Insolvency law: secured creditors take note (Bermuda)

The circumstances of the case were unusual.

In October 2010, Joseph Wakefield, as executor of an estate, granted a loan to Mr Darrell in the amount of $427, 259.47.

In May 2011, Mr Darrell executed a memorandum of deposit of deeds agreeing to deposit the deeds to a property in Bermuda with Mr Wakefield when he received them from the Bank of Bermuda Ltd, which held a first mortgage over the property.

The bank refused to provide the deeds, so Mr Darrell’s obligation was never fulfilled.

Mr Darrell defaulted on the loan, which resulted in Mr Wakefield obtaining a judgment against him by relying on the memorandum as evidence of the debt.

In 2017, Mr Wakefield successfully brought a petition under the Bankruptcy Act 1989 to have Mr Darrell adjudicated bankrupt, relying on the unsatisfied judgment.

Importantly, the petition provided that the loan was an unsecured claim and that Mr Wakefield did not hold any security in respect of the debt, which was accompanied by an affidavit sworn by Mr Wakefield verifying that the contents of the petition were true.

In administrating Mr Darrell’s estate, the trustees in bankruptcy entered into an agreement with a third party for the sale of the property. Prior to completion of the sale, however, it was discovered that an equitable charge over the property had been registered, reflecting the terms of the memorandum.

A further complicating factor was that Mr Wakefield had passed away, which meant that he could not provide evidence clarifying or explaining the registration of the equitable charge.

To progress the sale, the trustees sought directions from the Supreme Court under Section 18 (3) of the Act to resolve the question of whether the memorandum created an equitable charge.

The court determined this question by considering three key points.

First, was a valid equitable charge created by the memorandum? Given the passage of seven months between the granting of the loan and the execution of the memorandum, the court determined that the memorandum did not constitute consideration for the loan.

The court came to this conclusion in applying the general rule that granting security in respect of an antecedent debt is generally not valid because there is no present consideration for it, unless there is creditor forbearance. Although it may have been possible for Mr Wakefield to adduce evidence in overriding that general rule, the only evidence available from him was his sworn affidavit.

Second, even if the equitable charge was created, did Mr Wakefield surrender his right to it by petitioning as an unsecured creditor in the bankruptcy by virtue of paragraph five of schedule two of the Act?

That provision states that, in the context of submitting an affidavit or claim in support of a proof of debt, if a secured creditor has omitted to state that they are a secured creditor, they shall surrender their security for the general benefit of the creditors unless the court, on application, is satisfied that the omission has arisen from inadvertence. Even though the affidavit was sworn in support of the petition rather than a proof of debt, the court held that this provision was triggered.

Lastly, it was noted that over a seven-year period, Mr Wakefield did not amend the petition or take any steps to assert a claim that the memorandum was valid security and participated in the bankruptcy proceedings as an unsecured creditor.

The court considered this conduct to amount to a waiver of Mr Wakefield’s right to assert a security interest in the property, and that it would be inequitable to allow him — or anyone claiming through him — to assert to the contrary.

The provisions of the Act equally apply to the winding-up of companies. It is important therefore that secured creditors clearly disclose the nature of their secured interests when petitioning — or submitting an affidavit in support of a proof of debt — insolvent individuals and companies, including equitable charges.

Failure to do so could risk the security being deemed surrendered, particularly where the creditor’s conduct is inconsistent with an intention to assert or preserve a secured interest.

The full judgment of the court is available online.

Appleby did not act in this matter.

First Published in The Royal Gazette, Legally Speaking column, July 2025