In the Cayman Islands, the legal system incorporates specific statutory provisions to address transaction avoidance, a critical aspect in insolvency cases. These provisions, included in the Cayman Companies Act, aim to safeguard an insolvent company's assets for equitable distribution among creditors. The Act covers different scenarios, such as voidable preferences(Section 145), dispositions at an undervalue (Section 146), and fraudulent trading (Section 147).
The focus of this analysis is on Section 146, which deals with the avoidance of dispositions at an undervalue. Introduced in 2009, this section was part of a broader reform influenced by the recommendations from the Law Reform Commission's 2006 review of corporate insolvency laws in Cayman. These reforms sought to simplify the then-complex insolvency laws, which were an amalgamation of outdated legislation, foreign rules, and local case law.
A key aspect of Section 146 is its connection with the Fraudulent Dispositions Act, particularly Section 4. While both sections share similarities, Section 146 does not limit the setting aside of a disposition to the amount owed to a specific creditor, a restriction present in the Fraudulent Dispositions Act.
Section 146 is expansive in its definitions and requirements. It broadly defines a disposition to include almost any form of property transfer. The term "undervalue" refers to transactions where the consideration is significantly less than the property's value or where no consideration is provided. Furthermore, the section stipulates that an intent to defraud must be proven, defined as a willful attempt to circumvent obligations to creditors.
Interestingly, the requirement to demonstrate intent to defraud under Section 146 contrasts with similar provisions in the English InsolvencyAct 1986, where such intent is not a prerequisite. This distinction can be traced back to the English law's evolution, where the intention to defraud was a critical aspect in earlier legislation but was later revised.
Section 146 also addresses the treatment of transferees in transactions set aside under this provision. Transferees acting in good faith are afforded certain protections, such as a paramount charge over the disputed property to cover their defense costs. This approach differs from the English law, which doesn’t specifically address transferee good faith.
The application and interpretation of Section 146, particularly regarding the intent to defraud, may still evolve through judicial scrutiny in the Cayman Islands. The section's relative novelty and limited judicial consideration mean its full impact and interpretation remain to be seen, especially in light of expected economic downturns and the potential increase in fraud-related cases.
This article is only intended to give a general overview and summary of the subject matter. It is not, nor is it intended to be comprehensive, and it does not constitute, and should not be taken to be, legal advice. If you would like legal advice or further information on any issue of any kind raised by this guide, please get in touch with one of your usual contacts.
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