1. STATE OF THE RESTRUCTURING MARKET

1.1 Market Trends and Changes

The Bermuda restructuring market has continued to be extremely active over the last 12 months, largely as a result of tightening credit markets and ongoing unsettled economic conditions arising out of the COVID-19 crisis.

There has been a notable increase in creditordriven petitions in which immediate windingup orders are sought, particularly out of Asia. Creditors have seemed more willing to seek the liquidation of companies quickly, appearing less willing to engage in lengthy restructuring negotiations. Examples of such cases include two Hong Kong listed companies, Trinity Limited and Victory City International Holding Limited, which were both wound up on the petitions of major international financial institutions.

The amount of company-driven restructuring petitions has also remained steady. Bermuda has a "light-touch" provisional liquidation jurisdiction, which functionally mirrors the Chapter 11 regime in the United States and the Schedule B1 debtor-in-possession equivalent in the United Kingdom. "Light-touch" appointments permit the board and management of a company to remain in place, under the oversight of independent, professional liquidators, to enable a company to restructure its liabilities and return to solvency. The typical course of events is that a company incorporated in Bermuda will approach the Bermuda court for a "light-touch" appointment order, and then have that order recognised in the jurisdiction where it has its operations and/ or listing status. This is particularly important for companies operating in jurisdictions such as Hong Kong, where no equivalent restructuring regime is available.

Restructuring activity in the Bermuda market is expected to remain high throughout 2022, as listed companies avail themselves of the flexibility of the "light-touch" provisional liquidation regime and as financial institutions seek early liquidations.

2. STATUTORY REGIMES GOVERNING RESTRUCTURINGS, REORGANISATIONS, INSOLVENCIES AND LIQUIDATIONS

2.1 Overview of Laws and Statutory Regimes

Bermuda's corporate insolvency regime is governed by Part XIII of the Companies Act 1981 (the Act) and the Companies (Winding Up) Rules 1982 (the Rules).

The Bankruptcy Act 1989, the Employment Act 2000, the Segregated Accounts Companies Act 2000 and the Insurance Act 1978 are other sources of law that have an impact upon financial restructurings, reorganisations and insolvencies.

Part XIII of the Act and the Rules are based on the Companies Act 1948 (UK) and the Companies (Winding Up) Rules 1949 (UK).

Part XIII of the Act applies to all local and exempted companies incorporated in Bermuda, and also to non-resident insurance companies and permit companies (except for those provisions relating to members' voluntary liquidation). Restructurings are governed by Part VII of the Act.

The Bermuda Supreme Court (the Court) is the court of first instance in Bermuda. In 2006, the Court introduced a Commercial Court division, whose jurisdiction includes hearing matters arising under the Act, and therefore restructuring/ insolvency-related proceedings.

Her Majesty's Privy Council remains Bermuda's highest court of appeal, and its decisions are binding upon the courts of Bermuda (to the extent that such decisions are not inconsistent with Bermuda statutory provisions).

2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership

The primary types of proceedings available in Bermuda are:

  • members' voluntary liquidation;
  • creditors' voluntary liquidation;
  • court-appointed provisional liquidation;
  • court-appointed liquidation;
  • schemes of arrangement; and
  • receivership.

2.3 Obligation to Commence Formal Insolvency Proceedings

While there is no strict legal requirement for a company to commence formal insolvency proceedings when it is insolvent or in the zone of insolvency, insolvent trading that harms the interests of employees, creditors and shareholders will put company directors at risk of breaching their fiduciary duties. In fulfilling those duties, therefore, directors ought to consider whether commencing formal insolvency or restructuring proceedings is appropriate.

The exception to this general rule is that if, at any time during a members' voluntary windingup process, the liquidator is of the opinion that the company will not be able to pay its debts in full within the period stated in the directors' statutory declarations, he or she is obliged to call a meeting of creditors and lay before the meeting a statement of the company's assets and liabilities, otherwise he or she will be liable to a fine. Typically, the members' voluntary windingup process will then convert to a creditors' voluntary liquidation.

2.4 Commencing Involuntary Proceedings

Compulsory liquidation is commenced in Bermuda upon the presentation of a petition to the Court. This can be done by a creditor (including contingent or prospective creditors), a contributory (provided he or she has held the shares for at least six months) or the company itself. If the company is a Bermuda insurance company, the Bermuda Monetary Authority (the BMA) may also petition for the company's winding-up, in circumstances where the insurer has failed to meet certain statutory obligations or is insolvent.

2.5 Requirement for Insolvency

Insolvency is not required in order to commence voluntary or involuntary proceedings. A voluntary proceeding is commenced by resolution of the shareholders, usually at the recommendation of the board.

An involuntary proceeding (presentation of a petition) can be based on a number of non-insolvency-related grounds, including the following:

  • where the company has not commenced business within a year of its incorporation or has suspended trading for a whole year;
  • where the company is engaged in any restricted or prohibited business as proscribed under Sections 4A and 4B of the Act; or
  • where it is just and equitable to wind up the company.

Where a petition to wind up a company is based on insolvency, however, the petitioner must be able to demonstrate that the company is unable to pay its debts.

Pursuant to Section 162 of the Act, a company is deemed to be unable to pay its debts in the following circumstances:

  • if a creditor to whom the company is indebted for a sum over BMD500 has served a statutory demand for payment and the company has failed to pay the sum demanded or secure for same within 21 days of service;
  • if the execution of a court judgment over the company is returned unsatisfied; or
  • if it is proved to the satisfaction of the Court that the company is unable to pay its debts. In making such determination, the Court will take contingent and prospective liabilities into account, and will look to the cash flow and the balance sheet tests for insolvency.

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Originally Published by Chambers and Partners 2021 Global Practice Guide

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.