for the issuing of any new equity/debt by passing the appropriate resolutions authorising the required increase in share capital or issuance of debt instruments. The Directors pass suitable resolutions to allot, on the effective date, any shares to the transferor company's shareholders and creditors.
Results of meetings
The meetings are held and approval of the various classes obtained (a majority in number representing 75% or more in value/votes in each class). Further affidavits from the chairman of the class meetings report back to the Court the results of the meetings. The affidavit should:
- verify that the notice of meeting was duly sent in
accordance with the order for directions, exhibiting copies
of: the notices, the Scheme Document, the explanatory
statement and the forms of proxies sent with the
notices;
- verify that the meeting was duly held in accordance with
the Order for Directions.
- give full particulars of voting including:
- the number and value of the holders of each class of shares, creditors, etc, who were present in person or by proxy at each meeting;
- the number and value of the holders of each class who voted for and against the Scheme, distinguishing votes in person and by proxy;
- the number and value of the holders present in person who did not vote; and
- particulars of any proxies rejected by the chairman for any reason. The chairman will sign a copy of the Scheme for identification and this will be annexed to his report.
Additional affidavits
If the Scheme is an amalgamation, a further affidavit is sworn by a director of the transferee company supporting the petition.
Draft orders
Draft orders will be drawn up with the relevant provisions affecting the Scheme including such matters as the transfer of the assets and undertaking of the transferor company, and if necessary, its automatic dissolution without winding up as at the effective date.
Insurance licence holders
If the Scheme concerns the holder of an insurance licence under the Cayman Islands' Insurance Law, or is otherwise a regulated entity, notice of the Scheme should be given to the Cayman Islands' Monetary Authority as a matter of courtesy.
Petition hearing
The parties attend the hearing of the petition and submit the Scheme for approval of the Court. In exercising its discretion, the Court will satisfy itself that:
- that the classes have been properly constituted;
- that the meetings were convened and held in accordance
with the directions given by the Court;
- that the scheme has been properly explained to
shareholders or creditors so that they have been able to
exercise an informed vote in respect of the scheme;
- that a simple majority in number representing
three-quarters in value of those present and voting in person
or by proxy have voted in favour of the scheme; and
- that the scheme is one which should be sanctioned. This
requires the Court to consider whether the scheme is one
which an intelligent and honest man, who is a member of the
relevant class and acting properly might reasonably
approve.
Conditions imposed by the Court
On considering the Scheme the Court does have the power to impose conditions to its sanction of the Scheme. For example, if the Court is of the opinion that creditors may be at risk as a result of the terms of the Scheme, it may impose conditions affording them greater protection.
Copies to Registrar of Companies
Upon the granting of the orders, copies must be lodged with the Registrar of Companies within seven days. Once this has occurred, the Scheme is deemed to be effective and to have quasi statutory effect.
Distressed companies
If the Scheme is being effected by joint provisional liquidators in the context of a work out of a distressed company, it is usual for the Scheme to appoint the joint provisional liquidators as scheme administrators to oversee the distribution of new debt-equity to shareholders, creditors, etc (as the case may be). Once the effective rights and obligations in and of the company have been dealt with by way of the Scheme the joint provisional liquidation is no longer required. It is usual that shortly after the Scheme has been approved the joint provisional liquidators apply for their discharge.
Annex to Memorandum of Association
The Company must annex a copy of the order to every copy of their Memorandum of Association (or other instrument constituting or defining its constitution) issued after the order is made.
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Cayman Islands Guy Locke, Partner London David Whittome, Partner Jersey David Steenson, Partner |
British Virgin Islands Jack Husbands, Partner Hong Kong Hugh O'Loughlin, Partner Dubai Rod Palmer, Partner |
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.