Americas Restructuring Review 2023

Legal framework

Bermuda is an overseas territory of the United Kingdom and its legal system is based on the English common law comprising statute and case law. Bermuda has developed its own body of common law and statutes and this has been influenced by several jurisdictions including England, Canada, Australia and New Zealand. Decisions of the English courts are not binding on a Bermuda court, although they are highly persuasive. The decisions of the Privy Council, however, are generally binding on the Bermuda courts, unless they are based on a reference from a jurisdiction with considerably different statutory provisions and policies. The Privy Council is Bermuda’s highest appellate court and sits in London.

Bermuda’s insolvency landscape

The principal statutory provisions^[1] governing corporate insolvency and restructuring are contained in Part XIII of the Companies Act 1981 (the Companies Act) and are supported by the Companies (Winding-Up) Rules 1982 (the Winding-Up Rules). The Companies Act is based on the English Companies Act 1948 and the Companies Winding-Up Rules are based on the English Companies (Winding-Up) Rules 1949.^[2] No substantive changes have been made to Part XIII of the Companies Act and the Winding-Up Rules since they were enacted, although there have been minor amendments.

At the heart of Bermuda insolvency law is the principle of pari passu treatment of unsecured creditors (ie, where the company does not have sufficient assets to satisfy its debts to unsecured creditors, each unsecured creditor would receive an equal distribution on a rateable basis according to the quantum of their claim).^[3] Secured creditors are unaffected by insolvency proceedings in Bermuda and may enforce their security in accordance with the terms of the governing security instrument^[4] (although they have standing to present winding-up petitions).

A key feature of Bermuda insolvency law is that the Companies Act provides the ability to challenge certain transactions executed by insolvent companies through avoidance or clawback provisions. This includes the avoidance of preferential payments to creditors and transactions at an undervalue. The Companies Act also provides remedies for fraudulent trading and dispositions of company property after the commencement of the winding-up.

Corporate insolvency and rescue procedures

The primary insolvency and rescue procedures available under Bermuda law are:

• liquidation under the supervision of the court, commonly referenced as ‘compulsory liquidation’ or ‘compulsory winding-up’;
• provisional liquidation for the purpose of restructuring; and
• schemes of arrangement.

Bankruptcy procedures are relevant in the context of insolvent funds and individual insolvencies. The remedy of receivership is an important mechanism used when a segregated accounts company is insolvent.

Compulsory liquidation

Typically, a creditor seeking to place a debtor company into liquidation in Bermuda will apply to the court seeking such relief on the grounds the company is unable to pay its debts or that it is just and equitable for the company to be wound up. Compulsory winding-up proceedings can be commenced by any one or more of the following:

• the company itself;
• creditors, including any contingent or prospective creditors;^[5]
• contributories, subject to certain restrictions; and
• the Bermuda Monetary Authority (or the applicable regulator).

Winding-up proceedings are commenced by filing a winding-up petition with the Supreme Court of Bermuda, which is supported by a standard form affidavit verifying the contents of the petition. It is common for the petitioner to annex to the petition documentary evidence of the underlying debt, although this is not strictly necessary. Once the court fixes a date for the hearing of the petition, the petition must be served on the company at its registered office. Before the hearing of the petition, the petitioner must file a certificate of compliance with the Registrar of the Supreme Court certifying that the petition has been properly filed, served and advertised in an appointed newspaper and that other procedural rules have been followed.

Anyone intending to appear at the hearing of the petition, including those who wish to oppose the petition, are required to provide advance written notice to the petitioner within a prescribed time frame, failing which they require special leave of the court to appear at the hearing.

The court, when considering a winding-up petition, may grant, dismiss or adjourn the petition, or make any other order it thinks fit. If a petition is unopposed, the Court may make an immediate winding-up order at the first hearing. If a petition is opposed, the Court commonly adjourns the first hearing of the petition to allow the parties to prepare their respective cases. The Court may also adjourn a winding-up petition to facilitate a proposed restructuring by the company with the assistance of a court-appointed insolvency practitioner known as a ‘provisional liquidator’.

If the court makes a winding-up order (whether at the first hearing or a subsequent hearing), the company’s operations will immediately come to an end. The management of the company is taken from the directors and is placed in the hands of a court-appointed liquidator.^[6] Liquidators are equipped with a wide array of powers to ensure that the company adheres to a statutory process contained in the Winding-Up Rules. This process is intended to promote a systematic and orderly winding up of the company’s affairs.

Provisional liquidation

Provisional liquidation in Bermuda is the appointment of a liquidator other than for the immediate winding up of the company. A provisional liquidator will be nominated by one or more of the parties. The court must accept the credentials of the nominees who, by custom and practice, will be insolvency practitioners.

There are two scenarios where an order for provisional liquidation will be made:

• where there is a prospect of ‘rescuing’ an insolvent^[7] company through restructuring without the displacement of all of the board’s executive functions; or
• where it is necessary for the court to appoint an officer to protect and prevent a dissipation of the company’s assets in the intervening period between the filing of a petition and the making of a winding-up order.^[8]

The second type of appointment given above mirrors the English jurisdiction for appointment of provisional liquidators and, like in England, is one of the most extreme tools at the Court’s disposal, deployed only in exceptional circumstances.

The first type of provisional liquidation is a distinct feature of Bermuda’s restructuring landscape. Accordingly, where a company is insolvent, instead of making a winding-up order to liquidate the company, the Bermuda court often appoints provisional liquidators with certain, limited powers, known as ‘light-touch’ powers.^[9] This appointment is by far the most common form of provisional liquidation in Bermuda.

In a light-touch liquidation, a company may continue its business operations as usual, pending the implementation of a restructuring plan. This would normally occur where the court is satisfied that a restructuring will produce a better result than a winding up for creditors. As explained by Kawaley CJ in Z-OBEE Holdings Ltd(2017) Bda LR 19:

[Section 170 of the Companies Act 1981 (Power of Court to appoint liquidators)] has for almost 20 years been construed as empowering this Court to appoint a provisional liquidator with powers limited to implementing a restructuring rather than displacing the management altogether pending a winding-up of the respondent company.

The Bermuda court has used provisional liquidation as a tool to restructure the affairs of a company, preserve value in a business and provide a platform for distressed companies to recover – which together promotes the sustainability and success of cross-border business.

A key feature of provisional liquidation is the stay of proceedings against the company triggered by the appointment of provisional liquidators. Creditors are protected, given the independent oversight of provisional liquidators who, as officers of the court, are under a duty to act in the best interests of creditors.

A provisional liquidation may be commenced alone or in combination with another process in Bermuda or abroad, for example, in combination with a US bankruptcy, an English restructuring plan or a Bermudian scheme of arrangement.^[10] The combination of restructuring processes in multiple jurisdictions can be a very powerful tool, as demonstrated below in the Noble Group case study.

Schemes of arrangement

A scheme of arrangement is the only statutory court-supervised reorganisation procedure in Bermuda, provided for in sections 99 and 100 of the Companies Act. A scheme of arrangement may be initiated by the company, any member or creditor of the company or, where applicable, a liquidator who has been appointed in relation to the company. A proposed scheme must represent a compromise or arrangement between the company and its creditors or members, or any classes thereof.

Proceedings are started by applying to the Bermuda court for directions to convene meetings with the various classes of creditors or shareholders who will be affected by the scheme’s proposals. Once the meetings have been convened, a further application is made to the court to approve or ‘sanction’ the scheme.

A class of creditors will be made up of creditors whose interests are sufficiently similar so that they can consult together with a view to their common interest.

Cross-class cramdown of a dissenting class of creditors or members is not permitted in a Bermuda scheme of arrangement. If any single class of affected creditors or members does not approve the scheme of arrangement, the court cannot sanction the scheme.

Each class must approve the scheme by both:

• simple majority (in number) of those present and voting; and
• 75 per cent in value of debt of those present and voting.

This double majority requirement can lead to creditors representing small amounts in value, if sufficient in number, causing the rejection of a scheme. This represents significant minority creditor protection from the imposition of a scheme they consider unfavourable.

Expedited restructurings

The Companies Act does not provide for an expedited reorganisation, such as a reorganisation by way of a pre-pack arrangement. However, as a matter of practice, a reorganisation may be informally negotiated with a liquidator prior to his or her appointment on the informal understanding that the liquidator will approve the pre-negotiated arrangement once appointed. This type of informal arrangement will have a similar effect to a pre-package deal but the details of the arrangement will be bespoke to the particular circumstances of the case.

Receivership

Receivers are generally appointed by secured creditors pursuant to the terms of a security agreement. The function of the receiver is to realise the relevant secured assets of the company for the benefit of the security-holder. Assets of a company that have been validly secured as security for a company’s indebtedness are exempted from the claims of creditors in insolvency. On completion of the receivership, therefore, there can be a winding up of the assets not realised by the receiver for the benefit of the company’s unsecured creditors.

There is a separate insolvency regime that applies to segregated accounts companies incorporated in Bermuda under the Segregated Accounts Companies Act 2000 (sometimes referred to as protected cell companies or segregated portfolio companies in other jurisdictions). This regime provides for the appointment of receivers over the segregated accounts (or cells) of the segregated accounts company that are unable to meet their liabilities as they fall due. A liquidator may be appointed over a segregated account company’s general account if it is insolvent. There are relatively few statutory rules underpinning this regime when compared to the winding-up regime that applies to limited liability companies incorporated in Bermuda. It is thought that the Bermuda court would model its approach to the winding up of a segregated accounts company on the court’s established practice in relation to limited liability companies.

Bankruptcy

Corporate insolvency generally refers to the winding-up regime under Part XIII of the Companies Act and the Winding-Up Rules. Bankruptcy is a term that only applies to individual insolvency and limited partnerships, the latter being the corporate vehicle regularly used for investment funds.

Observations

Creditor-friendly jurisdiction

Each Bermudian court seeks to balance competing interests. On the one hand, the court recognises the importance of promoting a culture of rescue (where possible) and strives to assist companies in financial distress where it can. On the other hand, the court recognises that the interests of creditors are paramount, that an attempted rescue will not always maximise value to creditors and that sophisticated creditors are likely to be best placed to assess what course of action is in their commercial interests. Each Bermudian court is adept at applying the statutory regime with enough flexibility to achieve creditor-friendly results, as demonstrated by the development of the provisional liquidation regime, described above.

Bermudian courts are particularly alert to the realities and complexities of international commerce and will cooperate with courts of foreign jurisdictions where there is a Bermudian connection, for example, the company is incorporated in Bermuda, has assets in Bermuda or does business in Bermuda.

Hallmark of provisional liquidation – Noble Group Limited

The value of provisional liquidation was demonstrated in the widely publicised restructuring of Noble Group Limited in 2018. Noble Group was incorporated in Bermuda and listed on the mainboard of the Singapore Exchange. It was the ultimate holding company of a group of companies that was one of the world’s largest commodity traders, with hubs in London, Hong Kong and Singapore. The group managed a portfolio of global supply chains that involved marketing, processing, financing and transporting across the world. The restructuring was highly complicated owing to the very wide range of creditors involved and the global scale of the group’s business.

Noble Group experienced grave financial difficulties because of the industry-wide decline in commodity prices between 2014 and 2016. Noble Group’s pre-restructuring debt exceeded US$3 billion dollars. To avoid liquidation, the company’s directors pursued a financial restructuring based on a debt-for-equity swap and provided for the transfer of Noble Group’s assets to newly incorporated subsidiaries of a newly incorporated holding company, New Noble. Noble Group itself was to be dissolved. Scheme creditors were to be issued with new debt instruments and 70 per cent equity in the new group. The remaining equity was to be apportioned, with 20 per cent issued to existing shareholders and 10 per cent issued to existing management. One of the main goals of the scheme was to provide the new group with access to new hedging and trade finance facilities (US$800 million). These facilities were to be provided by a finance creditor, but also by scheme creditors who chose to guarantee the facility in exchange for senior debt instruments.

The company originally sought to achieve the restructuring solely by entering into parallel schemes of arrangement with its creditors (which were governed by both English and Bermuda law processes). Prior to presenting the English scheme of arrangement, which was regarded as the ‘lead’ scheme, Noble Group took steps to shift its centre of main interests from Hong Kong to England, including by relocating its main office to London from Hong Kong.

The English and Bermuda schemes of arrangement were approved by an overwhelming majority of scheme creditors and were sanctioned by the courts in both jurisdictions. The English scheme was sanctioned on 12 November 2018 and the Bermuda scheme was sanctioned two days later. The US Bankruptcy Court granted recognition of the scheme in the United States, via Chapter 15 of the US Bankruptcy Code, on 15 November 2018. Thereafter, all that remained was for the company’s directors to implement the scheme.

Following sanction of the schemes, however, the Singaporean authorities blocked the transfer of Noble Group’s listing on the Singapore Exchange to New Noble because of an ongoing investigation of the company and one of its subsidiaries. It was previously anticipated that Noble Group’s listing status in Singapore would be transferred to New Noble and the company’s directors had received prior shareholder approvals to pursue the restructuring on this basis. For various reasons – importantly, the stance taken by the Singaporean authorities – the directors were prevented from implementing the scheme in the manner contemplated.

Noble Group’s directors consequently pursued its restructuring using liquidation on a light-touch basis. On 14 December 2018, the Bermuda court appointed a provisional liquidator with light-touch powers over Noble Group. The significance of this appointment lies in the fact that the provisional liquidator was not subject to the same constraints faced by the company’s directors. His mandate would be solely guided by the best interest of the creditors, while at the same time being subject to the supervision of the court and having the benefit of a stay of proceedings against the company.

In the context of Noble Group, the provisional liquidator was granted sufficient latitude to implement the transfer of the company’s assets to the New Noble, provided that the scheme creditors were not prejudiced, even if that meant that the New Noble would no longer have a listing on the Singapore Stock Exchange as previously envisaged. Today, the New Noble is fully operational and the restructuring was a success. Had the Bermuda court not appointed a provisional liquidator, the company would have undergone a compulsory liquidation, its business would have come to an end and creditors would have received a significantly smaller dividend.

Recent developments in provisional liquidation – HSBC v NewOcean

On 30 September 2022, the Court of Appeal for Bermuda (the Court) handed down its reasons for making a winding-up order, overturning the Bermuda Supreme Court, in Hong Kong and Shanghai Banking Corporation Ltd v NewOcean Energy Holdings Limited [2022] CA (Bda) 16 Civ (re NewOcean).

Companies have often sought the shelter of light-touch provisional liquidation in response to a creditor’s petition. The Court must then consider whether to adjourn the creditor’s petition and appoint joint provisional liquidators (JPLs) or to make an immediate winding-up order, dismissing the application for light-touch provisional liquidation.

This was precisely the situation in re NewOcean when the case was heard before the Supreme Court of Bermuda in December 2021 on a creditor’s petition. NewOcean Energy Holdings Limited (NewOcean) is a Hong Kong-listed, Bermuda incorporated, holding company for a Chinese energy, real estate and shipping group.

In 2020, NewOcean found itself in financial difficulties. It owed upwards of US$800 million to a number of banks. NewOcean entered into negotiations with over 30 bank creditors and tried to restructure its debt by way of parallel schemes of arrangement in Hong Kong and Bermuda. Those schemes were ultimately unsuccessful, having failed to win sufficient support of creditors. On 22 October 2021, the Hong Kong and Shanghai Banking Corporation Ltd (HSBC), one of the bank creditors, presented a petition for NewOcean’s winding up.

NewOcean had failed to respond to a statutory demand served by NewOcean and so was deemed insolvent. The first default to HSBC was on 2 September 2020, and so by the time the petition was heard at the end of 2021, NewOcean was clearly cash-flow insolvent as a matter of fact. NewOcean accepted this in its evidence but claimed that it was balance sheet solvent, namely, that despite its current liquidity issues the values of its assets exceeded its liabilities.

Relying on this fact, among others, NewOcean asked the Court to adjourn the petition and appoint JPLs on a light-touch basis. The Court did so, adjourning the petition. JPLs were appointed on 14 December 2021 and the petition was adjourned on a number of occasions thereafter.

By the end of March 2022, the extent to which creditor sentiment had hardened against NewOcean was very clear: 64.8 per cent of bank creditors opposed any further adjournment and supported an immediate winding-up order. In order to secure its restructuring, NewOcean needed 75 per cent of its creditors to approve its proposed scheme.

On 9 May 2022, the petition was adjourned again for reasons given by Mussenden J in a written judgment dated 31 May 2022. In that judgment, the Court held that four exceptional circumstances that were relied upon by NewOcean were still in existence:

• NewOcean had come before the Court in relation to a scheme previously, showing early engagement with its financial difficulties;
• there was a restructuring plan that could be pursued by NewOcean with the JPLs’ assistance;
• as a listed company with a number of licences issued by the Chinese government, an immediate winding-up order would be value-destructive; and
• NewOcean was a balance sheet-solvent company praying for a short adjournment to attempt a restructuring.

The 31 May 2022 judgment, in particular the decision to adjourn, was appealed by HSBC as the petitioning creditor. The appeal was heard on 25 July 2022, and on 26 July 2022 the Court allowed the appeal, making a winding-up order against NewOcean. The Court’s reasons were handed down on 30 September 2022.

The Court of Appeal found that, in the decision adjourning the petition dated 31 May 2022, the judge had failed to take into account (sufficiently or at all) a number of relevant considerations, listed below:

• the size of the majority required to restructure the company’s debt. NewOcean required 75 per cent of creditors in favour but had nearly 66 per cent of creditors against. The prospect of the requisite majority being met and therefore of a restructuring succeeding was remote;
• the fact that so many creditors were opposed to the adjournment. The creditors were experienced bankers and best placed to judge their own interest with no evidence that any creditors were likely to change their mind;
• the absence of a majority of creditors opposing the making of a winding up order;
• the requirements of exceptionality, and that the factors relied upon were not really exceptional;
• that the proposal was an adjournment for time to liquidate assets and that liquidations should really be supervised by liquidators;
• the history of the case, including the time since the defaults and the previous failures to implement similar schemes;
• the absence of any agreement to purchase group assets that would be likely to lead to the debt being repaid;
• NewOcean’s lack of up-to-date financial accounts; and
• the behaviour of the company’s management in breaching the order by failing to provide the JPLs with information, including current financial information, by failing to tell the JPLs about a winding up petition presented in Hong Kong by a trade creditor and by entering into share pledges without informing the JPLs.

The following key points of principle can be derived from the Court’s judgment:

• The interests of the creditors are paramount and it will be a truly exceptional case where the views of the majority are disregarded by the Court, although the Court will not approach this from a strictly arithmetic point of view.
• The percentage of creditors opposed to or in support of the winding-up petition takes on even greater significance when the restructuring plan prayed in aid of an adjournment requires 75 per cent in favour. Where it is clearly unlikely that majority will be achieved, an adjournment should not be granted.
• The absence of creditors opposed to the winding up should be sufficient in most cases to justify an immediate winding up.
• The maintenance of a light-touch provisional liquidation calls for complete transparency and cooperation from the company and non-disclosure of material matters is a strong factor in favour of an immediate winding-up.

This judgment clarifies and strengthens the Bermudian insolvency regime, by making clear the circumstances in which a provisional liquidation will be made and when the Court should instead make an immediate winding-up order. The Court has reaffirmed that the views of creditors take precedence over other considerations and made clear that those seeking to appoint provisional liquidators, must cooperate with them.

Cross-border support

There are two main types of cases involving cross-border support that frequently arise in Bermuda. First, there are cases in which a winding-up proceeding is commenced in Bermuda to run parallel to, or in tandem with, an insolvency proceeding taking place elsewhere for the purpose of restructuring a Bermuda-registered company. Specifically, there have been a number of cases where Bermuda companies have been the subject of Chapter 11 proceedings in the United States, in which the Bermuda court has appointed provisional liquidators with light-touch powers to supervise the directors in the conduct of the Chapter 11 proceedings and to report to the Bermuda court. The Bermuda court will generally defer to the Chapter 11 proceedings and give effect to the Chapter 11 plan or reorganisation. As mentioned above, the advantages of this approach include independent oversight of the restructuring by court officers (ie, the provisional liquidators) focused on protecting creditors’ interests and achieving a stay of proceedings against the company which is triggered by the appointment of provisional liquidators.

Second, there are cases in which a foreign office holder (eg, a liquidator) applies to the Bermuda court for relief to assist with a liquidation taking place outside Bermuda, for instance, by asking the Bermuda court to order Bermuda entities to produce information or orders compelling individuals in Bermuda to provide witness evidence. The Bermuda court may exercise its common law power to assist in these cases, and has demonstrated a general willingness to do so, provided that the foreign office holder could obtain the same relief from the court in the country where the liquidation is taking place.

In relation to the topic of cross-border support, the Bermuda court does not have jurisdiction to wind up overseas companies, save for certain statutory exceptions. In the context of a group of companies, this restriction means that the Bermuda court lacks jurisdiction to wind up a multinational group of companies, as it is not possible to obtain an ancillary winding-up order from the Bermuda court in respect of a company within the corporate group that is domiciled outside Bermuda.

On the other hand, where the Bermuda court has appointed liquidators to wind up a Bermuda company, the liquidators may commence ancillary insolvency proceedings in other jurisdictions that permit ancillary proceedings (eg, in England or Hong Kong).

The Supreme Court of Bermuda has issued practice directions relating to cross-border insolvencies, modelled on the draft guidelines adopted by the Judicial Insolvency Network in October 2016.

Looking ahead

During the covid-19 pandemic, many creditors took a pragmatic, commercial approach to enforcement, allowing their debtors time and flexibility where they were struggling to service their debt. That forbearance may be reaching an end as the acute effects of the pandemic are subsiding. Businesses that are unable to service their debt now are perhaps less likely to have an improved financial outlook in the medium term, given the prevailing economic conditions, and so must move proactively to restructure that debt.

Creditors’ patience is not endless and we are seeing an increase in formal enforcement and insolvency action in Bermuda, particularly in the shipping, energy and real estate sectors (with some notable examples arising from the Asian markets). Creditors are aware that businesses in financial distress may have a number of creditors seeking to enforce. There is a perception of a tangible ‘first-mover’ advantage in some of these cases, in that a petitioning creditor may enjoy more control over the timing of the early stages of a formal insolvency process than other supporting creditors.

We expect that, in the near future, the provisional liquidation jurisdiction and its scope will be clarified, which is a welcome development given its prominence in the Bermuda insolvency regime. In the meantime, 2023 promises to be a busy year for the Bermudian restructuring industry.

Notes