First published in GRR's Americas Restructuring Review 2022, December 2021
This chapter discusses the defining features of Bermuda's insolvency landscape and the primary insolvency and rescue procedures available under Bermuda law, including compulsory liquidations and schemes of arrangements. The restructuring of Noble Group Limited is presented as a case study, to illustrate the use of provisional liquidation to facilitate a restructuring via a scheme of arrangement. The chapter also reviews the role of the Bermuda court in cross-border insolvencies and the creditor-friendly nature of the insolvency regime in Bermuda.
Legal framework
Bermuda is an overseas territory of the United Kingdom and its
legal system is based on the English common law comprising statute
and case law. Bermuda has developed its own body of common law and
statutes and this has been influenced by several jurisdictions
including England, Canada, Australia and New Zealand. Decisions of
the English courts are not binding on a Bermuda court, although
they are highly persuasive. The decisions of the Privy Council,
however, are generally binding on the Bermuda courts, unless they
are based on a reference from a jurisdiction with considerably
different statutory provisions and policies. The Privy Council is
Bermuda's highest appellate court and sits in London.
Bermuda's insolvency landscape Bermuda insolvency law 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 (the Companies Act) and are
supported by the Companies (Winding-Up) Rules 1982 (the Winding-Up
Rules). The Companies Act is based on the English Companies Act
1948 and the Companies Winding-Up Rules are based on the English
Companies (Winding-Up) Rules 1949.2 No substantive changes have
been made to Part XIII of the Companies Act and the Winding-Up
Rules since they were enacted, although there have been minor
amendments.
At the heart of Bermuda insolvency law is the principle of pari passu treatment of unsecured creditors (ie, where the 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). Secured creditors are unaffected by insolvency proceedings in Bermuda and may enforce their security in accordance with the terms of the governing security instrument (although they have standing to present winding-up petitions).
A key feature of Bermuda insolvency law is that the Companies Act provides the ability to challenge certain transactions executed by insolvent companies through avoidance or clawback provisions. This 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.
Corporate insolvency and rescue procedures
The primary insolvency and rescue procedures available under Bermuda law are:
- liquidation under the supervision of the court, commonly referenced as'compulsory liquidation' or 'compulsory winding-up';
- provisional liquidation for the purpose of restructuring; and
- schemes of arrangement.
Bankruptcy procedures are relevant in the context of insolvent funds and individual insolvencies. The remedy of receivership is an important mechanism used when a segregated accounts company is insolvent.
Compulsory liquidation
Typically, a creditor seeking to place a debtor company into liquidation in Bermuda will apply to the court seeking such relief on the grounds the company is unable to pay its debts or that it is just and equitable for the company to be wound up. Compulsory winding-up proceedings can be commenced by any one or more of the following:
- the company itself;
- creditors, including any contingent or prospective creditors;
- contributories, subject to certain restrictions; and
- regulator (if applicable).
The mode of beginning winding-up proceedings is by filing a
winding-up petition with the Supreme Court of Bermuda, which is
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, except in exceptional circumstances. However, the
court may adjourn a winding-up petition in order to facilitate a
proposed restructuring by the company with the assistance of a
court-appointed insolvency practitioner known as a 'provisional
liquidator'.
On the making of a winding-up order, the company's operations
come to an end and the control of the company is taken from the
directors and is placed in the hands of a court-appointed
liquidator. Liquidators are equipped with a wide array of powers to
ensure that the company adheres to a statutory process contained in
the Winding-Up Rules. This process is intended to promote a
systematic and orderly winding down of the company's
affairs.
Provisional liquidation
- Provisional liquidation occurs in two scenarios, being:
where the Bermuda court appoints an officer (typically an insolvency practitioner) with clearly defined powers that 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; or - where it is necessary for the court to appoint an officer to protect and prevent a dissipation of the company's assets in the intervening period between the filing of a petition and the making of a winding-up order.
The former type of provisional liquidation is a distinguishing
feature of Bermuda's restructuring landscape. Accordingly,
where a company is insolvent, rather than making a winding-up order
immediately upon hearing the petition, the Bermuda court often
appoints provisional liquidators with certain, limited powers,
known as 'light' or 'soft-touch' powers.
In a light-touch liquidation, a company may continue its business
operations as usual, pending the implementation of a restructuring
plan. This would normally occur where the court is satisfied that a
restructuring will produce a better result than a winding up for
creditors. As explained by Kawaley CJ in Z-OBEE Holdings Ltd (2017)
Bda LR 19:
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.
The Bermuda court has used provisional liquidation as a tool to
restructure the affairs of a company, preserve value in a business
and provide a platform for distressed companies to recover - which
together promotes the sustainability and success of cross-border
business.
The 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.
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 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 classes thereof.
Proceedings are started by applying to the Bermuda court 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 convened, a further
application is made to the court to approve or '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 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 cramdown (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 the scheme of
arrangement by the requisite majority, the scheme will fail in its
totality.
Expedited restructurings
The Companies Act does not provide for an expedited reorganisation, such as a reorganisation by way of a pre-pack arrangement. However, as a matter of practice, a reorganisation may be informally negotiated with a liquidator prior to his or her appointment on the informal understanding that the liquidator will approve the prenegotiated arrangement once appointed. This type of informal arrangement will have similar effect to a pre-package deal but the details of the arrangement will be bespoke to the particular circumstances of the case.
Receivership
Receivers are generally appointed by secured creditors pursuant
to the terms of a security agreement. The function of the receiver
is to realise the relevant secured assets of the company for the
benefit of the security-holder. Assets of a company that have been
validly secured as security for a company's indebtedness are
exempted from the claims of creditors in insolvency. On completion
of the receivership, therefore, there can be a winding up of the
assets not realised by the receiver for the benefit of the
company's unsecured creditors.
There is a separate insolvency regime that applies to segregated
accounts companies incorporated in Bermuda under the Segregated
Accounts Companies Act 2000 (sometimes referred to as protected
cell companies or segregated portfolio companies in other
jurisdictions). This regime provides for the appointment of
receivers over the segregated accounts (or cells) of the segregated
accounts company which are unable to meet their liabilities as they
fall due. A liquidator may be appointed over a segregated account
company's general account if it is insolvent. There are
relatively few statutory rules underpinning this regime when
compared to the winding-up regime that applies to limited liability
companies incorporated in Bermuda. It is thought that the Bermuda
court would model its approach to the winding up of a segregated
accounts company on the court's established practice in
relation to limited liability companies.
Bankruptcy
Corporate insolvency generally refers to the winding-up regime under Part XIII of the Companies Act and the Winding-Up Rules. Bankruptcy is a term that only applies to individual insolvency and limited partnerships, the latter being the corporate vehicle regularly used for investment funds.
Observations
Creditor-friendly jurisdiction
On the surface, the statutory rules governing the winding up of
companies are not clearly creditor friendly. The regime is
ostensibly designed to ensure that insolvent companies come to an
end by having liquidators appointed to realise the company's
assets, in order to satisfy creditors' claims before the
Bermuda court dissolves whatever remains of the company. However,
in practice, the Bermuda court is adept at applying the statutory
regime with enough flexibility to achieve creditor-friendly
results. In fact, a prominent characteristic of the insolvency
regime is the Bermuda court's development of a rescue culture.
When a company is insolvent, rather than making a winding-up order
immediately upon the winding-up petition, the Bermuda court often
appoints provisional liquidators on a light-touch basis, allowing
the company to continue its business as usual (under the
supervision of court-appointed office holders) pending the
implementation of a restructuring plan through a scheme of
arrangement.
Another defining feature of the insolvency landscape is the
Bermuda court's willingness to work in tandem with, and lend
assistance to, foreign courts and be receptive to companies having
interests in other jurisdictions where there is a substantial
international creditor or asset base. By way of illustration, in
2017, the Bermuda Supreme Court and the Supreme Court of Singapore
signed a Memorandum of Understanding of References of Questions of
Foreign Law in order to facilitate legal cooperation between the
two jurisdictions.
Hallmark of provisional liquidation - Noble Group Limited
The value of provisional liquidation was demonstrated in the
widely publicised restructuring of Noble Group Limited in 2018.
Noble Group was incorporated in Bermuda and listed on the mainboard
of the Singapore Exchange. It was the ultimate holding company of a
group of companies that was one of the world's largest
commodity traders, with hubs in London, Hong Kong and Singapore.
The group managed a portfolio of global supply chains that involved
marketing, processing, financing and transporting across the world.
The restructuring was highly complicated owing to the very wide
range of creditors involved and the global scale of the group's
business.
Noble Group experienced grave financial difficulties because of
the industry-wide decline in commodity prices between 2014 and
2016. Noble Group's pre-restructuring debt exceeded US$3
billion dollars. To avoid liquidation, the company's directors
pursued a financial restructuring based on a debt-for-equity swap
and provided for the transfer of Noble Group's assets to newly
incorporated subsidiaries of a newly incorporated holding company,
New Noble. Noble Group itself was to be dissolved.
Scheme creditors were to be issued with new debt instruments and
70 per cent equity in the new group. The remaining equity was to be
apportioned, with 20 per cent issued to existing shareholders and
10 per cent issued to existing management. One of the main goals of
the scheme was to provide the new group with access to new hedging
and trade finance facilities (US$800 million). These facilities
were to be provided by a finance creditor, but also by scheme
creditors who chose to guarantee the facility in exchange for
senior debt instruments.
The company originally sought to achieve the restructuring solely
by entering into parallel schemes of arrangement with its creditors
(which were governed by both English and Bermuda law processes).
Prior to presenting the English scheme of arrangement, which was
regarded as the 'lead' scheme, Noble Group took steps to
shift its centre of main interests from Hong Kong to England,
including by relocating its main office to London from Hong
Kong.
The English and Bermuda schemes of arrangement were approved by an
overwhelming majority of scheme creditors and were sanctioned by
the courts in both jurisdictions. The English scheme was sanctioned
on 12 November 2018 and the Bermuda scheme was sanctioned two days
later. The US Bankruptcy Court granted recognition of the scheme in
the United States, via Chapter 15 of the US Bankruptcy Code, on 15
November 2018. Thereafter, all that remained was for the
company's directors to implement the scheme.
Following sanction of the schemes, however, the Singaporean
authorities blocked the transfer of Noble Group's listing on
the Singapore Exchange to New Noble because of an ongoing
investigation of the company and one of its subsidiaries. It was
previously anticipated that Noble Group's listing status in
Singapore would be transferred to New Noble and the company's
directors had received prior shareholder approvals to pursue the
restructuring on this basis. For various reasons - importantly, the
stance taken by the Singaporean authorities - the directors were
prevented from implementing the scheme in the manner
contemplated.
Noble Group's directors consequently pursued its restructuring
using liquidation on a light-touch basis. On 14 December 2018, the
Bermuda court appointed a provisional liquidator with light-touch
powers over Noble Group. The significance of this appointment lies
in the fact that the provisional liquidator was not subject to the
same constraints faced by the company's directors. His mandate
would be solely guided by the best interest of the creditors, while
at the same time being subject to the supervision of the court and
having the benefit of a stay of proceedings against the
company.
In the context of Noble Group, the provisional liquidator was
granted sufficient latitude to implement the transfer of the
company's assets to the New Noble, provided that the scheme
creditors were not prejudiced, even if that meant that the New
Noble would no longer have a listing on the Singapore Stock
Exchange as previously envisaged.
Today, the New Noble is fully operational and the restructuring
was a success. Had the Bermuda court not appointed a provisional
liquidator, the company would have undergone a compulsory
liquidation, its business would have come to an end and creditors
would have received a significantly smaller dividend.
Cross-border support
There are two main types of cases involving cross-border support
that frequently arise in Bermuda. First, there are cases in which a
winding-up proceeding is commenced in Bermuda to run parallel to,
or in tandem with, an insolvency proceeding taking place elsewhere
for the purpose of restructuring a Bermuda-registered
company.
Specifically, there have been a number of cases where Bermuda
companies have been the subject of Chapter 11 proceedings in the
United States, in which the Bermuda court has appointed provisional
liquidators with light-touch powers to supervise the directors in
the conduct of the Chapter 11 proceedings and to report to the
Bermuda court. The Bermuda court will generally defer to the
Chapter 11 proceedings and give effect to the Chapter 11 plan or
reorganisation. As mentioned above, the advantages of this approach
include independent oversight of the restructuring by court
officers (ie, the provisional liquidators) focused on protecting
creditors' interests and achieving a stay of proceedings
against the company which is triggered by the appointment of
provisional liquidators.
Second, there are cases in which a foreign office holder (eg,
liquidator) applies to the Bermuda court for relief to assist with
a liquidation taking place outside Bermuda, for instance, by asking
the Bermuda court to order Bermuda entities to produce information
or orders compelling individuals in Bermuda to provide witness
evidence. The Bermuda court may exercise its common law power to
assist in these cases, and has demonstrated a general willingness
to do so, provided that the foreign office holder could obtain the
same relief from the court in the country where the liquidation is
taking place.
In relation to the topic of cross-border support, the Bermuda
court does not have jurisdiction to wind up overseas companies,
save for certain statutory exceptions. In the context of a group of
companies, this restriction means that the Bermuda court lacks
jurisdiction to wind up a multinational group of companies, as it
is not possible to obtain an ancillary winding-up order from the
Bermuda court in respect of a company within the corporate group
that is domiciled outside Bermuda.
On the other hand, where the Bermuda court has appointed
liquidators to wind up a Bermuda company, the liquidators may
commence ancillary insolvency proceedings in other jurisdictions
that permit ancillary proceedings (eg, in England or Hong
Kong).
Although there are no formal protocols or agreements for
coordinating the interaction between the Bermuda court and foreign
courts in cross-border insolvencies, the Supreme Court of Bermuda
has issued practice directions relating to cross-border
insolvencies - most recently, the Guidelines for Communication and
Cooperation between Courts in Cross-Border Insolvency Matters dated
9 March 2017 (which is modelled on the draft guidelines adopted by
the Judicial Insolvency Network in October 2016).
Looking ahead
In 2020, many companies have had to consider whether their
financial standing and existing business models are strong enough
to withstand the negative economic effects resulting from covid-19.
Important decisions relating to the most appropriate and effective
'business rescue' methods are being made on an urgent
basis. Bermuda has always been viewed as a creditor-friendly
jurisdiction that promotes restructuring and light-touch
provisional liquidation - the hallmark of Bermuda's insolvency
regime - will provide a number of those companies with a
much-needed lifeline to restructure their debts in a practical,
structured and sustainable manner.
While there remains a need to clarify and formalise the parameters
of provisional liquidation by the enactment of legislative updates,
comfort can still be taken that Bermuda's current restructuring
framework (largely dictated by evolving case law) has been tried,
tested and has successfully promoted cross-border business even in
these most challenging of economic environments.
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.