There has been steady activity in the Bermuda restructuring market over the last 12 months. Commodities trader Noble Group Limited, whose shares were listed on the Singapore Stock Exchange, completed a USD3.5 billion debt-for equity restructuring by way of parallel schemes of arrangement with its creditors in England and Bermuda. The appointment by the Bermuda Court of a provisional liquidator on 14 December 2018 to implement the final steps of the restructuring saved the deal at the last minute in circumstances where Singapore regulatory authorities had declined permission to transfer the company's listing status to a newly incorporated "New Noble" entity.
Up Energy Development Group Limited, the Hong Kong-listed HoldCo of a coking coal miner and processor based in Xinjian in the PRC, is also in the final stages of an insolvent restructuring by way of a scheme of arrangement, under the supervision of joint provisional liquidators in Hong Kong and Bermuda. The scheme was approved by the creditors at a meeting held in Hong Kong on 30 September 2019 and is expected to receive the sanction of the Bermuda and Hong Kong courts before the end of the year.
Ongoing disruptions in global credit markets and tepid investor activism are reflected – at least for the time being – in the relative hesitancy and restraint being exercised by creditors of distressed companies in Bermuda. The result has been a moderate downturn in enforcement action in the Bermuda courts in 2019. With yet further slowing of the Chinese economy, precipitated by the US-led trade war and domestic political turmoil, we are likely to see an uptick in insolvency and restructuring filings in Bermuda during 2020.
Legislative reforms effective from 9 July 2018 have restored the availability of derivative actions against overseas directors of Bermuda companies. The amendments bring Bermuda into line with the derivative action regimes in the Cayman Islands and British Virgin Islands and allow an additional avenue of recourse for aggrieved shareholders whilst, at the same time, protecting directors against frivolous or vexatious shareholder claims. The first reported decisions on these provisions were released in June and July of 2019.
There have been no noteworthy discernible changes or trends in this market over the last 12 months.
Bermuda's corporate insolvency regime is governed by Part XIII of the Companies Act 1981 (the 'Act') and the Companies (Winding Up) Rules 1982 (the "Rules"). Somewhat confusingly, the treatment of creditor claims must be discerned from various pieces of legislation, including the Bankruptcy Act 1989, the Employment Act 2000 and the Insurance Act 1978.
Part XIII of the Act and the Rules are based on the Companies Act 1948 (UK) and the Companies (Winding Up) Rules 1949 (UK). While the UK insolvency regime has developed markedly since this time, the Bermuda regime has had only minor amendments.
Part XIII of the Act applies to all local and exempted companies incorporated in Bermuda and also applies to non-resident insurance companies and permit companies (except for those provisions relating to members' voluntary liquidation).
Restructurings are governed by Part VII of the Act.
The Bermuda Supreme Court (the "Court") is the court of first instance in Bermuda. In 2006, the Court introduced a Commercial Court division, whose jurisdiction includes hearing matters arising under the Act, and therefore restructuring/insolvency-related proceedings.
Her Majesty's Privy Council remains Bermuda's highest court of appeal and its decisions are binding upon the courts of Bermuda (to the extent that such decisions are not inconsistent with Bermuda statutory provisions).
The primary types of proceedings available in Bermuda are:
There is no obligation for a company to commence formal insolvency proceedings, even if its directors determine that it is insolvent or in the zone of insolvency. The timing of the decision to voluntarily commence formal liquidation is typically a function of mounting pressure from creditors, the risk of involuntary insolvency or other court proceedings being commenced by disgruntled creditors, a proactive approach by directors to explore potential restructuring of the company, available rescue funding which may secure the company's return to solvency, and the risk of personal liability on the part of the directors. While there may be no legal obligation to commence formal insolvency proceedings, directors must be mindful of their fiduciary obligations to act in the best interests of, and to maximise returns to, the company's creditors once the company is insolvent or is in the zone of insolvency. In fulfilling those duties, therefore, directors ought to consider whether commencing formal insolvency or restructuring proceedings is appropriate.
If at any time during a members' voluntary winding-up process the liquidator is of the opinion that the company will not be able to pay its debts in full within the period stated in the directors' statutory declarations, he or she is obliged to call a meeting of creditors and lay before the meeting a statement of the company's assets and liabilities, otherwise he or she will be liable to a fine. Typically, the members' voluntary winding-up process will then convert to a creditors' voluntary liquidation.
As noted above, there is no obligation to commence proceedings. However, where the directors decide that in complying with their fiduciary duties, it is in the best interests of the company to commence some sort of insolvency or restructuring procedure, the appropriate procedure will depend on the circumstances of each case; in particular, the financial situation of the company and whether the directors believe it can be restructured or should be wound up.
If the directors believe the company can viably be restructured, this will usually be achieved via a scheme of arrangement. The process of restructuring can be initiated informally and out of Court with the co-operation of the company's creditors; however, this leaves the company exposed to the risk of a disgruntled creditor seeking to wind the company up at any time. Alternatively, the company may invoke a "light touch" Court-supervised provisional liquidation, acting through its board of directors. This gives the company the benefit of a statutory moratorium, preventing proceedings against the company being continued or commenced, and also gives it the breathing space to determine if a scheme of arrangement may be achieved. See 6 Statutory Restructurings, Rehabilitations and Reorganisations for information that addresses the Bermuda statutory restructuring framework in detail.
If there is no viable restructuring option available to the company, the directors may resolve to wind the company up either by a creditors' voluntary process or under the supervision of the Court.
As noted in 2.3 Obligation to Commence Formal Insolvency Proceedings, where a liquidator appointed under a members' voluntary liquidation process forms the opinion that the company will not be able to repay all its creditors within the period prescribed, the process will typically convert to a creditors' voluntary process.
Compulsory liquidation is commenced in Bermuda on presentation of a petition to the Court. This can be done by a creditor (including contingent or prospective creditors), a contributory (provided he or she has held the shares for at least six months) or the company itself. If the company is a Bermuda insurance company, the Bermuda Monetary Authority (the 'BMA') may also petition for the company's winding-up, in circumstances where the insurer has failed to meet certain statutory obligations or is insolvent (see 2.7 Specific Statutory Restructuring and Insolvency Regimes).
Pursuant to Section 161 of the Act, the Court may wind up a company where:
Once a petition has been presented, the Court has jurisdiction to appoint provisional liquidators pending the hearing of the petition. The application is made by summons and, typically, will be made by the petitioner. An application for the appointment of provisional liquidators in advance of the petition hearing can be brought by:
Insolvency is not required to commence voluntary or involuntary proceedings. A voluntary proceeding is commenced by resolution of the shareholders, usually at the recommendation of the board.
An involuntary proceeding (presentation of a petition) can be based on a number of non-insolvency-related grounds, for example:
Where a petition to wind up a company is based on insolvency, however, the petitioner must be able to demonstrate that the company is unable to pay its debts.
Pursuant to Section 162 of the Act, a company is deemed to be unable to pay its debts:
The provisions of the Insurance Act 1978 modify the winding-up provisions of the Act with respect to insurance companies.
A creditor of an insurance company may file a petition to wind up an insurance company in the normal way, however creditors holding only contingent or prospective claims may not petition to wind up an insurance company unless they are one of ten or more policy holders with an aggregate value of not less than BMD50,000, and even then, they may do so only with the leave of the Court.
The BMA has authority to petition for the winding-up of an insurance company on the grounds, in addition to its insolvency, of its failure to comply with statutory duties, for example, a failure to produce financial accounts.
Currently, the Insurance Act 1978 does not differentiate between trade creditors and policy holder creditors for the purposes of distribution of assets; all unsecured creditors rank equally. However, amendments to the Insurance Act 1978 came into force on 1 January 2019, providing priority for policy holder creditors over trade creditors.
Insurance companies which write long-term business must, upon a winding-up order being made, segregate the assets and liabilities of the company such that the assets of the long-term business fund are available to satisfy only the long-term business liabilities, and the assets of its other business are available to meet the liabilities of the other business.
Financial Market Firms
The Segregated Accounts Companies Act 2000 (the "SACA"), together with the Act and any other applicable legislation, govern the insolvency of segregated accounts companies in Bermuda. The key characteristic of such companies is that the assets and liabilities of the company itself are held in the company general account and separated from the assets and liabilities of each segregated account.
Generally, the SACA provides for the liquidation of the company, and the appointment of receivers over the segregated accounts.
The test for solvency of the company will be whether the general account can pay its liabilities as they become due, and for a segregated account, whether it can pay the liabilities linked to that account as they become due.
Limited liability companies ("LLC") are a relatively new concept introduced to Bermuda in 2016 and operate as a hybrid between a typical partnership and a corporation. An LLC is a separate legal entity and accordingly affords its members limited liability; however the affairs of an LLC are governed by agreement, rather than statutory documents.
The Limited Liability Company Act 2016 governs the liquidation and dissolution of an LLC.
Since Bermuda is an offshore jurisdiction, restructuring market participants are not typically based there. Generally speaking, Bermuda companies will be involved in cross-border group restructurings where the parent company may be registered in Bermuda (and possibly listed on the Singapore Stock Exchange or the HKSE) and group business operations are carried on in another jurisdiction; most commonly Singapore, Hong Kong, the People's Republic of China and the USA. As a result, restructuring market participants are usually based in the jurisdictions of the business operations of the group. Accordingly, their views and preferences vis-à-vis consensual restructuring will reflect their jurisdiction.
Bermuda's legislative insolvency regime does not impact the viability of informal/consensual out-of-court restructurings. However, if a company is seeking the protection of a stay of proceedings while negotiations take place, it will have to make an application to the Court for the appointment of provisional liquidators. In the absence of this, the company is at risk of a disgruntled creditor applying to the Court to wind up the company at any time during the consensual process.
There is no requirement under Bermuda law for a company to engage in consensual restructuring negotiations before commencing a formal statutory process. As discussed in 2.3 Obligation to Commence Formal Insolvency Proceedings, there is, likewise, no requirement for directors to commence a statutory process if the company is insolvent. However, whether the directors would be fulfilling their fiduciary obligations by engaging in a consensual process where the company is insolvent depends on the facts. In any distressed scenario, the directors should be continually considering (and documenting) whether the proposed steps are in the best interests of, and maximise returns to, the creditors of the company, and how the outcome of what is being proposed compares with what the creditors would achieve if the company were to be placed into formal winding-up proceedings.
As discussed in 3.1 Restructuring Market Participants, since Bermuda is an offshore jurisdiction, consensual restructuring and workout processes are generally conducted in the relevant onshore jurisdictions where the majority of the market participants are located and, as such, the process will be governed by those participants. There is therefore no typical consensual process in Bermuda.
With respect to the priority afforded to new money, see 6.10 Priority New Money. New money may be injected by existing lenders, creditors or a "white knight" investor, and it is common to see super-priority rights attached to new money investors.
There are no specific laws in Bermuda which define or regulate consensual restructuring strategies. Save for any separate agreement between parties, creditors do not owe any duties to each other. However, from a practical perspective, if a consensual out-of-court restructuring does not obtain the approval of 100% of the company's creditors, a disaffected creditor would be able to upset the restructuring.
Under Section 102 of the Act, where a contract or scheme involving transfer of shares to another company has been approved by not less than 90% of the relevant class of shareholders, the shares of dissenting shareholders may be compulsorily purchased by the transferee company.
There are no statutory provisions governing cram down of dissenting creditors or shareholders in consensual out-of-court restructurings. Only under a scheme of arrangement, merger or amalgamation, each of which involve a court process, can dissenting creditors or shareholders be crammed down if the statutory majorities of relevant stakeholders are met (see 6.4 Claims of Dissenting Creditors).
Under Bermuda law, security is commonly taken over an asset (whether movable or immovable property) by the grant, transfer or assignment of a proprietary interest in the asset to secure the performance of an obligation or contractual duty or payment of a debt.
The following security is commonly taken over the following types of assets:
Since secured creditors possess rights in rem, secured assets are generally considered to be outside of a company’s estate, and are therefore excluded or exempted from the assets available to the general body of unsecured creditors in insolvency. As a result, a secured creditor does not need the permission of a liquidator or the Court to enforce its security, and may do so at any time subject to the terms of the security document. The secured creditor will not participate in the waterfall of priority of debts provided he has not surrendered his or her security and his or her debt is fully satisfied by the security. Secured creditors’ rights, remedies and liens are not subject to any type of stay or deferral of enforcement in formal or informal proceedings.
However, the exercise of a secured creditor’s rights would typically be subject to the applicable terms of any intercreditor agreement entered into by the secured creditor. Although the Act does not expressly provide that intercreditor agreements will survive a company’s winding-up, as a matter of common law, the Court has recognised the efficacy of these arrangements.
Liquidators will typically conduct a security review to ensure the validity of the security and on the sale of the secured asset, will seek payment of the balance of any sums recovered in excess of the amount payable to the secured creditor. If the sale proceeds of the secured asset do not fully satisfy the secured debt, or the secured creditor has surrendered his or her security, the secured creditor can claim in the insolvent estate/restructuring as an unsecured creditor for the remainder of the debt.
Depending on the terms of a scheme of arrangement, secured creditors forming a distinct ‘class’ of creditors for the purposes of the scheme, may be able to block a restructuring if the relevant statutory majorities for each class of creditor under the scheme are not met. It is often vital to the success of a scheme of arrangement to keep the secured creditors on side, as typically the secured assets will be critical to the company’s continued operation. In practice, a secured creditor may also disrupt a voluntary or involuntary process by exercising its right to enforce the security. Depending on the nature of the secured assets and their importance to the viability of the scheme, enforcement may cause a scheme of arrangement to fail.
The types of remedies available to a secured creditor will depend upon the terms of the creditor’s security interest and may include the right to appoint a receiver over the secured asset in the event of a debtor’s default. A receiver will act under the powers set out in the security document and will usually realise the value of the secured asset to repay the secured creditor.
As a matter of statute, there are no prescribed timelines for enforcing a secured claim and lien/security in formal restructuring, insolvency and liquidation proceedings. Instead, such timelines are typically dependent upon the terms of the creditor’s security interest.
In terms of the creation of a security interest over shares of a Bermuda company, the permission of the BMA is not required. However, in the event of enforcement of the security, a secured party will require prior permission from the BMA to transfer any charged or mortgaged shares in a Bermuda exempted company.
The BMA has given general permission for the granting of any charge or security interest over the shares of a Bermuda company (and for the subsequent transfer of any securities upon enforcement of such charge/security interest) to a licensed bank or other licensed lending institution in certain approved jurisdictions, including but not limited to the USA, Canada, all EU countries, Australia, Hong Kong, Singapore and Japan.
Furthermore, the BMA must be notified in writing prior to, or as soon as practicable after, the enforcement of the security. In the event that the BMA is not notified of such enforcement, the BMA may exclude the charge or mortgage from the general permission.
There are no special procedures, outside of the terms of the security document, for treating, enforcing or vindicating secured creditor rights and liens/security on cash-collateral or other types of collateral.
There is no general distinction between foreign and local creditors in Bermuda. However, in the event that the property to be secured is real property in Bermuda, then foreign lenders must obtain prior ministerial permission.
See 4.2 Rights and Remedies.
See 4.2 Rights and Remedies and 5.8 Statutory Waterfall of Claims.
The claims of unsecured trade creditors are typically treated as unsecured debts in a restructuring process. A retention of title clause is the primary mechanism used by trade creditors to secure their debts.
In a compulsory liquidation, there will be a moratorium on proceedings commencing or continuing against the company without the leave of the Court once provisional liquidators have been appointed or a winding-up order has been made.
In the absence of a moratorium, an unsecured creditor may be able to disrupt a restructuring by enforcing judgment on its claim by means of a writ of execution, writ of possession or a garnishee order. Alternatively, an unsecured creditor may file a winding-up petition against the company. Upon hearing the petition, the Court may dismiss it, or adjourn the hearing conditionally or unconditionally, or make any interim order, or any other order that it thinks fit. Exercise of the Court’s discretion in this context may lead to the adjournment of the unsecured creditor’s petition, if the petition is opposed on the grounds that the company could viably be restructured.
An unsecured creditor may apply to the Court for a stay of the winding-up proceedings either, firstly, at any time after the presentation of a winding-up petition and before a winding-up order has been made; or secondly, at any time after an order for winding-up. In terms of the latter, the Court may make an order staying the proceedings (either altogether or for a limited time) on proof to the satisfaction of the Court that all proceedings in relation to the winding-up ought to be stayed.
Pre-judgement attachments are not available to unsecured creditors. However, in certain circumstances, an unsecured creditor may be able to obtain injunctive relief prohibiting the company from disposing of assets pending judgment.
The timeline for enforcing an unsecured claim will depend on the manner by which the action is commenced:
The Act provides that if a landlord takes steps to distrain the goods or effects of a company within three months before the date of a winding-up order, the preferential debts in the liquidation shall have first claim on the goods or effects so distrained, or the proceeds of the sale thereof.
Foreign creditors may have to provide security for costs when commencing an action to recover a debt from a Bermuda company or person.
Bermuda does not have an administration procedure.
In terms of the waterfall of claims in a liquidation, there is no single statute that lists the waterfall. Instead, various statutes must be considered to identify the ultimate waterfall of claims in a liquidation.
Creditors’ claims (not including secured creditors’ claims which fall outside the waterfall) are ranked in the following order of priority in a liquidation:
Each category of claims must be paid in full prior to payment of creditors in the subsequent category of claims. Creditors in the same category rank equally.
A company can enter into an agreement with its creditors under which certain debts are contractually subordinated to other debts.
For information on priority claims, see 5.8 Statutory Waterfall of Claims.
The principal restructuring tool in Bermuda is the scheme of arrangement under Section 99 of the Companies Act. Bermuda schemes are, in substance, very similar to schemes in the UK, although there are certain procedural differences.
The provisions of Section 99 allow for a "compromise" or "arrangement" between a company and its creditors. The most common use of Bermuda schemes is to facilitate the orderly reorganisation of a company's share capital, thereby avoiding an insolvent liquidation. Schemes are also used in anticipation of a liquidation in order to alter the distribution rights of creditors and/or shareholders.
Creditor approval threshold
A scheme becomes binding on the company and its creditors if a majority in number (representing 75% in value) of those creditors attending and voting at the scheme meeting (in person or by proxy) vote in favour.
Scheme proceedings can be commenced by the company, by any creditor or shareholder of the company or by a liquidator in an insolvency context. Scheme proceedings commenced by a creditor or shareholder will require the company's support.
Bringing a scheme into operation - with respect to either a solvent or an insolvent company - is a three-stage process:
Court sanction of a scheme will be required before the scheme may become effective. The Court will not simply "rubber stamp" a scheme, although it will recognise that a company's creditors are likely the best judge of what is to their commercial advantage.
In certain circumstances the Court may decline to sanction a scheme. Such circumstances could include where the Court finds the scheme is being used as a mechanism to oppress the minority shareholders, where the Court finds that creditor classes have not been properly determined, or where it can be shown that the information provided to creditors was materially defective or the scheme itself was procured by fraud.
A scheme of arrangement may be proposed, voted upon and sanctioned regardless of the solvency status of the company. Solvent schemes will typically proceed under the oversight of a scheme administrator appointed within the terms of the scheme itself. Insolvent schemes are often progressed in the context of a provisional liquidation, termed a "light-touch" provisional liquidation, where the provisional liquidator's powers are limited to overseeing the company's board and management as the scheme is implemented. A scheme progressed in the context of a light-touch provisional liquidation has the benefit of a statutory moratorium on proceedings.
The Court has the power under Sections 164(1) and 170 of the Companies Act to appoint provisional liquidators to aid in the restructuring of an insolvent company (Re Titan Petrochemicals Limited  Bda LR 76). In order to appoint restructuring provisional liquidators, it will first be necessary to present a winding-up petition to the Court, although often the petition is presented by the company itself. Upon the appointment of the provisional liquidators, the hearing of the winding-up petition will be adjourned to allow the restructuring to proceed.
Generally speaking, a Bermuda scheme can be completed within nine to 12 weeks from the date when the scheme originating summons is filed. A scheme timetable is generally prepared and disclosed in the affidavit evidence in support of the scheme originating summons. Prior to the originating summons being filed, there is typically an extended period of negotiation of scheme terms between all stakeholders; after commercial terms are settled and funding secured, the scheme document and explanatory memorandum are drafted.
Public court filings are required to bring a scheme into effect, and the petition seeking approval of the scheme meetings and ultimate sanction of the scheme are public documents. However, the key commercial and economic terms of the scheme will be disclosed in the scheme document and explanatory statement exhibited to the evidence filed in support of that petition, and those documents are not publicly accessible. While there is no formal requirement for public disclosure of the scheme documents, as a matter of practice if the company is publicly listed this material will become available to the world at large.
Conclusion of the Scheme
Once the Court has sanctioned the scheme and it is lodged with the Registrar of Companies, it is binding on the company and all of the affected creditors and shareholders, regardless of whether they voted on or were aware of the proposal. Once the scheme has been sanctioned and lodged with the Registrar of Companies, it is very difficult to challenge the scheme, other than in the case of a fraud which affected the result.
No moratorium is available if a scheme of arrangement is initiated when a company is not in provisional liquidation. If a scheme is initiated for a company that is in provisional liquidation, then an automatic stay prohibits the commencement or continuance of any proceedings against the company without the leave of the Court.
A company will typically continue to operate its business during a restructuring process. In a solvent restructuring, the process will be controlled by existing management. In an insolvent restructuring, management will drive the restructuring under the supervision of provisional liquidators in a light-touch provisional liquidation – in re Z-Obee Holdings Limited (2017), SC (Bda) 16 Com (17 February 2017).
A company can borrow money during a restructuring by way of a scheme of arrangement, although the sanction of the Court may be required in an insolvent restructuring where provisional liquidators have been appointed. In such circumstances, management would typically approach the Court for approval of the terms of any funding provided by existing creditors or third parties, and the provisional liquidators would provide the court with their views on the proposed borrowing.
The class composition of the creditors is a fundamental matter to be resolved at an early stage of scheme proceedings. The Act provides that a scheme should be between the company and its creditors, or "any class of creditors". Each class of creditors votes at a separate meeting, and each of those separate meetings must pass the scheme by the requisite majority for the scheme to be approved. See 6.1 The Statutory Process for Reaching and Effectuating a Financial Restructuring/Reorganisation.
The basic test is whether the members in each class have rights which are not so dissimilar as to make it impossible for them to consult together with a view to their common interest. In the English Court of Appeal decision in re Hawk Insurance Co Ltd, Lord Justice Chadwick posited the test in the following terms: "Are the rights of those who are to be affected by the scheme proposed such that the scheme can be seen as a single arrangement; or ought the scheme to be regarded, on a true analysis, as a number of linked arrangements?"
In a restructuring, creditor committees are formed on an ad hoc basis and act in an advisory capacity regarding the provisional liquidators' proposed actions.
Creditors will receive, as a minimum, copies of the scheme documents and explanatory statement so that they may vote on the scheme in an informed manner. Creditors of a company in an insolvent restructuring will also be entitled to copies of all the documents on the court file, which may include any reports made by the provisional liquidators as to the progress and prospects of the restructuring, subject to any sealing orders made with respect to those reports.
Under a scheme of arrangement, which involves a court process, dissenting creditors can be crammed down if the statutory majorities of approving creditors are met.
Shareholders can, in certain circumstances, be crammed down. In addition, where a 75% majority has approved a merger or amalgamation, a dissenting shareholder who is not satisfied he or she has been offered fair value for his or her shares, may apply to the Court to have his or her shares appraised under Section 106 of the Act. Upon the Court's appraisal (which will typically be informed by expert evidence adduced by the parties), the company has the option either to pay the appraised value to the dissenting shareholder, or to terminate the merger/amalgamation.
There is no statutory prohibition on the trading of creditor claims. However, if claims against the company are to be assigned/novated, the company will need to be notified.
A group restructuring may be effected by way of schemes of arrangement, although a separate scheme and separate scheme approval will be required for each company in the group. If a holistic approach to the restructuring is adopted, substantial efficiencies can be realised and the Court will play a proactive role in coordinating and streamlining the necessary hearings.
If the scheme is implemented while the company is in provisional liquidation (ie, an insolvent restructuring), the disposition of the company's assets will require the leave of the Court if the necessary power has not already been granted to the provisional liquidators.
In a solvent restructuring, there are no restrictions on the company's use of or sale of its assets during the restructuring, save for any relevant provisions in the company's bylaws or shareholders' agreement (if applicable), or relevant contractual restrictions.
In a solvent restructuring, the sale of assets will be conducted by duly authorised representatives of the company, who will generally be the directors. In the case of an insolvent restructuring, the sale of assets will usually be conducted by management, overseen by the provisional liquidators. The Court will give considerable deference to the views of the provisional liquidators in this regard.
A purchaser who acquires property in a sale executed pursuant to a restructuring by way of a scheme of arrangement will acquire good clear title to the property, unless the property is acquired in circumstances which amount to a fraudulent conveyance, as to which, see 13 Transfers/Transactions That May Be Set Aside.
Creditors may bid for assets and act as a stalking horse in a sale process. There are no defined rules which apply to such credit bids, although if the sale of assets is conducted in an insolvent restructuring, the provisional liquidators will probably have to seek the Court's sanction for the sale. Before sanctioning the sale, the Court will hear evidence from the provisional liquidators as to whether the sale of the assets is in the best interests of the creditors of the company.
There is generally speaking no impediment to effectuating during a restructuring proceeding sales and similar transactions which have been pre-negotiated prior to the restructuring proceeding, although a sale will typically require the approval of the provisional liquidators and ultimately the Court if the sale is being conducted in the context of an insolvent restructuring.
Secured creditor liens and security arrangements can be released in a solvent or insolvent restructuring.
While there is no statutory procedure for new money investments or loans, new money can be given priority by the company granting security to the lenders or by the subordination of existing creditors through the scheme itself. In the absence of any consensual subordination or release of their security, existing secured lenders will take priority over any new money security.
The adjudication of disputed or competing creditor claims can be dealt with in the scheme document.
Court sanction of a scheme will be required before the scheme may become effective. The Court will not simply rubber-stamp a scheme, although it will recognise that a company's creditors are probably the best judge of what is to their commercial advantage. See Section 6.1 Statutory Process for a Financial Restructuring/Reorganisation.
Subject to the law governing the underlying obligation, it is possible as part of a restructuring to release non-debtor parties from liabilities to the debtor.
In a solvent restructuring, creditors' rights of set-off or netting would need to be prescribed in the scheme document.
In an insolvent restructuring, the provisions of Section 235 of the Act, which imports Section 37 of the Bankruptcy Act 1989, would apply. Any contract purporting to limit or enhance the scope of set-off as prescribed therein will, generally, be void.
An agreed scheme of arrangement which has been sanctioned by the Court and lodged with the Registrar of Companies is a legally binding document and can be enforced as a matter of contract. Where the company or a creditor fails to abide by the terms of an agreed scheme, the assistance of the Court is typically sought to enforce the terms of the scheme.
Existing equity owners can receive/retain any ownership or other property on account of their ownership interests. The terms of the scheme will govern any equity retention.
Liquidation procedures in Bermuda include both compulsory and voluntary liquidations. The purpose of these procedures is to realise assets, pay-off creditors and distribute any remaining assets to the shareholders. Thereafter, the company can be dissolved and will cease to exist. Both of these liquidation procedures are available to all companies registered in Bermuda.
A company may be wound up voluntarily when the company resolves in general meeting that the company be so wound up.
There are two types of voluntary liquidations in Bermuda:
CVLs are uncommon in Bermuda. However, CVLs can relieve a company of mounting creditor pressure, without the need for the supervision of the Court.
A CVL must be commenced pursuant to a resolution for the company's winding-up being passed at a general meeting of its shareholders, typically based on the recommendation of the board of directors.
The company must, firstly, convene a meeting of the company’s creditors on the day of or the day following the shareholders’ meeting, and must send notices of the meeting of creditors to the creditors simultaneously with the notices of the meeting of the company; secondly, the company must ensure that notice of the meeting of creditors is advertised in an appointed newspaper on at least two occasions.
The directors of the company must arrange for a full statement of the position of the company’s affairs, together with a list of creditors of the company and the estimated amount of their claims, to be laid before the meeting of the creditors and must appoint one director to preside at the meeting.
Where it is proposed to wind up the company by an MVL, the majority of the directors of the company must file a statutory declaration to the effect that in their opinion the company will be able to pay its debts in full within a stated period not exceeding 12 months from the commencement of the winding-up.
Calculation and recognition of claims of creditors
The liquidator will inquire into and adjudicate upon all claims. All creditors must prove their debt unless the Court gives directions otherwise.
A liquidator will notify creditors of the requirement to submit proof of their debt by advertising this in the appointed newspaper in Bermuda and by writing to all of the company’s creditors that appear in the company’s books and records. The liquidator will specify the timeframe in which all proof of debt must be submitted, which must not be less than 14 days from the date of notice. Typically, the liquidator’s call for creditors to submit proof will take place in advance of the first meeting of the creditors to allow the creditors to vote on the appointment of a committee of members and the appointment of permanent liquidators.
In the event that a liquidator rejects a proof of debt, the liquidator must state the grounds in writing to the creditor. In the event that the claim is rejected, a creditor can appeal the liquidator’s decision by applying to the Court within 21 days of receiving the rejection notice.
Creditors of contingent claims may submit proof of debt on the basis of a just estimate, provided that the contingent claim arises from enforceable obligations.
Length of procedure
The duration of a CVL depends on the complexity and nature of the company's affairs, debts and assets.
The duration of a MVL will typically be between eight to 12 weeks.
Subject to any contractual restrictions, a claim in a voluntary liquidation can be assigned by a creditor. The company will need to be notified of the assignment.
In relation to voluntary liquidations, no automatic stay of proceedings applies. However, the Court is able to consider an application by a liquidator to grant a stay of creditor action from the date of the shareholders’ resolution, which is when the voluntary liquidation is deemed to commence.
Supervision and control
In voluntary liquidations, the liquidator takes over the management of the company from the directors and their powers are displaced.
In the context of a CVL, a resolution will be made by the members and creditors to appoint a nominated liquidator who will conduct the liquidation for the benefit of the creditors, whereas in an MVL, the liquidator conducts the liquidation for the benefit of the shareholders, given that it is expected that all creditors will be paid in full. A liquidator in an MVL or CVL is entitled to sell the assets of the company without either creditor or Court approval. Should a committee of inspection be appointed to represent the unsecured creditor body, it will act with the liquidator and assist the liquidator in conducting his or her duties.
The Act provides for the powers of liquidators in voluntary proceedings in Section 226, read in conjunction with Section 175.
Disclaimer of contracts
A liquidator may, with the leave of the Court, disclaim any property belonging to the company, including any right of action or right under a contract that in the liquidator’s opinion is onerous for the company to hold or is otherwise unprofitable or unsaleable. Prior to the granting of leave, the Court may require notice to be given to interested persons and may impose any conditions on the disclaimer as the Court thinks just.
In liquidations, there is an automatic set-off where there are mutual credits, mutual debits or other mutual dealings between the insolvent company and a creditor. In respect of mutual dealings, account shall be taken of what is due from one party to the other and the sum due from the one party shall be set off against any sum due from the other party.
It is not possible to temporarily suspend or terminate such set-off rights, as the requirements of Section 37 of the Act are mandatory.
Meetings of creditors are generally convened in the following circumstances:
Creditors are generally entitled to be informed about the financial status of the company and to receive copies of reports prepared by the liquidator. Ad hoc updates may also be provided by the liquidator. Although creditors do not have a general right to access the books and records of the company, creditors may apply to the Court for an order granting access.
Once the liquidator has realised all the assets of the company, paid any amounts due in respect of preferential payments, made distributions to creditors and distributed any balance to the shareholders, the liquidator must comply with certain formalities depending on the type of liquidation.
In the case of a CVL, the liquidator must convene final meetings of the creditors and the shareholders. Within seven days of the meetings, the liquidator must notify the Registrar of Companies about the meetings and provide an account of the liquidation.
In the case of an MVL, following the final general meeting of the shareholders, the company is deemed dissolved. Within seven days of the final general meeting of the shareholders, the liquidator must notify the Registrar of Companies.
Compulsory liquidation is a court-sanctioned insolvency proceeding and can be used whether a company is solvent or insolvent. This is the most commonly used type of liquidation proceeding in Bermuda, although a solvent compulsory liquidation is, as a general proposition, uncommon.
Compulsory liquidation must be initiated by one of the following parties presenting a petition to the Court:
A petition must be based on one or more of the grounds in Section 161 of the Act, including but not limited to the following:
While it is typical for more than one ground to be included in a petition, the most common ground used is the company’s inability to pay its debts. The Act provides certain circumstances under which a company is deemed to be unable to pay its debts, including the following:
Calculation and recognition of claims of creditors
See section under voluntary liquidation, above.
Length of procedure
The length of a compulsory liquidation depends on the complexity and nature of the company’s affairs, debts and assets.
See section under voluntary liquidation, above.
In a compulsory liquidation, once a winding-up order is made or a provisional liquidator appointed, an automatic stay prohibits commencement or continuance of actions against the company without the leave of the Court. However, secured creditors remain entitled to enforce their security.
Supervision and control
At any time after a petition has been presented to the Court, the Court may appoint a provisional liquidator to protect the assets of the company pending the hearing of the petition. On a winding-up order being made, a provisional liquidator is appointed (or continues in office if already appointed) to conduct the liquidation pending the first meeting of creditors, at which the creditors will pass a resolution for the permanent appointment of a liquidator and, if required, a committee of inspection. The power of directors to manage the company is displaced by the appointment of a liquidator, and once in office, a liquidator is empowered to sell the company’s assets without the approval of the creditors or the Court. Should a committee of inspection be appointed, it will act with and assist the liquidator with the exercise of his or her duties. For circumstances under which a provisional liquidator may be appointed prior to the hearing of the winding-up petition, see 2 Statutory Regime Governing Restructurings, Reorganisations, Insolvencies and Liquidations.
The Act expressly provides general powers to liquidators under Section 175.
Disclaimer of contracts
See section under voluntary liquidation, above.
See section under voluntary liquidation, above.
See section under voluntary liquidation, above. In compulsory liquidations, the presentation of the petition must be advertised in a Bermuda newspaper (and, in practice, typically also in any other jurisdiction where the company has a majority of creditors) so that the petition is brought to the attention of interested stakeholders.
Once the liquidator has realised all the assets of the company, paid any amounts due in respect of preferential payments, made distributions to creditors and distributed any balance to the shareholders (unlikely in an insolvent liquidation), the liquidator must comply with certain formalities including making application to the Court for his or her release. The liquidator must then give 21 days’ notice to creditors and shareholders of his or her intention to make the application, and provide an account of the liquidation with that notice.
Within a liquidation, the sale of a company’s assets or the sale of a company’s business is negotiated, authorised and effected by the liquidator. Consequently, any related contracts will need to be executed by the company acting through the liquidator. In the ordinary course of business, the sanction of the Court or the committee of inspection would typically be sought to protect the liquidator.
A purchaser would only acquire such title in any assets sold as the company holds. However, assuming that the company possesses title in any assets sold and either the Court or the committee of inspection sanctions such sale to give comfort to the liquidator, then assets purchased from a liquidator in these circumstances are considered "free and clear".
Creditors are generally permitted to make credit bids and act as a stalking horse. In terms of assessing the fairness of a credit bid, the Court will take into account special circumstances relating to the bid and may seek to rely upon an independent expert valuation. This applies in circumstances where the creditor is the original creditor or an assignee.
It is possible to effectuate pre-negotiated sales transactions following the commencement of a statutory procedure. However, the sanction of the Court would usually be sought to protect the liquidator.
The implications of the company or a creditor failing to observe the terms of an agreed or statutory plan will depend upon the circumstances and the terms of the plan.
A liquidator has the power without Court approval to raise any money required on the security of the assets of the company. A liquidator would generally seek the sanction of the Court where priority is to be afforded to the new money.
There are no provisions in Bermuda for insolvency proceedings to liquidate a corporate group.
Individual proceedings must be brought in relation to each company. However, in practice, the same individual(s) can be appointed as the liquidator(s) of each of the companies and the proceedings in relation to each company can be heard concurrently.
A committee of inspection may be formed, consisting of creditors and contributories of the company. Typically, at the first meeting of creditors and contributories, members of the committee of inspection are appointed by resolution of the creditors and contributories, subject to the sanction of the Court.
The committee of inspection may sanction the liquidator to take the following actions:
Members of the committee of inspection will be reimbursed out of the assets of the company for their reasonable expenses, including the reasonable cost of advisers.
Any transfer or disposition of the company’s assets after the commencement of a winding-up, including things in action, shares or any alteration of the register of members, is void unless the Court orders otherwise pursuant to Section 166 of the Act. Typically, an order winding-up the company and appointing liquidators will specify that any such dispositions by the liquidator may not offend this provision. Subject to existing security, a liquidator may sell any asset or the entire business of the debtor and will likely seek the sanction of the Court or the committee of inspection.
Although there are no statutory mechanisms for the recognition of foreign restructuring or insolvency proceedings, there is substantial jurisprudence whereby the Court has exercised its common law powers to recognise foreign insolvency and restructuring proceedings and to co-operate with the Court in another country.
Although there is no statutory protocol for the co-ordination of cross-border insolvency proceedings for the Court, the Supreme Court has issued two practice directives relating to cross-border insolvencies, namely Guidelines Applicable to Court-to-Court Communications in Cross-Border Cases, dated 1 October 2007, and Guidelines for Communication and Co-operation between Courts in Cross-Border Insolvency Matters, dated 9 March 2017.
There are no specific rules, standards or guidelines to determine which jurisdiction’s decisions, rulings or laws govern or are paramount.
Generally, the Court supervising the "secondary" proceeding will be guided by the approach of the Court supervising the "main" proceeding. While the Bermuda Court is limited by its jurisdiction, it adopts a flexible approach to cross-border proceedings to ensure an orderly process under which the interests of creditors are protected.
There is no distinction between foreign and local creditors in restructuring or insolvency proceedings.
Liquidators are typically appointed in restructuring or insolvency proceedings.
Outside of the scope of insolvency proceedings, and while not a "statutory" officer given they are appointed by contract rather than statute, a receiver may be appointed to enforce secured obligations under the terms of the relevant security document(s).
In practice, receivers are often tasked with co-operating with a provisional liquidator/liquidator particularly where the secured asset is the primary asset in the estate.
Although appointments as liquidators/receivers are commonly accepted by chartered accountants who specialise in insolvency and are Bermuda residents, there are currently no prescribed qualifications or licensing requirements. Efforts are underway within the insolvency fraternity to introduce a comprehensive licensing/supervision regime.
The liquidator’s primary duty is to realise the assets of the company and to declare a dividend for creditors. The liquidator must have regard to any directions that may be given by resolution of the creditors or contributories at any general meeting or by the committee of inspection. The liquidator shall use his or her own discretion in the management of the estate and its distribution amongst the creditors subject to statute.
A liquidator is subject to the normal common law rules applicable to fiduciaries, including the following:
Since the liquidator is an officer of the Court, a liquidator also owes a duty to the Court.
The Act provides far-reaching powers for liquidators, with the approval of either the Court or the committee of inspection, including:
The Act also provides far-reaching powers for liquidators, without the approval of either the Court or the committee of inspection, including but not limited to:
A liquidator in a compulsory winding-up proceeding must periodically report to the Court regarding the conduct and status of the liquidation. Creditors are generally entitled to know the total assets and liabilities of the company and to receive copies of any reports submitted by the liquidator to the Court. At the end of the liquidation, the liquidator must send a copy of the statement of receipts and payments relating to the liquidation to all creditors and contributories, together with a final report and notice of their intention to apply for release from the Court.
Liquidators in a voluntary winding-up are appointed by a resolution of the shareholders of the company (and confirmed by a resolution of the creditors in a creditors’ voluntary liquidation), whereas provisional liquidators in a compulsory liquidation are nominated by the petitioner and appointed by the Court, either upon making a winding-up order or pending the hearing of the winding-up petition, upon application by summons. In the latter case, the Court must be satisfied that there is sufficient ground for the early appointment of a provisional liquidator (typically a risk of dissipation of assets/mismanagement of the company, or for the purposes of a restructuring), and will make the appointment upon such terms as in the Court’s opinion shall be just and necessary.
Liquidators appointed by the Court may, on cause shown, be removed by the Court. However, an applicant seeking such removal must demonstrate a legitimate interest in the relief sought (for example, a creditor’s interest as a creditor will suffice).
Attorneys may be appointed by a liquidator/provisional liquidator with the sanction either of the Court or the committee of inspection (if appointed), and are usually appointed as a matter of practice. Liquidators and provisional liquidators have the power, without the need for sanction, to appoint an agent to do any business which the liquidator/provisional liquidator is unable to do themselves.
Attorneys will usually be appointed by all interested parties including the company, its directors (to the extent that they may have different interests to the company), creditors, creditor committees and shareholders.
Professionals are engaged by the liquidator/provisional liquidator on behalf of the liquidation estate. The terms of remuneration of professionals are generally left up to the liquidator/provisional liquidator, and remuneration is paid out of the assets of the estate. Fees incurred by local and foreign attorneys can be subject to taxation by the Court.
Professional fees incurred by interested parties may be ordered to be paid out of the assets of the estate, depending on the outcome of the proceedings.
Generally, the Court order appointing the liquidator/provisional liquidator will include specific provisions granting power to retain attorneys and any other agents or professional persons as the liquidator/provisional liquidator deems fit, and in any jurisdiction in which such appointments may be considered necessary. Financial advisers and management consultants are commonly engaged by provisional liquidators appointed for the purposes of restructuring.
Professional advisers owe duties and responsibilities to the company on whose behalf they have been engaged by the liquidator/provisional liquidator.
Disputes in Bermuda arising out of restructuring or insolvency matters are not generally settled through arbitration as they fall under the jurisdiction of the Court (for example, disputes relating to the validity of a winding-up petition). Likewise, mediation is not typically utilised in restructuring or insolvency matters.
Nonetheless, parties in Bermuda generally tend to view arbitration and mediation favourably.
The Court in Bermuda cannot order the parties to participate in mandatory arbitration or mediation to resolve their dispute.
Prior to a winding-up order being made, a pre-insolvency agreement to arbitrate disputes can be enforced without leave of the Court. However, once provisional liquidators have been appointed or a winding-up order has been made against a company, no arbitration process in relation to the company can be commenced or continued without the express leave of the Court.
The Bermuda International Arbitration and Conciliation Act 1993 ("1993 Act") provides that the UNCITRAL Model Law applies to all international commercial arbitrations held in Bermuda unless the parties expressly agree that the Arbitration Act 1986 ("1986 Act") will apply. The 1986 Act applies to any arbitration that has its seat in Bermuda and to which the 1993 Act does not apply. The 1986 Act is designed to apply to domestic arbitrations.
Mechanisms for the appointment of arbitrators can be found in the agreement between parties. In addition, there are default provisions under the 1993 Act and the 1986 Act.
The 1986 Act provides that the Court has the power to appoint an arbitrator in the following four circumstances:
In order to appoint an arbitrator in the aforesaid circumstances under the 1986 Act, the other party must be served with a written notice requiring the appointment of or agreement to appoint the arbitrator and if the appointment has not been made within 14 days after this notice is served, then the Court may appoint such an arbitrator. This application should be made by way of originating summons filed with the Court and should be supported by an affidavit.
The 1993 Act provides that the parties are generally free to agree on a procedure for appointing arbitrators and provides for the appointment of arbitrators where the parties have failed to agree on a procedure or where a party fails to perform its obligations under an agreed procedure.
There is no regulation regarding the appointment of mediators.
In terms of who can serve as an arbitrator, this will usually depend on the terms of the arbitration agreement. Nonetheless, the pool of suitably qualified international arbitrator candidates in Bermuda is limited and, as a result, foreign arbitrators are commonly appointed. In local arbitrations, parties often select from the panel of arbitrators maintained by the Chartered Institute of Arbitrators, Bermuda Branch.
In terms of who can serve as a mediator, there are no restrictions regarding the professional background and experience required to serve as a mediator.
As a matter of Bermuda law, directors owe duties to the company, rather than directly to shareholders or creditors, although when a company is solvent, having regard to the interests of the general body of shareholders is a component part of a director's duties. When a company is insolvent, or in the zone of insolvency, however, a director's duties expand to include also having regard to the interests of the general body of creditors. In such circumstances, a director must consider the interests of the creditors as paramount. The case law does not prescribe any bright-line test which can be used to determine precisely when a company is "financially distressed"; in general, if a company is in dire financial straits, a court will likely find that the company is in the zone of insolvency. The closer the company is to irretrievable insolvency, the greater the extent to which the directors must take into account the interests of the general body of creditors.
Bermuda law does not have an equivalent to the civil wrong of "wrongful trading" as described in English insolvency legislation, or "insolvent trading" in Australian corporations legislation. However, directors can still be held to account following the commencement of winding-up proceedings if it can be shown that a director:
The Act also sets out a range of offences pursuant to which a director may be held liable subsequent to the winding-up of a company (Section 243).
While Bermuda has no direct equivalent to the English Company Directors Disqualification Act 1986, if the Court convicts any director of an offence relating to the affairs of a company (including those enumerated in Section 243), the Court would be at liberty to make an order that such director not be involved in the management of any company without leave of the Court.
Creditors may only assert direct fiduciary breach claims against a director if that director had voluntarily assumed a direct duty to that creditor, which would be highly unusual. Claims for breaches of directors' fiduciary duties following a winding-up order will be pursued by the company's liquidators in the name of the company. It is important to note that many Bermuda companies include in their by-laws an indemnity/exculpation provision which will seek to hold the directors harmless for any negligent conduct, provided such conduct was not fraudulent or dishonest.
There is no legislative provision or convention in Bermuda providing for the appointment of a Chief Restructuring Officer.
There is no statutory recognition of the concept of a shadow director in Bermuda, although Section 243 of the Act provides an expanded definition of the term "officer" as including "any person in accordance with whose directions or instructions the of a company have been accustomed to act". In broad terms, in order to establish a shadow directorship under common law, one must establish that:
If a creditor or creditor representative met this test, it is certainly conceivable that a creditor could be regarded as a shadow director. A shadow director will be liable for any offences committed under Section 234 of the Act, although it is unclear to what extent a shadow director owes the same duties as de jure directors under Section 97 and fiduciary duties under general law.
A court will only lift the "corporate veil" and expose members of the company to liability in exceptional circumstances where it can be shown that the interposition of a corporate structure was a deliberate effort to evade legal obligations or liabilities.
Historical transactions may be set aside/annulled in certain circumstances:
In order to set aside a transaction alleged to be an unfair preference, the transfer or disposition must have been made within the six months prior to the commencement of the winding-up.
An application to set aside a transaction characterised as a fraudulent conveyance must be brought within six years of the relevant conveyance, although in certain, limited circumstances this period may be extended to eight years.
The proper plaintiff in an action to recover property on the basis of an alleged fraudulent preference is the company, acting through its liquidator.
Outside of a winding-up process, any aggrieved creditor may apply under the Conveyancing Act 1983 for a declaration that a disposition is void if it was made at an undervalue with the intention to defraud the company's creditors.
Fraudulent preference claims may only be brought in insolvency proceedings. Fraudulent conveyance claims can be brought regardless of whether the company has commenced restructuring or insolvency proceedings.
As with all offshore financial centres, valuations play a fundamental role in the Bermuda restructuring and insolvency market. Examples include:
A valuation exercise may be initiated by different parties, depending on the circumstances. For example, a liquidation analysis will typically be prepared at the request of either the company considering the comparative prospects of a restructuring vis-à-vis an insolvent winding-up (or potentially a provisional liquidator in the context of an insolvent restructuring), while a valuation of the shares of a dissenting shareholder would be valued at the request of the shareholder petitioning pursuant to Section 106 of the Act.
Bermuda has a sophisticated valuation jurisprudence in the restructuring and insolvency context, though there are few prescribed statutory rules governing the valuation process. Local and overseas valuators are both used, depending on the subject matter of the valuation. For example, the valuation of a local Bermuda company may call for the services of a local valuator, whereas a liquidation analysis of a Bermuda-exempted company incorporated on the Hong Kong Stock Exchange with its operations in mainland China, may call for an overseas valuator.
Valuation evidence is often a critical part of an application by a liquidator for sanction of the sale of assets to a shareholder, creditor or third party. The liquidator will seek to prove to the Court's satisfaction that fair value has been obtained on the sale.
A range of valuation methodologies are used (DCF, comparables, etc), depending on the circumstances of the case and the subject matter of the valuation.