COVID-19 and Local Business: Managing Debt When There's No Customers

Covid-19 and employment issues in the Cayman Islands
March 16, 2020
Introduction

As the Cayman Islands hunkers down in the face of the COVID-19 global pandemic, local businesses will feel the shock from the loss of cruise tourism, a dramatic slowdown in stayover tourism, government restrictions on public gatherings and the overall decline in consumer spending. Restaurants, bars, shops, tour operators and other consumer-facing businesses need to consider their options for how to manage their creditors when the revenue stops coming in. In this short article we highlight the main alternatives available for local Cayman businesses that are currently or may face challenges in paying their bills.

Before we get to the options, there is one important requirement applicable to any approach listed here: communication. The most fundamental step you can take is to communicate early, often and candidly with your bankers, lenders, landlords, suppliers and other creditors. As discussed below, creditors are generally willing to work with debtors experiencing temporary cashflow issues, but do not like to be taken by surprise. Keeping the lines of communication open will build trust and credibility and mitigate your reputational risk during this difficult time.

Alternative Financing and Cost-Cutting

The first step is an assessment of your business’s financial needs. This process can help you to identify what your immediate funding needs are and what costs can be cut in the short, medium and long-term.

Consider whether you can access alternative sources of funds, and how much you are willing to take on. Sources could include your personal savings, new injections from your business partners or a line of credit from your bank.

When it comes to cutting costs, you will have to make some difficult decisions. But demonstrating some financial restraint and a willingness to share the pain will also help in securing alternative financing or negotiating with your creditors (see next option below). If you have employees, you should read our guide on managing employment issues to understand your options, obligations and responsibilities.

Negotiated or Informal Arrangement with Creditors

By negotiated or informal arrangement, we mean an agreement between you and your creditors that is agreed without the need for a court proceeding. This is the most cost-effective way for both you and your creditors to come to a mutually acceptable path forward. Creditors will generally be willing to work with you if you can offer a credible proposal. They also want to avoid your business collapsing as they will generally be better off restructuring your debt than getting pennies on the dollar in a liquidation scenario.

Locally, the major banks are encouraging their borrowers to contact them to discuss how to manage their loans. We expect that the local banks will be encouraged by Government to be flexible and accommodating in order to support the community, so you should take advantage of those opportunities if you have bank debt.

Typically, a negotiated agreement will give some relief to the debtor by reducing or suspending payments for a period of time, allowing more time to pay, reducing the overall debt or similar measures. The creditor will agree not to take any enforcement steps such as commencing a lawsuit or enforcing any security. In return, the debtor is generally expected to demonstrate that the underlying business can survive and return to health through the forbearance process, so be prepared to show how your business can get through the downturn and how you can plan to be profitable again.

Court-Sanctioned Scheme of Arrangement

A scheme of arrangement is a tool under Cayman corporate law to allow a company to have a debt restructuring arrangement supported by a special majority of your creditors (meaning a simple majority in number holding 75% of your debt) made binding on the holdouts. It is a more expensive proposition, requiring a Grand Court proceeding and at least two hearings before a judge, but can be useful if you have the support of your major creditors and your overall debt burden justifies the additional costs. Because it is a corporate remedy, it is only available if you carry on business through a company and can only deal with debts owed by the company.

You can also use a provisional liquidation proceeding to obtain 'breathing room' to develop and negotiate a restructuring agreement with your creditors. The court will appoint a qualified insolvency practitioner as provisional liquidator to oversee the process, and creditors will be prevented from taking any debt enforcement steps. This a very court-driven process and accordingly is only appropriate where your debt burden and chance of successful resolution justify the expense.

Liquidation

Liquidation will generally be appropriate if your company is irreparably insolvent. The typical method for commencing an insolvent liquidation is for the shareholders to pass a special resolution (usually 2/3 of the voting shares). The voluntary liquidator will later apply to the Grand Court to bring the winding up under court supervision. A qualified insolvency practitioner will be appointed liquidator and will take possession and control of the company's assets and affairs. Creditors will be asked to prove their claims by filing the necessary documents with the liquidator. After the liquidator sells the company's assets and pays the costs of the liquidation, he will distribute the remaining cash to the creditors.

Depending on what assets are in your business, commencing a liquidation may require you to pay some upfront costs to cover some portion of the winding up expenses. Despite these costs, we generally advise clients to use a formal process to close down their business rather than simply abandoning it to creditors, to provide finality and mitigate the risk of incurring additional personal liabilities.

As a director, officer or shareholder of your business, you will generally not be personally responsible for the corporate debts unless you signed a personal guarantee or act in bad faith. Directors and officers will have a duty to cooperate with the liquidator and generally be required to provide information about the company’s business, assets, liabilities and creditors.

Conclusion

These will undoubtedly be difficult and challenging times for local businesses, and some will likely collapse and fail. Understanding your options now and taking proactive steps to deal with your creditors and financial position, will increase your chance of making it through this crisis.

For more information or to discuss your specific circumstances, contact us at:

Mark Russell
Head of Insolvency & Restructuring
+1 345 949 0003
markrussell@ksglaw.ky
James Kennedy
Partner
+1 345 949 0003
jameskennedy@ksglaw.ky