First published in The Law Reviews, December 2019
The seventh edition of The Insolvency Review offers an in-depth review of market conditions and insolvency case developments.
I INSOLVENCY LAW, POLICY AND PROCEDURE
i Statutory framework and substantive law
Bermuda is an overseas territory of the United Kingdom and its legal system is based on English common law, which comprises statute and case law. Decisions of the English courts are not binding on a Bermuda court, but they are highly persuasive. However, in general, the decisions of the Privy Council are binding on the Bermuda courts unless they are based on a reference from a jurisdiction with significantly different statutory provisions. The Privy Council is Bermuda's highest appellate court and sits in London. Bermuda's Commercial Court, a division of the Supreme Court of Bermuda, hears matters relating to insolvency.
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 former is based on the UK Companies Act 1948 and the latter are based on the UK Companies (Winding-Up) Rules 1949.
At the heart of Bermuda insolvency law is the pari passu treatment of unsecured creditors, that is to say, when a company does not have sufficient assets to satisfy its debts to unsecured creditors, each unsecured creditor would receive an equal distribution on a rateable basis according to the quantum of their claim.2 Secured creditors are unaffected by insolvency proceedings in Bermuda and may enforce their security in accordance with the terms of the governing security instrument3 (although they have standing to present winding-up petitions).
The Companies Act provides for challenging certain transactions executed by insolvent companies through avoidance or clawback provisions, which 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 is a creditor-friendly jurisdiction. A key feature of the insolvency regime is the Supreme Court's development of a rescue culture. When a company is insolvent, rather than making a winding-up order immediately upon hearing the petition, the Supreme Court often appoints provisional liquidators on a soft or light-touch basis. A provisional liquidator is an officer (typically an insolvency practitioner) for a limited purpose with clearly defined powers (known as light-touch powers) that may be used when there is a prospect of 'rescuing' an insolvent company through restructuring without the displacement of all executive functions of the board of directors. Restructurings are often achieved through a scheme of arrangement. In a soft liquidation, a company may continue its business operations as usual, pending the implementation of a restructuring plan.
Through the appointment of provisional liquidators with light-touch powers and the court's broad discretion to determine the allocation of powers and responsibilities between provisional liquidators and company directors, the Bermuda courts continue to create lifelines for the healthy recovery of distressed companies and for the protection of creditor interests.
Another distinguishing element of the Bermuda insolvency landscape is the willingness of the Bermuda courts to work in tandem with and to lend assistance to the foreign courts and companies having interests in other jurisdictions where there is a substantial international creditor or asset base.
iii Insolvency procedures
The insolvency and rescue procedures available under Bermuda law are:
a. liquidation under the supervision of the Bermuda court (also
known as compulsory liquidation);
b. provisional liquidation for the purpose of restructuring; and
c. schemes of arrangement.
LIQUIDATION UNDER THE SUPERVISION OF THE COURT
Typically, a creditor seeking to place a debtor into insolvent winding up in Bermuda will present a petition to the Supreme Court seeking such relief on the grounds that the company is unable to pay its debts, or it is just and equitable for the company to be wound up. Once appointed, the liquidator must obtain the sanction of the Supreme Court or the committee of inspection before taking certain actions. Upon the final distribution of the assets to the creditors or the members, the liquidator must obtain an order from the Supreme Court for its release and for the dissolution of the company.
If there is a risk that the company's assets may be dissipated prior to the hearing of the petition, a provisional liquidator may be appointed on an ex parte basis to take control of the assets. This form of provisional liquidation is contrasted with provisional liquidation on a soft or light-touch basis (discussed in the following subsection).
PROVISIONAL LIQUIDATION FOR THE PURPOSE OF RESTRUCTURING
When a company is insolvent, rather than making a winding-up order immediately upon hearing the petition, the Supreme Court often appoints provisional liquidators on a soft or light-touch basis. Authority for provisional liquidators with light-touch powers is not found in the Companies Act or any other legislation, but rather in the Bermuda common law. The Bermuda courts have used provisional liquidation as a tool to restructure the affairs of a company, preserve value in a business and to provide a platform for distressed companies to recover – which together promote the sustainability and success of cross-border business.
The provisional liquidators are subject to the supervision of the Bermuda court and they would typically provide periodic updates to the court on the status of a restructuring in the form of reports.
SCHEMES OF ARRANGEMENT
A scheme of arrangement is the only court-supervised reorganisation procedure in Bermuda, provided for in Sections 99 and 100 of the Companies Act. A scheme of arrangement may be initiated by a company, any member or creditor of a company or, where applicable, a liquidator who has been appointed in relation to a company. A proposed scheme must represent a compromise or arrangement between a company and its creditors or members, or any classes thereof.
Proceedings are started by applying to the Supreme Court for directions to convene meetings with the various classes of creditors or shareholders (or both) who will be affected by the scheme's proposals. Once the meetings have been convened, a further application is made to the Supreme Court to approve the scheme.
Classes of creditors are determined by the requirement for a class to be confined to those persons whose rights (as affected by the proposed scheme) are not so dissimilar as to make it impossible for them to consult together with a view to their common interest.
For a scheme to be presented to the Bermuda courts for sanction, a majority in number representing 5 per cent in value of the creditors or members present, and voting either in person or by proxy at each creditors' or members' class meeting, as the case may be, must approve the scheme.
Cram up or cram down (as those terms are generally understood in reorganisation proceedings) of a scheme of arrangement on to any dissenting class of creditors or members is not permitted in a Bermuda scheme of arrangement. To the extent that any single class of affected creditors or members fails to approve a scheme of arrangement by the requisite majority, the scheme will fail completely.
iv Starting proceedings
Statutory winding-up proceedings can be commenced by any one or more of the following:
a. the company itself;
b. creditors, including any contingent or prospective creditors. However, the court will not give a hearing to a winding-up petition presented by a contingent or prospective creditor until (1) security for costs has been given and (2) a prima facie case for winding up has been established;
c. contributories, subject to certain restrictions; and
d. the regulator (if applicable).
A winding-up proceeding is started by filing a winding-up petition with the Supreme Court of Bermuda supported by a standard form affidavit verifying the contents of the petition. Once the Supreme Court fixes a date for the hearing of the petition, the petition must be served on the company at its registered office. Before the hearing, the petitioner must obtain a certificate of compliance from the Registrar of the Supreme Court certifying that the petition is ready for hearing because it has been properly filed, served and advertised in an appointed newspaper.
Those intending to appear at the hearing of the petition, including those who wish to oppose the petition, are required to provide advance written notice to the petitioner within a prescribed time limit, failing which they require special leave of the Supreme Court to appear at the hearing.
On hearing a winding-up petition, the Supreme Court may grant, dismiss or adjourn the petition, or make any other order it thinks fit. It is unlikely that the Supreme Court would grant a stay of winding-up proceedings, save in exceptional circumstances. However, the Supreme Court regularly adjourns winding-up petitions.
It is now well established that adjournments can be granted to facilitate a proposed restructuring by provisional liquidators who may be appointed under Section 170 of the Companies Act 1981. This is where the court is satisfied that a restructuring will produce a better result for creditors than a winding up. As stated by the Hon. Mr Justice Kawaley in Z-Obee Holdings Ltd: 'This provision 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.'4 Benefits of this approach include the stay of proceedings against the company triggered by the appointment of provisional liquidators and independent oversight of the restructuring by court officers focused on protecting creditor interests.
Case law contains guidance in relation to how a court exercises its discretion to grant an adjournment: the views of the majority of unsecured creditors ordinarily hold considerable weight and the court will consider whether the proposed restructuring has a reasonable prospect of success.5
v Control of insolvency proceedings
The Supreme Court orders the winding up of a company by one or more liquidators when it grants a winding-up petition. Liquidators are officers of the Supreme Court and, accordingly, under the supervision of the Supreme Court. They are commonly appointed from accountancy firms. If nobody else is appointed, the Official Receiver, a public officer, acts as liquidator. Following the making of a winding-up order, the Supreme Court's role is primarily supervisory. Liquidators can return to the Supreme Court for directions regarding any particular matter arising in the winding up and they require approval of either the court or committee of inspection before exercising certain of their statutory powers, such as deciding to bring or defend legal proceedings on behalf of the company.
In directing insolvency proceedings, the Supreme Court will be guided by the main purpose of its winding-up jurisdiction, namely, protecting the best interests of the general body of unsecured creditors.
When the Supreme Court winds up a company and appoints liquidators, the board of directors becomes functus officio. This should be distinguished from the situation when the court adjourns the winding-up petition and appoints provisional liquidators to facilitate a restructuring (as discussed above). In the latter case, the Supreme Court may, in appropriate circumstances, reserve powers of management to the existing board for the purpose of implementing a restructuring and give the provisional liquidators light-touch powers to monitor the board. For example, it is necessary to keep the directors in place when a company is subject to proceedings under Chapter 11 of the US Bankruptcy Code and parallel proceedings in Bermuda, because Chapter 11 requires a debtor in possession – meaning the directors.
vi Special regimes
The Companies Act 1981 is applicable to the insolvencies or restructurings of all corporate entities in Bermuda, save to the extent that its provisions are amended by other legislation that applies to specific types of corporate entities, including the Insurance Act 1978 (for licensed insurance companies), the Segregated Accounts Companies Act 2000 (for licensed segregated accounts companies) and, once in force, the Banking (Special Resolution Regime) Act 2016 (for licensed banks).
Under the Insurance Act 1978, a liquidator is required to carry on the long-term business of an insurer with a view to it being transferred as a going concern to another insurer, unless the court orders otherwise.
The Segregated Accounts Companies Act 2000 allows for the appointment of a receiver over the assets and liabilities of an insolvent segregated account; the Bermuda courts will direct the receiver to manage the segregated account for the purposes of the management, sale, rehabilitation, run-off or termination of its business, or distribution of assets.
There are no special insolvency rules relating to corporate groups. To achieve practical efficiency, insolvencies of a group of companies may occur at the same time. If this occurs, each company within the group is treated separately and is subject to separate legal proceedings. Assets of the companies within the group are not pooled for distribution, unless a scheme of arrangement has been approved or another consensual arrangement has been put in place between the group and its creditors.
vii Cross-border issues
The Supreme Court does not have jurisdiction to wind up an overseas company, save for certain statutory exceptions.6 Accordingly, it is generally not possible to obtain an ancillary winding-up order from the Supreme Court in respect of a company domiciled outside Bermuda. Thus, forum shopping 'in Bermuda' is not relevant. However, if the main insolvency proceedings are in Bermuda, liquidators appointed by the Supreme Court may commence ancillary insolvency proceedings in other jurisdictions that permit ancillary proceedings, such as Hong Kong or England. The Bermuda courts are willing to assist foreign courts where it has the common law power to do so. However, that power cannot be used to grant relief to a foreign liquidator in circumstances where the court in the country where the liquidation is taking place could not have granted such relief.7
II INSOLVENCY METRICS
There is no information publicly available about companies restructuring their debts or defaulting.
During the course of 2018, Bermuda witnessed 14 compulsory winding-up petitions, 10 of which converted into court orders. It looks likely that a similar level will be achieved in 2019 – there have been seven petitions to date, at the time of writing. Petitions in Bermuda that do convert generally do so in a swift and orderly fashion, with many being processed within a month, which is quicker than anywhere else in the offshore region.
There are cases currently pending in which a Bermuda company is subject to insolvency proceedings outside Bermuda and parallel proceedings in Bermuda but, as has been discussed, the Supreme Court does not have jurisdiction to wind up foreign companies and so Bermuda is not an 'ancillary jurisdiction' in a true sense. There are no reported cases in the past 12 months involving the Bermuda courts assisting, or being called upon to assist, foreign liquidators.
III PLENARY INSOLVENCY PROCEEDINGS
i Noble Group
Noble Group Ltd was registered and incorporated in Bermuda. Its shares were listed on the Singapore Stock Exchange. It was the holding company of a group that was a major global commodity trader, with hubs in London, Hong Kong and Singapore. It ran into financial difficulty because of a worldwide decline in commodity prices, resulting in a default on its main financial obligations. Its pre-restructuring debt exceeded US$3 billion (unsecured). The company's directors originally sought to achieve a restructuring by entering parallel schemes of arrangement in England and Bermuda. Prior to presenting the English scheme, the company took steps to shift its centre of main interest from Hong Kong to England, including by moving its main office to London. The English and Bermuda schemes were approved by an overwhelming majority of scheme creditors in November 2018, following which the US Bankruptcy Court for the Southern District of New York granted recognition of the scheme in the United States via Chapter 15 of the US Bankruptcy Code. Shortly afterwards, however, the Singaporean authorities blocked the transfer of the company's listing on the Singapore Stock Exchange to the restructured company (or new co) created under the scheme because of ongoing investigations of the company and one of its subsidiaries. Against this background, the company's directors had to pursue the restructuring using Bermuda-appointed provisional liquidators with light-touch powers. The provisional liquidators were granted sufficient latitude to implement the transfer of the company's assets to the new co provided that the scheme creditors were not prejudiced, even if that meant the new co would no longer have a listing on the Singapore Stock Exchange as previously envisaged. The new co is now fully operational.
Provisional liquidators with light-touch powers would normally be appointed, if at all, prior to the proposal of a scheme of arrangement. Thus, when the Supreme Court of Bermuda appointed provisional liquidators over the company after the approval of the scheme in a company-driven restructuring, this was an innovative and welcome development. In practical terms, this decision allows the company's plans for restructuring its business operations to come to fruition, albeit with modified terms. Had the Bermuda court not appointed a provisional liquidator for the purpose of a restructuring, the company would have undergone a compulsory liquidation, meaning its business would have come to an end and its creditors would have received a significantly smaller dividend.
ii Up Energy Development Group Ltd
Up Energy Development Group Ltd is a Bermuda-registered company, publicly listed on the main board of the Hong Kong Stock Exchange. The company is an international energy investment group based in China. It is principally engaged in mining, producing and selling coking coal. At the Supreme Court hearing, it was reported that the company held a large interest in a Canadian coal mining company, whose operations had been suspended, and interests in a coal coking facility operating at less than 50 per cent and three coal mines in the pre-production development stages.8
Credit Suisse AG, Singapore Branch, petitioned the Court for the winding up of the company in May 2016. This was the culmination of a long-standing dispute between the petitioner and the chief executive officer of the company, who is also the ultimate beneficial owner of the company. The petitioner has an undisputed debt of HK$150 million under matured convertible notes. Also in 2016, HEC Securities Limited sought to wind up the company in the High Court of Hong Kong on the grounds of an unpaid debt in the form of a matured convertible note for HK$230 million. The petitioning creditors in Bermuda and Hong Kong, however, do not represent the majority of creditors, and stakeholders have disagreed regarding the direction of the insolvency proceedings.
In July 2016, Credit Suisse sought the appointment of provisional liquidators to oversee the restructuring. This was opposed by the company on the basis that, among other things, the company had already retained independent restructuring advisers and a provisional liquidation may be misunderstood in Asia. The Bermuda court felt that a case for the appointment of provisional liquidators had not been made because there was no evidence of any misconduct on the part of management and there seemed to be significant creditor support for there to be no appointment. The Bermuda court sought to fill the gap in independent monitoring by requiring the company to attempt to form an informal creditors' committee. Credit Suisse subsequently renewed its application for the appointment of provisional liquidators to oversee the restructuring being pursued by the directors, complaining that the restructuring was moving too slowly and that appointing provisional liquidators was necessary given conflicting interests among creditors and 'information black holes' about the company's financing. The Bermuda court granted Credit Suisse's application, emphasising that it was preferable for the restructuring to be supervised by provisional liquidators having statutory powers and not an ad hoc out of court company-directed process – and that this practice was so entrenched in Bermuda that all stakeholders have a legitimate expectation of provisional liquidators being appointed to monitor an insolvent restructuring. A practical benefit of this approach was that provisional liquidators appointed by the Bermuda court, acting as officers of the Bermuda court and agents of the company, would be able to access all relevant information, review it and report to the court.
The Supreme Court has allowed the company to remain in provisional liquidation for more than three years to afford it the opportunity to present a scheme of arrangement to its creditors during the latter part of 2019.
Seadrill Limited was registered and incorporated in Bermuda. It was one of the world's largest offshore drilling companies but ran into financial difficulty as a result of the knock-on effects of the downturn in the oil market, a resulting decline in revenue forecast in the short to medium term and a series of debt maturities running from 2016 to 2020.
Seadrill and two subsidiaries, Sevan Drilling Ltd and North Atlantic Drilling Ltd, filed for (voluntary) Chapter 11 Bankruptcy Protection in the Bankruptcy Court of Houston, Texas to serve as a platform for restructuring the Group as a response to the liquidity challenges. The following day, a parallel Bermuda winding-up proceeding was commenced and the appointment of provisional liquidators with light-touch powers was granted by the Bermuda court.
The order appointing the provisional liquidators empowered them, inter alia, to review the financial position of the company, to oversee the continuation of the business of the company under the control of the company's board of directors and to oversee, in conjunction with the board of directors, the Chapter 11 proceedings and any such proceedings as deemed appropriate by the company after consultation with the provisional liquidators. One of the primary benefits of commencing parallel proceedings was to ensure that all proceedings against the company were stayed, pending the determination of a restructuring solution and to prevent issues being determined in the US court to be re-litigated in Bermuda.
The provisional liquidators worked with the company to develop a viable restructuring plan for the Seadrill Group, which was presented to the US bankruptcy court pursuant to a Chapter 15 application for approval. This plan contemplated the negotiation of settlements, the grant of new capital and reprofiling Seadrill's capital structure. The US order approving the restructuring plan was subsequently presented to the Bermuda court for recognition, which was successfully obtained.
Seadrill is considered to be one of the most successful and complex cross-border restructurings. This case also demonstrates the willingness of the Bermuda's Supreme Court to cooperate with foreign jurisdictions (and, where possible, align its insolvency processes to the extent possible) to provide a platform for failing businesses to recover and to support cross-border business.
IV ANCILLARY INSOLVENCY PROCEEDINGS
The Supreme Court does not have jurisdiction to wind up foreign companies and so Bermuda is not an 'ancillary jurisdiction' in a true sense. There are no reported cases in the past 12 months involving the Court assisting, or being called upon to assist, foreign liquidators.
The Bermuda insolvency and restructuring practice is at an interesting juncture. With increased regulation across the financial services industries (particularly insurance), the organic development and evolving flexibility of provisional liquidation on a light-touch basis, and the absence of statutory provisions governing provisional liquidation, the Bermuda courts will be required to conduct an important balancing act when considering, in particular, the competing interests of creditor rights against the need to have deterrence-based regulation, as well as the costs of prolonged provisional liquidation against the prospects of a successful restructuring. While the courts have allowed provisional liquidation to evolve into a malleable tool that has a vital role in cross-border business, it is anticipated that the courts may in due course start defining the boundaries and scope of provisional liquidation in a clearer and more systematic manner.
The information provided in this publication is general and may not apply in a specific situation, nor does it necessarily represent the views of authors' firms or their clients. Legal advice should always be sought before taking any legal action based on the information provided.
1 John Wasty is a partner, John Riihiluoma is a senior counsel, Lalita Vaswani is a senior associate and Sam Riihiluoma is an associate at Appleby.
2 Certain amounts due to employees have preferential status.
3 The stay of proceedings that occurs when a winding-up order is made does not prevent secured creditors from exercising their rights under validly created security.
4 Z-Obee Holdings Ltd  Bda LR 19.
5 Up Energy Development Group Ltd  SC (Bda) 76 Civ.
6 PricewaterhouseCoopers v. Saad Investments Company Limited  UKPC 35.
7 Singularis Holdings Limited v. PricewaterhouseCoopers  UKPC 36. The Supreme Court of Bermuda could not order production of information to the liquidator appointed in Cayman when no equivalent order could have been made by the Cayman court.
8 In the Matter of Up Energy Development  SC (Bda) 83 Com (20 September 2016)
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.