The Insolvency Review: Bermuda

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. Generally speaking, the decisions of the Privy Council are, however, 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 insolvency law statutory framework consists of statute and common law. The principal statutory provisions governing corporate insolvency and restructuring are contained in Part XIII of the Companies Act 1981 (Companies Act), and are supported by the Companies (Winding-Up) Rules 1982 (Companies Winding-Up Rules). The Companies Act is based on the UK Companies Act 1948 and the Companies Winding-Up Rules 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, where a company has insufficient assets to satisfy its debts to unsecured creditors, each unsecure creditor would receive an equal distribution on a rateable basis according to the quantum of their claim.² Secured creditors are generally 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 the ability to challenge certain transactions executed by insolvent companies through avoidance or clawback provisions, including 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.

The Companies (Winding-Up) Rules 1982 were significantly amended in 2020 by the Companies (Winding-Up) Amendment Rules 2020. Some of the most significant changes include the expansion of the list of people permitted to inspect the court file, rationalisation of service of documents provisions, the tightening up of advertisement provisions and the addition of a requirement to produce a certificate of compliance before a petition is heard. In addition, it is notable that, pursuant to the new rules, if a sole liquidator is appointed, that liquidator must be resident in Bermuda; and, on the appointment of joint liquidators or provisional liquidators, at least one of them must be resident in Bermuda and his or her credentials must be accepted by the court.

The changes made in relation to access to the court file make it easier for creditors and contributories of a company being wound up to access the documents that have been filed with the court. Previously, in order for a creditor or contributory to gain access to the court file, his or her claim or proof of debt must have already been admitted. Outside of these categories of persons, the only other people who could gain access to the court file would be an officer of the company or the Registrar of Companies. Now, any person who produces a sworn statement confirming that he or she is a creditor of the company may inspect the court file on a winding-up proceeding and obtain copies of any documents thereon.

ii Policy

Bermuda is a creditor-friendly jurisdiction. A key feature of the Bermuda insolvency regime is the Bermuda court’s development of a rescue culture. Where a company is insolvent, rather than making a winding-up order immediately upon hearing the petition, the Bermuda court often appoints provisional liquidators on a ‘light touch’ basis whose primary focus is to assist the company explore the merits of a restructuring plan. A provisional liquidator is an officer of the court (typically an insolvency practitioner or accountant) appointed for a limited purpose with clearly defined powers (‘light touch powers’), which may be used where there is a prospect of ‘rescuing’ an insolvent company through restructuring without the displacement of all of the board’s executive functions. Restructurings are often achieved through a scheme of arrangement. In a light touch provisional 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 court continues to create lifelines for a healthy recovery of distressed companies and for the protection of creditor interests.

Another key element of the Bermuda insolvency landscape is the willingness of the Bermuda court to work in tandem with and to lend assistance to foreign courts and Bermuda 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 as follows:

• liquidation under the supervision of the court (also known as compulsory liquidation);
• provisional liquidation on a ‘full powers’ basis;
• provisional liquidation for the purpose of restructuring; and
• 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 court seeking relief on the grounds that that company is unable to pay its debts; or that it is just and equitable for the company to be wound up. Once appointed, the liquidator must obtain the sanction of the 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 court for its release and for the dissolution of the company.

Provisional liquidation on a full powers basis

Where 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 and safeguard the assets. A court typically appoints a provisional liquidator on a full powers basis where there is a suspicion of fraud or where cogent evident exists demonstrating a likelihood that the directors may dispose of assets if tipped off about an impending winding-up petition. This form of provisional liquidation is known as provisional liquidation on a full powers basis contrasted with provisional liquidation on a light touch basis (discussed below).

Provisional liquidation for the purpose of restructuring

As indicated above, where a company is insolvent, rather than making a winding-up order immediately upon hearing the petition, the Bermuda court often appoints provisional liquidators on a 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 court has 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 promotes the sustainability and success of cross-border business.

The provisional liquidators are subject to the supervision of the court and will typically provide periodic updates to the court on the status of a restructuring in the form of reports.⁴

Schemes of arrangement

A scheme of arrangement is the only court-supervised restructuring or reorganisation procedure in Bermuda, provided for in Sections 99 and 100 of the Companies Act. A scheme of arrangement may be initiated by the company, any member or creditor of the company or, where applicable, a liquidator who has been appointed in relation to the company. A proposed scheme must represent a compromise or arrangement between the company and its creditors or members, or any class thereof.

Proceedings are started by applying to the Bermuda courts for directions to convene meetings with the various classes of creditors or shareholders who will be affected by the scheme’s proposals. Once the meetings have been held and the statutory voting thresholds have been met, a further application is made to the court to sanction 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 75 percent 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.

To cram up or cram down (as those terms are generally understood in reorganisation proceedings) 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 the scheme of arrangement by the requisite majorities, the scheme will fail in its totality.

iv Starting proceedings

Statutory winding-up proceedings can be commenced by any one or more of the following:

• the company itself;

• 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:

• • security for costs has been given; and
  • a prima facie case for winding up has been established;

• contributories, subject to certain restrictions; and
• regulators (if applicable).⁵

The mode of beginning winding-up proceedings is 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 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 of the petition, 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 frame, failing which they require special leave of the court to appear at the hearing.

On hearing a winding-up petition, the court may grant, dismiss or adjourn the petition, or make any other order it thinks fit. It is unlikely that the court would grant a stay of winding-up proceedings, save in exceptional circumstances. However, the 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 than a winding up for creditors. As stated by Kawaley CJ 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.’⁶

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.

v Control of insolvency proceedings

The court orders the winding up of the company by one or more liquidators when it grants a winding-up petition. Liquidators are officers of the court and, accordingly, under the supervision of the court. They are commonly appointed from accountancy firms. The Official Receiver, a public officer, acts as a liquidator when nobody else is appointed. Following the making of a winding-up order, the court’s role is primarily supervisory. Liquidators can return to 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; for example, deciding to bring or defend legal proceedings on behalf of the company.

In directing insolvency proceedings, the 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 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 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 its 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 court 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. Where 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 between the group and its creditors.

vii Cross-border issues

The Bermuda court does not have jurisdiction to wind up an overseas company, save for under certain statutory exceptions: PricewaterhouseCoopers v. Saad Investments Company Limited.⁷ Accordingly, it is generally not possible to obtain an ancillary winding-up order from the Bermuda court in respect of a company domiciled outside of Bermuda. Thus, forum shopping in Bermuda is not possible or relevant. Conversely, if the main insolvency proceedings are in
Bermuda, liquidators appointed by the Bermuda court may commence ancillary insolvency proceedings in other jurisdictions that permit ancillary proceedings, such as Hong Kong and England. The Bermuda court is 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: Singularis Holdings Limited v. PricewaterhouseCoopers⁸ (Bermuda court could not order production of information to a liquidator appointed in Cayman when no equivalent order could have been made by the Cayman court).

INSOLVENCY METRICS

There is no information publicly available on companies restructuring their debts or defaulting. During 2019, Bermuda witnessed 23 compulsory winding-up petitions, five of which converted into court orders. The year 2020 was on a similar trajectory, with nine petitions. During 2021, the number of winding-up petitions advertised was consistent with the number of petitions presented the previous year. The year 2022 is on track to have maintained this steady pace. Petitions in Bermuda that lead to a winding-up order generally do so in a swift and orderly fashion, with many being processed within one month, which is quicker than any other offshore jurisdiction to our knowledge.

PLENARY INSOLVENCY PROCEEDINGS

NewOcean Energy Holdings Limited

Companies often seek the protection of light touch provisional liquidation in response to a creditor’s petition. When this happens, the court must consider whether to adjourn the creditor’s petition and appoint joint and several provisional liquidators (JPLs) or to make an immediate winding up order, dismissing a company’s application for light touch provisional liquidation.

This was 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 businesses in various sectors, including liquefied petroleum gas, real estate and shipping.

In 2020, NewOcean encountered financial difficulties. It owed in excess of US$800 million 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 the 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 HSBC and so was deemed insolvent. The first default to HSBC was on 2 September 2020, and the petition was first 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., despite its current liquidity issues, the values of its assets exceeded its liabilities).

Relying on this fact, among others, NewOcean applied to adjourn the petition and appoint JPLs on a light touch basis. The Court did so, adjourning the petition. The Court appointed JPLs on 14 December 2021, and the petition was adjourned on a number of occasions thereafter. The Court appointed the petitioning creditor’s compulsory liquidator nominees as JPLs instead of the nominees proposed by the company. By the end of March 2022, the extent to which creditor sentiment had hardened against NewOcean was very clear: 64.8 per cent of bank creditors opposed any further adjournment and supported an immediate winding-up order. To secure its restructuring, NewOcean needed 75 per cent 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 of Appeal allowed the appeal making a winding-up order against NewOcean (rather than choosing to remit the matter to the first instance court). The Court of Appeal’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 arithmetical 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 per cent 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 consider (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 per cent of creditors in favour but had nearly 66 per cent 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 company, acting through Mr Shum, its executive director, subsequently sought and was refused leave to appeal to the Judicial Committee of the Privy Council from the Court of Appeal’s decision and a stay of the order which was made in May 2022, pending the final determination by the Privy Council of the appeal. The Court of Appeal formed the view that a further appeal would not raise any question of great general or public importance.

In making its decision to decline the stay, the Court considered that:

• The relationship between the liquidators and Mr Shum was dysfunctional and there were repeated complaints that the company was not cooperating with the liquidators during provisional liquidation.
• The history of events, and the matters set out in the JPLs’ reports, did not inspire the Court’s confidence that this relationship could be repaired.
• It was apparent that any value of the company depended on the value it derives from a very large number of direct and, more importantly, indirect subsidiaries. To realise the assets of the company and derive value from the subsidiaries in the group, the liquidators were going to have to change the composition of the boards of the relevant companies and secure recognition of the status of the liquidators in the PRC and elsewhere – which had already commenced.
• At the first creditors meeting, bank creditors representing US$744.9 million out of some US$786 million voted to have the liquidators confirmed by the Bermuda court and a committee of inspection appointed. The fact that so many voted in favour of confirmation showed an almost universal view that there should be a liquidation.
• The majority of the creditors who were supportive of liquidation were sophisticated bank creditors who were capable of forming their own judgement as to the benefits and risks of asset disposals by the company in provisional liquidation as compared to assets disposals under the liquidators’ control.

These decisions demonstrate the extent to which the court will respond to prevent companies from taking advantage of the light touch regime.

ANCILLARY INSOLVENCY PROCEEDINGS

The Bermuda court does not have jurisdiction to wind up foreign companies, and thus, Bermuda is not an ‘ancillary jurisdiction’ in a true sense. There were no reported cases in the past 12 months involving the Bermuda court assisting, or being called upon to assist, foreign liquidators.

TRENDS

Bermuda continues to demonstrate its ability to be a reliable and stable restructuring destination. The jurisdiction continues to maintain a sophisticated and diligent approach to questions of corporate structure and regulation. It continues to offer flexible and innovative cross-border restructuring options for distressed multijurisdictional companies and groups while maintaining a consistently high level of vigilance about the primacy of creditor interests.

Through the development of Bermuda’s light touch provisional liquidation regime 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 innovative solutions for a healthy recovery of distressed companies and for the protection of creditor interests.

First published in The Law Reviews, October 2023