First published by International Corporate Rescue, 2017
In the recent decision of Re C&J Energy Ltd and another 1 the Supreme Court of Bermuda continued a line of judgments which establish the court's willingness to provide, to the fullest extent permissible under its common and statutory powers, commercially sensible and pragmatic support to foreign insolvency and re structuring proceedings.
The commercial result of that matter: C&J Energy Services Ltd ('C&J Energy') and its Bermuda subsidiary company (collectively, the 'Bermuda companies') were dissolved by the Bermuda court in a break-neck 35 days from the grant of winding-up orders for the Bermuda companies. The expediency of the Bermuda companies' liquidations was the result of the Bermuda companies' use of three separate, but interrelated, mechanisms in the Bermuda winding-up regime:
(i) the appointment of provisional liquidators with limited
powers to oversee the groups' restructuring under Chapter 11 of
the US Bankruptcy Code ('Chapter 11 ');
(ii) the prospective recognition of the Bermuda companies' Chapter 11 plan in the absence of parallel schemes of arrangement in Bermuda; and
(iii) the accelerated winding-up of the Bermuda companies as shell companies.
Although the first mechanism has been used in Bermuda for many years to achieve an administration-like process in the absence of a statutory administration regime, the second mechanism had only recently been confirmed as forming part of the Bermuda liquidation regime and the third mechanism was wholly novel. C&J Energy is only a first instance decision, but it ushers in a welcomed increase in the flexibility of Bermuda's cross border restructuring and insolvency regime.
In this article, we discuss each of the 3 mechanisms that were necessary to achieve the accelerated dissolution of the Bermuda companies.
Appointment of provisional liquidators to oversee foreign restructuring proceedings
Prior to its restructuring, C&J Energy was the ultimate holding company of the C&J Energy group of companies. Desirous of pursuing a group restructuring, certain of the group entities filed for protection under Chapter 11. The day after the Chapter 11 filings, the Bermuda companies presented petitions for their windings-up but sought the immediate adjournment of the petitions for six months. At the same time, the Bermuda companies sought the appointment of joint provisional liquidators with limited powers to enable the Bermuda companies to participate in the group's Chapter 11 restructuring.
The statutory provisions in Bermuda as to when a provisional liquidator may be appointed and the terms of such appointment are extremely broad. A provisional liquidator may be appointed at any time after the presentation of a winding-up petition and prior to the appointment of a permanent liquidator, and may be appointed with such limited powers as the court considers appropriate in the circumstance.2 Upon the appointment of a provisional liquidator by the Bermuda court, an automatic stay of proceedings against the company arises in Bermuda (which may only be lifted by leave of the court).3
It is now beyond doubt that, on the application of a company, the Bermuda court may appoint a provisional liquidator in circumstances where: (i) the company is pursuing its restructuring under Chapter 11 (or some other appropriate foreign restructuring procedure); and (ii) the company wants to avail itself of the benefit of the statutory moratorium that will arise on the provisional liquidator's appointment.
As the court has previously commented:
'In practice, however, in circumstances where no suspicions about the integrity of the directors really exist, the provisional liquidator is appointed as part of a legal quid pro quo for receiving the benefit of the stay on proceedings that the appointment guarantees, Bermuda law presently lacking a formal equivalent of the US Chapter 11 regime or the English administration proceedings.'4
The Bermuda court appointed joint provisional liquidators over the Bermuda companies with powers to oversee the continuation of the Bermuda companies' businesses, including their restructuring under Chapter 11, by the Bermuda companies' respective boards of directors and the US Bankruptcy Court.
Recognition of the Plan
In December 2016, the US Bankruptcy Court confirmed a plan of reorganisation which included the Bermuda companies as debtors-in-possession ('Plan'). The Plan was overwhelmingly supported by the classes of creditors and contributories entitled to vote, being in all classes approved by more than 99.96% in value and 98.4% in number (with the majority of classes being approved by 100% in value and number). Following the implementation of the Plan, the estates of the Bermuda companies had for all practical purposes been effectively wound-up; the Bermuda companies had no foreseeable creditors, no assets and no shareholders with exercisable equity rights. The Plan expressly contemplated the liquidation of both Bermuda companies in Bermuda following the implementation of the Plan.
A few months prior to the confirmation of the Plan by the US Bankruptcy Court, the Bermuda court had recognised another Chapter 11 plan (in the absence of parallel scheme of arrangement proceedings in Bermuda) of a company in provisional liquidation by permanently staying in Bermuda all claims against that company that would be discharged pursuant to that Chapter 11 plan.5 In that matter, the Bermuda court recognised the Chapter 11 plan:
(a) on the basis of traditional recognition principles in the
context of parallel insolvency proceedings and common law
co-operation with foreign insolvency courts in relation to Bermuda
(b) to restrain abuses of process by preventing parties whose claims had been effectively dealt with under the Chapter 11 proceedings from re-litigating those claims in Bermuda. 7
The Bermuda companies sought from the Bermuda court, and obtained, recognition of the Plan by a permanent stay of all claims of creditors and shareholders that were bound by the Plan that may have or may be brought in Bermuda. In considering the Bermuda companies' application for recognition of the Plan, the Bermuda court was satisfied that the recognition order complied fully with the principles of private international law as, on its face, the recognition order stayed only the claims of those parties who were properly bound by the US Bankruptcy Court's confirmation order of the Plan.8
The effect of the recognition order was that, to the best of the Bermuda companies' and the joint provisional liquidators' beliefs, the claims of all known and foreseeable creditors and contributories against the estates of both Bermuda companies had been permanently stayed in Bermuda. At that stage of the proceedings, the joint provisional liquidators could, with a great degree of certainty, consider the Bermuda companies to be shell companies with no assets (which had been disposed of pursuant to the Plan) and no reasonably foreseeable liabilities (which had been compromised and stayed pursuant to the Plan and the Bermuda court's recognition order).
Accelerated winding-up in Bermuda
In their application for a recognition order, the Bermuda companies sought winding-up orders (which were granted) and the appointment of the joint provisional liquidators as permanent liquidators. Unusually, however, the Bermuda companies sought total dispensation from three statutory post-winding-up requirements: (i) the holding of the first meetings of creditors and contributories to decide whether to appoint permanent liquidators; (ii) the preparation of a statement of affairs by the permanent liquidators; and (iii) the preparation of a court-sanctioned list of contributories. The relevant statutory provisions expressly bestow on the court the discretion to dispense with the latter two requirements; which the court did without further ado. The dispensation of the requirement to convene the first meeting of creditors and contributories, however, required further analysis.
The statutory winding-up regime in Bermuda re quires a provisional liquidator to convene first meetings of creditors and contributories within 1 month of its appointment for purposes of determining whether to appoint permanent liquidators. The court may extend the period in which the meetings must be convened as it considers appropriate. The court will maim such orders in respect of the appointment of permanent liquidators as are necessary to give effect to the creditors' and contributories' resolutions, including deciding any differences between them. Where the court does not appoint a permanent liquidator 'the Official Receiver shall be the liquidator'.9
The Bermuda court is not expressly empowered to dispense with the requirement to convene the first meetings of creditors and contributories. The statutory regime does not, however, contemplate the scenario where the first creditor and contributory meetings cannot practically be convened as the estate of a company has already been wound up.10 On further analysis, the Bermuda court considered that the statutory regime is flexible enough to accommodate such a scenario:
(a) it is a long established practice of the Bermuda court to
accept that strict compliance with the requirement to convene both
creditor and contributory meetings is not necessary in
circumstances where one meeting (usually the meeting of
contributories) is inquorate or has no prospect of being
(b) the Bermuda court's power to extend the period in which the meeting of creditors and contributories must take place is unfettered so that the court may extend that period indefinitely by dispensing with the requirement altogether;12 and
(c) in such a scenario, all that is necessary is substantial compliance with the statutory regime.13
In relation to the Bermuda companies' applications, the Bermuda court appointed the joint provisional liquidators as permanent liquidators; in all the circumstances of that case, appointment of the joint provisional liquidators as permanent liquidators for the narrow purpose of pursuing the accelerated windings-up of the Bermuda companies constituted substantial compliance with the statutory regime.14
The court appears, however, to have raised the possibility that the formal appointment of a permanent liquidator in similar circumstances to those of the Bermuda companies may not be necessary at all:
'Nothing of substance in my judgment turned on whether the JPLs were authorized to summarily conclude the winding-up wearing provisional liquidator hats or permanent liquidator hats. They were clearly legally entitled to remain in office as provisional liquidators until another liquidator was appointed in any event. Any defect in their nomenclature for the brief period required to apply for the Companies' dissolution would be cured by section 173(5) ["the acts of a liquidator shall be valid notwithstanding any defect which may be afterwards found in his appointment or qualifications"]. Their main task was to apply for the Companies' dissolution under a statutory provision which is primarily designed to be deployed in circumstances which clearly applied to the present case: the Companies' affairs had been "fully wound up". The term "liquidator" in section 200(1) of the Act, when that section is read with section l7l(a), can in any event fairly be read as including a provisional liquidator where, for good cause, the Court has declined to appoint any other person as liquidator and the Official Receiver has understandably not sought to act either. Section 200 provides:
"(1) When the affairs of a company have been completely wound up, the Court, if the liquidator makes an application in that behalf, shall make an order that the company be dissolved from the date of the order, and the company shall be dissolved accordingly".'
Dissolution of the companies
The orders winding-up the Bermuda companies and appointing the permanent liquidators were granted on 23 February 2017. Thirty-five days later, and following the expiry of the 21 day objection period from the date on which the permanent liquidators gave notice of their intention to apply for their release and the dissolutions of the Bermuda companies, the Bermuda companies were dissolved by order of the court.
Bermuda entities that are interested in pursuing their restructuring under foreign proceedings should carefully consider the benefits and potential risks of seeking to rely on recognition of those proceedings in the absence of parallel restructuring proceedings in Bermuda. A creditor or shareholder that is not bound by the foreign proceedings, for whatever reason, may pursue their claims against the Bermuda entity in Bermuda notwithstanding recognition of the foreign restructuring proceedings. In appropriate circumstances, however, recognition of foreign restructuring proceedings (in the absence of parallel restructuring proceedings in Bermuda) coupled with the potential for a greatly accelerated winding-up process may provide Bermuda entities a distinct advantage in the speed.
1 Re C&J Energy Ltd and another [2017} SC (Eda) 20.
2 Companies Act 1981, section 170.
3 Companies Act 1981, section 167(4)
4 Discover Reinsurance Co v PEG Reinsurance Co Ltd  Bda L.R 88, para 20.
5 Re Energy XXI  SC (Bda) 79 Com.
6 Ibid, para 27.
7 Ibid, para 37.
8 Re C&J Energy Ltd and another  SC (Bda) 20, para 19.
9 Companies Act, section 171.
10 Re C&J Energy Ltdand anotller  SC (Bda) 20, para 42.
11 Ibid, para 31.
12 Ibid, para 33.
13 Ibid, para 40.
14 Ibid, para 40.
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.