Bermuda: Litigation Remedies And Rights: Some Key Differences Between Bermuda And The UK

Last Updated: 4 December 2013
Article by Appleby  

Whilst Bermuda's legal landscape is similar to the UK in many respects there are a number of key areas in which it differs. The purpose of this article is to underline the differences from the law or practice of the UK in three areas which have an important impact on the enforcement of claims by creditors and shareholders of Bermuda companies: namely, the use of provisional liquidators, the stay of judicial proceedings to enforce arbitration agreements and the indemnities afforded to directors in a company's constitution.

The appointment of provisional liquidators to a company is an extreme remedy which can be deployed before any final adjudication as to the validity of a creditor's claim or the merits of placing the company into liquidation. Its effect is to replace directors with insolvency practitioners tasked with preserving records and assets, and otherwise conducting the company's affairs. Whilst the legal principles underpinning an appointment may be recognisable to English lawyers, the practical use of them in Bermuda may not. Bermuda does not have the UK's administration or voluntary arrangement regimes which provide for restructuring and independent intervention into a company's affairs before they are wound up.

Freezing Relief

In addition, freezing relief may not be as effective as it would be in the UK. The assets of the Bermuda Company may consist primarily of shares in its foreign operating subsidiaries and its management may not be resident in Bermuda. In respect of non-proprietary claims, such relief normally provides for an exception for usual business transactions. The creditor has little visibility over what the foreign management may be doing to the company's assets or affairs purportedly under that exception. As the English Court of Appeal observed in Commissioners for Her Majesty's Revenue and Customs v Rochdale Drinks Distributors Ltd [2011] EWCA Civ 1116, the appointment of a provisional liquidator, unlike a freezing order, will bring such transactions to an end. In addition, the provisional liquidator can exert his rights of management in foreign jurisdictions and exercise the company's powers to direct or replace the management of the operating group. As a consequence, the use of provisional liquidation in Bermuda has developed into a key remedy for the purposes of both the enforcement of claims and the restructuring of companies.

Restructuring of Companies

Unlike the UK, Bermuda adopted the UNCITRAL Model Law by virtue of the Bermuda International Commercial Arbitration Act 1993. In the context of international commercial arbitration, under both that Act and the English Arbitration Act 1996, a party seeking to stay judicial proceedings in favour of arbitration must establish the existence of a concluded arbitration agreement which covers the dispute. However, under the English Act any objection to the existence and scope of the arbitration clause is likely to be decided by the English Court as a matter of jurisdiction, rather than the arbitral tribunal. In the absence of clarity, there will normally not be a stay. By contrast, the Bermuda Supreme Court has held that the proper approach under the Bermuda Act is to grant a stay even where there is only a prima facie case that there is a valid arbitration agreement covering the dispute. This is consistent with the approach in other Model Law jurisdictions and the strong policy in favour of arbitration which underlies the Model Law: Buchanan v Lawrence [2012] Bda LR 47. Once a foreign international commercial award is rendered, the provisions of the Bermuda Act provide for it to be readily recognised and enforceable as a judgment of the Bermuda Court, rather than having to commence an action to enforce it at common law. In contrast to the position under English law, these provisions apply regardless of whether the foreign jurisdiction is part of the Commonwealth, a party to a convention with Bermuda or has reciprocal arrangements as to enforcement of awards.

Claims Against Directors

The availability of claims against directors is central to evaluating the merits of a liquidation or an action to enforce a shareholder's rights. Under the English Companies Act 2006, any provision which purports to exempt a director from liability in connection with any negligence, default, breach of duty or breach of trust by him, or provide him with an indemnity, is void. By contrast, section 98 of the Bermuda Companies Act 1981 permits such provisions so long as they do not attempt to apply to fraud or dishonesty. Very often, the bye-laws of Bermuda companies (equivalent to articles of association in England) will also exempt a director for claims other than those arising from "wilful negligence" or "wilful default". The Bermuda authorities support the formulation laid down in the English case of Re City Equitable Fire Insurance Co. Ltd. [1925] 1 Ch. p.407, at p.434 that "wilful default" is where "the officer in question is consciously acting or failing to act, in a reprehensible manner" and "wilful negligence" is where the officer concerned "knows that he is committing, and intends to commit, a breach of his duty, or is recklessly careless in the sense of not caring whether his act or omission is or is not a breach of duty". The onus of proving that the conduct is fraudulent, dishonest or wilful lies on the claimant. Unless those allegations can be proven, bye-law indemnities limit the scope of misfeasance proceedings against directors in liquidation and derivative actions against directors by shareholders. In addition, they remove the ability to rely on breaches of fiduciary duty alone as a ground of oppression in proceedings by minority shareholders.

Minority Shareholders

Those surveying Bermuda's legal landscape through the lense of litigation practice in other Commonwealth jurisdictions may not expect to see these features. These are only a few examples. It is important that their significance is appreciated when it comes to cross-border litigation, and indeed well before that point when evaluating and negotiating the rights and liabilities arising from commercial relationships with Bermuda companies.

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.

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