On 1 November 2019, the Supreme Court of Bermuda appointed provisional liquidators to North Mining Shares Company Limited, a company incorporated in Bermuda and listed in Hong Kong ("North Mining"). The provisional liquidators were appointed on a 'light touch' basis and 'for restructuring purposes only', in circumstances where creditor action in Hong Kong was threatening the company's survival. This latest ruling on Bermuda's 'light-touch' jurisdiction shows the extent to which the Bermuda and Hong Kong courts will work together to facilitate the restructuring of companies experiencing short term liquidity issues. The ruling is available here: In the matter of North Mining Shares Company Limited  SC (Bda) 7 Com.
North Mining was incorporated in Bermuda in 1995 and subsequently listed on the Hong Kong Stock Exchange. Together with its subsidiaries, it carried on a successful business for many years, operating in the molybdenum mining, property management, security technology and chemical manufacturing sectors.
During the course of 2018 and 2019, challenging market conditions were reflected in poorer-than-expected financial results. Cashflow tightened. Management sought to dispose of certain non-core business units so as to focus on the company's primary business of mining and property management. A purchaser for these business units was found and the proposed transaction was documented.
Before the transaction could be completed, an unpaid creditor petitioned for the winding-up of North Mining in Hong Kong. The company was in a difficult position; although it was unquestionably solvent on a balance sheet basis, cashflow was tight and there was a real risk of a winding-up order being made in Hong Kong before the proposed asset sales could be completed so as to permit the petitioning creditor to be paid. North Mining needed more time to restructure its financial affairs and continue on as a profitable going concern.
Application for the appointment of light-touch provisional liquidators
As we have previously written, one advantage of the appointment of provisional liquidators in Bermuda is the statutory moratorium – or 'stay' – on creditor action which continues for so long as the provisional liquidators remain in office. In simple terms, a provisional liquidator appointed on the company's own application prevents unsecured creditors of the company from seeking unilateral repayment of their own debts. This gives the company breathing room to implement a restructuring, allowing it to continue trading and preserve its listing status.
Faced with a potential winding-up in Hong Kong due to a temporary cashflow issue, the directors of North Mining resolved to apply to the Supreme Court of Bermuda for the appointment of provisional liquidators on a 'light touch' basis, for restructuring purposes. The application was made on 28 October 2019, on an urgent basis. It was urgent because there was a risk that the company could be wound up at the next hearing of the creditor's petition in Hong Kong on 4 November 2019. The application was supported by extensive evidence from the directors of North Mining, showing that the company was balance sheet solvent and that a viable restructuring plan was in place, but more time was needed in order for that restructuring to be implemented.
What happened at the hearing?
The company's application was heard on 1 November 2019 – the Friday before the Monday hearing of the Hong Kong petition. The application was opposed, with counsel for the Hong Kong petitioning creditor entering an appearance and arguing that the Bermuda Court should not interfere with the winding-up proceedings already on foot before Justice Harris of the Hong Kong Court.
There were three major issues for the Bermuda Court to decide:
- Did the court have jurisdiction to appoint provisional liquidators in these circumstances?
- Was it in the interests of the creditors of North Mining for the appointment to be made?
- Was the appointment of provisional liquidators, in circumstances where a winding-up petition was being pursued by a creditor in Hong Kong, consistent with the principles of comity and judicial cooperation?
Issue one – The Court's power to appoint provisional liquidators
Justice Subair Williams readily determined that in the circumstances of the particular case the Court had jurisdiction to appoint provisional liquidators on a 'light touch' basis for restructuring purposes. At paragraph 27 of the ruling, she observed:
"This Court has previously considered 'light touch' appointments to be appropriate in cross-border insolvency cases where there are parallel liquidation proceedings in a foreign court. 'Light touch' appointments are particularly useful where the ultimate aim is to rescue a company by restructuring its affairs rather than winding up the company altogether".
At paragraphs 28 to 31 of the ruling, the judge summarised the local jurisprudence which has firmly established Bermuda's bespoke, management-led restructuring regime, with the judge confirming that "[t]he Court's appointment of JPLs serves to protect a company against legal action by its creditors while it is undergoing its restructuring efforts".
Issue two – What about the creditors?
Critical to North Mining's success in securing the appointment of provisional liquidators was the support of a majority of its creditors. At the time of the hearing, 78% of creditors by value and 58% by number had expressly indicated their support for the restructuring, with a further 10% remaining neutral. The only creditor which opposed the appointment of provisional liquidators in Bermuda was the creditor which had petitioned for the winding-up of North Mining in Hong Kong.
The judge held:
"...the possible prejudice to one creditor must be balanced with the overall position of the creditors at large. As this Court's jurisdiction has been invoked on a petition, albeit the Company's petition, it will monitor the progress of the restructuring at regular intervals.
In exercise of my judicial discretion, I gave due regard to the wishes of the majority of the unsecured creditors...In this case, the expressed preference of the majority creditors in value should be treated with similar importance and priority since they are, of course, always the real stakeholders".
Although not determinative, the fact that the petitioner had the support of a significant majority of the Company's creditors, both in terms of number of creditors and value of the debt (which also met the statutory threshold to pass a Bermuda scheme of arrangement), was a relevant factor taken into account by the judge at the hearing.
Issue three – Comity
The company's application for the appointment of provisional liquidators was opposed by the Hong Kong petitioning creditor on the basis that it "offended the principles of comity given that the HK High Court has been seized of liquidation proceedings of the Company" (paragraph 45 of the Ruling). Cutting through the legal argument, what the opposing creditor plainly wished to achieve was to maximise the commercial pressure placed on North Mining by reason of the Hong Kong petition.
Walkers, on behalf of North Mining, drew the judge's attention to the 2018 ruling of Justice Harris in Z-Obee Holdings Ltd  1 HKLRD 165, and particularly at paragraph 8 thereof where he held that the Hong Kong Court did not have an equivalent to Bermuda's 'light touch' jurisdiction:
"The limitations of our legislative framework and restrictions on the use of provisional liquidators in Hong Kong to restructure companies in financial distress, created a risk that the court might be constrained to wind up Z-Obee, precluding the proposed restructuring. In order to alleviate these concerns, Z-Obee acting by its board took steps to invoke the jurisdiction of its place of incorporation, Bermuda (where provisional liquidation may in appropriate circumstances be used to facilitate a restructuring), to cause provisional liquidators to be appointed in that jurisdiction".
The Bermuda Court found this argument persuasive, with paragraphs 45 and 46 of the ruling recording that:
"...the appointment of JPLs on a light touch basis was consistent [with] and even furthered the spirit of comity. Following the principles set by both the English and Bermuda common law, this Court recognised that the HK High Court has been seized of liquidation proceedings of the Company. The Court was taken to a previous ruling of Harris J where he held that the HK High Court did not have the power or authority to appoint JPLs on a light-touch basis.
During the hoped-for stay of the HK proceedings, the Company, together with its majority of creditors, sought the opportunity to restructure under the framework of the Bermuda proceedings. Herein lays the common good which is generally protective of the stakeholders as a whole. Since the HK Court does not have the powers to appoint soft touch JPLs, this Court agreed to assist in a creative but judicially known way. That is consistent, in my judgment, with the principles of comity".
Orders made by the Court
Ultimately, the Court was satisfied that it was in the best interests of the creditors for provisional liquidators to be appointed on a 'light touch' basis, and the Court also issued a Letter of Request to the Hong Kong Court seeking its recognition of the appointees.
The Hong Kong Court has since adjourned the winding-up petition in order to permit the Bermuda restructuring to proceed. The restructuring will likely be effected by way of a Bermuda scheme of arrangement.
Light-touch restructuring – the Bermuda advantage
Bermuda's 'light-touch' provisional liquidation restructuring regime is a tremendous asset for companies incorporated within the jurisdiction but which have their listing or operations overseas. In the event of a temporary cashflow crisis or other liquidity event, Bermuda companies have the opportunity to continue trading under the supervision of provisional liquidators and with the oversight of the Bermuda Court. As the North Mining matter demonstrates, the courts of Bermuda and Hong Kong will work closely together to facilitate a restructuring which has the support of a majority of creditors by value.
Nicole Tovey and Benjamin McCosker, together with Joanne Collett and Shannon Dyer from Walkers' Hong Kong office, acted for North Mining in this matter.
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