Insolvency 2021

Last Updated November 23, 2021

The Bahamas

Law and Practice

Authors



McKinney, Bancroft & Hughes has an Insolvency and Restructuring practice group whose members are nationally and internationally renowned for their expertise and proficiency in insolvency and restructuring, vital when navigating a complex and ever-changing financial market. The firm's team regularly engages in a wide range of complex cross-border insolvency and restructuring matters and has a keen understanding of insolvency and restructuring regimes around the world. It acts on behalf of a broad range of clients, including banks, corporations, fiduciaries, shareholders, liquidators, receivers, administrative receivers, directors, private equity funds and hedge funds. Its attorneys have participated in some of the largest liquidations and company reorganisations in The Bahamas. Its lawyers use multidisciplinary skills to find creative and practical solutions for their clients when faced with the complex issues which often arise during the course of insolvency and restructuring. McKinney, Bancroft & Hughes' insolvency and restructuring services include liquidations, receiverships, bankruptcy and asset recovery.

The Bahamian economy is slowly recovering from the dual calamity of the devastating Hurricane Dorian, which made landfall in The Bahamas in September 2019, and the COVID-19 pandemic. The first confirmed case of COVID-19 in The Bahamas was in March 2020.

With the emergence of the COVID-19 pandemic, the government of The Bahamas declared a state of emergency on 17 March 2020. The state of emergency persists, and the economy remains “handcuffed”. A snap national election was recently called, and a new Prime Minister and governing party were elected. While the new administration is in its early days, it is clear that economic revival is at the forefront of its agenda.

Given the current state of the economy, it is no surprise that companies are making attempts to restructure their businesses, both organisationally and financially. While there has not been an uptick in insolvency work to date, we expect this work to increase in the coming months with the commencement of insolvency proceedings in 2022 and beyond.

To aid the faltering economy, the government of The Bahamas has implemented several initiatives, including:

  • the expansion of unemployment benefits;
  • a loan payment deferral programme;
  • a business continuity loan programme; and
  • a tax credit and tax deferral employment retention programme.

Liquidations are the only type of insolvency proceedings for companies which are recognised by the Bahamian insolvency regime.

There is no statutory procedure for a formal restructuring or reorganisation of insolvent companies. However, an official liquidator or provisional liquidator has the power to enter into a scheme of arrangement or compromise with creditors or debtors. A successful scheme of arrangement or compromise may result in a court-ordered stay of the liquidation proceedings.

While not formally a statutory procedure, restructuring is possible within liquidation proceedings commenced under the Bahamian insolvency regime.

Liquidation proceedings may be voluntary or involuntary. Voluntary liquidations are often administrative in nature if a company is solvent. Involuntary liquidation proceedings are commenced by the presentation of a winding-up petition by a creditor, contributor or regulator of the company. An application may be made to continue either a voluntary or an involuntary liquidation under the supervision of the court.

A receiver may be appointed over the assets of a company by a mortgagee or secured lender. The court can also appoint a receiver over a debtor company when it is just and convenient to do so. 

There is an obligation to commence liquidation proceedings in the event that a company is insolvent. However, there is no formal time limit by which an insolvent company must be placed into liquidation. Directors may be liable for insolvent trading should a company continue to trade while insolvent.

In voluntary liquidations, the directors must sign a declaration of solvency within 90 days of the commencement of the liquidation. In the event that the declaration is not signed, the voluntary liquidator must make an application to place the voluntary liquidation under the supervision of the court. If, at any time during the course of the voluntary liquidation proceedings, the company is deemed to be of doubtful solvency or insolvent, the voluntary liquidator shall place the voluntary liquidation under the supervision of the court. 

Involuntary proceedings may be commenced by a creditor, contributory or regulator of the company by the presentation of a winding-up petition.

Grounds for the commencement of involuntary liquidation proceedings include situations where:

  • the company is insolvent;
  • it would be just and equitable that the company should be wound up; or
  • in the case of proceedings commenced by a regulator, the company is not duly licensed or registered to carry on its business or for any other reason under the relevant regulatory laws.

There is no requirement of insolvency for voluntary or involuntary proceedings.

A company is insolvent if it is unable to pay its debts as they fall due or the value of the company’s liabilities exceeds the value of its assets.

A company is deemed to be unable to pay its debts if:

  • it fails to satisfy a valid statutory demand duly served by a creditor within three weeks;
  • execution of a process issued on a judgment or court order in favour of any creditor remains unsatisfied in whole or in part; or
  • the court is satisfied that the company is unable to pay its debts.

The same insolvency procedure applies to all types of companies, including banks, insurers or other regulated businesses.

However, regulated companies may be subject to additional requirements relating to their liquidation. Companies licensed or registered under the Banks and Trust Companies Regulation Act, Securities Industry Act or Insurance Act cannot commence voluntary proceedings without prior written approval from the Central Bank, Securities Commission or Insurance Commission respectively.

The recently enacted Banks and Trust Companies Regulation Act, 2020 empowers the Central Bank to appoint a statutory administrator in the event that a bank is unable or likely to become unable to meet its debts as they fall due or pay its depositors’ demands in the normal course of business. During the period when the statutory administrator is appointed, no proceedings may be brought or continued against the bank, and no creditor may enforce its security without the prior written consent of the statutory administrator.

The statutory administrator has the full and exclusive power to carry on the business of and manage the bank. With Central Bank approval, the statutory administrator can carry out a merger or transfer the bank’s shares, securities, assets, rights and liabilities to a purchaser, an asset management vehicle or temporarily to a bridge institution.

As a regulator, the Insurance Commission can also appoint a statutory administrator for a number of reasons, including the failure of an insurance company to pay its liabilities or if, in the opinion of the Insurance Commission, the insurance company is unable to meet its liabilities and other obligations as they become due. The statutory administrator shall be seized of the management and control of the registered insurer. 

Within 90 days after their appointment, the statutory administrator shall make an application to the court for:

  • a winding-up order if the statutory administrator determines that there is no reasonable prospect for the return of the company to financial soundness through reorganisation or otherwise;
  • an order that the company be placed under judicial management; or
  • approval of a plan of reorganisation.

As there is no statutory procedure for out-of-court workouts and restructurings, most restructurings and workout strategies are informal/consensual when companies experience financial hardship. While there was a draft bill enacting a formal reorganisation procedure, no legislation in this regard has materialised.

Banks and other lenders tend to be generally supportive of borrower companies when they experience financial difficulties pending a detailed assessment of their financial position, especially in the current economic climate with the COVID-19 pandemic. Commencement of liquidation proceedings is often a last resort measure taken by a well-funded creditor.

There is no formal process for consensual restructurings and out-of-court workouts.

When a winding-up petition has been presented, a company may seek the appointment of a provisional liquidator on the basis that the company is, or is likely to become, unable to pay its debts, but intends to present a compromise or arrangement to its creditors.

Consensual workouts between lenders and borrowers include forbearance and the restructuring of a loan, which may involve the injection of new money by the lender or security by the borrower.

New money can be injected by the lender in a consensual workout relating to the restructuring of a loan between a lender and a borrower. However, money can also be injected by a new-money investor. In this scenario, it is likely that the new-money investor would require the subordination of existing debts.

Arrangements can be agreed between creditors and a company as a type of restructuring/workout strategy. Even when there has been an arrangement which has been consented to by a majority of creditors, a creditor can repudiate the arrangement on the ground that the other creditors were induced to enter into the arrangement by a secret bargain to their advantage.

In the event that a creditor is oppressed in the negotiation or implementation of an arrangement, the oppressed creditor may have a claim against the company and its directors for oppression or unfair prejudice. The court can rectify the oppressive action if it is satisfied that:

  • any act or omission of the company or any of its affiliates caused an oppressive result;
  • the business or affairs of the company or any of its affiliates are, or have been, carried on or conducted in an oppressive manner; or
  • the powers of the directors of the company or any of its affiliates are or have been exercised in a manner which is oppressive or unfairly prejudicial to, or which unfairly disregards the interest of any shareholder or debenture holder, creditor, director or officer of the company.

Cram-down mechanisms which would bind dissenters to enable an otherwise consensual financial restructuring to be effectuated do not exist in The Bahamas. 

A secured creditor may take various types of liens and securities over immovable and movable property.

Immovable Property

The primary types of security taken over immovable property are the legal mortgage and the equitable mortgage. A legal mortgage is the transfer of a debtor’s legal ownership in the property which is subject to the security. It is subject to the debtor’s right of redemption to the legal title of the property upon repayment of the debt. An equitable mortgage creates an equitable charge on the property, but does not transfer any legal interest in the property to the creditor.

Another type of security taken over immovable property is the fixed charge, which provides a creditor with the right to sell the property and apply the sale proceeds towards discharging the debt.

Movable Property

In relation to movable property, the main types of security which may be taken by a secured creditor are mortgages, fixed charges, pledges, liens and floating charges. A pledge is the transfer of possession of an asset as security until payment. Ownership of the asset remains with the pledgor, and the pledge confers on the creditor/pledgee a power of sale in the event of default. A lien is a legal right to retain possession of property belonging to another person for so long as a debt is owed by that person. A floating charge, unlike a fixed charge, does not attach to specific property or assets, but can be held over all of a company's assets or certain classes of asset. When a company is placed into liquidation, or in an otherwise defined event of default, the floating charge becomes crystallised and converts into a fixed charge.

A secured creditor may realise or enforce its security in accordance with the terms of a pre-existing inter-creditor covenant in the event that the company is not in a liquidation which is subject to a stay or a moratorium. While the Companies Act does not expressly provide that inter-creditor covenants will survive the winding-up of a company, the court has recognised the efficacy of these arrangements at common law.

A secured creditor whose claim exceeds the value of its security may make a claim in the liquidation by way of a proof of debt for the unsecured balance. When filing a proof of debt in the liquidation, the secured creditor is required to state particulars of the security held and the valuation thereof.

All creditors’ claims rank pari passu subject to the rights of preferred and secured creditors, which take priority. The ranking of unsecured creditors’ claims is further discussed under 5.5 Priority Claims in Restructuring and Insolvency Proceedings.

There is no distinction between unsecured trade creditors and other unsecured creditors in The Bahamas.

Unsecured creditors generally have no special rights or remedies in a restructuring and insolvency context unless and until they have obtained a judgment or an arbitral award. Where an unsecured creditor has concerns that there is a real risk the debtor may dissipate its assets or transfer them outside of the jurisdiction, the unsecured creditor can apply to the court for an injunction restricting dealings with the assets in question prior to obtaining judgment.

Pre-judgment attachments are not available in The Bahamas. However, a creditor may apply to the court for a Mareva or “freezing” injunction which may be granted on the ground that there is a good arguable case and a real risk that, if the injunction is not granted, the debtor will dissipate its assets or remove them from the jurisdiction prior to any judgment being awarded in the creditor’s favour.

In insolvency proceedings, priority is given to the payment of the liquidator's fees and other expenses of the liquidation and then to the preferential debts set out in section 275 of the Companies Act, which include:

  • all wages or salaries of any clerk or servant accrued four months before the commencement of the liquidation;
  • all wages due to any workman or labourer accrued two months before the commencement of the liquidation; and
  • unpaid taxes due to the government of The Bahamas.

The preferential debts referred to above rank equally amongst themselves and are to be paid in full unless the company’s assets are insufficient to meet them, in which case they shall abate in equal proportions.

In The Bahamas there is no statutory process, procedure or mechanism for reaching and effectuating a financial restructuring/reorganisation plan or agreement akin to a scheme of arrangement in the UK or a Chapter 11 reorganisation plan in the USA.

While not formally a statutory procedure, restructuring is possible within liquidation proceedings commenced under the Bahamian insolvency regime.

See 6.1 Statutory Process for a Financial Restructuring/Reorganisation.

See 6.1 Statutory Process for a Financial Restructuring/Reorganisation.

See 6.1 Statutory Process for a Financial Restructuring/Reorganisation.

See 6.1 Statutory Process for a Financial Restructuring/Reorganisation.

See 6.1 Statutory Process for a Financial Restructuring/Reorganisation.

See 6.1 Statutory Process for a Financial Restructuring/Reorganisation.

See 6.1 Statutory Process for a Financial Restructuring/Reorganisation.

See 6.1 Statutory Process for a Financial Restructuring/Reorganisation.

See 6.1 Statutory Process for a Financial Restructuring/Reorganisation.

See 6.1 Statutory Process for a Financial Restructuring/Reorganisation.

See 6.1 Statutory Process for a Financial Restructuring/Reorganisation.

See 6.1 Statutory Process for a Financial Restructuring/Reorganisation.

See 6.1 Statutory Process for a Financial Restructuring/Reorganisation.

See 6.1 Statutory Process for a Financial Restructuring/Reorganisation.

See 6.1 Statutory Process for a Financial Restructuring/Reorganisation.

Voluntary Liquidation

A company may be placed into voluntary liquidation:

  • by a resolution requiring the company to be wound up voluntarily, which has been passed by 75% of the company’s members;
  • if any specific event, outlined in the company's articles of association, has occurred, the consequence of which is that the company shall be wound up;
  • because the period, if any, fixed for the duration of the company by its articles of association has expired; or
  • under the supervision of the court.

Once a voluntary liquidation has commenced, the company shall cease to carry on its business, except insofar as it may be beneficial for its winding-up.

One or more liquidators are appointed by resolution of the company for the purpose of winding-up its affairs and distributing its assets. On the appointment of a voluntary liquidator, all the powers of the directors cease, except insofar as the company in a general meeting or the liquidator sanctions their continuance.

A voluntary liquidation does not require Court supervision if the directors of the company file a “declaration of solvency” with the Registrar within 28 days of the liquidation being commenced. If a “declaration of solvency” is not filed within the prescribed time period, the voluntary liquidator must apply to the court for an order that the liquidation continue under the court’s supervision.

Involuntary Liquidation

An involuntary liquidation (also known as a compulsory liquidation or a winding-up by the court) is generally commenced by a creditor issuing a petition to the Supreme Court of The Bahamas to wind-up the company. Proceedings may also be commenced by a member of the company or a regulator. A company may be placed in involuntary liquidation if:

  • the company has passed a resolution to that effect;
  • the company does not commence its business within a year from its incorporation or suspends its business for a whole year;
  • the members are reduced in number to less than two;
  • the company is insolvent; ie, unable to pay its debts as they fall due or the value of its liabilities exceeds the value of its assets;
  • it is just and equitable that the company should be wound up; or
  • a regulator petitions for the winding-up of a company over which it has regulatory authority and whose licence or registration has been suspended or revoked.

Inability to pay debts can be evidenced by:

  • the failure to respond to a statutory demand;
  • an executed judgment in favour of a creditor which is returned unsatisfied; or
  • proof to the satisfaction of the court that the value of a company’s assets is less than the value of its liabilities.

The court may appoint one or more persons to be the official liquidator(s) of the company. Official liquidators must be qualified insolvency practitioners resident in The Bahamas or may be foreign practitioners who must be appointed jointly with a domestically qualified insolvency practitioner.

Provisional Liquidation

Following the issuance of a winding-up petition, but prior to the making of a winding-up order, a provisional liquidator may be appointed, primarily for the purpose of preserving the company’s assets pending the hearing of the petition. An application for the appointment of a provisional liquidator may be made by a creditor, contributory of the company or any relevant regulator on the following grounds.

  • That there is a prima facie case for making a winding-up order.
  • That the appointment of a provisional liquidator is:
    1. necessary to prevent the dissipation or misuse of the company’s assets;
    2. necessary to prevent the oppression of minority shareholders;
    3. necessary to prevent the mismanagement or misconduct on the part of the company’s directors; or
    4. in the public interest.

An application to appoint a provisional liquidator may also be made by the company ex-parte on the ground that the company is, or is likely to become, unable to pay its debts, but intends to present a compromise or arrangement to its creditors. A provisional liquidator has the rights and powers of an official liquidator to the extent necessary to maintain the value of the assets owned or managed by the company or to carry out any specific functions for which they were appointed.

Powers of the Official Liquidator

The official liquidator is an officer of the court whose function is to collect, realise, maintain, manage and distribute the company’s assets. The official liquidator has broad powers, some of which are exercisable without the sanction of the court, including the power to:

  • take possession of and collect the company’s property;
  • promote a scheme of arrangement;
  • convene meetings of creditors and contributories;
  • engage staff and attorneys to assist the official liquidator; and
  • do all other acts incidental to the exercise of their powers.

There are specific powers which are exercisable by the official liquidator only with the sanction of the court. These include the power to:

  • bring/defend any action or legal proceeding on behalf of the company;
  • carry on the business of the company;
  • dispose/sell company property to a related party; and
  • pay any class of creditors in full.

Stay

When a company is placed in compulsory liquidation or a provisional liquidator is appointed, no proceedings can be continued or commenced as against the company without the leave of the court.

When a voluntary liquidation is commenced, there is no automatic stay on proceedings against the company. However, the liquidator or any creditor or member of the company may apply to the Court for a stay of proceedings.

Set-Off and Netting

Creditors may exercise rights of set-off and netting. Contractual rights of set-off established prior to the commencement of the liquidation process are binding and will be upheld and given effect by the liquidator.

In the absence of a contractual right of set-off, an account shall be taken of what is due from each party to the other in respect of their mutual dealings, and the sums due from one party will be set-off against the sums due from the other. Sums due from the company to another party will not be included in the accounting if that other party had notice at the time when the debt became due that a winding-up petition was pending. The rules of insolvency set-off are mandatory and may not be varied by contract.

Disclaimer

With the leave of the court, the official liquidator may disclaim any onerous property of the company even though they have taken possession of it, tried to sell or assign it or otherwise exercised rights of ownership in relation thereto. Onerous property is defined as any unprofitable contract, any other company property which is unsaleable or not readily saleable or is such that it may give rise to a liability to pay money or perform any other onerous act. A disclaimer operates so as to determine the rights, interests and liabilities of the company, but does not affect the rights or liabilities of any other person, except insofar as is necessary for the purpose of releasing the company from any liability.

In Bahamian insolvency proceedings, a liquidator negotiates, executes and authorises the sale of assets of the company during the proceedings. In a compulsory liquidation, the official liquidator is required by law to seek the approval of the court before making any disposition or sale of the company’s assets. In a voluntary liquidation, the liquidator is not required to seek the approval of the court prior to making any disposition or sale of the company’s assets.

Purchasers who buy assets of the company generally acquire them “free and clear” of claims and liabilities asserted against the company. However, in those instances where the assets are subject to third-party security interests, the purchasers may acquire the assets subject to such interests.

There are no statutory provisions governing credit bids or stalking-horse bids. The official liquidator generally exercises their discretion in the conduct of negotiations and the sale of assets. If there is any issue or dispute, the official liquidator may seek directions from the court.

A liquidation committee shall be elected at the first meeting of creditors, which the official liquidator is required to convene with 90 days of the winding-up order being made. The liquidation committee is required to be comprised of not less than three and no more than five creditors.

A creditor is eligible to be a member of the liquidation committee if their debt is not fully secured, they have lodged a proof of their debt and their proof has neither been wholly disallowed for voting purposes nor wholly rejected.

The liquidation committee may appoint legal counsel, whose legal fees are paid out of the assets of the company as an expense of the liquidation provided that they have been reasonably and properly incurred. Travelling expenses and/or telephone charges reasonably and properly incurred by committee members in attending a meeting of the liquidation committee shall be reimbursed by the official liquidator out of the assets of the company. Other expenses incurred by any committee member are capable of being reimbursed if the expenses were incurred pursuant to a resolution of the liquidation committee and with the prior approval of the official liquidator.

Section 254 of the Companies Act provides that, upon application of a foreign representative (defined by the Companies Act as a liquidator, trustee or other official appointed in respect of a debtor for the purposes of foreign proceedings), the court may make orders ancillary to foreign proceedings for the purposes of:

  • recognising the right of a foreign representative to act on behalf of a debtor jointly with a qualified insolvency practitioner in The Bahamas;
  • enjoining the commencement or staying the continuation of legal proceedings against a debtor;
  • staying the enforcement of any judgment against a debtor;
  • requiring a person in possession of information relating to the business or affairs of a debtor to be examined by and produce documents to the foreign representative;
  • ordering the turnover to a foreign representative of any property belonging to a debtor; and
  • granting such other relief as it considers appropriate.

The court, in exercising its discretion to grant or deny any ancillary relief in relation to the foreign representative, must take into consideration factors such as:

  • the just treatment of all holders of claims against or interests in the debtor’s estate;
  • the protection of claim holders in The Bahamas against prejudice and inconvenience in the processing of claims in the foreign proceeding;
  • the prevention of preferential or fraudulent dispositions of property comprised in the debtor's estate; and
  • comity.

There are no express statutory provisions, agreements or protocols between Bahamian courts and foreign courts to co-ordinate proceedings. However, Bahamian courts are mindful of the principles of comity and co-operation between courts. 

See 8.1 Recognition or Relief in Connection with Overseas Proceedings.

In Bahamian insolvency proceedings foreign creditors are dealt with in the same manner as local creditors.

In The Bahamas, the recognition and enforcement of foreign judgments are principally governed pursuant to the Reciprocal Enforcement of Judgments Act of 1924 (the Act). The Act permits the recognition and enforcement of judgments obtained in a limited number of expressly designated jurisdictions, namely:

  • Australia;
  • Barbados;
  • Belize;
  • Bermuda;
  • British Guiana;
  • Jamaica;
  • Leeward Islands;
  • St Lucia;
  • Trinidad; and
  • the United Kingdom.

Otherwise, where a judgment is obtained from a jurisdiction to which the Act is not applicable, the judgment creditor will have to commence fresh proceedings in The Bahamas, using the unpaid judgment debt as a cause of action.

Requirements for Recognition

Section 3(1) of the Act grants the Supreme Court of The Bahamas the jurisdiction and discretion to recognise and register a foreign judgment handed down by a court in an expressly designated jurisdiction if, in all the circumstances of the case, it thinks that it is just and convenient that the judgment should be registered and enforced in The Bahamas.

An application for recognition of the foreign judgment is required to be brought by a judgment creditor within 12 months of the date when the foreign judgment was obtained or within a longer period of time based on the discretion of the court.

Grounds for Non-Recognition

Recognition and registration of the foreign judgment will be refused by the court or may be challenged by the judgment debtor on any of the following grounds provided for in Section 3(2) of the Act:

  • the foreign court acted without jurisdiction;
  • the judgment debtor, being a person who was neither carrying on a business nor was ordinarily resident within the jurisdiction of the foreign court, did not voluntarily appear or otherwise submit or agree to submit to the jurisdiction of that court;
  • the judgment debtor, being the defendant in the proceedings, was not duly served with the process of the foreign court and did not appear in the proceedings, notwithstanding that they were ordinarily resident or were carrying on a business within the jurisdiction of that court or agreed to submit to the jurisdiction of that court; or
  • the judgment was obtained by fraud.

Enforcement

Once a foreign judgment has been recognised, it becomes enforceable by the same means which are available for the enforcement of any Bahamian judgment. Those are provided for in Order 45 Rule 1(1) of the Rules of the Supreme Court and include a writ of fieri facias, garnishee proceedings, a charging order, the appointment of a receiver, committal and a writ of sequestration.

In insolvency proceedings the statutory officer appointed will either be a liquidator or a receiver. There are no restrictions on who may be appointed as a voluntary liquidator of a company under Bahamian law. Provisional and official liquidators must be qualified insolvency practitioners resident in The Bahamas or may be foreign practitioners who must be appointed jointly with a domestically qualified insolvency practitioner. A receiver or receiver-manager can be appointed by the court or a secured creditor pursuant to a debenture or other security instruments.

Liquidator

It is the duty of the liquidator to ensure that the company’s assets are realised and distributed to the creditors admitted by the liquidator. If there is any surplus, it is the duty of the liquidator to distribute it to the contributories. A liquidator will also examine the circumstances which led to the liquidation and determine whether any improper transactions or criminal offences have taken place. A liquidator is an officer of the court and is expected to act fairly and impartially.

Receiver

A receiver can be appointed over all or a part of the assets of a company by the court or by a secured creditor pursuant to a debenture or other security instruments. A court-appointed receiver’s powers will be tailored to the specific circumstances of each case and will be expressly set out in the court order appointing the receiver.

A court-appointed receiver’s primary duty is to collect the property over which they have been appointed. Court-appointed receivers are independent officers of the court. As such, they must act impartially and fairly for the benefit of all parties interested in the assets of the company.

When a receiver is appointed by a secured creditor, the receiver’s primary role is to take possession of all the assets subject to the security and to sell them to satisfy the debt owed to the secured creditor. The powers and duties of the receiver will typically be set out in the express provisions of the security document. The receiver’s principal duty will be to the secured creditor.

Additionally, a receiver-manager can be appointed by either the court or a secured creditor to discharge all the responsibilities of the receiver and, additionally, to manage the whole or any part of the undertaking of a company.

See 7.1 Types of Voluntary/Involuntary Proceedings.

As a general principle, directors of a Bahamian company owe their duties to the company rather than to individual creditors. Directors of a Bahamian company owe both a fiduciary duty and a duty of skill and care. Directors must act in good faith in the interests of the company. They must exercise their powers for a proper purpose and avoid conflicts of interest.

With regard to the duty of skill and care to the company, a director must exercise the conduct of a reasonably prudent person, having both the general knowledge, skill and experience of that director and the general knowledge, skill and experience which may reasonably be expected of a person carrying out the director’s functions in relation to the company.

However, where a company is insolvent or near-insolvent, the directors’ duty to act in the best interest of the company requires them to have primary regard to the interests of creditors when making decisions. It is in the interest of the creditors to be paid, and it is in the interest of the company to be safeguarded against being put in a position where it is unable to pay its debts.

Directors can be made personally liable to the company in an insolvency context for breach of duty. In addition to being liable for the transactions detailed under 11.1 Historical Transactions, a director may be found liable for insolvent trading if the Court is satisfied that the director:

  • knew or ought to have concluded that there was no reasonable prospect that the company would avoid being wound up by reason of insolvency;
  • was a director of the company at that time; and
  • failed to take every step to minimise the potential loss to the company’s creditors which ought to have been reasonably taken.

A director of an insolvent company owes his duties to the body of creditors collectively. A creditor cannot bring breach of fiduciary duty claims against the directors. Instead, such claims must be asserted by the official liquidator.

The Companies Act and the Fraudulent Dispositions Act provide that certain transactions which preceded an insolvency process may be avoided. These include voidable preferences, dispositions made at an undervalue or fraudulently.

Voidable Preferences

In accordance with Section 241 of the Companies Act, any payment or disposal of property to a creditor constitutes a voidable preference if:

  • it occurs within six months prior to the commencement of the liquidation;
  • it occurs at a time when the company is unable to pay its debts; and
  • it was done with a view of giving a creditor a preference over other creditors.

Dispositions Made at an Undervalue

Section 242 of the Companies Act provides that transactions, whereby property is disposed of at an undervalue with the intention of wilfully defeating an obligation owed to a creditor, are voidable/may be set aside on the application of the official liquidator. The application must be brought within two years of the disposition.

Fraudulent Dispositions

Pursuant to the Fraudulent Dispositions Act, a disposition made at an undervalue with an intent to defraud a creditor may be set aside at the instance of a creditor so prejudiced, provided that proceedings to set aside the disposition are commenced within two years of that disposition.

See 11.1 Historical Transactions.

Claims to set aside or annul voidable preferences or dispositions made at an undervalue must be commenced by the official liquidator. Any creditor may apply pursuant to the Fraudulent Dispositions Act for a declaration that a disposition is void if it was made at an undervalue with the intention to defraud the company’s creditors.

McKinney, Bancroft & Hughes

Mareva House
4 George Street
P.O. Box N-3937
Nassau
The Bahamas

+1 242 322 4195

+1 242 328 2520

nassau@mckinney.com.bs www.mckinney.com.bs
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McKinney, Bancroft & Hughes has an Insolvency and Restructuring practice group whose members are nationally and internationally renowned for their expertise and proficiency in insolvency and restructuring, vital when navigating a complex and ever-changing financial market. The firm's team regularly engages in a wide range of complex cross-border insolvency and restructuring matters and has a keen understanding of insolvency and restructuring regimes around the world. It acts on behalf of a broad range of clients, including banks, corporations, fiduciaries, shareholders, liquidators, receivers, administrative receivers, directors, private equity funds and hedge funds. Its attorneys have participated in some of the largest liquidations and company reorganisations in The Bahamas. Its lawyers use multidisciplinary skills to find creative and practical solutions for their clients when faced with the complex issues which often arise during the course of insolvency and restructuring. McKinney, Bancroft & Hughes' insolvency and restructuring services include liquidations, receiverships, bankruptcy and asset recovery.

In the Matter of Rural International Bank Limited (In Liquidation) – a Bahamian Case Study on Costs in Insolvency Proceedings

Recently the Supreme Court of the Commonwealth of The Bahamas handed down a comprehensive Ruling on the issue of costs in liquidation proceedings: In the Matter of Rural International Bank Limited – 2013/COM/bnk/0088. This decision is important as it clarifies the position relating to the taxation of costs in insolvency proceedings in The Bahamas, the entitlement to costs of the attorney of the liquidation committee and the treatment of Calderbank offers within the context of insolvency proceedings.

Background

Former counsel ("Former Counsel") to the liquidation committee (the LC) of Rural International Bank Limited (In Liquidation) (RIBL) submitted three invoices to the joint official liquidators of RIBL (the Liquidators) for fees and expenses related to their representation of the LC. Former Counsel represented the LC from March 2017 to February 2018. The submitted invoices were dated 6 October 2017, 9 March 2018 and 31 January 2019 totalling BSD653,741.39 (the Invoices).

Upon receiving the Invoices, the Liquidators filed three summonses (the Summonses) seeking (i) directions on whether any part of the fees and expenses set out in the Invoices should be paid out of the assets of RIBL; and (ii) in the event that any part of the Invoices should be so paid, a taxation in accordance with the insolvency regime in The Bahamas.

Former counsel raised preliminary objections to the Summonses; however, the Court found that they were unsustainable. Ultimately, Charles J. (the Judge) held that only Former Counsel’s legal fees and expenses which were reasonably and properly incurred from the date of their appointment until the date of their termination were to be paid out of the assets of RIBL. The court undertook a taxation of the Invoices and found that BSD206,702.21 was payable out of RIBL’s estate.

As some monies were payable to Former Counsel, but far less than had been claimed, neither the Liquidators nor Former Counsel were wholly successful in respect of the Summonses. The parties were unable to agree on the issue of costs and sought the Court’s directions on the following matters.

  • Whether Part II of Order 24 of the Companies Liquidation Rules, 2012 (CLR) or the Rules of the Supreme Court, 1978 (RSC) is the applicable statutory regime for costs in liquidation proceedings.
  • Whether the Summonses constituted summonses for directions or sanction applications (as defined in the CLR).
  • If they constituted sanction applications, whether Former Counsel’s costs on the Summonses ought to be paid on an indemnity basis.
  • Whether the statutory indemnity in Orders 9 and 25 of the CLR precludes the use of an issue-based indemnity taxation.
  • As the Liquidators’ costs are paid out of the assets of RIBL, whether Former Counsel’s costs should be paid out of the RIBL estate as well.
  • Whether a valid Calderbank offer was made by the Liquidators.
  • Whether Former Counsel acted unreasonably when it refused to accept the Calderbank offer.
  • Whether the legal costs claimed were unreasonable and should be borne by Former Counsel.

Costs in liquidation proceedings

The procedure for the liquidation of companies in The Bahamas is governed by the Companies Act of 1992 (as amended by the Companies (Winding Up) Amendment Act, 2011 (CWUAA)) and its subsidiary legislation, the CLR. Order 1 rule 2 of the RSC, the rules of court for civil matters in the Supreme Court of The Bahamas, expressly provides that it shall not apply to proceedings relating to the winding-up of companies. On the other hand, Order 24 of the CLR expressly states when the RSC are to be applied in taxations in insolvency proceedings.

Order 24 of the CLR also provides that an order for costs made in a liquidation proceeding shall be taxed by the taxing master in accordance with Order 59 of the RSC. The term “taxing master” is not defined in the CLR. However, it cannot mean a judge as Order 24 rule 11 of the CLR provides that an application can be made to a judge to review the taxing master’s decisions. Furthermore, Order 59 of the RSC defines taxing master as meaning the Registrar of the Supreme Court. While not referenced in the Judge’s ruling, Section 69 of the Supreme Court Act also defines taxing master as a Registrar of the Supreme Court. 

In summary, the Court held that Part II of Order 24 of the CLR applies to costs in liquidation proceedings. The RSC are only applicable to the extent that the CLR expressly provide so. Taxations of costs in liquidation proceedings are within the jurisdiction of the Registrar as taxing master. Accordingly, the Judge did not have power to tax the costs in respect of the Summonses.

Summons for directions in liquidation proceedings

The Court found that the Summonses, which were seeking directions on whether any of the fees and expenses claimed by Former Counsel are payable out of the RIBL estate, did not fall into the definition of a “sanction application” in accordance with Order 11 rule 1 of the CLR as they were not seeking the Court’s sanction of the specific powers exercisable by an official liquidator as listed in Part 1 of the Schedule of the CWUAA.

Although the CWUAA and the CLR only expressly provide for winding-up petitions and sanction applications to be made to the court, the court in its inherent jurisdiction may also hear applications for directions from liquidators. Official liquidators are officers of the court and appointed to act for the benefit of all creditors. If, in the exercise of their function, they encounter problems, they have a duty to come to the court and seek directions. The Judge, pursuant to the court’s inherent jurisdiction, was thus empowered to hear the Summonses as they were brought by the liquidators in their capacity as officers of the court.

Costs payable on an indemnity basis

As the Judge found that the Summonses were applications for directions as opposed to sanction applications, the issue of whether Former Counsel’s costs ought to be paid on an indemnity basis did not arise for consideration.

Statutory indemnity precludes issue-based indemnity taxation

Based on the Judge’s conclusion that the Summonses were not sanction applications, this issue also did not arise for consideration.

Former Counsel’s costs are not treated the same as the Liquidators’ costs

Former Counsel argued that its legal costs should be considered to be in the same class as fees incurred by counsel for liquidators and, accordingly, should be paid on an indemnity basis.

The Court found it absurd that Former Counsel would place itself in the same class as the Liquidators. Liquidators are officers of the court and have a duty to ensure that the company’s assets are realised and distributed to the creditors and, in the event of a surplus, to the contributories. Former Counsel’s appointment was of an entirely different nature to that of the Liquidators. Therefore, Former Counsel could not be treated similarly in terms of having its legal costs taxed on an indemnity basis.

Valid Calderbank offer

The term Calderbank offer originates from the matrimonial case Calderbank v Calderbank [1975] 3 All ER 333. A Calderbank offer is one which is made without prejudice save as to costs and is privileged from discovery until the costs stage of proceedings. The consequence of not accepting a Calderbank offer is that, if a party is to further advance its case, it will do so at the peril of having to compensate the other party making the Calderbank offer by way of full indemnity legal costs if at trial the offer is not bettered.

Although Calderbank offers originated in UK case law, which was later codified in the English Civil Procedure Rules, Bahamian courts have been proactive in accepting their use in the jurisdiction. Furthermore, while Calderbank offers can be valid in Bahamian liquidation proceedings, there are certain pre-conditions which must be satisfied for the offers to be valid. The Judge relied on the decision of Dyson LJ in Trustees of Stokes Pension Fund v Western Power Distribution (South West) plc [2005] 3 All ER 775 to state the pre-conditions for an offer to settle a money claim to be treated the same as a payment into court as follows:

  • the offer is expressed in clear terms so that there is no doubt as to what is being offered;
  • the offer should be open for acceptance for at least 21 days;
  • the offer should be genuine and not a sham or non-serious in some way; and
  • the offeror should have been good for the money at the time when the offer was made.

By letter dated 24 May 2019, the Liquidators made an offer of BSD275,000.00 in full and final settlement of the Invoices, which was to expire four days (two working days) later on 28 May 2019. Former Counsel did not accept the offer. While Former Counsel was partly successful in its claim (BSD206,702.21), it recovered less than the Liquidators’ offer.

Although RIBL is in insolvent liquidation, the Judge did not find that the offer was a sham or insincere. Furthermore, even though there was no payment into court, she was of the opinion that RIBL was good for the money at the time when the offer was made.

The major defect in the Liquidators’ Calderbank offer was that it was not open for acceptance for at least 21 days. However, in the exercise of its discretionary powers, the court can determine the weight to be given to a Calderbank offer, which may result in a percentage reduction of the costs awarded. The court can also consider the conduct of the parties; eg, whether Former Counsel could have requested a time extension to consider the Liquidators’ Calderbank offer. Accordingly, the Judge found the Calderbank offer to be valid, but exercised her discretionary powers as to what weight should be placed on the offer.

Former Counsel acted unreasonably by rejecting the Calderbank offer

The Judge placed some weight on the conduct of the parties, specifically Former Counsel’s failure to request additional time to consider the Calderbank offer. The Court reflected on this failure and opined that Former Counsel was determined to fight for its full costs of BSD635,741.39. Furthermore, the Judge opined that the third invoice in the amount of BSD314,362.18 should have never been presented to the Liquidators as it covered a period when Former Counsel no longer represented the LC. As a result of the presentation of this invoice, the Liquidators had no alternative but to seek the directions of the Court. Accordingly, the Liquidators could not be faulted for doing so and were not sanctioned by the Court in making cost orders against them personally.

Unreasonable costs – “split cost” orders or costs in a “mixed result” case

The court must have regard to the conduct of all parties, before, during and after the proceedings when making cost orders. Exaggeration of fees and expenses indicates conduct which would merit criticism from the court.

As Former Counsel was only entitled to be paid BSD206,702.21, less than the BSD275,000.00 Calderbank offer, and the Court also found that neither party was wholly successful in respect of the Summonses, the Court made a split cost order with regard to the Bills of Costs submitted by both parties.

The starting point of the Court’s analysis was that Former Counsel’s arguments in relation to indemnity costs were not applicable and so the Court had to consider (i) whether an award of costs to either or both parties should be made on a standard basis, and (ii) whether consideration should be given to the mixed results in this case.

A mixed result case arises when it is not immediately apparent which party is the clear winner. It often refers to cases where there is more than one issue to be determined and the parties are successful on different issues considered by the court. In the exercise of the court’s discretionary power, it may order a split order for costs in a mixed result case.

The Judge found that the instant case was a mixed result case and determined that it was appropriate for her to make a split order for costs. Ultimately, the Court ordered that the costs would be split as follows (all costs to be taxed, if not agreed).

Former Counsel was awarded costs on a standard basis from 6 February 2019, when its attorneys filed an appearance on its behalf, to 21 August 2019, the date when Former Counsel raised the preliminary objections in respect of the Summonses. The Court’s rationale in allowing costs for approximately three months after the expiration of the Calderbank offer was that the offer should have been open for acceptance for at least 21 days and Former Counsel was given additional time within which the matter could have been settled. These costs were ordered to be paid out of the assets of RIBL.

From 1 September 2019, when the Summonses were initially fixed to be heard (although that date was adjourned because of Former Counsel’s preliminary objections) to 16 February 2021, the date of the Court’s oral ruling on the Summonses, Former Counsel was ordered to bear its own costs and pay the Liquidators’ costs together with interest on a standard basis.

Former Counsel was also ordered to pay to the Liquidators the costs of the application relating to the parties’ costs.

Pursuant to the CLR, costs in liquidation proceedings shall be taxed by the Registrar as the taxing master. Accordingly, the Court referred the taxation of the costs to the Registrar.

Conclusion

The insolvency jurisprudence in The Bahamas has continued to evolve since the introduction of the new insolvency legislation in 2011 and 2012, which courts have grappled with interpreting.

Charles J.’s ruling In the Matter of Rural International Bank Limited is the most comprehensive decision on costs in insolvency proceedings in The Bahamas to date. Her Ladyship has ratified the use of Calderbank offers in Bahamian insolvency proceedings and has expanded on the ruling on costs In the Matter of Pacifico Global Advisors Ltd. – 2019/COM/bnk/00077.

McKinney, Bancroft & Hughes

Mareva House
4 George Street
P.O. Box N-3937
Nassau
The Bahamas

+1 242 322 4195

+1 242 328 2520

nassau@mckinney.com.bs www.mckinney.com.bs
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McKinney, Bancroft & Hughes has an Insolvency and Restructuring practice group whose members are nationally and internationally renowned for their expertise and proficiency in insolvency and restructuring, vital when navigating a complex and ever-changing financial market. The firm's team regularly engages in a wide range of complex cross-border insolvency and restructuring matters and has a keen understanding of insolvency and restructuring regimes around the world. It acts on behalf of a broad range of clients, including banks, corporations, fiduciaries, shareholders, liquidators, receivers, administrative receivers, directors, private equity funds and hedge funds. Its attorneys have participated in some of the largest liquidations and company reorganisations in The Bahamas. Its lawyers use multidisciplinary skills to find creative and practical solutions for their clients when faced with the complex issues which often arise during the course of insolvency and restructuring. McKinney, Bancroft & Hughes' insolvency and restructuring services include liquidations, receiverships, bankruptcy and asset recovery.

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Authors



McKinney, Bancroft & Hughes has an Insolvency and Restructuring practice group whose members are nationally and internationally renowned for their expertise and proficiency in insolvency and restructuring, vital when navigating a complex and ever-changing financial market. The firm's team regularly engages in a wide range of complex cross-border insolvency and restructuring matters and has a keen understanding of insolvency and restructuring regimes around the world. It acts on behalf of a broad range of clients, including banks, corporations, fiduciaries, shareholders, liquidators, receivers, administrative receivers, directors, private equity funds and hedge funds. Its attorneys have participated in some of the largest liquidations and company reorganisations in The Bahamas. Its lawyers use multidisciplinary skills to find creative and practical solutions for their clients when faced with the complex issues which often arise during the course of insolvency and restructuring. McKinney, Bancroft & Hughes' insolvency and restructuring services include liquidations, receiverships, bankruptcy and asset recovery.

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