Bermuda: The AS&K Brief - The Companies Amendment Act 1996 - 21st June 1996

Last Updated: 11 July 1996
A Bill entitled "The Companies Amendment Act 1996" (the "Bill") was tabled in the Bermuda House of Assembly on 21st June, 1996. This is the fifth successive year that the Minister of Finance has introduced a bill to effect amendments to the Companies Act 1981 (the "Act"). The enactment of the Bill, together with the Companies Amendment Acts of 1992, 1993, 1994 and 1995, continues the process of modernising Bermuda's company law.

The Bill contains a number of highly significant proposed amendments which are of a broad policy nature. These include:

A. A proposal to permit alternative arrangements for all those exempted companies that do not wish to have a quorum of Bermuda resident directors and to redefine the role and duties of a resident representative and to extend the role of resident representative to apply to private as well as public companies.

Currently the Act requires that all private exempted companies have a quorum (a minimum of two) resident directors. While the historical reason for this requirement, designed largely to assist subsidiaries of U.K. companies to meet certain taxation requirements, has long been rendered irrelevant, the requirements has nevertheless resulted in these directors becoming a significant part of Bermuda's regulatory environment. However, to address continuing general concerns regarding directors' liability in the increasingly litigious business environment, it is proposed to require that a company have either a quorum of resident directors (i.e., maintaining the status quo), or a resident secretary and a resident director, or a resident secretary and a resident representative. In this way, a certain level of Bermuda-based oversight in respect of the activities of exempted companies would be preserved.

B. A proposal to remove the current prohibition on the ability of a company to indemnify its officers (which, as defined in the Act, includes directors) or auditors against liability for "wilful negligence" and "wilful default".

These two terms lack legal precision, which has resulted in actions being taken against directors which have no legal merit but which are nevertheless costly and time-consuming to defend and have had the effect of increasing insurance premiums. Eliminating the prohibition would ensure that actions must meet a clearer test, i.e. that the directors were guilty of fraud or dishonesty. This amendment is expected to reduce significantly the incidence of frivolous or unmeritorious actions, thereby reducing the cost of doing business in Bermuda.

C. A proposal to limit the liability of officers and the auditor of a company so that, except in cases of fraud or dishonesty, they would only share in the reimbursement of a plaintiff to the extent that their conduct contributed to the damages sustained.

When a company fails and shareholders and creditors suffer a loss, there are typically many contributing factors. Indeed, the damaged party may himself bear some of the responsibility. In such circumstances, certain officers and the auditor may have had a relatively small part to play in the circumstances giving rise to the loss. However, due to their perceived resources, in the past they have often ended up shouldering a large part of the responsibility of defending the case and paying for the loss, by virtue of the operation of the principle of joint and several liability.

Where the causal link between the actions of the officers or auditor and the loss is tenuous, the operation of this principle is unfair, which is the reason for this amendment. Significantly, under the proposed new provisions, an officer or auditor may still be held to be jointly and severally liable with another officer or auditor if both of them knowingly engaged in some fraud or dishonesty. In all other cases, liability is determined by "fault". In addition, the courts are expressly empowered to determine, as a percentage, the extent of liability of each person.

This proposed amendment was inspired in part by legislation in certain American states, which have moved in similar fashion to limit the application of the principle of joint and several liability and substitute therefor a system based on proportionate liability.

D. A proposal to permit the giving by a company of financial assistance in connection with the acquisition of its shares or those of its holding company provided that, after the giving of such financial assistance, the company remains solvent.

In general, a company is prohibited from giving such financial assistance, although the Act provides for various exceptions where such assistance is permitted. The concept of prohibiting financial assistance was introduced into Bermuda's statute law in 1983, following the equivalent provisions in the U.K. Companies act. Despite significant revisions, some as late as 1992, it became apparent that still further amendments were required to avoid certain commonly accepted international transaction and business arrangements failing to comply and being declared unlawful. The proposed amendment, which establishes a solvency test which is virtually identical to that found in the provisions of the Act dealing with dividends and distributions of contributed surplus, has been drafted to provide the most practical solution for all cases of financial assistance. This approach is similar to the one taken in the Canada Business Corporations Act, as well as in the relevant statutes of a number of Canadian provinces.

Assuming the Bill is enacted in substantially the form tabled in the House of Assembly today, it will also:

1. Permit a wholly-owned subsidiary of a local 60/40 company the same status as its parent.

2. Provide for the outward amalgamation of Bermuda companies into overseas companies.

3. Remove the existing restrictions on the ability of overseas companies (either subsidiary or holding) to avail themselves of the short form amalgamation procedures of the Act.

4. Clarify that in respect of an amalgamation into Bermuda it is permissible for one or more exempted companies to amalgamate with one or more bodies incorporated outside Bermuda.

5. Remove the general prohibition on exempted and permit companies investing in local companies (without first obtaining specific approval from the Minister of Finance) so as to permit passive investment without any specific approval but still require a licence (in the case of an exempted company) or a permit (in the case of an overseas or permit company) if the involvement is to be more active.

6. Limit actions against auditors is their role as auditors of the annual financial statements of a company to those filed by the company itself and by others if the auditors have expressly authorised them to rely on the auditor's work.

7. Permit companies to act as secretaries of other companies, except in the case of secretaries acting as such for the purposes of A above.

8. Permit the paperless trading of securities where made through the mechanism required or permitted by an appointed stock exchange.

9. Clarify certain matters relating to the dissolution of limited duration companies.

The complete text of the Bill is available from the firm on request. Please feel free to contact Shaun Morris or any member of the Company Department of Appleby, Spurling & Kempe regarding the provisions of the Bill. We will be sending a further Brief to advise you of the operative date of the Bill.

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.

We anticipate that our own edition of the Act, as amended, will be available within 6 weeks of the operative date of the Bill. Should you wish such a copy, please send your request to the attention of our librarian, Karen Skiffington-Simpson.

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