Bankruptcy & Restructuring – To Enforce, or not to Enforce
Bermuda’s flagship restructuring process is the appointment of provisional liquidators, whose powers can be tailored to meet the specific need of a particular situation. It is very common, for instance, for provisional liquidators to be empowered to promote a scheme of arrangement between an insolvent company and its creditors. The practice is now developed to the point where the Court will generally not permit an insolvent company to promote a scheme of arrangement unless provisional liquidators are appointed.
Provisional liquidation may, at least on the face of it, prove less useful where the realisable value of an insolvent company’s assets is exceeded by the value of secured debt. In Bermuda, a secured creditor is permitted to enforce its security against an insolvent company, even where a winding-up petition has been presented or a winding up order made, without regard to the commencement of insolvency proceedings.
As a result, a provisional liquidator appointed to facilitate the restructuring of a company with secured debt exceeding realisable assets may find that they have little to do. The secured creditors may simply proceed to enforce their security without regard to the appointment of the provisional liquidator or any subsequent order made winding up the company.
It may appear as though a secured creditor would have little interest in participating in a collective, court-supervised procedure when remedies, such as possession, sale and appointment of a receiver are available to them and do not require a court order.
Enforcement of securities through the use of these remedies does, however, leave the company with the equity of redemption. This allows a company, or its liquidator, a right against the secured creditor after enforcement that can inhibit the manner in which the security is realised or afford less certainty after enforcement. A secured creditor may prefer to wait and see how a collective insolvency process (such as provisional liquidation) plays out, if the enforcement of security does not finally settle the balance between the secured creditor and insolvent company.
The enforcement of security, as opposed to a collective insolvency process, may be ill-suited where the secured creditor wants to preserve value in an underlying business by facilitating a cross-border restructuring of the business’ debts. Enforcement of security will often (i) offer less certainty than transactions entered into during a collective insolvency process, and (ii) be less capable, or incapable, of cross-border recognition.
Accordingly, even where a secured creditor has a right to directly enforce its security and the value of the secured debt exceeds an insolvent company’s available assets, it may nevertheless be desirable for the secured creditor to participate in a collective insolvency process to achieve greater certainty and cross-border recognition.
Moreover, provisional liquidation provides additional strategic advantages that are particularly valuable in complex restructurings involving multiple international jurisdictions and stakeholders. By participating in provisional liquidation, secured creditors may benefit from court-sanctioned mechanisms that facilitate negotiations with other classes of creditors, thereby achieving broader consensus and reducing litigation risk. Court supervision also assures stakeholders that transactions conducted during provisional liquidation are transparent, equitable, and subject to judicial oversight, mitigating the risk of subsequent challenges.
Provisional liquidation also facilitates international coordination through recognition in foreign courts, enhancing legal certainty. Many jurisdictions recognise and cooperate with provisional liquidation proceedings in Bermuda, thus providing a stable platform for multinational restructurings. This international recognition is critical where the company’s assets, creditors, or operations span multiple jurisdictions, as it streamlines the process and reduces conflicts between courts.
Additionally, the provisional liquidation process allows for the possibility of debtor in- possession financing arrangements or other restructuring funding solutions. Such financing solutions, approved by the court and monitored by provisional liquidators, can provide immediate liquidity to support ongoing operations during the restructuring process. This financial flexibility is typically unavailable in straightforward security enforcement scenarios, potentially leading to deterioration of asset value during enforcement.
Finally, participation in a court-supervised insolvency process aligns the interests of secured creditors with broader restructuring objectives. By coordinating with other creditors, regulators, and stakeholders through provisional liquidation, secured creditors can enhance the overall recovery and long-term viability of the underlying business. This collaborative approach is beneficial not only for immediate financial recovery but also for preserving the reputation and ongoing commercial relationships that may be essential post-restructuring.
In 2024, and early 2025, the Bermuda Courts have demonstrated repeatedly that novelty and complexity are no barrier to the achievement of restructuring outcomes that strike a fair, efficient and effective balance between stakeholders of distressed or insolvent companies. In the restructuring of BlockFi International Ltd, the Court adopted a novel cross-border protocol to align provisional liquidation with Chapter 11 proceedings before the US Bankruptcy Court. In Tahoe Life Insurance Company Limited, the Court appointed light-touch provisional liquidators less than six hours after the appointment of insurance managers by the Hong Kong Insurance Authority. In R&Q Re (Bermuda) Ltd, the Court sanctioned an innovative scheme for the solvent resolution of the company: a Class 3A reinsurer.
These decisions further demonstrate the flexibility and utility of provisional liquidation as a tool. Even in situations where a secured creditor has direct enforcement rights, provisional liquidation may prove the better option.
First published in Corporate Live Wire, Bankruptcy & Restructuring – Expert Guide, May 2025
