The Companies (Winding up Amendment) Act, 2011 (the "Act") came into force on April 30, 2012 and has effected several significant changes to the regime for liquidation of companies in The Bahamas. The Act applies to companies formed under the Companies Act, the International Business Companies Act and other statutes. Under the Act, a company may be wound up:

  • Compulsorily by order of the court; or
  • Voluntarily (by resolution pursuant to its articles of association or on its expiration in the case of a limited duration company); or
  • Under the supervision of the court.

Jurisdiction

Among the changes effected by the Act is the enlargement of the court's jurisdiction to make winding up orders. This now extends beyond companies incorporated or registered under the laws of The Bahamas to foreign companies that have assets in The Bahamas or that carry on business in The Bahamas.

The court's power to wind up a company may be exercised where:

  • The company has passed a resolution requiring that it be wound up by the court;
  • The company does not commence business within one year after incorporation or suspends business for a whole year;
  • The company is insolvent;
  • The members are reduced to less than two;
  • The court is of the opinion that it is just and equitable for the company to be wound up; or
  • A regulator having authority over the company files a petition for it to be wound up after its license is suspended or revoked.

Voluntary Liquidation

The procedure for voluntary liquidation of companies incorporated or registered under the Companies Act may be summarised as follows:

  • The winding up is commenced by a resolution passed by 75% of the company's members.
  • A notice of the resolution must be filed at the Companies Registry within 28 days and also published in the Gazette.
  • Along with the notice, the liquidator's consent to act and the director's declaration of solvency must be filed at the Companies Registry.
  • If the business is a regulated one, the notice must be filed with the relevant regulator/s within 28 days of the passing of the resolution.
  • As soon as the company's affairs are wound up, the liquidator prepares a report and account of the winding up showing how it was conducted and how the company's assets were disposed of.
  • The liquidator should convene a general meeting of the company to present his report and explain the report.
  • 21 days before the meeting the liquidator sends a notice specifying the time, place, object of the meeting to each contributory in any manner authorised by the company's articles and published in the gazette.
  • No more than 7 days after the meeting, a return should be made to the Registrar in the prescribed form specifying (a) the date on which the meeting was held; and (b) if there was a quorum, particulars of any resolutions passed at the meeting.
  • Three days after receipt of the Liquidator's return, the Registrar must register the return.
  • Upon the expiration of three months from the registration of the return, the company is deemed to be dissolved.
  • Prior to the company being dissolved, the liquidator or any other interested person may apply to the court for an order deferring the date at which the dissolution is to take effect. Any such order must be registered with the Registrar within seven days.
  • Unclaimed dividends and assets shall be held by the liquidator as trustee for a period of one year after which they are to be transferred to the Treasurer.

Insolvency – Winding up Under Court Supervision

A company that is insolvent must be wound up under court supervision. Under the Act, a company is insolvent if it is unable to pay its debts as they fall due or if the value of its liabilities exceeds the value of its assets. A company is deemed to be unable to pay its debts as they fall due if it fails to pay a creditor for at least three weeks after being served with statutory demand or if an execution made by a creditor pursuant to court proceeding is returned either partially or wholly unsatisfied, or if it is proved to the courts satisfaction that the company is unable to pay its debts.

The provision relating to the making of a statutory demand makes it easier for creditors to initiate insolvency proceedings. However, it should be noted that the court may set aside a statutory demand or extend the time for compliance therewith.

Winding up by the Court

An application for the court to wind up a company may be made by the company; any creditor or group of creditors, any contributory or group of contributories or a regulator with statutory power to do so. The court may not wind up a company on the application of a person who is under a contract obligation not to make such an application.

The Act preserves the power of the court to wind up a company on the ground that it is just and equitable to do so but allows the court to make the following alternative orders:

  • An order regulating the conduct of the company's affairs in the future;
  • An order requiring the company to act or not to at in a particular manner;
  • An order authorising civil proceedings in the company's name; or an order for the company or members of the company to purchase the shares of a member and, where applicable, reduce its capital.
  • An alternative order which has the effect of altering the company's memorandum and articles of association takes effect as a resolution of the company and must be filed with the Registrar of Companies.

Shadow Directors

One of the concepts under the Act which is new to Bahamian law is that of a shadow director, on whom several responsibilities/ liabilities are imposed. Some of these responsibilities and liabilities are set forth below.

A shadow director is not a director in the formal sense of having been appointed in that capacity in accordance with the company's governing documents. A shadow director is defined as "any person in accordance with whose directions or instructions the directors of a company are accustomed to act". This does not include a person who gives advice to the board merely in a professional capacity.

Investigative Powers of a Liquidator

Among the other changes made by the Act is the power of a liquidator to require present and former directors, officers (including shadow directors), professional service providers and employees and former liquidators to prepare and submit a statement of affairs on the company verified by affidavit. The statement must set out information on company's assets and liabilities, persons in possession of assets, creditors and securities pledged to them in addition to any other information required by the liquidator.

In a winding up by the court a liquidator has the power to investigate the company's business dealings and the causes of its failure and make any report he deems fit to the court. Subject to the court's directions, the liquidator may also assist in any investigations conducted by a regulator or the police and may assist the Attorney General in criminal prosecutions. The costs of such investigations and prosecution may be paid from the company's assets on the approval of its contributories (if the company is solvent) or its creditors (if it is insolvent).

In carrying out his investigations, the liquidator may seek orders of the court to examine persons, produce documents or seize the company's documents or assets. In this regard, the court may make such orders affecting persons resident outside of The Bahamas and may issue a letter of request to a foreign court to obtain such evidence. Persons who may be subject to such orders include shadow directors.

As with the previous insolvency regime, a provisional liquidator may be appointed by the court to prevent dissipation or misuse of the company's assets, oppression of minority shareholders, mismanagement or misconduct by directors or in the public interest. Such an appointment may be made on an ex parte application if the company is, or is likely to become, unable to pay its debts or if the company intends to present a compromise or arrangement to its creditors.

The court has the power to stay winding up proceedings or to make an order to recall the liquidator and place the company in good standing on such terms and conditions as it deems fit.

Clawback Provisions

The Act includes provisions that expand significantly the circumstances in which the transactions may be reversed (commonly referred to as a "clawback"). Such clawback rights arise with respect to fraudulent preferences and dispositions at an undervalue.

A transaction may be reversed as a voidable preference if it takes place within six months of liquidation proceedings at a time when the company is unable to pay its debts and is made with a view to giving a creditor preference over other creditors.

A disposition at an undervalue may also be reversed by the court on the application of the official liquidator. This occurs where any conveyance, transfer, assignment, lease, pledge or mortgage of a company asset is made either for consideration (i.e. as a gift) or for consideration with a value that is lower than that of the asset, with the intent to defraud creditors. Proceedings for the avoidance of a disposition must be commenced within two years of the disposition complained of. If the court sets aside the disposition but is satisfied that the person to whom the property had been transferred did not act in bad faith, such transferee will be awarded his costs incurred in defending the legal proceedings and shall have a first charge over the property for such costs.

Fraudulent/ Insolvent Trading

In addition, the Act makes directors (including shadow directors) criminally liable for fraudulent trading and insolvent trading. Where a company has carried on business for the purpose of defrauding creditors or for any fraudulent purpose, the liquidator may obtain a declaration from the court for any person who knowingly participated in doing do to contribute to the company's assets.

An order for contribution may also be made against past or present directors if the court is satisfied that before the winding up commenced such director knew or ought to have known that there was no reasonable prospect that the company would avoid being wound up by reason of insolvency. A company is insolvent if it is unable to pay its debts or if the value of its liabilities exceeds its assets.

New Netting and Set-off Provisions

One of the significant advances made by the Act is the inclusion of an express provision for the distribution of the company's assets to be made after taking account of contractual rights of set-off or netting of claims between the company and any other person or persons. Importantly, this extends without limitation to both bi-lateral and multilateral set-off or netting arrangements. This provision is of particular importance in the context of derivatives transactions, where the contracts are dependent on payments being made on a net basis. The inclusion of a statutory provision reinforcing the validity and enforceability of such contractual terms during insolvency, removes the risk that a counter party to the derivatives contract may be forced to pay the insolvent party on a gross rather than a net basis.

International Cooperation

The Act also makes express provisions for international cooperation in corporate insolvency proceedings. Where liquidation proceedings are commenced in the courts of a "relevant" foreign country against a foreign corporate entity (the "debtor"), the liquidator (or equivalent official) may apply to the Bahamian Court for ancillary orders for any of the following purposes:

  • To recognise the foreign liquidator's right to act in The Bahamas on behalf of and in the name of the debtor;
  • To either commence or stay legal proceedings against the debtor;
  • To stay the enforcement of any judgement against the debtor;
  • To obtain orders for production of information and for examination of any person in relation to the business and affairs of the debtor;
  • To gain possession of any property of the debtor; and
  • Granting such other relief as the court considers appropriate.

Conclusion

This Bulletin does not attempt to summarize all aspects of the new insolvency regime and is merely an outline of some of the provisions that we consider significant.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.