The Bermuda winding-up regime under the Companies Act 1981 (the “Companies Act”), Part XIII, applies to companies registered under the Companies Act, companies limited by shares incorporated by private Act, mutual companies incorporated before 1 July 1983, non-resident insurance undertakings, and overseas companies operating in Bermuda under a permit (other than the provisions relating to members’ voluntary liquidations).

Part XIII sets out the statutory procedure for the winding-up (also referred to as liquidation) of both solvent and insolvent companies, incorporates by reference, and companies. In addition, certain provisions relating to the insolvency of individuals under the Bankruptcy Act 1989 apply. There are further provisions in the Employment Act 2000 and the Contributory Pensions Act 1970. Procedural rules relating to company liquidation are in the Companies (Winding-up) Rules 1982, and the Rules of the Supreme Court 1985 apply generally to court proceedings in the Supreme Court of Bermuda (the “Bermuda Court”) including liquidations.

There are special provisions relating to the insolvency of companies in different sectors and categories. For example:

• the winding-up regime for limited liability companies is found in the Limited Liability Company Act 2016 (largely mirroring the provisions of the Companies Act);
• winding-up provisions that are additional to those in the Companies Act relating to insurance and reinsurance companies are found in the Insurance Act 1978;
• provisions relating to segregated accounts companies and incorporated segregated accounts companies are found in the Segregated Accounts Companies Act 2000 (the “SAC Act”) and Incorporated Segregated Accounts Companies Act 2019 (the “ISAC Act”), respectively; and
• the Banking (Special Resolution Regime) Act 2016 applies to licensed banks although it remains only partially in force.

Reorganisations and restructurings (by way of scheme of arrangement) are dealt with in Sections 99 to 101 of the Companies Act 1981, Part VII.

The types of winding-up proceedings in Bermuda are:

• voluntary liquidation, of which there are two types: members’ voluntary liquidation (MVL) or creditors’ voluntary liquidation (CVL); and
• compulsory liquidation, which is a winding-up by the Bermuda Court.

The only form of statutory restructuring is a scheme of arrangement.

Receivers may be appointed by the Bermuda Court or privately pursuant to rights under security agreements.

Voluntary Liquidation

Voluntary liquidation is an out-of-court process to wind up and dissolve companies under Sections 201-233 of the Companies Act. An MVL is commenced by the passing of a resolution of the members (ie, shareholders) that the company be wound up voluntarily and a named liquidator be appointed. If, in the five weeks preceding the passing of the resolution, the company’s directors, or a majority of them, each swear a statutory declaration confirming that the company is able to pay its debts in full within a period not exceeding 12 months from the commencement of the winding up, the liquidation will be an MVL. If the declarations of solvency are not sworn, it will be a CVL.

MVLs are usually used for companies that have reached the end of their purpose and are typically commenced once all liabilities have been met and assets distributed. Once the winding-up is completed, the company is deemed to be dissolved on the date of the final general meeting of members.

In a CVL, on the same day as the shareholders’ resolution is passed, or the day after, a meeting of creditors must be held where a full statement of the company’s affairs is presented with a list of creditors and an estimated amount of their claims. The creditors may also nominate a person to act as liquidator and if they nominate a different person to the shareholders, the creditors’ nomination will prevail.

Under Section 211 of the Companies Act, if a company is undergoing an MVL and the liquidator becomes of the opinion that the company will be unable to pay its debts in full within the timeframe stated in the statutory declarations, they are obliged to convene a creditors’ meeting and present a statement of the company’s assets and liabilities. Failure to comply will result in a fine for the liquidator. In this instance, the MVL will convert to a CVL.

Compulsory Liquidation

A compulsory liquidation or winding-up by the Bermuda Court is commenced by the presentation of a winding-up petition in the Bermuda Court seeking an order that the company be wound up by the Bermuda Court and a provisional liquidator or joint provisional liquidators (JPLs) be appointed. It is usual for at least two provisional liquidators to be appointed. There are various grounds on which a company may be wound up by the Bermuda Court and where the company is insolvent, the most common ground is that it is unable to pay its debts.

Voluntary Strike-Off

Under Section 261A of the Companies Act, a solvent company that has ceased operating and has no remaining assets or liabilities may apply to the Registrar of Companies to be struck off the register of companies voluntarily, resulting in the dissolution of the company without any liquidation process. The Registrar of Companies also has the power to strike a defunct company off the register.

Restructurings/Reorganisations

The main tool for implementing restructurings or reorganisations for companies incorporated in Bermuda is a scheme of arrangement. A scheme of arrangement is available to both solvent and insolvent companies and gives a company the opportunity to enter into an arrangement or compromise for the purpose of restructuring its debts or equity without the unanimous consent of those who may potentially be affected by the restructuring.

A compulsory liquidation may also be commenced for restructuring purposes. In this case, a joint provisional liquidator will be appointed upon or soon after presentation of the winding-up petition with powers limited to “light touch” powers of oversight of the board and management, while the latter endeavour to propose and implement a restructuring. The restructuring may be by way of a scheme of arrangement or could be by a foreign restructuring process such as a plan of reorganisation under Chapter 11 of the US Bankruptcy Code.

Reorganisations of solvent companies can also be achieved through amalgamations, mergers and consolidations under the Companies Act.

Liquidator

In a voluntary winding-up the statutory officer appointed is a liquidator.

• MVL: In an MVL, the liquidator is appointed by the members. The powers of the directors and officers of the debtor cease upon the appointment of the liquidator, except so far as the company in general meeting or the liquidator sanctions the continuance of any of their powers.

• CVL: In a CVL, the liquidator is appointed by the creditors, or, if the creditors fail to appoint one, by the members. The powers of the directors and officers of the debtor cease upon the appointment of the liquidator, except so far as the committee of inspection (creditors’ committee), or, if there is none, the creditors, sanction the continuance of any of the directors’ and officers’ powers.

In a compulsory liquidation, a provisional liquidator or JPLs are appointed initially, either upon the making of the winding-up order, or earlier at any time after presentation of the petition (for example to take control of the company to prevent dissipation of assets, or for the purposes of a restructuring).

The powers of the directors and officers cease upon the appointment of a provisional liquidator, other than the residual power to cause the company to defend the winding-up proceedings, unless the court order appointing the JPLs provides otherwise. This will be the case when the JPLs are appointed for the purposes of a restructuring and their powers are limited to oversight of the board and management.

The JPLs’ appointment is provisional only in time. JPLs appointed prior to the making of a winding up order may be granted the full powers of a liquidator under the Companies Act. After a winding-up order is made, the JPLs are required to convene separate meetings of the creditors and contributories to vote on whether the JPLs should be appointed as permanent liquidators or whether someone else should be appointed.

The Official Receiver is the liquidator appointed by the Bermuda Court when a private sector liquidator is not appointed. The Official Receiver is a government official with a limited government budget.

There is no administrator or administration concept under Bermuda law.

Receivers

A receiver may be appointed by the Bermuda Court, under Section 19(c) of the Supreme Court Act 1905, over the property of a company or individual, whenever it appears to the Bermuda Court to be just or convenient to do so. A secured creditor may apply to the Bermuda Court for the appointment of a receiver as an alternative to an appointment pursuant to powers in the security documents. The powers of the receiver, including the extent to which this interacts with the powers of the directors, will be determined by the order appointing them.

Receivers can also be appointed by a secured creditor out of court under the powers contained in a security instrument. The receiver appointed under powers in a security document may be constituted the agent of the company under the terms of the document, and if so, the company will be liable, for example, for breaches of pre-existing contracts by the receiver or debts contracted by the receiver.

A receiver may be appointed over one or more segregated accounts of a segregated accounts company under the SAC Act or of an incorporated segregated accounts company under the ISAC Act.

A receiver may also be appointed under Section 35 of the Conveyancing Act 1983 by a mortgagee once they have received a power of sale.

Certain provisions regarding receivers, whether appointed in or out of court, are found in the Companies Act, Part XIV. They deal with issues such as the right of any receiver to apply to the Bermuda Court for directions and delivery of accounts to the Registrar of Companies.

Trustee in Bankruptcy

After an individual is adjudged bankrupt, a trustee in bankruptcy is appointed by resolution of the creditors which takes effect upon an order of the Court certifying the appointment.

The types of creditors are as follows and the order of priority of their claims is established by the statutory scheme in a compulsory liquidation as follows.

• Secured creditors with fixed charges have priority over all other creditors and over the expenses of the liquidation, save that provision will be made for any unpaid pension contributions due from the company under the National Pensions Scheme (Occupational Pensions) Act 1998 before any distribution is made to a secured creditor applying for an order for seizure or sale of property of the company.
• Fees and expenses of the liquidation, including the costs of the petition (also ranked in priority).
• Claims under the Employment Act 2000 of Bermuda resident employees to unpaid salary, vacation pay and severance allowance up to a maximum of 26 weeks’ pay.
• Preferential claims including certain overseas employee claims, government taxes, certain pension contributions and worker’s compensation claims.
• Secured creditors with floating charges.
• Unsecured creditors (in the liquidation of a reinsurer, the unsecured insurance and reinsurance debts of the company must be paid in priority to other unsecured creditors of the company pursuant to Section 36A of the Insurance Act).
• Monies due to shareholders in their capacity as shareholders, eg, declared but unpaid dividends.
• Shareholders if there is a surplus.

Each category of debts must be paid in full before payment of creditors in the subsequent category. Creditors in the same category rank equally among themselves.

Subordinated Debt

A company can enter into an agreement with its creditors, and creditors may enter into agreements with each other, under which certain debts are contractually subordinated to other debts.

Assets Subject to Security

Assets secured by a mortgage or fixed charge are outside the scope of an insolvency as they are not assets to which the company is beneficially entitled. The secured debts are satisfied from the proceeds of the sale of the secured property. However, the liquidator will typically:

• review the circumstances of the creation of the security to ensure that it is valid; and
• seek repayment of any sums recovered that are above the amount payable to the creditor under the mortgage or fixed charge.

If the proceeds from the sale of the property do not fully satisfy the debt secured by the mortgage or fixed charge (or if the estimated value would be insufficient to satisfy the debt), the secured creditor may claim for the balance in the liquidation as an unsecured creditor.

Rent Arising from a Lease Agreement

Rent incurred prior to the commencement of a liquidation will be provable as an unsecured claim in the liquidation. The rent arising under a lease agreement that is adopted by the liquidator and incurred after the commencement of the liquidation will be an expense of the estate.

The priority of claims in a liquidation is as listed in 2.1 Types of Creditors.

Priority of Claims in a Restructuring

The priority of claims in a restructuring will be determined by the terms of the restructuring, which may include provisions for new money to take priority over prior claims, including those of secured creditors.

Types of Security

The principal types of security devices that are taken over immovable property are legal and equitable mortgages. Non-Bermudian individuals or entities are prohibited from owning land and property in Bermuda without a government-issued licence, which is only granted in limited circumstances. It is therefore unusual for the insolvency or reorganisation of an internationally owned company to involve secured lending and credit issues in respect of immovable property.

The principal types of security that are taken over movable property are a fixed charge over a particular asset or a floating charge over the assets, business and undertaking of the entity. Security devices may be registered under the Companies Act in a register of charges which is maintained by the Registrar of Companies.

Registration of a charge is not necessary in order for the charge to be valid. The effect of registration is to give the charge priority over unregistered charges or charges created after registration based on the date that the charge is registered. Registration is usually recommended as a result.

Rights and Remedies of Secured Creditors

Secured creditors are entitled to enforce their security notwithstanding the commencement of winding-up proceedings against the company. Secured creditors cannot prove their debts in a winding-up to the extent that they have security unless they forfeit their security.

Secured creditors have standing to commence winding-up proceedings and to participate in them even if they are fully secured. They may oppose or support the making of a winding-up order or other orders within the proceedings, such as an order to appoint JPLs. They can participate in any restructuring that may be proposed in winding-up proceedings that is intended to affect their rights. Secured creditors can similarly participate in a CVL.

In a compulsory liquidation, an automatic stay on the commencement or continuation of proceedings against the company without leave of the Bermuda Court is imposed by Section 167(4) of the Companies Act upon the making of a winding-up order or earlier appointment of a provisional liquidator. A secured creditor is bound by the automatic stay, but if proceedings were necessary in Bermuda in order for it to enforce its security, leave to do so would be likely to be granted by the Bermuda Court.

There are no special procedural protections and rights for secured creditors in statutory insolvency, principally because they are entitled to enforce their security outside of insolvency proceedings. Under a scheme of arrangement, secured creditors will be in a different class to unsecured creditors and secured creditors with different rights and priorities may in turn be separated into different classes.

Civil Actions

Prior to the commencement of a winding-up, an unsecured creditor can enforce their rights against a debtor by an action in the courts, or by arbitration or any other dispute resolution process provided for in the relevant contract(s).

Attachments

A creditor who is pursuing an action against the debtor in Bermuda may be granted pre-judgment relief by way of an interim injunction requiring a party to the proceedings to do, or refrain from, some act. For example, if there is a danger of the debtor dissipating its assets, the creditor may apply to the Bermuda Court for an order to freeze the assets of the debtor (such as its bank accounts) to prevent dissipation.

A creditor who has obtained judgment against the company may enforce that judgment by various methods including a writ of execution, garnishee proceedings and the appointment of a receiver of the assets of the debtor.

Set-Off

A creditor may have a contractual right to set-off claims payable to a debtor against claims due to the debtor or to other parties, as there is no requirement of mutuality in a pre-liquidation contractual set-off.

There are no formal requirements for an out-of-court restructuring, and there is no typical consensual restructuring or workout process and timeline. These will depend upon the parties involved, their goals and what deadlines may be imminent in relation to any debt, such as upcoming maturity dates. It is common for ad hoc committees or groups to be formed for different categories of creditor involved in the negotiations.

There is no requirement under Bermudian law for mandatory consensual restructuring negotiations before the commencement of a formal statutory process.

Out-of-court restructurings tend to be difficult to achieve unless the number of creditors is small, as unanimity is required. If the body of creditors is too large to be certain that all have been included in the consensus, it is preferable to go through a scheme of arrangement that, if approved by the requisite majority of creditors and sanctioned by the court, will bind all creditors intended to be bound.

There are no requirements under Bermudian law imposing duties on creditors to each other. Individual creditors may therefore act in their own best interests, for example, when deciding whether to participate in an out-of-court restructuring. They do not have to take into consideration the interests as a whole of any class of creditors to which they belong.

No one can be forced to co-operate in an out-of-court restructuring. An out-of-court financial restructuring or workout cannot be accomplished over the dissent of minority creditors who are in the class of creditors whose debt is being restructured. Unanimity is usually required for an out-of-court restructuring, unless there is provision, for example, in the lending facility contracts for a majority of the lenders to bind the minority of lenders. In that case, the restructuring can only affect the lenders that are parties to the facility in question. No cram-down mechanisms exist under Bermudian law to bind dissenters to a consensual financial restructuring.

An out-of-court restructuring will be effected by a contract or contracts that will be enforceable by or against the parties to the contract pursuant to the terms of the contract(s).

The Scheme of Arrangement

The statutory process for a company to implement a formal financial restructuring, reorganisation plan or agreement under Bermudian law is the scheme of arrangement. A scheme of arrangement is a statute-based, court-sanctioned, compromise or arrangement between a company and its creditors and/or its members under Sections 99 to 101 of the Companies Act.

A scheme of arrangement can be proposed both within and outside a liquidation proceeding. There is no limitation on the types of agreements, compromises or reorganisations that can be achieved under a scheme of arrangement. The Companies Act contains no restrictions on how a scheme may be used and therefore a scheme of arrangement is a very flexible tool.

Initiating the Scheme Process

The scheme process may be initiated by the company, any creditor or member (ie, shareholder), and, where the company is being wound up, by the JPLs/liquidator(s). There is no obligation on the directors or JPLs/liquidator(s) of a company to propose a scheme of arrangement.

There are no formal criteria for initiating the scheme procedure. It is usual for the proposer of a scheme to ensure that there is sufficient support for the scheme from the creditors and/or members intended to be bound by the scheme and from any other key stakeholders. The proposer could do this by asking them to enter into a restructuring support agreement before commencing the formal process, for example.

The scheme procedure is only available to individual companies. Scheme proceedings of group companies cannot be consolidated into one proceeding, meaning that each company’s scheme proceeding will have a separate case number. However, the Bermuda Court will allow scheme proceedings of several companies to be dealt with on an effectively consolidated basis, with all applications being heard at the same time in one hearing, with evidence shared across the proceedings.

Information to be Provided

Certain information is required to be provided to creditors or shareholders who are intended to be bound by the scheme. The first hearing in the scheme process is the “convening hearing”. At this hearing the proposer of the scheme will seek leave to convene the meeting(s) of creditors or shareholders to vote on the scheme.

The practice direction letter – creditor schemes

Pursuant to a practice direction issued by the Bermuda Court in Circular No 18 of 2007, if the company is proposing to implement a scheme of arrangement with creditors, it must notify those creditors affected by the scheme of the following prior to the convening hearing:

• that a scheme of arrangement is being promoted;
• the aim the scheme is trying to achieve;
• what meeting(s) of creditors the company believes are required for the purpose of voting on the scheme; and
• what the company considers to be the appropriate composition of the creditor meeting(s).

This information is provided to creditors by way of a practice direction letter. The key purpose of the practice direction letter is to try to ensure that creditors are aware of the proposed composition of the classes of creditors under the scheme so that any issues regarding creditor classes may be addressed at the convening hearing. If the classes are not properly constituted, the Bermuda Court will not have jurisdiction to sanction the scheme, even if the scheme is approved by the creditors.

Explanatory statement

In both creditor and shareholder schemes of arrangement, Section 100 of the Companies Act requires that the proposer of a scheme send to creditors/shareholders, with the notice of the scheme meeting(s), a statement (the “explanatory statement”) explaining the effect of the scheme and in particular any material interests of the directors of the company and the effect of the scheme on those interests if different from the interests of other persons.

The explanatory statement will typically describe the company and its business in detail and the company’s financial situation, including the financial difficulties that have led to the need for restructuring under the scheme. Details of any material interests of any party (not just directors) that could impact voting on the scheme will be disclosed, along with information about any ad hoc groups and their involvement in the process.

The terms of the proposed scheme will be included in the explanatory statement and various other documents will be sent to creditors/shareholders with the notice of the meeting(s) and explanatory statement, including a letter from the board and/or liquidators recommending the scheme, drafts of documents that need to be executed to implement the scheme and a comparator analysis (often a liquidation analysis) comparing the outcomes for creditors with or without a scheme.

Approval Process

If a scheme of arrangement is approved by the requisite majority of creditors or shareholders and sanctioned by the Bermuda Court, it will be binding on all creditors or shareholders who are the subject of the scheme, including creditors or shareholders who voted against the scheme or who did not vote at all. Unanimity is therefore not required for approval of a scheme.

The requisite majority required to approve a scheme is a majority in number representing 75% in value of creditors or shareholders present, in person or by proxy, and voting at the meeting held to vote on whether to approve the scheme. If there is more than one class of creditor or shareholder, that majority must be achieved in each class meeting.

Whose Rights Can be Restructured

A scheme of arrangement is intended to effect a compromise or arrangement between the company and its shareholders or any class(es) of them, or its creditors or any class(es) of them. No one else can be a party to the scheme itself, although non-scheme parties can undertake to be bound by a scheme (for example, reinsurers of an insurance company that enters into a scheme with its policyholders or group companies that are providing guarantees or other assistance in support of the scheme).

How the Shareholders and/or Creditors are Organised and Represented

Based on decisions of the English Court that have been followed in Bermuda:

• shareholders and creditors are put into separate classes when their rights prior to the proposal of the scheme, or their rights under the scheme, are so dissimilar as to make it impossible for them to consult together with a view to their common interest; and
• the principle upon which the classes of creditors or shareholders are to be constituted is that they should depend upon the similarity or dissimilarity of their rights against the company and the way in which those rights are affected by the scheme, and not upon the similarity or dissimilarity of their private interests arising from matters extraneous to such rights.

If a shareholder or creditor has a private interest that may cause it to vote against the interests of the class, this will not prevent it from voting in that class, but the Bermuda Court may take the fact that that creditor or shareholder has voted in this manner into account when deciding whether to sanction the scheme.

Any shareholder or creditor who is involved in a scheme process is entitled to be represented at the convening hearing by counsel (or in person if they are an individual). Shareholders or creditors may also form ad hoc groups to represent all or any number of persons in their class and engage attorneys to represent the group or class.

Claims Determination

The calculation of creditors’ claims will depend on the nature of those claims. For the purpose of voting on the scheme, creditors will be required to state the value of their claims on their ballot forms, and the chairperson of the scheme meetings will have discretion regarding what value should be allowed.

In situations where the value of a claim may not be certain, a creditor may be required to provide supporting evidence regarding the claim by way of proof of debt or otherwise.

In schemes where there are contingent claims, for example, in an insurance company scheme, estimates of claims may be accepted for voting purposes. A scheme will usually include a mechanism for valuing contingent claims for the purpose of payment of claims (for example, an actuarial methodology for contingent insurance claims).

The scheme will usually also include a mechanism for dealing with adjudication of claims that are rejected by the scheme administrators.

Preventive Restructuring Measures

If the scheme of arrangement is taking place outside of a liquidation proceeding, there is no moratorium against or automatic stay of claims being asserted against the company. If the company is at risk of proceedings that could disrupt the restructuring process, it can commence its own winding-up proceeding and apply for JPLs to be appointed for the purposes of restructuring with “light touch” powers of oversight of the board and management of the company while they seek to negotiate and implement the restructuring.

An automatic stay on commencing or proceeding with actions against the company is imposed upon the appointment of the JPLs.

The Position of Dissenting Creditors

If a scheme of arrangement is approved by the requisite majority of shareholders or creditors and sanctioned by the Bermuda Court, it will be binding on all shareholders or creditors who are the subject of the scheme, those who voted against the scheme, or those who did not vote at all. Unanimity is therefore not required for approval of a scheme.

The requisite majority required to approve a scheme is a numerical majority representing 75% of the shareholders or creditors present, in person or by proxy, and voting at the meeting held to vote on whether to approve the scheme.

If there is more than one class of shareholder or creditor, that majority must be achieved in each class meeting. This means that the claims of dissenting creditors within a class may be modified without their consent if their class and every other class vote to approve the scheme in the requisite majority, and the scheme is then sanctioned.

There is no provision for interclass cram-down or cram-up under Bermudian law. If any class of creditor or shareholder votes against the scheme, the Bermuda Court has no jurisdiction to sanction the scheme and the scheme fails.

New Money

There are no statutory procedures relating to priority for new money and what security may be provided for it. The status of new money will be determined by the terms of the scheme. New money may be injected by existing investors and lenders or by new investors and lenders. It is common for new money investors or lenders to be given super priority in any restructuring process.

There are no rules regarding the company borrowing money during the scheme process. If the scheme is conducted outside of a liquidation, this will be a matter of agreement between the company and its lenders. If it is conducted within a liquidation proceeding after the making of a winding-up order, the liquidator has power to cause the company to borrow money and grant security without the need for court approval.

If light touch provisional liquidators have been appointed for restructuring purposes prior to the making of a winding-up order, the order limiting the JPLs’ powers may state whether or not any such new borrowing and/or grant of security requires the prior approval of the JPLs.

Timelines and Milestones in the Scheme Process

No timelines are set by the Companies Act for the scheme process, and the timeline will vary from scheme to scheme and be dependent on the extent to which there is creditor buyin and whether or not any creditors oppose the scheme in court, which will delay the process. Much of the time in the process will be incurred prior to the formal commencement in court in negotiating the scheme terms with key creditors and then seeking support for the scheme from other creditors.

A company will rarely commence the scheme process unless it has already obtained support for the scheme from a sufficient number of creditors for the company to be reasonably confident that the scheme will be approved at the scheme meetings.

Key milestones in the scheme process include:

• the issuing of the practice direction letter;
• the convening hearing;
• scheme meeting(s);
• sanction hearing; and
• delivery of the scheme sanction order to the Registrar of Companies for registration.

At the convening hearing, the Bermuda Court hears the application by the proposer of the scheme for leave to convene the scheme meeting(s) at which the shareholders or creditors will vote on whether to approve the scheme. The proposer will seek various directions regarding the scheme meetings including regarding the date of the meetings, length of notice to be given of the meetings, and documentation to be provided to shareholders or creditors.

In addition, in a creditors’ scheme, the Bermuda Court will determine at the convening hearing whether the proposed classes of creditor have been properly constituted. Creditors will have been informed of the proposed classes by the practice direction letter referred to in 4.1 Opening of Statutory Restructuring, Rehabilitation and Reorganisation.

Creditors are entitled to be represented at the convening hearing by counsel (or in person if they are individuals) and to raise any issues or objections they have to the class composition or the scheme generally at that hearing. They may also raise such issues at the sanction hearing, but the Bermuda Court will expect them to give a reasonable explanation as to why any class issues were not raised at the convening hearing.

The scheme meeting(s) will be held on the date, or within the timeframe, stated in the scheme directions order made at the convening hearing. A separate scheme meeting will be held for each class of creditor or shareholder, if there is more than one class.

If the scheme is approved by the creditors or shareholders in the requisite majority at the scheme meeting(s), it then has to be sanctioned by the Bermuda Court before it can become effective. The promoter will present a petition to the Bermuda Court seeking sanction of the scheme and this application is dealt with at the second court hearing in the process, the sanction hearing.

Completion of the Scheme Process

A scheme court process will close once the scheme has been sanctioned by the Bermuda Court and the effective date of the scheme has been reached. The effective date is usually the date when the order sanctioning the scheme is delivered to the Registrar of Companies for registration, but where there are conditions precedent to the scheme, the effective date may not occur until those conditions are met.

If there is an ongoing purpose of the scheme, such as to provide a mechanism for the adjudication and resolution of creditor claims in a liquidation, as an alternative to the statutory insolvency regime, the scheme will continue in effect until this process is complete.

The Sanction Hearing

The sanction of the Bermuda Court is not a formality. The Bermuda Court has an unfettered discretion as to whether or not to sanction the scheme. An application to sanction a scheme of arrangement involves applying a four-stage test, which if satisfied the Bermuda Court is likely to exercise its discretion in favour of sanction.

• At the first stage, the Bermuda Court must consider whether the provisions of the statute have been complied with.
• At the second stage, the Bermuda Court must consider whether the class was fairly represented by the meeting and whether the majority was coercing the minority in order to promote interests that are adverse to the class that they purported to represent.
• At the third stage, the Bermuda Court must consider whether the scheme was a fair scheme that a creditor or shareholder could reasonably approve.
• At the fourth stage, the Bermuda Court must consider whether there is any “blot” or defect in the scheme.

If the Bermuda Court sanctions the scheme, a copy of the order sanctioning the scheme must be filed for registration with the Registrar of Companies. The scheme will not become effective until the order has been so filed.

Enforcement of the Scheme

If the company or any party to a scheme fails to observe the terms of the scheme, the scheme can be enforced by action in the Bermuda Court. The scheme may provide for a dispute resolution process in relation to the resolution of claims made under the scheme, such as binding arbitration.

Effect of Initiation of the Scheme Process

The consequences of the initiation of the procedure for formal restructuring, ie, a scheme, will depend on whether the company is in a liquidation procedure already or commences a liquidation procedure in support of the restructuring.

Carrying on business

If the company is not in liquidation, it can continue to operate its business while going through the scheme procedure.

If the company is in a liquidation proceeding, it will be able to continue to operate its business only if the Bermuda Court, by order, allows this. If the liquidation proceeding has been commenced for the purpose of allowing the restructuring to take place, the company will usually be allowed to continue its business under the control of its board and management, with JPLs being appointed for restructuring purposes only, with limited “light touch” powers of oversight of the board and management.

Use of company’s assets

If the scheme process is being conducted without liquidation proceedings, there are no restrictions imposed on the company’s use of its assets as part of the scheme process, unless the company agrees to restrictions requested by the key creditors or ad hoc groups involved in negotiating the terms of the scheme.

If the scheme is being conducted within liquidation proceedings where JPLs are appointed with light touch powers, the company’s assets will remain under the control of the board and management, and the order appointing the JPLs will set out what oversight powers the JPLs have. For example, the right to be consulted prior to the company’s use of assets outside the normal course of business or entering into transactions over a certain amount. The JPLs may be given veto power over certain transactions.

If the scheme is being conducted within a compulsory liquidation, where the JPLs have full powers, the liquidator(s) will have control of the company’s assets and will deal with them in the usual course subject to control of the Bermuda Court.

If the Bermuda restructuring process is being conducted in parallel to a US Chapter 11 reorganisation, the rules of the US Bankruptcy Code may also come into play in determining whether there are any restrictions on the use of assets.

Borrowing money

There are no rules regarding the company borrowing money during the scheme process if it is conducted outside of a liquidation. This will be a matter of agreement between the company and its lenders. If it is conducted within a liquidation proceeding after the making of a winding-up order, the liquidator has power to cause the company to borrow money without court sanction. If light touch JPLs have been appointed for restructuring purposes prior to the making of a winding-up order, the order limiting the provisional liquidators’ powers will state whether or not any borrowing by the company requires the prior approval of the JPLs.

If the scheme is proposed outside of a liquidation proceeding, the board and management of the company will usually cause the company to propose the scheme and manage the process. It is rare for a creditor or shareholder to propose a scheme, even though this is provided for in Section 99 of the Companies Act. Scheme administrators may be appointed to deal with the implementation of the scheme once sanctioned.

If the scheme is proposed in a liquidation, the liquidators will usually be responsible for proposing the scheme and managing the scheme process and will likely act as scheme administrators if these are necessary.

If the scheme is proposed in a provisional liquidation commenced for the purposes of the restructuring, as previously mentioned, the JPLs’ role will usually be one of oversight of the board and management while they propose the scheme and manage the scheme process.

Parties to the Scheme

The persons who are entitled to be involved in a scheme proceeding are principally the company and the persons who are intended to be bound by the scheme, whether creditors or shareholders. A company may propose a scheme to whichever class(es) of creditor or shareholder it chooses and is not required to propose the scheme to all of them. A person whose rights are not affected would not be entitled to object to a scheme, although the Bermuda Court has discretion to hear objections of third parties who may be indirectly affected by the scheme.

Rights of Participants

If the scheme is proposed outside of a liquidation proceeding, creditors’ rights, such as a right to enforce security, pursue an action, apply a contractual right of set-off, and any contractual intercreditor rights or obligations, will not be affected by the commencement of a scheme of arrangement process, save to the extent that this may have been agreed with the company and/or other creditors. Similarly, the rights of shareholders to deal with their shares will not be affected, unless otherwise agreed in anticipation of the scheme.

If the scheme is proposed within a liquidation proceeding after the appointment of JPLs, the rights of unsecured creditors and the rights of shareholders will be restricted as described in 5.2 Course of the Liquidation Procedure.

There are no rules regarding transfer of creditor claims while scheme proceedings are pending or requirements for disclosures or approvals of transfers. A record date will usually be set in the explanatory statement and only holders of claims as of that date will be entitled to vote at the scheme meeting(s). The transferor would have to exercise the vote on behalf of the transferee who acquired the claim after the record date.

The scheme will provide for what is to happen if a person acquires a creditor’s claim between the record date and the distribution of benefits under the scheme. The transferee may similarly need to claim its benefits under the scheme through the original creditor.

Challenges by Dissenting Creditors or Shareholders

A scheme of arrangement can be challenged by a dissenting shareholder or creditor at the convening hearing, at the relevant scheme meeting and at the sanction hearing. The creditor can attend, by proxy, in person, or by its representative at the scheme meeting. Any objections raised at the scheme meeting(s) will be reported to the Bermuda Court at the sanction hearing.

At the convening hearing or sanction hearing, the process for objections will be for the shareholder or creditor to appear, by counsel if they are a company, or by counsel or in person, if an individual, to make submissions in opposition. The dissenting shareholder or creditor may submit evidence in support of their opposition. The company and other creditors or shareholders will have standing to be heard on any application in opposition to the scheme.

A shareholder will not usually have standing to object to a creditors’ scheme where the company is insolvent or likely to become insolvent, and a creditor will not usually have standing to object to a shareholders’ scheme that does not affect creditors’ rights.

Moratorium on Claims

If the scheme of arrangement is taking place outside of a liquidation proceeding, there is no moratorium or automatic stay of claims asserted against the company and if within a liquidation proceeding, the moratorium described in 5.2 Course of the Liquidation Procedure is imposed.

If the company is at risk of proceedings that could disrupt the restructuring process, it can commence its own winding-up proceeding and apply for provisional liquidators to be appointed for the purposes of restructuring with “light touch” powers of oversight of the board and management of the company while they seek to negotiate and implement the restructuring. An automatic stay of proceedings against the company in Bermuda is imposed upon the appointment of a provisional liquidator.

Whether or not a shareholder may receive or retain any ownership or other property on account of their ownership interests will depend on the terms of the scheme.

Voluntary Liquidation

There are no set criteria for commencing a voluntary liquidation. In particular, there is no requirement that a company be insolvent to commence a voluntary liquidation. On the contrary, the MVL process is for companies that are solvent either based on their recent financial statements or because another party, usually the shareholder(s) or indirect holding company has provided an indemnity, undertaking or pledge in favour of the company in respect of its liabilities. Insolvency is not a prerequisite for the commencement of a CVL but it is likely that the company is insolvent.

Winding up by the Court

The grounds on which a company may be wound up by the Bermuda Court are set out in Section 161 of the Companies Act as follows.

• The members of the company may pass a resolution in a general meeting that the company be wound up by the Bermuda Court. There are no criteria required for a winding-up based upon the resolution of the members.
• Default is made in holding the annual general meeting, in laying financial statements before the shareholders at the AGM or in appointing auditors (unless these requirements have been waived by the shareholders).
• The company does not commence its business within a year of its incorporation or suspends its business for a whole year.
• The company carries on any restricted business activity (which includes some financial and professional services and holding land) in contravention of Section 4A of the Companies Act.
• The company engages in a prohibited business activity (which includes trafficking in armaments and, except as authorised by law, operating lotteries or gambling facilities and trading in controlled drugs) in contravention of Section 4B of the Companies Act.
• The company is unable to pay its debts.
• The consent of the Minister, where under the Companies Act such consent was required, was obtained as a result of a material misstatement in the application for consent.
• The Court is of the opinion that it is just and equitable that the company be wound up.

Regulators

The grounds for a petition presented by the Bermuda Monetary Authority (the“BMA”) as regulator of the financial services industry under the legislation related to each sector will be insolvency and/or that the company has breached certain provisions of the applicable legislation and/or that it is expedient in the public interest that the company be wound up. The Registrar of Companies may petition to wind a company up on the just and equitable ground under Section 163(d) of the Companies Act.

It will be necessary to prove that a company is insolvent in order to commence a compulsory liquidation based on the ground that the company is unable to pay its debts. A company is deemed unable to pay its debts under Section 162 of the Companies Act if:

• the company fails to discharge a debt or reach a settlement to the reasonable satisfaction of the creditor within 21 days of being served with a demand for payment (a “statutory demand”);
• execution of a judgment or order against the company is returned unsatisfied; or
• the Bermuda Court is satisfied that the company is unable to pay its debts, taking into account the contingent and prospective liabilities of the company.

Either a cash flow or balance sheet test of insolvency can therefore be used. The statutory demand can be used only if the debt that is the subject of the demand exceeds BMD500, is undisputed, and is currently due and payable. It is a very commonly used tool for establishing insolvency.

The just and equitable ground is typically used by shareholders.

Standing to present a winding-up petition

The persons who have standing to present a winding-up petition under the Companies Act are the company itself, creditors (including contingent and prospective creditors), contributories (being shareholders and certain former shareholders) and regulators.

A company may decide to commence its own compulsory liquidation by the shareholders passing a resolution in general meeting that the company be wound up by the Bermuda Court. Once the resolution is passed, the directors will then take the steps necessary by causing the company to present its own winding-up petition. If a company is insolvent, the directors of the company can cause it to present its own winding-up petition without the need for shareholder approval.

The most common ground used by creditors when seeking a winding-up order is that the company is unable to pay its debts.

If a company is solvent, a shareholder may petition for the company to be wound up on the ground that it is just and equitable that the company be wound up. For example, if the purpose for which the company was formed has failed.

If a company is insolvent, in order to successfully petition to wind it up, a shareholder will have to prove that they have a tangible interest in the liquidation in order to have standing to present a petition. If there is no prospect of there being a surplus for distribution to shareholders after all debts and the expenses of the liquidation are paid, a shareholder is unlikely to be allowed to proceed with a petition, unless it has partly paid or unpaid shares and has an interest in preventing the company from incurring further debt that could result in a greater call on shares in the liquidation.

In addition, under the Companies Act, the Registrar of Companies may present a petition on the ground that it is just and equitable that a company be wound up and the Official Receiver (the government official responsible for winding up) may present a petition against a company that is in voluntary liquidation.

There are provisions in legislation regulating the financial services industry that give the BMA, as regulator standing, to present a winding-up petition against regulated companies, such as the Insurance Act 1978 and the Investment Funds Act 2006. The grounds for such a petition will be insolvency and/or that the company has breached certain provisions of the applicable legislation or that it is expedient in the public interest that the company be wound up.

The procedures above apply to companies only.

Bankruptcy

There is a separate insolvency procedure for individuals or partnerships and that is bankruptcy, under the Bankruptcy Act 1989. This procedure is not addressed in this guide.

Consequences of the Initiation of the Procedure(s)

In a compulsory liquidation, an automatic stay on the commencement or continuation of proceedings against the company without leave of the Bermuda Court is imposed by Section 167(4) of the Companies Act upon the making of a winding-up order or earlier appointment of a provisional liquidator. This stay protects the company from proceedings in Bermuda. Although it does not have extraterritorial effect, if a creditor is subject to the jurisdiction of the Bermuda Court and commences proceedings overseas, the liquidator will be able to seek an injunction to prevent the creditor from continuing the proceedings.

Under Section 166 of the Companies Act any disposition of the property of the company and any transfers of shares or alteration in the status of members made after the commencement of the liquidation is void unless the Bermuda Court orders otherwise. Although the avoidance of the disposition only takes effect if a winding-up order is made, the company or persons dealing with the company will usually wish to have any transaction entered into after the date of commencement of the winding-up approved by the court.

As noted above, the powers of the directors and officers cease in an MVL or CVL upon the appointment of the liquidator and in a compulsory liquidation, they cease upon the making of a winding-up order or earlier appointment of a provisional liquidator, other than the residual power to cause the company to defend the winding-up proceedings.

The Task and Powers of the Different Officeholders/Actors

Liquidators, receivers and trustees in bankruptcy (the statutory officers in individual insolvency proceedings in Bermuda) are not currently subject to any licensing or qualification criteria. However, they do have to satisfy the Bermuda Court as to their credentials and undischarged bankrupts are unable to hold office and can be liable to imprisonment and/or a fine if they seek to do so.

In compulsory liquidations, appointments are usually accepted by chartered accountants who specialise in insolvency and at least one liquidator in every matter must be ordinarily resident in Bermuda, unless the Bermuda Court orders otherwise.

The Official Receiver is the liquidator appointed by the Bermuda Court when a private sector liquidator is not appointed. The Official Receiver is a government official with a limited government budget.

In voluntary liquidations, there is also no licensing or qualification criteria for liquidators, nor is there currently a resident requirement, with appointments commonly accepted by chartered accountants and lawyers and sometimes company officers.

There is no administrator or administration concept under Bermuda law.

A trustee in bankruptcy is appointed by the Bermuda Court when an individual is adjudged bankrupt or by creditors after a resolution to that effect.

A receiver may be appointed over one or more segregated accounts of a segregated accounts company under the SAC Act or of an incorporated segregated accounts company under the ISAC Act. In practice, receivers appointed under these Acts are usually chartered accountants specialising in insolvency, although this is not a prerequisite.

A receiver may be appointed by the Bermuda Court under Section 19(c) of the Supreme Courts Act 1905 over the property of a company or individual whenever it appears to the Bermuda Court to be just or convenient to do so.

Receivers can also be appointed out of court under the powers contained in a security instrument.

A receiver may also be appointed under Section 35 of the Conveyancing Act 1983 by mortgagees once they have received a power of sale.

Certain provisions regarding receivers, whether appointed in or out of court, are found in the Companies Act, Part XIV. They deal with issues such as the right of any receiver to apply to the Bermuda Court for directions and delivery of accounts to the Registrar of Companies.

Duties

Liquidators are officers of the Bermuda Court and owe duties to, and are subject to control by, the Bermuda Court. They also owe fiduciary duties to the unsecured creditor body as a whole. The liquidator has a duty to:

• preserve, get in and realise the assets of the company for the benefit of creditors;
• adjudicate claims;
• after payment of the expenses of the liquidation and preferential debts, distribute the available assets of the company pari passu to the unsecured creditors; and
• distribute any surplus to the shareholders.

Similarly, the other statutory insolvency officers mentioned above owe fiduciary duties to the respective creditors. Their general duties include preserving, realising and distributing the estate assets for the benefit of the body of creditors as a whole.

The court-appointed officers (liquidators in involuntary liquidations, statutory receivers under SAC and ISAC and trustees in bankruptcy) may often have the terms of their appointment defined in the court order appointing them. These may be in addition to their usual powers as granted under the relevant statute. For liquidators this is Section 175 of the Companies Act. For SAC receivers this is Section 21 of the SAC Act and for ISAC receivers this is Section 46 of the ISAC Act.

Receivers and managers under Part XIV of the Companies Act will have the terms and powers of their appointment defined in the relevant security agreement or in the court order appointing them.

A receiver appointed out of court under the powers contained in a security instrument will have the powers set out in that instrument and also powers under the Conveyancing Act 1983. A receiver owes a duty when exercising their powers, to do so in good faith for the purpose of preserving, exploiting and realising the secured assets and achieving payment of the secured sum. A receiver who decides to exercise a power of sale owes a duty to obtain the best price reasonably obtainable but does not owe a general duty of care.

All insolvency officers will usually report to creditors periodically and may have additional reporting requirements, including to the Registrar of Companies, the BMA and the Official Receiver. Court-appointed insolvency officers will report to the court periodically.

Committee of inspection (creditors’ committee)

When a winding-up order has been made by the Bermuda Court, the provisional liquidator is required to convene the first statutory meetings of the creditors and contributories to determine by votes on resolutions proposed at the meetings:

• whether an application should be made to the Bermuda Court to appoint the JPLs or someone else as permanent liquidators; and
• whether an application should be made to the Bermuda Court to appoint a committee of inspection, and if so what creditors/contributories will make up that committee of inspection.

An application is then made by the JPLs to the Bermuda Court to make these appointments in line with the votes at the meetings. In an insolvent liquidation, if a committee of inspection is appointed it is usually comprised of creditors only.

If appointed, the committee of inspection will meet at such times as it determines and the liquidator and any member of the committee may also call a meeting of the committee when considered necessary. The committee may act by a majority of the members if a majority of the committee is present. A committee must consist of a minimum of two members.

The committee may sanction the following actions of the liquidator which otherwise would be required to be sanctioned by the Bermuda Court:

• bringing or defending actions;
• carrying on the business of the company;
• appointing lawyers;
• paying any class or classes of creditors in full;
• making compromises or arrangements with creditors; and
• compromising any claims against contributories or other debtors.

The committee must also fix the remuneration to be paid to the liquidator and review the fees and expenses of the liquidator.

No committee members, or their affiliates, are entitled to make a profit from their appointment.

Committee members are not paid, except for the reimbursement of their reasonable expenses, which may include the reasonable costs of any necessary advisers to the committee, if allowed by the Bermuda Court.

Informal creditors’ committees are sometimes formed before a winding-up order is made. The order appointing a provisional liquidator may grant them the power to appoint an informal creditors’ committee and may specify the role of the committee. There are no statutory rules surrounding informal creditors’ committees, and their organisation, powers, and expenses are agreed on an ad hoc basis, usually in line with the rules for committees of inspection or an order of the Bermuda Court.

Where a creditors’ committee is appointed to represent all creditors or a class of them, the committee members will owe duties to act in the interests of all of the other creditors who they represent.

The Effects of the Procedure on (Pre-Insolvency) Existing Agreements

Employment contracts

Section 33 of the Employment Act 2000 provides that the contracts of employment of employees will terminate one month from the date of the winding-up or appointment of a receiver, unless otherwise terminated in accordance with the Companies Act.

Other contracts

Other pre-existing agreements do not terminate automatically and may be continued or terminated at the discretion of the liquidator.

A liquidator in a winding-up by the court has the power, with the leave of the Bermuda Court, to disclaim assets that are onerous for the company to hold or unprofitable or unsaleable.

Voluntary Liquidation

In a voluntary liquidation, when the affairs of the company have been fully wound up, the liquidator will prepare an account of the winding-up to show how it has been conducted and how the property of the company has been disposed of.

In an MVL the liquidator will then call a final general meeting of the members of the company on at least one month’s notice published in the local paper. At that meeting, the liquidator will present their account to the members and the members will vote on how the records of the company are to be dealt with in accordance with the record retention provisions of the Companies Act and other legislation, and they will then pass a resolution that the company be dissolved. The dissolution will be effective on the date of that resolution.

In a CVL the liquidator will call a final general meeting of the members of the company and a meeting of the creditors, also on at least one month’s notice published in the local paper, at which they will present their account. Within one week of the later to be held of the meetings, the liquidator must send a copy of the account to the Registrar of Companies and submit a return to him about the holding of the meetings and their dates.

The registrar registers the account and the return of the meetings and three months after registration, the company is deemed to be dissolved.

Under Section 230 of the Companies Act, a liquidator in a voluntary liquidation may also stay the liquidation either for a period or altogether. The Official Receiver or any creditor or shareholder may, within three weeks of the liquidator publishing his intention to stay the liquidation, apply to the Bermuda Court for an order requiring the liquidator to continue the winding up proceedings. When a liquidator stays the winding up of a company altogether he shall, after the three-week period has expired, take such steps as he considers desirable to enable the company to be as near as practicable to the position it was in before the resolution to wind up the company was made.

Compulsory Liquidation

A petition to wind up a company may, with the leave of the Bermuda Court, be withdrawn or dismissed prior to the making of a winding-up order.

After the making of a winding-up order, the liquidation proceedings will conclude when the company is dissolved, or if the proceedings are permanently stayed, with the company being restored to operations.

Dissolution

When the affairs of a company have been completely wound up, the liquidator will apply to the Bermuda Court for their release and discharge and for an order that the company be dissolved. The liquidator must give 21 days’ notice of their intention to apply for their release to contributories and to creditors who have proved their debts and send them a copy of the liquidator’s summary of receipts and payments in the liquidation.

Upon the hearing of the application, assuming no creditor or shareholder has objected, the Bermuda Court will order that the company be dissolved with effect on the date of the order.

Stay of liquidation

Under Section 184 of the Companies Act, a compulsory liquidation may be stayed by the Bermuda Court at any time after a winding-up order is made. A stay application may be made by the liquidator, the Official Receiver or any creditor or contributory. If the Bermuda Court is satisfied that sufficient evidence that all proceedings in relation to the winding up ought to be stayed has been presented, the Court may make an order staying the proceedings, either altogether or for a limited time, on such terms and conditions as the Bermuda Court thinks fit.

Where the Bermuda Court makes an order staying the proceedings altogether it may, on hearing the liquidator, the Official Receiver, if he desires to be heard, and the interested creditors or contributories, make such order as it considers desirable to enable the company to be as near as practicable to the position it was in before the winding-up order was made.

On any Section 184 application, the Bermuda Court may, before making an order, require the Official Receiver or the liquidator to furnish to the Bermuda Court a report with respect to any facts or matters that are, in his opinion, relevant to the application.

A copy of every order made under Section 184 must be forwarded by the company to the Registrar of Companies for registration.

Standing to Commence a Compulsory Liquidation

A creditor whose debt is undisputed has standing to petition to have a company wound up if the company is unable to pay its debts. The usual way in which a creditor will prove that a company is unable to pay its debts is by issuing a statutory demand. The company will be deemed unable to pay its debts by virtue of Section 162(a) of the Companies Act if it fails to pay the demand or reach a satisfactory settlement within 21 days. In order for a creditor to issue a demand, its debt must be undisputed and currently due, but unpaid, in an amount exceeding BMD500.

In a CVL the creditors’ choice of a liquidator, made at a meeting convened for the purpose of voting on who should be liquidator, will prevail over the choice of the shareholders. The creditors may appoint a committee of inspection (creditors’ committee) with the power to sanction certain actions of the liquidator that require the sanction of the Bermuda Court or the committee.

In a winding-up by the Bermuda Court, a creditor:

• has the right to appear and be heard at the hearing of the petition and may oppose or support the making of a winding-up order;
• may apply for the appointment of a provisional liquidator prior to the making of a winding-up order;
• has the right to obtain a copy of the petition from the petitioner;
• has the right to inspect the court file in the liquidation (subject to any sealing orders) upon establishing to the Bermuda Court that it is a creditor;
• has the right to apply to be substituted as petitioner in various circumstances, including if the petitioner consents to withdraw its petition or have it dismissed, or the petition hearing is adjourned; and
• if unsecured, has the right to vote on who the permanent liquidator(s) should be at the first statutory meeting of creditors and the right to vote on whether there should be a committee of inspection appointed (creditors’ committee) to act with the liquidator. An unsecured creditor may be nominated to be and be appointed as a member of that committee.

The creditors’ committee (if appointed) has the power to sanction the exercise of the liquidator’s power to bring or defend any legal proceeding, carry on the business of the company, appoint an attorney, pay any class of creditors in full, and compromise with any creditor or debtor of the company.

A creditor or group of creditors can disrupt a compulsory liquidation process by objecting to the making of a winding-up order at the hearing of a winding-up petition. If the Bermuda Court accepts that the objection may proceed, this will lead to the adjournment of the petition to a later date for a contested hearing. If the creditor is unsuccessful in its opposition, it may have costs awarded against it.

Pre-insolvency attachments

A creditor that has issued execution against the property of the company or has attached any debt due to him is not entitled to retain the benefit of the execution or attachment against the liquidator, unless they have completed the execution or attachment before the date of commencement of the liquidation.

Set-off

In a liquidation of an insolvent company, mandatory set-off of mutual credits, mutual debts or other mutual dealings applies, displacing any contractual rights of set-off. The time at which the right to set-off is determined is the date of commencement of the liquidation. This is the date of presentation of the petition or passing of the resolution to voluntarily wind up the company in a CVL.

Bermuda Proceedings

Insolvency proceedings in the Bermuda Court will be governed by Bermudian law. Assets located in Bermuda are usually subject to the jurisdiction and laws of Bermuda. Assets of the company located in foreign jurisdictions may be subject to other laws too. Conflict of laws is a complex area and much will depend on the specific facts of a case.

There are no statutory provisions under Bermudian law dealing with international restructuring and insolvency and the common law applies to determine cross-border insolvency issues within Bermuda.

Within insolvency proceedings with international aspects, the Bermuda Court will usually take a co-operative approach, in line with modified universalism which is a legal concept in relation to corporate insolvency that national courts should strive to administer the estates of insolvent companies in the spirit of international comity.

Foreign Proceedings

Under the common law application of modified universalism, the Bermuda court may recognise and assist overseas/foreign insolvency proceedings and the appointment of insolvency officeholders in those proceedings and will use its powers to grant relief to foreign insolvency officeholders. However, there are some limitations:

• the Privy Council held in Singularis (2009) that when assistance is provided to a foreign insolvency officer, the Bermuda Court is limited to providing assistance under Bermudian law only to the same extent that such relief is available under the law of the country of the foreign insolvency proceeding; and
• the Court has since further restricted the recognition and assistance provided to foreign insolvency proceedings, holding that the Bermuda Court will require evidence that the company is either incorporated in Bermuda or has assets within Bermuda, necessitating the protection of the Bermuda Court.

The Bermuda Court will therefore look to the rules, standards and guidelines of the foreign jurisdiction before granting any relief in these instances.

The Bermuda winding-up regime under the Companies Act applies only to companies registered under the Companies Act, companies limited by shares incorporated by private Act, mutual companies incorporated before 1 July 1983, non-resident insurance undertakings, and overseas companies operating in Bermuda under a permit (other than the provisions relating to members’ voluntary liquidations).

The Bermuda Court does not have jurisdiction to wind up an overseas company that is not a permit company or non-resident insurance undertaking.

Bermudian law will apply to the restructuring or liquidation of a company in the Bermuda Court. The Bermuda Court may also recognise restructuring proceedings relating to a Bermuda company that are being conducted in a foreign court that has assumed insolvency jurisdiction over the Bermuda company (for example, a proceeding in the US Bankruptcy Court under Chapter 11 of the US Bankruptcy Code).

Recognition of Foreign Proceedings

It is common for the Bermuda Court to recognise and assist foreign insolvency and restructuring proceedings, subject to the restrictions outlined in 6.1 Sources of International Insolvency Law, with recognition orders and stays of proceedings.

There are no set protocols. However, to facilitate court-to-court communications in cross-border cases, the Bermuda Court has issued two practice directions as follows.

• Guidelines Applicable to Court-to-Court Communications in Cross-Border Cases.
• Guidelines for Communication and Co-operation between Courts in Cross-Border Insolvency Matters.

Recognition of Chapter 11 plans of reorganisation

The Bermuda Court has also established a process for recognising and giving effect in Bermuda to plans of reorganisation under Chapter 11 of the US Bankruptcy Code relating to Bermuda incorporated companies. When this recognition process was first established, in proceedings in 1999 and into the early 2000s, it was usual for there to be a Chapter 11 proceeding and a parallel Bermuda liquidation proceeding for the company in which provisional liquidators were appointed with light touch powers.

The key purpose of the Bermuda proceedings was to benefit from the automatic stay imposed on the appointment of the JPLs, which would protect the company from claims in Bermuda while the Chapter 11 reorganisation was underway.

The restructuring would be effected by the Chapter 11 plan of reorganisation and would be implemented in Bermuda by a parallel scheme of arrangement. Over the years the process has changed and the parallel scheme of arrangement is not commonly used anymore. Instead, there is a process in the Bermuda provisional liquidation in which the provisional liquidators make an application for an order recognising the Chapter 11 plan and for orders giving effect to the plan by:

• permanently staying all claims by creditors or contributories in Bermuda;
• stating that leave to commence any proceedings against the company will not be granted; and
• stating that no debts may be proved by creditors whose claims are affected by the plan, and no claims may be brought by any contributories in the Bermuda proceedings.

The application is made on notice to all creditors and included with the solicitation package distributed to creditors in the Chapter 11 proceedings. Creditors who are not subject to the jurisdiction of the US Bankruptcy Court are entitled to appear at the hearing of the application.

Enforcement of Foreign Judgments

Under Bermuda law, the enforcement of a foreign judgment by a judgment creditor cannot be undertaken on the basis of the foreign judgment solely and directly. Bermuda is not a party to any bilateral or multilateral treaties for reciprocal recognition and enforcement of foreign judgments. However, arbitration awards are enforceable through the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and Part IV of the Bermuda International Conciliation and Arbitration Act 1993.

A foreign judgment undertakes the character of a debt that is capable of enforcement by one of two regimes available under Bermuda law:

• by statue pursuant to the Judgments (Reciprocal Enforcement) Act 1958 (the “JRE Act”); or
• at common law.

The JRE Act, which is derived from the English Foreign Judgments (Reciprocal Enforcement) Act 1933, provides for enforcement by registering a foreign judgment, to which the JRE Act applies, in the Bermuda Court. The JRE Act applies to judgments of the superior courts, as defined by the JRE Act, of certain countries, states or territories (predominantly the courts of the United Kingdom and certain other designated countries).

In order to qualify for registration under the Companies Act the judgment must be:

• final and conclusive as between the parties;
• for a sum of money, not being a sum payable in respect of taxes or other charges of a like nature or in respect of a fine or another penalty (judgments for specific performance or for an injunction will not be enforced, although such judgments may be relied upon as a defence to a claim or as conclusive evidence of an issue in a claim);
• given by a Superior Court of a relevant jurisdiction (including an Appellate Court on appeal from a Superior Court); and
• within the time limit (six years after the date of the last judgment).

If the judgment is an arbitration award, the award must be enforceable as a judgment of the superior court in the place where it was made.

This statutory-based recognition of the foreign judgment is granted as of right rather than as a matter of discretion, provided the requirements have been complied with. The judgment creditor can, upon registration, seek enforcement via the Supreme Court by way of:

• garnishee proceedings;
• the appointment of a receiver;
• writ of fieri facias;
• committal (if appropriate); or
• writ of sequestration.

In cases where the JRE Act does not apply, because the judgment is of the court of a country not designated under the JRE Act, such as the United States and Canada, the enforcement route is not by a direct execution of the foreign judgment but by a fresh common law action.

The foreign judgment creates a debt capable of enforcement and the judgment creditor will sue on the foreign debt obligation. This procedure does not mean that a full trial on the merits will be necessary, as the Bermuda Court will not usually look behind the decision of the foreign court in determining the judgment obtained. The judgment creditor will seek judgment in default of appearance or summary judgment if the proceedings are acknowledged.

The summary judgment procedure expedites enforcement upon the foreign judgment asserting that there is no defence to the action in Bermuda on this basis. Upon judgment being granted, the Bermuda Court will have the powers of enforcement.

As noted above, to facilitate court-to-court communications in cross-border cases, the Bermuda Court has issued two practice directions as follows.

• Guidelines Applicable to Court-to-Court Communications in Cross-Border Cases.
• Guidelines for Communication and Co-operation between Courts in Cross-Border Insolvency Matters.

Within insolvency proceedings in Bermuda, foreign creditors are treated the same as domestic creditors.

The duties of directors and officers are stated in Section 97 of the Companies Act as follows:

“Every officer of a company in exercising his powers and discharging his duties shall act honestly and in good faith with a view to the best interests of the company; and exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.”

Accordingly, the directors and officers of Bermuda companies have fiduciary duties and obligations to act in the best interests of the company. When a company is solvent, the directors are required to have regard to the interests of the company’s shareholders when determining what is in the best interests of the company. Once the company is insolvent or in the zone of insolvency, in making that determination the directors are required to have regard to the interests of the company’s creditors instead.

This switch is triggered when the director(s) knows or ought to know that the company is actually insolvent, the company’s insolvency is imminent, or an insolvent liquidation is probable. While there are no specific legal obligations for Bermuda companies to commence formal insolvency proceedings or to do so within specified timeframes, once a company is insolvent, the directors should consider whether the company ought to commence its own winding-up if this would be in the best interests of the creditors.

There is no power for directors to present a petition in Bermuda insolvency legislation. However, in the Bermuda case of Re First Virginia Ltd (2003) the Bermuda Court held that once a Bermuda company is insolvent the director(s) of the company may cause the company to present its own winding-up petition without the need to obtain approval of the shareholders in a general meeting, even if the by-laws do not give the director(s) that power.

Bermuda does not have the concept of wrongful trading. However, it does have the concept of fraudulent trading which is the carrying on of the business of the company with intent to defraud creditors or for any other fraudulent purpose, under Section 246 of the Companies Act. If, in the course of a winding-up, it appears that fraudulent trading has occurred, the Official Receiver, the liquidator or any creditor or contributory of the company may make an application to the Bermuda Court for a declaration that any persons who were knowingly parties to fraudulent trading be held personally liable to pay such debts and other liabilities as the Bermuda Court may determine.

Fraudulent trading by officers of the company is also a criminal offence, punishable by imprisonment for up to two years and a fine. Directors can be held personally liable for fraudulent trading and creditors may have the right to bring claims against directors for this under Section 246 of the Companies Act.

There are no provisions in Bermuda’s insolvency regime for disqualification of directors.

A director may be personally liable to creditors or shareholders if the director has accepted or voluntarily assumed direct personal liability to a creditor or a shareholder, but this would be unusual.

Otherwise, as directors’ duties are owed to the company, only the company may bring an action against the directors for breach of duty. A shareholder may be able to bring a derivative action on behalf of the company if the directors will not do so. If the company is in liquidation, the liquidator would need to cause the company to bring any action against the directors for breach of duty.

Bermuda does not have the concept of wrongful trading. However, under Section 246 of the Companies Act, it does have the concept of fraudulent trading, which is the carrying on of the business of the company with intent to defraud creditors or for any other fraudulent purpose, if, in the course of a winding-up, it appears that fraudulent trading has occurred, the Official Receiver, the liquidator or any creditor or contributory of the company may make an application to the Bermuda Court for a declaration that any persons who were knowingly parties to fraudulent trading be held personally liable to pay such debts and other liabilities as the Bermuda Court may determine.

Directors and officers can therefore be held personally liable for fraudulent trading and creditors (among others) have the right to bring claims against directors for this. Fraudulent trading by officers of the company is also a criminal offence, punishable by imprisonment for up to two years and a fine.

The officers of the company are subject to the same duties as directors.

Disqualification

There are no provisions for directors’ disqualification in the Bermudian insolvency regime. However, when determining whether a person is a fit and proper person to hold any office in a regulated company, the BMA may take into account the fact that the person was a director of a company that went into insolvent liquidation and may object to that person being appointed as a director of another company.

Criminal Offences

Several criminal offences by officers of a company specific to liquidations are prescribed by Sections 243 to 245 of the Companies Act. These include:

• fraudulent trading;
• failing to co-operate with the liquidator in providing information regarding the company’s affairs and property;
• failing to deliver up to the liquidator any property or records of the company;
• within the twelve months before commencement of the liquidation concealing or fraudulently removing property of the company, destroying any records of the company or falsifying records; or
• various other fraudulent activities.

Antecedent Transactions that may be Challenged in a Liquidation

Fraudulent preference

Under Section 237(1) of the Companies Act (applying Section 47 of the Bankruptcy Act), any transaction or other act relating to property may be challenged as a fraudulent preference if a company goes into liquidation and the transaction was made or done by or against a company:

• in favour of any creditor;
• within the six months before the commencement of the company’s winding-up (ie, the date of presentation of the winding-up petition or passing of the resolution to commence a voluntary liquidation);
• with the dominant purpose of preferring that creditor at the expense of other creditors; and
• the company was insolvent at the time of the transaction or rendered insolvent by the transaction.

Floating charge

A floating charge granted by a company within 12 months before the commencement of its winding-up is void, unless it can be proven that the company was solvent immediately upon the granting of the charge, except to the amount of any cash paid to the company at the time of creating the charge.

Onerous property

Liquidators can disclaim onerous, unprofitable or unsaleable property belonging to the company with the leave of the Bermuda Court. Any person injured by the disclaimer may prove in the liquidation for the amount of the injury.

Fraudulent trading

Transactions that may constitute fraudulent trading can be challenged and set aside in a fraudulent trading action under Section 246 of the Companies Act.

Dispositions at an Undervalue with the Requisite Intent

Under Sections 36A to 36C of the Conveyancing Act 1983 (which replace former fraudulent conveyance provisions), a creditor may apply to set aside a disposition made by a company at an undervalue if it was made with the dominant purpose of putting property that is the subject of the disposition beyond the reach of other creditors.

Applications to set aside dispositions at an undervalue with the requisite intent must be brought within six years of the relevant disposition, or the date when the creditors’ claim arose, whichever is later. This means that, in some circumstances, the limitation period can be as long as eight years. The company does not have to be insolvent or in liquidation for the claim to be brought.

Standing to Make a Claim to Set Aside or Annul Transactions

Only a liquidator can bring an action to set aside fraudulent preferences or floating charges or to disclaim onerous property. The Official Receiver, liquidator, or any creditor or contributory can bring an action for fraudulent trading.

Where a transaction is challenged successfully in a liquidation, the proceeds of the action will form part of the estate available for distribution to unsecured creditors, unless the Bermuda Court orders otherwise. The proceeds will not usually be payable to the creditor who suffered as a result of the transaction, other than a secured creditor who is entitled to enforce against the assets that are recovered.

Only an eligible creditor can bring an action to avoid a disposition at an undervalue with the requisite intention. However, they would require the leave of the court in order to pursue the action if the company is in compulsory liquidation.

None of these claims can be brought in a scheme proceeding.