I INSOLVENCY LAW, POLICY AND PROCEDURE
i Statutory framework and substantive law
Bermuda is an overseas territory of the United Kingdom and its legal system is based on English common law, which comprises of statute and case law. Decisions of the English courts are not binding on a Bermuda court, but they are highly persuasive. Generally speaking, the decisions of the Privy Council are, however, binding on the Bermuda courts unless they are based on a reference from a jurisdiction with significantly different statutory provisions. The Privy Council is Bermuda’s highest appellate court and sits in London.
Bermuda insolvency law’s statutory framework consists of statute and common law. The principal statutory provisions governing corporate insolvency and restructuring are contained in Part XIII of the Companies Act 1981 (Companies Act), and are supported by the Companies (Winding-Up) Rules 1982 (Companies Winding-Up Rules). The Companies Act is based on the UK Companies Act 1948 and the Companies Winding-Up Rules are based on the UK Companies (Winding-Up) Rules 1949.
At the heart of Bermuda insolvency law is the pari passu treatment of unsecured creditors – that is, where a company has insufficient assets to satisfy its debts to unsecured creditors, each unsecure creditor would receive an equal distribution on a rateable basis according to the quantum of their claim.2 Secured creditors are generally unaffected by insolvency proceedings in Bermuda and may enforce its security in accordance with the terms of the governing security instrument3 (although they have standing to present winding-up petitions).
The Companies Act provides the ability to challenge certain transactions executed by insolvent companies through avoidance or ‘clawback’ provisions, which 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.
ii Policy
Bermuda is a creditor-friendly jurisdiction. A key feature of the insolvency regime is the Bermuda court’s development of a rescue culture. Where a company is insolvent, rather than making a winding-up order immediately upon hearing the petition, the Bermuda court often appoints provisional liquidators on a ‘soft’ or ‘light touch’ basis whose primary focus is to assist the company with exploring the prospects of pursuing a restructuring plan. A provisional liquidator is an officer of the court (typically an insolvency practitioner or accountant) appointed for a limited purpose with clearly defined powers (known as ‘light touch powers’), which may be used where there is a prospect of ‘rescuing’ an insolvent company through restructuring without the displacement of all of the Board’s executive functions. Restructurings are often achieved through a scheme of arrangement. In a ‘soft’ liquidation, a company may continue its business operations as usual, pending the implementation of a restructuring plan.
Through the appointment of provisional liquidators with soft touch powers and the court’s broad discretion to determine the allocation of powers and responsibilities between provisional liquidators and company directors, the court continues to create ‘lifelines’ for a healthy recovery of distressed companies and for the protection of creditor interests.
Another distinguishing element of the Bermuda insolvency landscape is the willingness of the Bermuda court to work in tandem with and to lend assistance to foreign courts and Bermuda companies having interests in other jurisdictions where there is a substantial international creditor or asset base.
iii Insolvency procedures
The insolvency and rescue procedures available under Bermuda law are:
a liquidation under the supervision of the Bermuda court (also known as compulsory liquidation);
b provisional liquidation on a ‘full powers’ basis;
c provisional liquidation for the purpose of restructuring; and
d schemes of arrangement.
Liquidation under the supervision of the court
Typically, a creditor seeking to place a debtor into insolvent winding up in Bermuda will present a petition to the court seeking such relief on the grounds that that company is unable to pay its debts; or it is just and equitable for the company to be wound up. Once appointed, the liquidator must obtain the sanction of the court or the committee of inspection before taking certain actions. Upon the final distribution of the assets to the creditors or the members, the liquidator must obtain an order from the court for its release and for the dissolution of the company.
Provisional liquidation on a full powers’ basis
Where there is a risk that the company’s assets may be dissipated prior to the hearing of the petition, a provisional liquidator may be appointed on an ex parte basis to take control of and safeguard the assets. A court typically appoints a provisional liquidation on a full powers’ basis where there is a suspicion of fraud or where cogent evident exists demonstrating a likelihood that the directors may dispose of assets if tipped off about an impending winding-up petition. This form of provisional liquidation is known as ‘provisional liquidation on a full powers’ basis’ contrasted with provisional liquidation on a ‘soft’ or ‘light-touch’ basis (discussed below).
Provisional liquidation for the purpose of restructuring
As indicated above, where a company is insolvent, rather than making a winding-up order immediately upon hearing the petition, the Bermuda court often appoints provisional liquidators on a ‘soft’ or ‘light touch’ basis. Authority for provisional liquidators with light-touch powers is not found in the Companies Act or any other legislation, but rather in the Bermuda common law. The Bermuda court has used provisional liquidation as a tool to restructure the affairs of a company, preserve value in a business and to provide a platform for distressed companies to recover – which together promotes the sustainability and success of cross-border business.
The provisional liquidators are subject to the supervision of the court and they would typically provide periodic updates to the court on the status of a restructuring in the form of reports.4
Schemes of arrangement
A scheme of arrangement is the only court-supervised restructuring or 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 courts 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 and the statutory voting threshold has been attained, a further application is made to the court to approve or ‘sanction’ the scheme.
Classes of creditors are determined by the requirement for a class to be confined to those persons whose rights (as affected by the proposed scheme) are not so dissimilar as to make it impossible for them to consult together with a view to their common interest.
For a scheme to be presented to the Bermuda courts for sanction, a majority in number representing 50 per cent in value of the creditors or members present and voting either in person or by proxy at each creditors’ or members’ class meeting, as the case may be, must approve the scheme.
‘Cram up’ or ‘cram down’ (as those terms are generally understood in reorganisation proceedings) of a scheme of arrangement on to any dissenting class of creditors or members is not permitted in a Bermuda scheme of arrangement. To the extent that any single class of affected creditors or members fails to approve the scheme of arrangement by the requisite majority, the scheme will fail in its totality.
iv Starting proceedings
Statutory winding-up proceedings can be commenced by any one or more of the following:
a the company itself;
b creditors, including any contingent or prospective creditors. However, the court will not give a hearing to a winding up petition presented by a contingent or prospective creditor until (1) security for costs has been given; and (2) a prima facie case for winding-up has been established;
c contributories, subject to certain restrictions; and
d regulator (if applicable).5
The mode of beginning winding -up proceedings is by filing a winding-up petition with the Supreme Court of Bermuda, supported by a standard form affidavit verifying the contents of the petition. 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 obtain a certificate of compliance from the Registrar of the Supreme Court certifying that the petition is ready for hearing because it has been properly filed, served and advertised in an appointed newspaper.
Those 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.
On hearing a winding-up petition, the court may grant, dismiss or adjourn the petition, or make any other order it thinks fit. It is unlikely that the court would grant a stay of winding-up proceedings, save in exceptional circumstances. However, the court regularly adjourns winding-up petitions. It is now well established that adjournments can be granted to facilitate a proposed restructuring by provisional liquidators who may be appointed under Section 170 of the Companies Act 1981. This is where the court is satisfied that a restructuring will produce a better result than a winding up for creditors. As stated by Kawaley CJ in Z-OBEE Holdings Ltd [2017] Bda LR 19: ‘This provision 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.’ Benefits of this approach include (1) the stay of proceedings against the company triggered by the appointment of provisional liquidators; and (2) independent oversight of the restructuring by court officers focused on protecting creditor interests.
v Control of insolvency proceedings
The court orders the winding up of the company by one or more liquidators when it grants a winding-up petition. Liquidators are officers of the court and, accordingly, under the supervision of the court. They are commonly appointed from accountancy firms. The Official Receiver, a public officer, acts as a liquidator when nobody else is appointed. Following the making of a winding-up order, the court’s role is primarily supervisory. Liquidators can return to court for directions regarding any particular matter arising in the winding up and they require approval of either the court or committee of inspection before exercising certain of their statutory powers, such as deciding to bring or defend legal proceedings on behalf of the company.
In directing insolvency proceedings, the court will be guided by the main purpose of its winding-up jurisdiction; namely, protecting the best interests of the general body of unsecured creditors.
When the court winds up a company and appoints liquidators, the board of directors becomes functus officio. This should be distinguished from the situation when the court adjourns the winding-up petition and appoints provisional liquidators to facilitate a restructuring (as discussed above). In the latter case, the court may, in appropriate circumstances, reserve powers of management to the existing board for the purpose of implementing a restructuring and give the provisional liquidators ‘soft touch’ powers to monitor the board. For example, it is necessary to keep the directors in place when a company is subject to proceedings under Chapter 11 of the US Bankruptcy Code and parallel proceedings in Bermuda, because Chapter 11 requires a debtor in possession – meaning the directors.
vi Special regimes
The Companies Act 1981 is applicable to the insolvencies or restructurings of all corporate entities in Bermuda, save to the extent that its provisions are amended by other legislation that applies to specific types of corporate entities, including the Insurance Act 1978 (for licensed insurance companies), the Segregated Accounts Companies Act 2000 (for licensed segregated accounts companies) and, once in force, the Banking (Special Resolution Regime) Act 2016 (for licensed banks).
Under the Insurance Act 1978, a liquidator is required to carry on the long term business of an insurer with a view to its being transferred as a going concern to another insurer, unless the court orders otherwise.
The Segregated Accounts Companies Act 2000 allows for the appointment of a receiver over the assets and liabilities of an insolvent segregated account; the court will direct the receiver to manage the segregated account for the purposes of the management, sale, rehabilitation, run-off or termination of its business, or distribution of assets.
There are no special insolvency rules relating to corporate groups. To achieve practical efficiency, insolvencies of a group of companies may occur at the same time. Where this occurs, each company within the group is treated separately and is subject to separate legal proceedings. Assets of the companies within the group are not pooled for distribution, unless a scheme of arrangement has been approved or another consensual arrangement between the group and its creditors.
vii Cross-border issues
The Bermuda court does not have jurisdiction to wind up an overseas company, save for certain statutory exceptions: PricewaterhouseCoopers v. Saad Investments Company Limited [2014] UKPC 35. Accordingly, it is generally not possible to obtain an ancillary winding-up order from the Bermuda Court in respect of a company domiciled outside of Bermuda. Thus, forum shopping ‘in Bermuda’ is not possible or relevant. On the other hand, if the main insolvency proceedings are in Bermuda, liquidators appointed by the Bermuda court may commence ancillary insolvency proceedings in other jurisdictions that permit ancillary proceedings, such as Hong Kong and England. The Bermuda court is willing to assist foreign courts where it has the common law power to do so. However, that power cannot be used to grant relief to a foreign liquidator in circumstances where the court in the country where the liquidation is taking place could not have granted such relief: Singularis Holdings Limited v. PricewaterhouseCoopers [2014] UKPC 36 (Bermuda court could not order production of information to liquidator appointed in Cayman when no equivalent order could have been made by the Cayman court).
II INSOLVENCY METRICS
There is no information publicly available on companies restructuring their debts or defaulting.
In 2019, Bermuda witnessed 23 compulsory winding-up petitions, five of which converted into court orders. So far, 2020 is on a similar trajectory, with nine petitions thus far. Petitions in Bermuda that do convert generally do so in a swift and orderly fashion, with many being processed within a month, quicker than anywhere else in the offshore region.
There are cases currently pending in which a Bermuda company is subject to insolvency proceedings outside of Bermuda and parallel proceedings in Bermuda but, as discussed above, the Bermuda court does not have jurisdiction to wind up foreign companies and, so, Bermuda is not an ‘ancillary jurisdiction’ in a true sense. There are no reported cases in the last 12 months involving the Bermuda court assisting, or being called upon to assist, foreign liquidators.
III PLENARY INSOLVENCY PROCEEDINGS
i GCX Limited
GCX Limited was registered and incorporated in Bermuda. It offered network services through an underwater cable system which powered digital transformation for enterprises, new media providers and telecoms carriers. It was an indirectly owned subsidiary of Reliance Communications Limited – one of India’s largest telecommunications companies – which was placed in bankruptcy proceedings in India.
The company ran into financial difficulties in 2019, which resulted in its inability to repay its bondholders. GCX Limited filed for (voluntary) Chapter 11 Bankruptcy Protection in the United States Bankruptcy Court for the District of Delaware and, at the same time, (the company and its affiliates) filed a prepackaged Chapter 11 Plan of Reorganisation.
Shortly after, parallel winding-up proceedings were commenced in Bermuda. Although an application for the appointment of provisional liquidators had been filed, the application was never heard – given certain challenges around obtaining approvals to transfer funds to the potential provisional liquidator.
The Plan contemplated a swap of GCX’s secured bonds for equity in a newly reorganised entity and the cancellation of existing shareholder interest in GCX Limited. The US Bankruptcy Court found that the Plan was proposed with the legitimate purpose of maximising the value of the company’s estate. Under the Plan, GCX was authorised to continue to operate its business and to manage its property as a debtor-in-possession.
The Plan proposed (and it was found by the US Bankruptcy Court) that the claims of general unsecured creditors of the debtors would be unimpaired (i.e., such creditors would receive the amount of their allowed claims in full). Those persons whose claims and interests would be impaired by the Plan comprised (1) GCX interests; (2) the claims of senior secured noteholders; and (3) the holders of subordinated securities claims.
The Plan was confirmed in spite of an objection raised by Reliance Communications Limited and the Bermuda Court granted an order validating and implementing certain aspects of the Plan. GCX was considered to be one of the most successful cross-border restructurings in 2019. This case also demonstrates the willingness of the Bermuda court to co-operate with foreign jurisdictions (and where possible, align its insolvency processes to the extent possible) in order to provide a platform for failing businesses to recover and to support cross-border business.
ii Agritrade Resources Limited
Agritrade Resources Limited is an investment holding company that was incorporated in Bermuda and listed on the Main Board of the Hong Kong Stock Exchange. It invests internationally in the coal mining, energy and shipping industries. On 1 June 2020, the Supreme Court of Bermuda appointed joint provisional liquidators (JPLs) over the company with soft touch powers to facilitate a potential restructuring; and issued Letters of Request to the High Court of Hong Kong and the Supreme Court of Singapore, to enable the JPLs to be recognised in those jurisdictions.
On 14 May 2020, TA Genco Limited and TA Private Debt III Limited filed separate winding-up petitions in the Supreme Court of Bermuda, claiming petition debts totalling approximately 200 Bermudian dollar million under facility agreements; and, at the same time, applied for the immediate appointment of ‘soft touch’ joint provisional liquidators to supervise the management of the company and assist in the formulation and implementation of any scheme of arrangement.
On 19 May 2020, Golden Equator Capital Pte Ltd filed a separate winding-up petition in Bermuda, and an identical winding up petition in the High Court of Hong Kong and, at the same time, applied for the immediate appointment of JPLs with full-powers to replace the company’s existing management. GE claimed that it was a creditor for approximately 60 Bermudian dollar million under a facility agreement.
The company did not dispute that it was cash flow insolvent, and it accepted that JPLs should be appointed. While the company’s assets more than double its liabilities, its finances have been detrimentally affected by the serious financial difficulties facing its major shareholder, the Singapore based company Agritrade International Pte Ltd (AIPL). As a result of the interconnectedness of the financial obligations between the companies in the Agritrade group, AIPL’s defaults caused a significant decline in the company’s share price and triggered cross-defaults on the part of the company. The company has insufficient short-term cash flow to meet the cross-defaults.
On 20 May 2020, the company filed an application in the Singapore High Court for a moratorium under Section 210 of the Singapore Companies Act, to preserve the possibility of a restructuring. This achieved a 30-day moratorium on proceedings against the company pending the hearing of its application and therefore provided the company with temporary relief from further creditor action in Singapore, its COMI.
Since February 2020, the company, the petitioners and a consortium of white knight investors led by HC Holdings Limited, had been working to try to agree terms for restructuring AIPL’s debts. This contemplated injecting funds into the company, with a view towards sustaining the company’s business and resolving its outstanding liabilities. The parties entered into a non-binding term sheet, agreeing to use best endeavours to reach a final agreement by 14 May 2020. The TA companies filed their petitions upon expiry of that deadline when no agreement had been reached.
At the substantive hearing before Bermuda’s Chief Justice, there was a dispute as to whether the joint provisional liquidators should have ‘soft powers’ or full powers. A ‘soft touch’ appointment is where the Bermuda court appoints an officer (typically an insolvency practitioner) for a limited purpose with clearly defined powers which may be used where there is a prospect of ‘rescuing’ an insolvent company (including a company in the zone of insolvency) through restructuring without the displacement of all of the board’s executive functions. In a ‘soft’ liquidation, a company may continue its business operations as usual, pending the implementation of a restructuring plan. By contrast, where liquidators are appointed with full powers, they displace the board of directors and take on the powers of management as set out in the order appointing them.
The Chief Justice decided to make a ‘light touch’ appointment on the basis that the appointing of provisional liquidators with ‘soft powers’ was likely to be more effective in the implementation of any restructuring and in the interests of the creditors of the company. In this regard, he relied on evidence filed in support of the ‘light touch’ appointment to the effect that management possesses intrinsic knowledge of the company and its operations and that management’s involvement in the restructuring would be necessary.
A novel point that arose at the hearing was whether the provisional liquidators appointed on a ‘light touch’ basis to supervise management may, at their discretion, dismiss management. The Chief Justice found that declined to include this power on the part of the company’s provisional liquidators. He viewed such a power as an attempt to enlarge the powers of provisional liquidators which, he said, is not contemplated by Section 170(3) of the Companies Act 1981 – as that provision speaks only to the court making an order of appointment that ‘limits’ the powers of provisional liquidators.
IV ANCILLARY INSOLVENCY PROCEEDINGS
The Bermuda court does not have jurisdiction to wind up foreign companies and, so, Bermuda is not an ‘ancillary jurisdiction’ in a true sense. There are no reported cases in the last 12 months involving the Bermuda court assisting, or being called upon to assist, foreign liquidators.
V TRENDS
The unfortunate economic effects of the covid-19 pandemic are being felt throughout the world, as many companies are now being forced to visit the ‘drawing board’. Critical discussions about the implications of a decline in business, altering the existing business model to adapt to ‘the new norm’, restructuring existing or imminent debts and avoiding liquidation have been an ongoing theme for insolvency lawyers in recent months. It is anticipated that the parameters of Bermuda’s pro-restructuring regime will undoubtedly be tested in the immediate future and particular over the next twelve months. The flexible nature of ‘light touch’ provisional liquidation will likely reveal itself to be a critical lifeline for many companies and for the sustainability of cross-border business.
The information provided in this publication is general and may not apply in a specific situation, nor does it necessarily represent the views of authors’ firms or their clients. Legal advice should always be sought before taking any legal action based on the information provided.
