APPLEBY Article by Jeremy Snead 15 November 2012

In the past ten years 105,290 companies have been registered in the Cayman Islands. However, in that same period, the total number of companies on the Cayman Islands Corporate Register has only increased from 64,495 to 92,964. The mismatch in these figures indicates that there must be a significant number of group restructurings, reorganisations or liquidations taking

place on an annual basis. Whilst some of these will be involuntary, many will take place with the consent and consideration of stakeholders, creditors and shareholders alike.

In the USA, the practice of offering payments in return for affirmative votes to a proposed financial reorganisation has become an accepted tool for securing that the restructuring goes ahead. There are no reported instances of this practice having been judicially considered in the Cayman Islands. However, the English High Court recently approved¹ the use of payments for votes in a reorganisation of a Cayman Islands company; although not binding here, the decision could provide persuasive authority that such methods may be approved by the Cayman Court in due course.

The Imcopa group of companies, incorporated in Brazil, Uruguay and the Cayman Islands (the “Imcopa Group“) was one of the largest soybean processors in the world. The Imcopa group completed a restructuring in 2006 by issuing US$100m 10.375% guaranteed notes, due for maturity in 2009 (the “notes“). The notes were held by a Security Trustee subject to an English law Trust Deed that was designed to ensure that the notes were treated pari passu with no recourse for individual enforcement of rights or any preferential treatment to groups of noteholders.

Between 2009 and 2011, the Imcopa Group formulated and implemented a financial restructuring culminating in a formal reorganisation plan with judicial approval from the Brazilian court. As part of the financial restructuring, the Imcopa Group gave a series of four proposals to noteholders, in the form of “consent solicitations” which required an extraordinary resolution to be passed. In each case a “consent payment” was offered that would be paid only to those noteholders that voted in favour of the proposals. The proposals almost invariably included the postponement of the semi-annual interest payment that would otherwise have been payable. Each proposal was passed with the requisite majority.

A claim was brought against the Imcopa Group by a number of noteholders who had not voted in favour of the fourth proposal (the “Claimants“). The Claimants alleged that the consent payments were in the nature of a bribe and so rendered unlawful each proposal that was passed by a resolution. As the Trust Deed was governed by English law, the English High Court came to consider, amongst other things, whether the consent payments were illegal bribes that gave rise to repudiation and breach of contract which the Claimants were entitled to accept.

The Court considered authorities from the early twentieth century concerning inducements to individual bond holders or creditors² and concluded that payments offered in exchange for votes did not constitute bribery where the scheme had openly provided for the separate treatment of voters and that each bondholder was entitled to vote with his own self-interest in mind, which may include factoring the consent payment as a benefit for voting in favour of the resolution. It was only where a “special personal advantage” was conferred by way of a secret agreement which was the result of special negotiations and which was not disclosed as part of the scheme to be voted on that would amount to a bribe or illegal inducement.

In the absence of more recent English jurisprudence, the Judge went on to consider authorities from Delaware (which he referred to as the “leading US corporation jurisdiction“). He noted that consent payments have been a commonly used means of debt restructuring in Delaware since at least the 1980s and that the Delaware court had held that such payments within certain limits were permissible. He concluded that, as the offer had been made openly to all stakeholders on an equal basis and with the option to vote freely in favour or against the consent solicitation as the noteholder saw fit, there was nothing illegal or fraudulent about the payments which were not bribes and that the votes were not invalidated by them.

The Judge also considered that the consent payments did not breach the pari passu principle enshrined in the terms of the notes, even though it led to a situation where some bondholders received payments where others had not, because the offer had been available to all of the bondholders on the same terms and did not fall within the pari passu contractual provision in the Trust Deed.

In the absence of local precedent, the Cayman Court will often look to the jurisprudence of comparable common law jurisdictions for guidance. The Imcopa judgment serves as a persuasive indication that consent payments would be permitted in restructurings conducted in the Cayman Islands. These may offer a useful tool to assist corporate entities in securing a successful reorganisation and judicial approval of this practice would likely be a welcome addition to any restructuring tool kit.

Footnotes

^{1. [2012] EWHC 1849 (Comm)}

^{2. Goodfellow v Nelson Lime Liverpool Ltd [1912] 2 Ch 324 and British American Nickel Corporation Ltd v M J O’Brien [1927] AC 369}

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