This economic malaise has also coincided with:
- significant amounts of debt falling due for repayment – about 40 per cent of the USD11.4 trillion in bonds issued by Asian companies will mature before the end of next year, including about USD23 billion of stressed dollar notes due this year; and
- declining Sino-American relations, adding further stress to the credit markets, which will likely continue to decline in the run-up to the November 2020 US elections (and potentially thereafter depending on the outcome).
As a result, we continue to see rising enquiries in relation to offshore restructuring solutions. These are primarily being received from Oil & Gas companies and Oil & Gas service providers, developers, commercial property holders and issuers of large USD denominated offshore bonds. Whilst in many cases it has not yet been necessary to deploy the full range of offshore restructuring solutions, as these entities generally have existing credit facilities which they have been able to draw down on, the cash burn rate means that we are nearing the phase in which engagement with creditors will need to begin.
We therefore expect to see the full spectrum of the offshore restructuring and insolvency toolkit being utilised in the coming months to allow debtors to “right size”, to compromise the claims of creditors and to deploy processes available to secure sustainability at this unprecedented time. For larger corporate structures, this could entail restructuring of debt, addressing underperforming or distressed entities in various jurisdictions within the group, or seeking to have a formal process commenced in one jurisdiction recognised in another.
In this update, we consider the powers and discretion of the domestic courts in Bermuda, the BVI and Cayman to assist the courts of a foreign jurisdiction with a view to facilitating cross border restructuring.
The Companies Act 1981 (Companies Act) and the Companies (Winding-Up) Rules 1982 (Rules) are the main pieces of legislation regulating the reorganisations and insolvencies of corporate entities in Bermuda. The reorganisation and insolvency regimes provided by the Companies Act are derived largely from the English Companies Act 1948. Any company to which the Companies Act applies, ordinarily being a company that is incorporated in Bermuda, may avail itself of the insolvency and restructuring processes provided for in the Companies Act irrespective of whether it has any business operations or assets in Bermuda.
A petition for the reorganisation or winding up of a company, and any ancillary applications thereto (for example, an application for the appointment of provisional liquidators), is made to the Supreme Court of Bermuda, Commercial Court. There is a right of appeal to the Court of Appeal of Bermuda, with leave for appeals from interlocutory orders and without leave for final orders. The appellant is usually required to provide security for the costs of an appeal in accordance with the directions of the Registrar of the Court of Appeal.
Bermuda has not adopted the UNCITRAL Model Law on Cross-Border Insolvency 1997 and is not currently considering its adoption. Foreign liquidators may apply for recognition in Bermuda pursuant to Bermuda’s common law and the principles of comity.
There are no statutory mechanisms for the recognition of foreign insolvency proceedings or for cross-border cooperation in insolvency or restructurings. There is, however, substantial jurisprudence of the Bermuda court exercising its common law powers to recognise foreign insolvency and restructuring proceedings and to cooperate with courts of foreign jurisdictions, particularly in circumstances where:
- the subject company is incorporated in Bermuda;
- the subject company has assets located in Bermuda;
- the liquidators seek assistance that would be available to them both under the law of the foreign jurisdiction and under Bermuda law; and
- such recognition and cooperation are not contrary to Bermuda public policy.
The Supreme Court has issued two practice directives relating to cross-border insolvencies: Guidelines Applicable to Court to Court Communications in Cross-Border Cases, dated 1 October 2007; and Guidelines for Communication and Cooperation between Courts in Cross-Border Insolvency matters, dated 9 March 2017. The latter is based on the draft guidelines adopted by the Judicial Insolvency Network in October 2016.
Under the Reciprocal Judgements Act 1958 (Reciprocal Judgements Act), a judgment of a superior court in the United Kingdom or other designated common law jurisdiction may be registered as a judgment in the Bermuda courts to the extent the foreign judgment is final and conclusive as between the parties and is for a fixed sum of money (not being in respect of taxes or in respect of fines or penalties).
Under Bermuda’s common law, the Bermuda courts may, subject to certain requirements, recognise judgments from foreign jurisdictions not otherwise qualifying for registration under the Reciprocal Judgments Act for a liquidated sum by way of summary judgment.
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 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 plays 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 more clear and systematic manner.
BRITISH VIRGIN ISLANDS
In 2003, the BVI enacted the Model Law through Part XVIII of the Insolvency Act 2003. However, in common with the administration provisions which were also enacted at the same time, those provisions were never brought into force. The decision of the legislature to enact those provisions, but then not to bring them into force led Bannister J to conclude In re Bernard L Madoff Securities LLC BVIHCM 140/2010 that the common law entitlement of the Court to act in aid of a foreign process had been impliedly repealed. Bannister J was subsequently invited to depart from that decision in In Re C (A Bankrupt) BVIHCM 2013/0080, but he declined to do so in respect of officeholders from certain non-designated jurisdictions.
Although the Model Law was never brought into force, the same is not true of Part XIX of the Insolvency Act 2003, which was brought into force. That contains a suite of provisions which allows the Court to act to assist a foreign representative appointed in aid of a collective judicial or administrative proceeding relating to insolvency in a “relevant foreign country”. On 23 August 2005, nine such countries were designated, including the United Kingdom, the United States of America, Jersey, Japan, Hong Kong, Canada and Australia. Officeholders from those jurisdictions are entitled to seek orders, on an application by application basis. The consequence of Bannister J’s decision in Re C (A Bankrupt) is that officeholders from those jurisdictions will also be entitled to recognition at common law.
In cases to which Part XIX is not applicable, there are other routes by which the Court’s assistance can be obtained. Following the crisis in 2009, it became common to see parallel insolvency proceedings in the BVI and elsewhere, so that an insolvent BVI company may be wound up in the BVI and in another jurisdiction. To facilitate that, the BVI Court has the power to appoint an overseas practitioner when it is effecting an appointment, and the Court is a signatory to the Judicial Insolvency Network Guidelines on communication between Judges supervising insolvent estates. In cases where the assistance of the BVI Court is to be limited to the provision of evidence or the examination of witnesses, this can be achieved by a letter of request pursuant to the provisions of the Evidence (Proceedings in Foreign Jurisdictions) Act. It is possible that the Court will also appoint Provisional Liquidators, in order to facilitate a restructuring, as with a scheme of arrangement or through a US Chapter process.
In the turnaround context, there are issues which the coming period seems likely to resolve. Amongst them are whether Bannister J was right to hold that the common law power to act in aid of a foreign insolvency process was impliedly repealed, the extent to which the BVI Court will ask a foreign Court to initiate, for example, an administration process which is not available locally and the effectiveness of a “soft touch” provisional liquidation as a restructuring tool.
For many decades, the Cayman Islands has been recognised as a leading proponent of progressive cross-border insolvency law and practice. Indeed, prior to the Model Law on Cross-Border Insolvency (Model Law) being adopted by the UNCITRAL in May 1997, the Cayman Islands was among the jurisdictions that exemplified the standards and practices that came to be enshrined within the Model Law; an example being the BCCI liquidation (1992) in which the Grand Court of the Cayman Islands (Cayman Court) constructed a pooling arrangement between liquidation estates in the United Kingdom, Luxembourg and the Cayman Islands pursuant to which creditors of the pooling entities looked to that pool of assets for liquidation distributions.
However, when the Cayman Islands overhauled its cross-border insolvency legislation in 2009, inserting the international cooperation provisions of Part XVII of the Companies Law, the jurisdiction elected not to adopt the Model Law per se. Despite its non-adoption of the Model Law, the Cayman Islands has continued to build on a strong tradition of cross-border insolvency best practice and to exercise the Cayman Court’s powers in aid of foreign proceedings in furtherance of comity between nations. It is fair to say that the Cayman Court applies Model Law principles in all but name.
Part XVII of the Companies Law codifies these longstanding international co-operation practices and is aligned with (although it does not directly apply) the Model Law. Part XVII has more in common with the former section 304 of the US Bankruptcy Code (although Part XVII is construed on its own terms) than Chapter 15 of the Bankruptcy Code which facilitates the continuation of the flexible approach to cross-border insolvency.
Part XVII applies to insolvency proceedings brought outside the Cayman Islands and to applications for recognition and assistance from the foreign representative of those proceedings. In overview, Part XVII provides:
- definitions which foreign representatives must come within in order to attain standing or seek ancillary relief from the Cayman Court (section 240);
- for the kinds of ancillary orders that the Cayman Court may make if it exercises its discretion to do so (section 241);
- criteria on the basis of which the Cayman Court may decide whether to exercise its discretion to grant ancillary orders (section 242); and
- for certain notice obligations arising upon issue of foreign insolvency proceedings in respect of companies incorporated in the Cayman Islands or foreign companies registered in the Cayman Islands (section 243).
Under Part XVII, the Cayman Court at all times retains its discretion in relation to making orders ancillary to or in assistance of a foreign insolvency proceeding. This contrasts with comparable legislation in other jurisdictions, such as Chapter 15 of the US Bankruptcy Code which requires the applicant to establish that the relevant proceedings are ‘foreign main proceedings’ (i.e. issued in the place the company has its centre of main interests) before recognition as of right is granted. In the Cayman Islands, there are no such threshold tests or automatic rights and foreign representatives are required to satisfy the Cayman Court that it is appropriate for the Cayman Court to exercise its discretion by granting the relief sought in the foreign representative’s application. As a consequence, the controversy surrounding applications of the Chapter 15 system, in which the Bankruptcy Court acts as a sole gatekeeper rigidly enforcing mandatory procedures without the benefit of court discretion, does not apply to the Cayman Islands’ cross-border law and practice, which maintains the flexibility and versatility for which it is known.
For a full global update on cross border restructuring where Appleby offices are located you can read more here.