The island group is located in the Atlantic Ocean, approximately 760 miles due east of Cape Hatteras, North Carolina. Surrounded by coral reefs and the Gulf Stream, Bermuda remains a popular destination for tourists but its infrastructure, flexible and innovative corporate structures and strong regulatory environment have made it a leading offshore jurisdiction for company incorporations, including for a number of companies listed on the main New York and Hong Kong stock exchanges. Despite its small size, Bermuda has a reputation as a financial centre, including as the third-largest reinsurance centre, after London and New York, and the BSX is the leading exchange for the listing of insurance-linked securities. Bermuda is also a longstanding jurisdiction for the formation of trusts and home to a dozen or so professional trust companies.
From an enforcement-related perspective, Bermuda offers a system of law based upon English and Welsh common law and a body of relevant statutes that will be familiar to many English and Commonwealth lawyers. The system for enforcement of foreign judgments and arbitral awards is operated under the supervision of the Commercial Court, which was established as a specialist division of the Bermuda Supreme Court in 2006. There are two dedicated Commercial Court justices at any one time and a Court of Appeal, which sits three times a year, comprises many leading English, Caribbean and Bermuda judges. The current President of the Court of Appeal is Sir Christopher Clarke, a former judge of the English Court of Appeal. Appeals from the Court of Appeal for Bermuda are to the Judicial Committee of the Privy Council in London.
2020 – A Challenging Year
2019 was a good year for Bermuda in many ways, with healthy business and tourism figures, and a growing sense of optimism about the future. To many commentators, 2020 looked all set to be a continuation of this trend. The impact of the emergency phase of COVID-19, as elsewhere, has been very significant indeed. The pandemic has led to a number of restrictions on ordinary and working life, including six weeks of strict “Shelter in Place” regulations, and a drastic change in working practices, as businesses, and the courts, have moved to remote working, and physical meetings and hearings ceased to be possible for many months.
At the time of writing, those restrictions, originally imposed out of necessity, are being eased and life is slowly returning to a phase of “new normal”, as the Bermuda government has described it. On 1 July 2020, Bermuda entered into Phase 4 of its reopening, with government departments mostly fully operational and mandated working from home ending. It is therefore possible at this stage to now examine what the future may hold in relation to issues that may have some bearing on the enforcement of judgments and arbitral awards over the next 12 months; in terms of new models of working for the courts, changes in local legislation and identifying developing trends.
Dispute Resolution in the COVID-19 Context
Like most other small jurisdictions, such as Cayman, BVI and the Isle of Man, managing the effects of COVID-19 and the need for physical distancing measures have presented a significant challenge for the Bermuda courts, especially in a jurisdiction where entirely video-linked hearings (albeit not the giving of witness evidence remotely, which was an established practice) were unknown and the administrative workings of the court are not online, with filings taking place by hand rather than electronically. This has meant that both the Bermuda courts and Bermuda legal practitioners have had to adapt quickly in order to be able to provide a continuation of service for court users and clients alike.
In the early stages of the pandemic, the Bermuda courts suspended physical hearings and all outstanding court proceedings were adjourned administratively. The focus at the time was to deal with the listing and hearing of the most urgent matters, such as injunction applications, and dealing with less controversial applications such as validation orders in insolvency proceedings “on the papers”. The Supreme Court swiftly moved to a mixture of telephone and virtual hearings, with attorneys and judges working from home. An increasing variety of cases have been dealt with in this way, and members of the Appleby Dispute Resolution team have been involved in virtual hearings for, amongst other things, an ex parte worldwide freezing order application to freeze BMD104 million of assets; a ground-breaking three-day specific discovery application in a high-value trust case in the Supreme Court, concerning multiple parties in different time zones, all represented by English leading counsel, appearing via a third-party maintained Zoom hearing with a live electronic transcript; and a convening hearing conducted by telephone and a sanction hearing by Zoom leading to the approval of a reconstruction scheme of arrangement for telecommunications company Digicel pursuant to Sections 99 and 101 of the Companies Act 1981. The Court of Appeal made arrangements to conduct the entirety of its June 2020 session remotely via Zoom with the Justices participating from their homes in England and Cayman and the hearings streamed live on YouTube. The Appleby Dispute Resolution team took part in a two-day appeal in a significant disclosure case with English leading counsel also appearing on the video link.
These types of virtual hearing also throw up considerable challenges of their own, as well as the technical aspects. They have the benefit (and downside) of parties being able to share or file documents during the hearing, including amended orders, further submissions and additional authorities. This requires careful case management from the judge and would benefit from a more detailed practice direction. There is also the logistical challenge of using an electronic bundle. Additionally, thought has to be given to the fatigue that comes from lengthy video calls; often involving more frequent breaks than would usually be the case. In summary, the Bermuda Commercial Court has acted to address these matters and ensure that the technology is available and utilised to allow commercial litigation to continue despite COVID-19.
As Bermuda enters the final phase of its exit from lockdown, the Bermuda courts have continued to utilise virtual hearings in matters where there are overseas parties and attorneys, or where English leading counsel are instructed. This is likely to continue for at least a number of months while travel globally is restricted. It remains to be seen what lasting effect this will have on court procedures as the precedent has now been set for successful interlocutory hearings to be held in cases that otherwise would have required multiple parties, lawyers and leading counsel to attend in Bermuda. Physical hearings have also resumed and the priority for the Court has changed from simply dealing with urgent matters to relisting the cases adjourned in late March 2020 and efficiently working through the backlog. The Supreme Court Registry has also reopened to the public to enable new filings and to allow inspection of the cause book by appointment.
Overall, there is no reason to anticipate (unless there is a significant spike in the pandemic) that enforcement of a judgment or arbitral award in Bermuda will be made any more complicated, or be substantially delayed, as a result of the effects of COVID-19 restrictions.
Legislative Developments
In addition, the Bermuda government has not been idle in drafting new legislation to update Bermuda’s trust laws, including enhancements to Bermuda’s “firewall” provisions that prevent the enforcement of non-monetary judgments against a Bermuda trust (such as a variation of trust made by the English High Court in a divorce case or where a foreign court has dealt with a forced heirship claim). The Trusts (Special Provisions) Amendment Act 2020 (Bill) was passed in the House of Assembly on its second reading on 24 July 2020. The Bill will now proceed to Bermuda’s upper house, the Senate, for review before passing into law.
There are no statutory mechanisms in Bermuda for the enforcement of foreign judgments in ancillary relief proceedings that purport to vary offshore trusts or to reorganise beneficial interests under them, and nor has Bermuda adopted any form of “comity” route to enforcement of ancillary relief proceedings. Indeed, Section 11 of the Trusts (Special Provisions) Act 1989 (Principal Act) prevents the enforcement of foreign judgments in matrimonial proceedings varying offshore trusts.
In summary, where a Bermuda trust is properly constituted, the so-called firewall provisions are intended to (i) protect against foreign law application relating to heirship rights, matrimonial/other familial relationship, or matters of insolvency, to the determination of any question concerning a Bermuda trust; (ii) exclude the application of foreign law to questions relating to the validity, construction, effects or administration of a Bermuda trust; and (iii) prevent the enforcement of foreign orders in relation to property held in a Bermuda trust (with the exception of immovable property outside Bermuda) that are inconsistent with Bermuda law.
The Bill enhances these protections by the following measures.
Adding a new Section 1A
The new section improves certain definitions in the Principal Act, such as “foreign court” (to cover foreign arbitration and other tribunal determinations) and “foreign order” (to include interim or final judgments, awards, orders or other decisions of a foreign court). Of particular importance in the context of firewall provisions is a new definition for ”Bermuda trust”, as it has been specifically tailored to allow for the possibility that Bermuda law may apply to a severable part of a trust only, in accordance with Section 8 of the Principal Act.
Amending Section 10
The amendment repeals and replaces Section 10 in order to enhance the effectiveness of firewall protections under that section. The revised approach as contained in the new Section 10 is intended to provide for an exclusion of foreign law where appropriate as opposed to providing for a blanket application of Bermuda law, subject to exceptions. This is accomplished by specifying the circumstances under which any foreign law shall be excluded from application to a Bermuda trust.
The new Section 10(3) will clearly state that no foreign law shall apply to the determination of any question concerning the validity, construction, effects or administration of a Bermuda trust. This will include any matters concerning the appointment of trustees, rights and duties of trustees, powers of delegation, investment and accumulation of income, duration of the trust, relationship between trustees and beneficiaries and any liability, variation or termination of the trust and distribution of trust assets. The firewall protection afforded under the new Section 10 will not apply to foreign land or in cases where foreign law has been chosen to apply to any severable aspect of a Bermuda trust in accordance with Section 8 of the Principal Act.
Amending Section 11
The amendment repeals and replaces Section 11 in order to supplement the protective measures under the new Section 10 by preventing the enforcement or recognition of any order of a foreign court where such order is in conflict with the provisions of the new Section 11.
Consequential amendments
The amendments repeal and replace Section 36G of the Conveyancing Act 1983 (Bermuda’s fraudulent transfer legislation) so as to simplify the language and to allow for consistency with the updates to the firewall provisions of the Principal Act. This will clarify that Bermuda’s fraudulent transfer legislation will not enable a creditor’s claim if the claim is precluded by Bermuda’s firewall provisions.
Standstill Agreements and Statutory Moratoria
As might be expected in a time of economic uncertainty, Bermuda has already seen an uptick in insolvency-related applications, especially in the context of restructuring. How this affects enforcement options relates principally to the effect of the statutory moratorium on the creditors of an insolvent company. The statutory moratorium in Bermuda represents a prohibition of legal proceedings being continued or commenced against the debtor company without leave of the court and occurs on the appointment of a provisional liquidator following the presentation of a winding-up petition.
This can arise in two ways. Firstly, where a petition has been presented and a petitioning creditor, often supported by a group of creditors, applies for the appointment of a provisional liquidator on the basis that there is a risk of dissipation of the company’s assets if the board of directors is left in place. In this scenario, the order of appointment removes the board, management of the company is transferred to the provisional liquidator and the moratorium automatically takes effect to protect the company from action by other creditors (albeit not secure creditors – see below).
The second means is restructuring-focused. As Bermuda has no direct equivalent to administration proceedings in England and Wales or to US Chapter 11 proceedings, this legislative gap has been filled by the practice of the Bermuda Supreme Court over the last two decades in imaginatively interpreting its power to appoint liquidators under the Companies Act to include the power to appoint provisional liquidators for restructuring purposes. This is a particularly useful option for a Bermuda company where the directors believe that the company is viable and there is a high degree of creditor support for restructuring of the company’s debt, but not all the creditors are signed up to this approach or can be persuaded to enter into a standstill agreement.
In this form of “light touch” provisional liquidation, a petition is presented by the company (exceptionally it could be by a creditor), an application is made for the appointment of a provisional liquidator, and upon that appointment, which will be with limited powers (typically to monitor and advise on restructuring options), the board of directors remains in place to deal with the day-to-day management of the company and to lead the restructuring. The scope of this form of provisional liquidation has proven to be quite wide and has been used:
- to promote a scheme of arrangement on behalf of a company whereby the company makes a compromise or arrangement with its members and/or creditors pursuant to Section 99 of the Companies Act;
- with very limited powers to oversee the actions of the board of directors while parallel Chapter 11 or Chapter 15 proceedings are pursued in the USA; and
- to explore other restructuring options such as an equity injection by a “white knight investor” or a purchase of distressed debt by a third party.
Regardless of the form of restructuring, the company obtains the benefit of the statutory moratorium during the period that the provisional liquidator is in office. The benefit to creditors is that the company is now operating under the supervision of a provisional liquidator and the court.
Whether the proceedings are company or creditor-led, the procedure is the same. A petition is filed and an urgent application, usually made without notice, is filed for the appointment of a provisional liquidator. The moratorium comes into effect on appointment. Where the petition has been filed for restructuring purposes, the proceedings will be adjourned. It should be noted, however, that the moratorium does not impact the rights of secured creditors to enforce their security against the company provided that they can rely upon “self-help” provisions contained in the relevant security documents and do not require recourse to legal proceedings to do so.
Another burgeoning trend is the use of standstill agreements between a creditor seeking to enforce a debt, including judgment debts, and the company. This works as follows: where an event of default under a loan agreement has already occurred, or where it is likely to occur in the future due to cash constraints on the company, the company and its creditors can enter into a standstill agreement to suspend either the creditor’s rights of enforcement (if the default has already occurred) or the obligations of payment (if default will otherwise occur in the near future). This will be an entirely consensual private contractual arrangement between the creditors and the debtor company. Thus the creditor will retain and protect their enforcement rights but avoid the need to immediately pursue the collective route of insolvency proceedings.
There is no particular specified form that a standstill agreement must take in Bermuda, but it will need to follow usual common law contractual principles; there will need to be mutual benefit to the parties to the agreement and the agreement must have the certainty of a specified period (the standstill period). The agreement should also fix the amount of debts owed to the creditors of the company as at a particular date (the standstill date).
From the authors’ experience, standstill agreements will frequently be relatively short in duration (often two to three months), usually at the creditors’ insistence in order to allow them to maintain leverage. It is common for agreements to be extended by mutual consent where genuine progress is being made, although the negotiation of extensions is likely to involve demands from creditors for additional enhanced levels of information provision or other covenants.
Arbitration
Bermuda continues to be an arbitration and mediation-friendly jurisdiction. The jurisdiction has a modern international arbitration statute that is based on a “model law” adopted by a large number of other jurisdictions. There is also an active Bermuda branch of the Chartered Institute of Arbitrators (CIArb), and a strong local body of experienced arbitration lawyers, as well as an available pool of senior qualified arbitrators, many of whom are CIArb fellows, with extensive experience in areas as diverse as contract law, trusts, construction and insurance disputes.
In order to promote the jurisdiction as an arbitral centre, on 24 July 2020 the Bermuda government announced plans to create an international arbitration centre in Hamilton, the capital of Bermuda. This is on the basis that the jurisdiction is well placed geographically, in light of its unique location, and proximity and easy connections to London and New York, to attract arbitration work, and has a modern legislative arbitration framework. It is hoped that this development will allow a regional arbitration centre to develop to complement Bermuda’s existing reputation for using international arbitration to resolve insurance and reinsurance contract disputes.
Turning specifically to enforcement-related issues, the Bermuda courts have continued to take a robust position in relation to challenges by defendants to the validity of awards. In the recent Supreme Court judgment in CAT SA v Priosma Limited [2019] Bda LR 69, the Chief Justice emphasised “the predisposition” in favour of enforcement of New York Convention arbitral awards contained in the Bermuda International Conciliation and Arbitration Act 1993. He described this policy as one “which favours finality in arbitration awards”. Where, as in this case, there was an appeal pending before a court in the seat of the arbitration challenging the validity of the award, the Court determined that a judgment debtor may be ordered to provide security in the full amount of the award and costs as a condition of granting a stay of enforcement proceedings in Bermuda. It was held that the Bermuda court in the exercise of its discretion will consider (i) the strength of the argument that the award is invalid, and (ii) whether enforcement of the award will be more difficult if enforcement is delayed.
