Bermuda: Recent Decisions On Recognition And Assistance And The Appointment Of Provisional Liquidators

Bermuda, a leading offshore commercial centre, does not currently have any modern, express statutory provisions relating to recognition and assistance to foreign officeholders. The legislative basis for insolvency proceedings is contained in the Companies Act 1981 (the 'Act') which was itself based on the English Companies Act 1948 and related regulations. Over the past 20 years, it has been required to adapt these provisions, and turn to common law principles, to meet the needs of international businesses looking to restructure.

Over the past 12 months there have been several decisions of the Bermuda Courts which have served to clarify and restate the law which has developed, in particular, as it relates to recognition and assistance. These cases have highlighted that the prior practices in these areas are now beyond doubt. This article explains by reference to these recent cases, the approach of the Bermuda Courts in respect of such matters.

While the cases referred to below have clarified the current common law position, given Bermuda's business model the authors believe that it would be in the interests of the jurisdiction for there to be greater certainty through the adoption of these principles in legislation.1

Assistance in recognition of foreign proceedings

In conjunction with the filing of a Chapter 11 proceeding in Texas2 in respect of, a group of companies which included a Bermuda company, Energy XXI Ltd,3 a petition was filed in Bermuda seeking the winding up of the company and the immediate appointment of a provisional liquidator. The purpose of the Bermuda filing was to obtain the statutory stay of proceedings in Bermuda which automatically arises upon the appointment of a provisional liquidator by the Court. The provisional liquidator's powers under the order were limited; essentially he had an oversight role while the restructuring plan in the US Bankruptcy Court (the 'USBC') was proposed and confirmed. Prior to the confirmation of the US plan of reorganisation, the provisional liquidator made an application seeking a conditional order granting recognition to the US plan once it was confirmed by the USBC. The Equity Committee which, had been appointed by the USBC, objected to the making of the order on a number of grounds, including that the Bermuda Court had no jurisdiction to grant the relief sought, and that the appointment of provisional liquidator for the purpose of restructuring did not fall within the provisions of the Act. As part of its submission it argued that the extension of the common law in such circumstances as set out in Cambridge Gas4 had been overturned by subsequent decisions of the English Supreme Court.5

The Bermuda Court dismissed these arguments. In his ruling, the Chief Justice provided clear guidance on the ability to obtain recognition of Chapter 11 proceedings in the Bermuda Courts. The upshot of Energy XXI was that the Bermuda Court has the power to recognise and enforce (by way of a stay of proceedings or otherwise in accordance with local law) a foreign restructuring which has the effect of extinguishing claims against an insolvent Bermudian company. However, it may only properly do so as against parties who have submitted to the personal jurisdiction of the foreign court; and/or with respect to property of the company which (by reason of its situs) is subject to the in rem jurisdiction of the foreign court. He further ruled that it was a perfectly proper use of the winding up provisions of the Bermuda Companies Act to file a petition to wind up a company for the purpose of restructuring and specifically, to assist with a foreign restructuring.

In February 2017 the Court decided the cases of C&J Energy Services Ltd6 and Z-obee Holdings Limited,7 in which it reaffirmed the Court's jurisdiction (and clear desire) to provide necessary assistance to foreign courts in certain circumstances.

In C&J Energy Services Ltd, the Court, referring to Energy XXI, granted recognition of a Chapter 11 plan and granted a permanent injunction in aid of such a plan. In that case, the Court also set out its jurisdiction to authorise an accelerated winding-up procedure in circumstances where the plan confirmed by the USBC provided that the Bermuda company was to be wound up and certain requirements under the Companies Act 1981 (the 'Act') (namely sections 171, 168, 181 and 185) be dispensed with.

The Court held that it is empowered under the Act (as read with the Companies (Winding-Up) Rules 1982) to short circuit the formal winding-up process where engaging the usual machinery will serve no useful commercial or public purpose. In C&J all known debt and equity interests had apparently been extinguished in the foreign 'main' proceeding8 which the Bermuda proceedings were commenced to support and assist. The Company' affairs had been fully wound-up by the time the winding-up order was sought so it was considered to be an obvious case for the court exercising its powers to expedite the winding up process.

Z-obee Holdings concerned a company that had been in provisional liquidation in Hong Kong since June 2014. The Hong Kong provisional liquidators had identified a potential investor and therefore sought to restructure rather than wind up. The company subsequently presented a petition in Bermuda and applied to appoint the same provisional liquidators in the Bermuda proceedings with their powers restricted to the explicit purpose of effecting the restructuring. In providing reasons for allowing the appointment, the Court reiterated that it has, for 20 years, construed the relevant provisions of the Companies Act so as to enable it to appoint provisional liquidators with limited powers in order to allow the company to implement a restructuring. The fact that it was proposed that the winding-up proceedings be adjourned (and may ultimately be dismissed) did not impact this position. Reiterating the sentiment of both Energy XXI and C&J, the Judge held that the Court has a broad discretion to adjourn a petition for good reason and that power was clearly flexible enough to encompass an adjournment to enable alternatives to a winding-up to be explored. Should the alternatives no longer be realistic, the Court may, on the application of creditors, determine that it's no longer appropriate to continue to adjourn the winding up petition. This is unlikely where the majority of creditors are in favour of the adjournment.

Lifting the automatic stay of proceedings.

The Bermuda court has recently held that it will not lift a stay which it has made in aid of foreign insolvency proceedings where to do so would amount to an abuse of process and would undermine the proceedings in the foreign court. This was in circumstances where the company in question was a Bermuda company. This case exemplifies the willingness of the Bermuda courts to take an international approach to insolvency cases and apply common law principles to assist where appropriate. The facts of the case are set out below.

Celestial Nutrifoods Limited9 is a Bermudian company whose shares were traded on the Singapore stock exchange. The company was wound up by the Singapore Court in 2010 and a provisional liquidator appointed. It was placed into liquidation in Singapore in 2010. In 2011 the Singapore appointed provisional liquidator applied to the Bermuda Court and obtained an order that (i) he be recognised in Bermuda, (ii) the automatic stay of proceedings in Bermuda under section 167(4) of the Bermuda Companies Act be confirmed and imposed;10 and (iii) the Bermuda Court would make an order under s.195 of the Companies Act requiring a party with information about the Company to be examined and/or produce documents in its custody.

In 2016 two of the former directors of the Company applied for leave to bring proceedings against the Company in Bermuda in order to pursue their rights to claim an indemnity against the Company under the bye-laws. The same directors were being sued in Singapore for breach of duty and were relying on the bye-law indemnity in the Singapore proceedings but the point and not yet been ruled upon by the Singapore Courts. In determining the matter, the Chief Justice accepted that the principles governing the lifting of the statutory stay should apply to a stay imposed under the Court's inherent jurisdiction by way of common law assistance to a foreign insolvency court. It was further accepted that the usual approach to lifting the liquidation stay by reference to the character of the claim is that an attempt 'by a debtor to establish non-liability will typically be allowed to be pursued.'11

However, on the facts of the present case, the Chief Justice held that it would, in all the circumstances, be wrong and unfair to permit the applicant directors to sue the Company in Bermuda given that the legal proceedings they wished to bring would undermine the purpose of the recognition order (which they did not contest), by impeding the efforts of the Singapore Court to liquidate the Company. Further the Chief Justice held that the present application was an abuse of the process of the Bermuda Court since the proper time for seeking to invoke the Bermuda Court's jurisdiction in respect of relief sought had long passed. Finally he ruled that the applicants had, by their conduct in the Singapore Proceedings, in any event waived the right to assert that Singapore was an inappropriate forum for adjudicating the Bermuda law issues and the applicants had submitted to the jurisdiction of the Singapore Court and made no attempt to invite that court to decline jurisdiction in relation to the relevant Bermuda law issues.

However, the Bermuda Court will, in appropriate circumstances, issue anti-suit injunctions in cases where there is an arbitration clause in a contract, even in circumstances where one of the parties to the arbitration agreement is a debtor in a bankruptcy proceeding in the United States.

This was the Court's ruling in Ironshore Insurance Ltd and others v M F Global Assigned Assets LLP and others.12 The Chief Justice based his ruling in that case on the fact that the arbitration agreements provided for arbitration in Bermuda under the relevant Bermuda arbitration legislation, and that there was a high public policy premium placed by the Bermuda Courts on protecting the contractual right to arbitrate, regardless of the place of arbitration.

From a Bermuda law perspective, contractual claims against debtors arising under contracts containing arbitration clauses do not raise any opportunity for contending that the governing arbitration agreement is any way affected by the fact that the counterparty seeking to establish a contractual liability is itself in liquidation. If the insolvent company succeeded in making a recovery from the contractual debtor, the sums recovered would of course be administered and distributed by the relevant insolvency court, in that case the USBC, Southern District of New York.

Who can be appointed a provisional liquidator?

In the last six months there have been two cases in which there was a dispute as to who should be appointed as provisional liquidators. In UpEnergy Development Group Limited13 and Opus Offshore Limited14 the Court helpfully outlined the relevant considerations that it properly took into account when determining who should be appointed.

By way of background it should be noted that Bermuda law provides that the Court, upon the application of the petitioner, or in limited circumstances another party, appoints provisional liquidators. The creditors15 at a meeting convened for that purpose, determine who should be appointed as permanent liquidators. This may explain why there have not, until very recently, been any disputes as to who should act as liquidator on a provisional basis and therefore the court has not had the opportunity to set out the test to be applied in deciding who to appoint.

UpEnergy Development Group Limited was incorporated in Bermuda and listed on the Hong Kong Stock Exchange. While the Company was seeking to implement an out-of-court restructuring, a creditor presented winding-up petitions in Hong Kong and then Bermuda and sought the appointment of provisional liquidators; professionals from Hong Kong and Bermuda. The petition was initially adjourned in order to give the Company and the majority of its creditors (who supported the adjournment against the wishes of the petitioning creditor) time to progress the restructuring. On the adjourned date for the hearing of the Petition, the petitioner sought the appointment of FTI as the provisional liquidators along with a Bermuda based insolvency practitioner, John McKenna. The Company sought the appointment of its then restructuring consultants to the Company, RSM Corporate Advisory (Hong Kong) Limited ('RSM'), together with its preferred Bermuda based insolvency practitioner. Following a contested hearing, the Chief Justice approved the petitioning creditor's application to appoint provisional liquidators to monitor the restructuring, but adjourned the question as to who should be appointed. At the adjourned hearing the court appointed RSM (the company's Hong Kong nominee) but also appointed Mr McKenna who was put forward by the petitioner.

While the Court was sympathetic to the petitioning creditor's concerns surrounding the independence of RSM, it found these to be more perceptual than real and recognised the likelihood of wasted costs if RSM was replaced altogether. In addition, the Court noted that there was a risk of tension between any new appointees and the company's management, whereas management was already familiar with RSM. In appointing the Bermuda based professional put forward by the petitioner - to work alongside RSM the court was trying to find a middle ground. In doing this, the Court made it clear that the provisional liquidators should work together to establish an agreed plan of action, noting that any irreconcilable differences could be brought back before the Court for resolution. The Chief Justice noted that the Hong Kong officeholders should be responsible for Hong Kong based work with the Bermuda officeholders being responsible for Bermuda based work. In his ruling, the Chief Justice referred to the primary function of the Bermuda-based officeholder as being to serve as an independent filter within the provisional liquidator team so as to ensure that the restructuring process (which is expected to result in a scheme of arrangement) does not, as the minority wholly unsecured creditors fear, prejudice their interests. While this guidance might be considered novel, it is not surprising, in circumstances where provisional liquidators from different firms are instructed to work 'jointly', the Judge's articulation of the Court's expectations is helpful.

In Opus Offshore Limited the Court was faced with two separate winding up petitions presented by different creditors, each petitioner seeking different provisional liquidators on their petition. The petitioner, in respect of the second petition, filed the petition in its capacity as a creditor, but it was also the majority shareholder of the company.16

In respect of the competing petitions, the Court saw no reason to depart from the general rule, as adopted by the English courts, that priority should be given to the petition presented first. However, this did not impact the determination of who should be appointed as provisional liquidators. In this regard, having established that none of the proposed nominees were conflicted and all were eminently qualified the Judge took into account that: (i) the opposition of the shareholders to a winding up petition or, by parity of reasoning, to the choice of provisional liquidator, will carry less weight than the wishes of the creditors (particularly, in this instance, given the shareholders' involvement with the management of the debtor company); and (ii) disputed debts of supporting creditors will carry less weight than they would if their claims had not been disputed by the Company. With this in mind and noting that the choice of provisional liquidators is a matter for the Court's discretion, the Judge proceeded with the first petitioner's nomination reasoning that such appointees were most likely to command the confidence of a majority of those who will seek to prove in the liquidation in light of the fact that a large number of creditors had supported such appointments.

Conclusion

While there is a drive to make legislative amendments to modernise the law, in particular in relation to recognition, there is now a credible body of case law that has developed to plug the gap left by the statutory regime. This case law demonstrates the Court's desire to find practical solutions to facilitate restructurings of Bermuda companies, with due deference to foreign proceedings and the provision of appropriate assistance. As shown by the cases above, by operating under a less rigid statutory framework, Bermuda Courts are able to be more flexible in their approach to these issues.

Footnotes

1 The Restructuring and Insolvency Specialists Association of Bermuda is currently reviewing the legislation with a view to proposing the adoption of provisions relating to restructuring, foreign assistance and winding up of foreign entities.

2 Chapter 11 is the chapter of the United States Bankruptcy Code which affords a company or group of companies to restructure under the supervision of the relevant Bankruptcy Court.

3 In the Matter of Energy XXI Ltd [2016] SC (Bda) 79 Com (15 August 2016).

4 Cambridge Gas Transport Corp v Official Committee of Unsecured Creditors of Navigator Holdings Plc [2007] 1 A.C. 508.

5 Singularis Holdings Limited v PricewaterhouseCoopers [2014] UKPC 35 and Rubin v Eurofinance [2012] UKSC 46.

6 In the Matter of C & J Energy Services Ltd [2017] SC (Bda) 20 Com (28 February 2017).

7 In the matter of Z-obee Holdings Limited [2017] SC (Bda) 16 Com (21 February 2017).

8 It should be noted that Bermuda has not adopted the UNCITRAL Model Law on Cross Border Insolvency.

9 In the matter of Celestial Nutrifoods Limited (in liquidation) [2017] SC (Bda) 10 Civ (31 January 2017).

10 It should be noted that the basis for the stay relied upon by the Chief Justice in his 2011 order has since held by the Privy Council to be wrong in law (Singularis Holdings Ltd. v. PricewaterhouseCoopers [2015] AC 1675).

11 At Paragraph 18.

12 Ironshore Insurance Ltd and others v M F Global Assigned Assets LLP and others [2017] SC (Bda) 6 Com (23 December 2016).

13 In The Matter of upEnergy Development Group Limited [2016] Bda LR 101.

14 In the matter of Opus Offshore Limited [2017] SC (Bda) 14 Com (17 February 2017).

15 Bermuda law provides for the provisional liquidator to convene meetings of creditors and contributories to determine who should be appointed by the Court as permanent liquidators.

16 In Bermuda there is no subordination of shareholder creditor claims, save those where the claim arises in a shareholder's capacity as a shareholder.

Originally published by International Corporate Rescue, Volume 14, Issue 5.

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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