Bermuda's insolvency and restructuring landscape is distinct in a number of ways. In this article, we discuss three of those areas with recent developments.
- Bermuda has developed a rescue culture without statutory provisions in support of rescue procedures;
- Bermuda's approach to directors is notably friendlier than many other jurisdictions; and
- Bermuda strives to enable, through regulation, novel corporate activity and structures.
First however, we will begin with a brief overview of the key aspects of Bermuda's insolvency regime.
Bermuda is an overseas territory of the United Kingdom. Its legal system is based on the English common law but, over the years, Bermuda has developed its own distinct jurisprudence in many areas, including insolvency and restructuring.
The principal statutory provisions governing corporate insolvency and restructuring are contained in Part
XIII of the Companies Act 1981 (the Companies Act) and are supported by the Companies (Winding-Up) Rules 1982 (the Winding-Up Rules). The Companies Act is based on the English Companies Act 1948 and the Companies Winding-Up Rules are based on the English Companies (Winding-Up) Rules 1949. No substantive changes have been made to Part XIII of the Companies Act and the Winding-Up Rules since they were enacted, although there have been minor amendments. The following insolvency and restructuring processes are available in Bermuda:
- Members' voluntary liquidation;
- Creditors' voluntary liquidation;
- Compulsory winding up by the Court;
- Provisional liquidation; and
- Schemes of arrangement.
Pari passu treatment of unsecured creditors is central to the Bermudian insolvency regime. Secured creditors are unaffected by insolvency proceedings in Bermuda and may enforce their security in accordance with the terms of the governing security instrument (although they have standing to present windingup petitions).
The Companies Act allows liquidators to challenge certain transactions executed by insolvent companies through avoidance or claw-back provisions.
This includes the avoidance of preferential payments to creditors and transactions at an undervalue. The Companies Act also provides remedies for fraudulent trading and dispositions of company property after the commencement of the winding-up.
BERMUDA'S RESCUE CULTURE
Bermuda enjoys a strong rescue culture. Provisional liquidation in Bermuda is the appointment of a liquidator other than for the immediate winding up of the company. A provisional liquidator will be nominated by one or more of the parties. The court must accept the credentials of any nominees who, by custom and practice, will be insolvency practitioners with an accounting background and at least one of whom must be resident in Bermuda.
There are two circumstances an order for the appointment of a provisional liquidator will be made:
- where it is necessary for the court to appoint an officer to protect and prevent a dissipation of the company's assets in the intervening period between the filing of a petition and the making of a winding-up order; or
- where there is a prospect of 'rescuing' an insolvent company through restructuring either with or without the displacement of some or all of the board's executive functions.
The first type of appointment given above mirrors the English jurisdiction for appointment of provisional liquidators and, like in England, is one of the most extreme tools at the Court's disposal, deployed only in exceptional circumstances where an urgent need to preserve assets justifies the immediate appointment of liquidators; it will be unlikely the Company recovers.
The second type of provisional liquidation is a distinct feature of Bermuda's restructuring landscape. Accordingly, where a company is insolvent, instead of making a winding-up order to liquidate the company, the Bermuda court often appoints provisional liquidators with certain, limited powers, known as 'light-touch' powers. This appointment is by far the most common form of provisional liquidation in Bermuda.
The Court of Appeal for Bermuda has recently addressed the law on this second kind of provisional liquidation. On 30 September 2022, the Court of Appeal for Bermuda (the Court) handed down its reasons for making a winding-up order, overturning the Bermuda Supreme Court, in Hong Kong and Shanghai Banking Corporation Ltd v NewOcean Energy Holdings Limited  CA (Bda) 16 Civ (re NewOcean) (discussed in further detail below).
In a light-touch liquidation, a company may continue its business operations as usual, pending implementation of a plan for the restructuring the company's debt. Usually, the court must be satisfied that a restructuring will produce a better result than a winding up for creditors. As explained by Kawaley CJ in Z-OBEE Holdings Ltd (2017) Bda LR 19:
"[Section 170 of the Companies Act 1981 (Power of Court to appoint liquidators)] has for almost 20 years been construed as empowering this Court to appoint a provisional liquidator with powers limited to implementing a restructuring rather than displacing the management altogether pending a winding-up of the respondent company."
The Bermuda court has used provisional liquidation as a tool to restructure the affairs of a company, preserve value in a business and provide a platform for distressed companies to recover – which together promotes the sustainability and success of cross-border business.
A key feature of provisional liquidation is the stay of proceedings against the company triggered by the appointment of provisional liquidators. Creditors are protected, given the independent oversight of provisional liquidators who, as officers of the court, are under a duty to act in the best interests of creditors.
Provisional liquidation is often used together with a scheme of arrangement to effect debt restructurings. It has been said that it is unprecedented for an insolvent scheme to be promoted other than by provisional liquidators. The Scheme of Arrangement requires a double majority: 75% in value and a majority of those voting in each class.
Class composition is broadly in line with other common law jurisdictions and there is no cross-class cram down in a Bermudian scheme.
Companies have often sought the shelter of light-touch provisional liquidation in response to a creditor's petition. The Court must then consider whether to adjourn the creditor's petition and appoint JPLs or to make an immediate winding up order, dismissing the application for lighttouch provisional liquidation.
This was precisely the situation in re NewOcean when the case was heard before the Supreme Court of Bermuda in December 2021 on a creditor's petition. NewOcean Energy Holdings Limited (NewOcean) is a Hong Kong listed, Bermuda incorporated, holding company for a Chinese energy, real estate and shipping group.
In 2020, NewOcean found itself in financial difficulties. It owed upwards of USD $800m to a number of banks. NewOcean entered into negotiations with over 30 bank creditors and tried to restructure its debt by way of parallel schemes of arrangement in Hong Kong and Bermuda. Those schemes were ultimately unsuccessful, having failed to win sufficient support of creditors. On 22 October 2021 the Hong Kong and Shanghai Banking Corporation Ltd (HSBC), one of the bank creditors, presented a petition for NewOcean's winding up.
NewOcean had failed to respond to a statutory demand served by NewOcean and so was deemed insolvent. The first default to HSBC was on 2 September 2020, and so by the time the petition was heard at the end of 2021, NewOcean was clearly cash-flow insolvent as a matter of fact. NewOcean accepted this in its evidence but claimed that it was balance sheet solvent, i.e. that despite its current liquidity issues the values of its assets exceeded its liabilities.
Relying on this fact, amongst others, NewOcean asked the Court to adjourn the petition and appoint JPLs on a light-touch basis. The Court did so, adjourning the petition. JPLs were appointed on 14 December 2021 and the petition was adjourned on a number of occasions thereafter. By the end of March 2022, the extent to which creditor sentiment had hardened against NewOcean was very clear. 64.8% of bank creditors opposed any further adjournment and supported an immediate winding-up order. In order to secure its restructuring, NewOcean needed 75% of its creditors to approve its proposed scheme.
On 9 May 2022, the petition was adjourned again for reasons given by Mussenden J in a written judgment dated 31 May 2022. In that judgment, the Court held that four exceptional circumstances that were relied upon by NewOcean were still in existence:
- NewOcean had come before the Court in relation to a scheme previously, showing early engagement with its financial difficulties;
- There was a restructuring plan that could be pursued by NewOcean with the JPLs' assistance;
- As a listed company with a number of licences issued by the Chinese Government, an immediate winding-up order would be value destructive; and
- NewOcean was a balance-sheet solvent company praying for a short adjournment to attempt a restructuring.
The 31 May 2022 judgment, in particular the decision to adjourn, was appealed by HSBC as the petitioning creditor. The appeal was heard on 25 July 2022 and on 26 July 2022, the Court allowed the appeal making a winding-up order against NewOcean. The Court's reasons were handed down on 30 September 2022.
The following key points of principle can be derived from the Court of Appeal's judgment:
- The interests of the creditors are paramount and it will be a truly exceptional case where the views of the majority are disregarded by the Court, although the Court will not approach this from a strictly arithmetic point of view.
- The percentage of creditors opposed or in support of the winding-up petition takes on even greater significance when the restructuring plan prayed in aid of an adjournment requires 75% in favour. Where it is clearly unlikely that majority will be achieved, an adjournment should not be granted.
- The absence of creditors opposed to the winding up should be sufficient in most cases to justify an immediate winding up.
- The maintenance of a light-touch provisional liquidation calls for complete transparency and cooperation from the company and non-disclosure of material matters is a strong factor in favour of an immediate winding-up.
Sir Christopher Clarke P, delivering the judgment of the Court of Appeal found that in the decision adjourning the petition dated 31 May 2022, the judge had failed to take into account (sufficiently or at all) a number of relevant considerations including:
- The size of the majority required to restructure the company's debt. NewOcean required 75% of creditors in favour but had nearly 66% of creditors against. The prospect of the requisite majority being met and therefore of a restructuring succeeding was remote.
- The fact that so many creditors were opposed to the adjournment. The creditors were experienced bankers and best placed to judge their own interest with no evidence that any creditors were likely to change their mind.
- The absence of a majority of creditors opposing the making of a winding up order.
- That the proposal was an adjournment for time to liquidate assets and that liquidations should be supervised by liquidators.
- The history of the case, including the time since the defaults and previous failures to implement similar schemes.
This judgment clarifies the circumstances in which an order for provisional liquidation will be made and when the Court should instead make an immediate winding-up order. The Court of Appeal has reaffirmed that the views of creditors take precedence over other considerations and made clear that those seeking to appoint provisional liquidators, must cooperate with them. The decision is however subject to an outstanding appeal.
Provisional liquidators may also be appointed with full powers for the purpose of restructuring, in which case they displace the board of directors which becomes defunct. Although not common, this form of appointment has taken place where there is a lack of confidence in the Company's management and there is a likelihood that creditors may receive a greater recovery than in a liquidation scenario. In FDG Electric Vehicles Limited  SC (Bda) 32 Com. In the FDG case, the Supreme Court chose to order the removal of the existing Joint Provisional Liquidators who had been appointed with "light touch powers" and replace them with new JPLs with full powers.
The Court found that one of the directors of the company had a conflict of interest and that the Board of Directors had engaged in questionable transactions. The Court accordingly ordered that new JPLs be appointed with full powers which effectively displaced the Board of Directors as that appointment was both in the best interests of the company and its unsecured creditors.
There are a number of features of the Bermudian landscape that could lead one to conclude Bermuda is a director friendly jurisdiction. Examples include:
- The availability of a defence to a breach of statutory directors' duties on the basis that the director has relied on, inter alia, the report of an attorney, accountant, engineer, appraiser or other person whose profession lends credibility to a statement made by him (section 97(5A) of the Companies Act 1981).
- Bermuda requires shareholders who wish to bring a derivative action to demonstrate that an exception to the rule in Foss v Harbottle applies: a high bar requiring a fraud on the minority with the wrongdoers in control of the Company.
- The ability of companies to indemnify directors and hold them harmless in respect of liabilities incurred by directors to the Company.
This last feature of Bermudian corporate law provides considerably protection against claims for breaches of directors' duties than is available in other jurisdictions (for instance in the United Kingdom under section 232of the Companies Act 2006). The standard Bermudian indemnity from a company to its officers (usually contained in the bye-laws) will prevent the Company from bringing an action against a director except in cases of fraud or dishonesty.
In Peiris v Daniels  BDA LR 16, heard before the Bermuda Supreme Court, directors of a company omitted to obtain compulsory insurance against workplace injury.
The failure by the directors to obtain this compulsory insurance amounted to a strict liability criminal offence. One of the company's employees was injured in the course of his employment.
The Company entered insolvent liquidation and proceedings were brought by the liquidator pursuant to section 247 of the Companies Act 1981 (power of court to assess damages against delinquent officers) alleging that the directors' actions constituted misfeasance and wilful default.
The Court found that the breach of duty constituted a misfeasance but not a wilful default for the purpose of the indemnity. The Plaintiff's action was dismissed. The directors were therefore saved only by their indemnity from this wilful default in the performance of their duties. Notwithstanding Bermuda's relatively director-friendly approach, Bermudian courts have applied English decisions in some contexts, particularly where there is little Bermudian authority. One such area is in relation to the creditor duty owed on the eve of insolvency.
Corporate and dispute resolution lawyers have been reflecting on the potential impact of BTI 2014 LLC v Sequana SA  3 WLR 709, since its release last month. While directors enjoy significant protections in Bermuda, are acutely aware of and consider themselves bound by the duties they owe to their companies. BTI v Sequana has therefore already had an influence in Bermudian boardrooms, as we find ourselves able to give clearer and more definitive advice on the timing and nature of the creditor duty.
CUTTING-EDGE CORPORATE FORMS
Bermuda has played a leading role in the creation of novel corporate structures, principally in support of the insurance industry but that may be of wider applicability in the fullness of time. The Segregated Account Companies Act 2000 and the Incorporated Segregated Account Companies Act 2019 create two different forms of company: the Segregated Account Company (SAC) and the Incorporated Segregated Account Company (ISAC).
In July of this year, in Ivanishvili v Credit Suisse BM  SC 57, the Chief Justice described the nature of SACs:
"The concept of a segregated accounts company is that the company, as a separate legal entity, may create segregated accounts such that the assets and liabilities of each segregated account are separate from the assets and liabilities of each other segregated account. A segregated accounts company comprises (i) a general account containing assets and liabilities which are separate from the assets and liabilities of other segregated accounts; and (ii) the segregated accounts. A fundamental feature of a segregated accounts company is that assets linked to the segregated account may only be used to discharge liabilities which are linked to that segregated account. This fundamental feature is reinforced by a number of provisions set out in the SAC Act."
ISACs operate in a similar fashion, save that each segregated account is itself, a corporate entity.
These novel corporate forms will continue to pose interesting questions as the Courts grapple with the practical implications of these structures. A liquidator may be appointed in respect of a SAC or an ISAC but, if the Court is invited to consider a petition against a SAC or ISAC, any assets or liabilities linked to the segregated accounts must be disregarded when considering with the SAC or ISAC is solvent. Conversely, a segregated account may not be wound up by order of the Court.
The Court is instead limited to appointment of receivers over those accounts. A receivership order may direct that the business and assets and liabilities of an ISAC, a segregated account or an incorporated segregated specified in the order for the purpose of:
- the orderly management, sale, rehabilitation, run-off or termination of the business of, or attributable to, the ISAC, the segregated account or the incorporated segregated account; or
- the distribution of the assets and the payment of the liabilities of the ISAC, the segregated account or incorporated segregated account to those entitled thereto.
This is perhaps reasonably clear in the context of a straightforward insurance company but a power exists to grant SAC or ISAC status to noninsurance companies and insurance itself is becoming increasingly complex in Bermuda, with insurance as an investment or as a component of commercial lending becoming increasingly common. That is to say nothing about the insurtech movement that is sprouting up on the island, encouraged by the Bermuda Monetary Authority's innovation hub and sandbox initiatives for novel insurance models that are not yet ready for a full insurance licence.
While we wish these businesses taking advantage of novel structures every success, as litigators we are curious to see how the courts would face some of the challenges that would be posed by their failure.
Bermuda will continue to thrive as a restructuring destination, offering a suite of flexible options for organisations considering restructuring, supported by courts, lawyers and insolvency practitioners who have a sophisticated understanding of cross-border complexities.
Bermuda remains a jurisdiction with a vibrant and evolving insolvency and restructuring scene. Through the appointment of provisional liquidators with soft touch powers and the Court's broad discretion to determine the allocation of powers and responsibilities between provisional liquidators and company directors, the Court continues to create lifelines for a healthy recovery of distressed companies and for the protection of creditor interests.
The last year has seen interesting developments and we look forward to whatever the next year will bring. We believe that Bermuda will remain committed to its rescue culture, its director-friendly approach and its innovative approach to questions of corporate structure and regulation.
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.