First published in Corporate Live Wire, Bankruptcy & Restructuring - Expert Guide, November 2021
In the absence of a formal equivalent to English administration proceedings or U.S. Chapter 11 proceedings, Bermuda has developed its own unique restructuring regime through the use of provisional liquidation.
For more than 20 years, it has been recognised that the winding up provisions of Bermuda's Companies Act 1981 and Companies (Winding-Up) Rules 1982 empower the Supreme Court of Bermuda to appoint provisional liquidators with powers limited to implementing a restructuring rather than displacing management altogether pending a winding-up of the company. Historically, provisional liquidation was used for a different purpose, namely, to displace management where there was a justifiable fear of a company's assets being dissipated pending the making of a winding up order.
An application to appoint provisional liquidators is made at, or after, the filing of a winding up petition at the Supreme Court of Bermuda. In practice, applications are often commenced by the company itself, with the support of its main creditors. The applicant needs to show a reasonable basis for believing that the company's debts can be restructured. It is therefore important to have a developed restructuring plan in place when the application comes on for hearing, as well as adequate 'buy in' from relevant creditors and stakeholders. It must also be shown that there is a good prima facie case for winding-up the company, albeit the case law shows that a clear case of insolvency is not required. It is enough that the company being restructured is in the 'zone of insolvency.'
If the court appoints provisional liquidators to carry out a restructuring, it will adjourn the winding-up petition periodically until the restructuring has been completed, at which time the winding-up proceedings can be discontinued or withdrawn. If the court appoints provisional liquidators, it imposes a mandatory stay of proceedings against the company, which gives the company time to restructure without the threat of hostile proceedings being pursued against it, including petitions by creditors to wind up the company and place it into a full-blown liquidation.
The provisional liquidators may be appointed with full powers, in which case they displace the board of directors which becomes defunct. Alternatively, they may be appointed with limited powers, in which case the board of directors remains in place, subject to monitoring by the provisional liquidators in what is referred to as a light (or sometimes "soft") touch provisional liquidation. As stated by Chief Justice Kawaley, "In theory, these monitoring powers are designed to reassure both creditors and the Court that assets are not dissipated, on the implicit assumption that the management that has run the company into difficulties can hardly be trusted to have the creditors' best interest at heart. In practice, however, in circumstances where no suspicions about the integrity of the directors really exist, the provisional liquidator is appointed as part of legal quid pro quo for receiving the benefit of the stay on proceedings that the appointment guarantees." (Re Up Energy Development Group Limited [2016] SC (Bda) 83 Com.
In particular, a 'light touch' provisional liquidation may be used where directors and management have knowledge or experience that will assist in implementing a successful restructuring. In such cases, it is often considered to be more efficient or cost effective for the provisional liquidators powers to be limited and for management to remain in place to carry out the restructuring.
Provisional liquidators are often accountants at Bermuda-based accountancy firms. Where the company is listed on an overseas stock exchange, an overseas insolvency practitioner can also be appointed. Provisional liquidators are officers of the court and their powers are set out in the order appointing them.
Contested applications regarding the identity of provisional liquidators tend to arise where there are concerns that one party's nominees or candidate may follow an agenda set by the nominating party. There is sometimes a perception that provisional liquidators do the bidding of one side or the other. However, the case law demonstrates that provisional liquidators must not only act impartially, but also be seen to act impartially. Appearances matter. For this reason, a provisional liquidator should not be the nominee of a person against whom the company has hostile or conflicting claims, or whose conduct in relation to the affairs of the company is under investigation.
In considering potential conflicts that may disqualify a candidate or nominee, the court will review all relevant professional and economic relationships. This exercise may include a review of, among other things, the funding arrangement agreed with the nominee. However, the cases warn against holding a mini-trial into the identity of the provisional liquidator, as the process of selecting a nominee should be determined on a summary basis.
There have been a number of reported decisions arising from contested applications to appoint provisional liquidators in recent years, including the decision of Chief Justice Hargun in Re Agritrade Resources Ltd [2020] Bda LR 35. The Chief Justice's judgment contains a useful summary of the applicable legal principles, which are taken from decisions from Bermuda, Hong Kong and England & Wales (in relation to the essential qualities of a liquidator). Where the court is minded to appoint provisional liquidators on a 'light touch' basis for the purpose of carrying out a restructuring, a relevant consideration in selecting provisional liquidators is the extent to which the nominee office holders and management can work together. Evidence of disharmony may be fatal, since "the object of the exercise" in selecting provisional liquidators "is to achieve the successful reconstruction of the company."
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