Share
This article first appeared in the International Comparative Legal Guide - Restructuring & Insolvency 2024, which covers common issues in restructuring and insolvency, including issues that arise when a company is in financial difficulties, restructuring options, insolvency procedures, tax, employees and cross-border is.
1 Overview
1.1 Where would you place your jurisdiction on the spectrum of debtor- to creditor-friendly jurisdictions?
Bermuda can be described, for the most part, as a creditor-friendly jurisdiction. Secured creditors can generally enforce their security outside of the insolvency process, and the insolvency legislation is pro-creditor. It provides, in particular, for the right of an unsecured creditor with an unpaid debt to apply for an order that the corporate debtor be compulsorily wound up and its assets applied in satisfaction of its debts, and there is no statutory corporate rescue regime beyond the ‘Scheme of Arrangement’ (Scheme), discussed below.
Nevertheless, the Supreme Court has developed an insolvency practice, through the appointment of ‘light touch’ provisional liquidators, which is designed to support formal and informal restructuring plans which have credible prospects of success, and the support of the majority of creditors. In appropriate circumstances, therefore, the Court has the power to approach corporate insolvencies in a ‘debtor-friendly’ manner, with a view to achieving a corporate restructuring.
1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what extent are each of these used in practice?
There is no provision in Bermuda’s legislation for informal work outs. However, informal work-outs are common in Bermuda, and the Supreme Court has developed certain practices to support and assist them, as discussed in question 3.1 below.
The only formal restructuring process in Bermuda is the scheme process, discussed in question 3.2 below. The scheme is a highly versatile statutory procedure which enables the restructuring of debt (and capital) by 75% majority approval by value, and 50% majority approval by number (per class of creditor/ member) along with Court sanction. Both majorities (value and numerosity) must be attained in the statutory meeting(s). (See our answer to question 9.1 for details of a law reform proposal of a reduction in the value majority for creditor’s schemes to 2/3 and the abolition of the numerosity requirement in all schemes.) The scheme process is frequently used to restructure debt where the consent of all creditors is unlikely to be forthcoming.
The only formal insolvency proceeding is compulsory winding up by the Supreme Court. As we discuss in what follows, the Court’s compulsory winding up jurisdiction can serve as a protective device within which to restructure a company’s debt with a view to its continued trading. Compulsory liquidations are common in Bermuda.
2 Key Issues to Consider When the Company is in Financial Difficulties
2.1 What duties and potential liabilities should the directors/managers have regard to when managing a company in financial difficulties? Is there a specific point at which a company must enter a restructuring or insolvency process?
Directors’ and officers’ duties are principally owed to the company itself. To the extent that the company is solvent, such duties are ordinarily owed to the company for the benefit of its present and future shareholders.
When the company enters the zone of insolvency, directors must consider the best interests of the company’s creditors. Directors that permit a company to continue to trade whilst it is in financial difficulties face a range of potential liabilities, depending on the precise circumstances and the relevant director’s conduct and state of mind (as discussed below).
Fraudulent trading
Section 246 of the Companies Act 1981 provides that any director that has knowingly caused or permitted a company to carry on business with intent to defraud creditors of the company, or for any fraudulent purpose, may be found personally liable for all, or any, of the debts or other liability as the Court may direct. This would include carrying on the business of the company when it is known to be insolvent.
Personal liability for fraudulent conveyances/fraudulent preferences
It is possible that directors might be held personally liable, in certain circumstances, for fraudulent conveyances or fraudulent preferences, as discussed in question 2.3 below.
Breach of fiduciary duty and failure to exercise reasonable skill and care
Directors owe duties to the company, both pursuant to section 97 of the Companies Act 1981 and at common law, to act honestly and in good faith with a view to the best interests of the company (which can include the interests of the company’s creditors when the company is in the zone of insolvency), and to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Failure to comply with these obligations may result in personal liability on the part of directors. Although not confirmed in statute, the power of the directors of a Bermuda company to petition for the compulsory winding up of an insolvent company has been recognised in Re First Virginia Reinsurance Ltd [2003] Bda LR 47.
Misfeasance and breach of trust
Section 247 of the Companies Act 1981 provides that a director may be personally liable if he has misapplied, retained or become liable or accountable for any money or property of the company, or been guilty of any misfeasance or breach of trust in relation to the company. The scope and effect of section 247 was considered by the Supreme Court of Bermuda in Peiris v Daniels [2015] SC (Bda) 13 Civ.
Unlawful return of capital
At common law, and pursuant to certain sections of the Companies Act 1981 dealing with dividends, reduction of capital, share repurchases and share redemptions, a Bermuda company that is not in liquidation cannot lawfully return capital to its shareholders except by way of an approved reduction of capital or by way of authorised dividend, redemption or repurchase. Section 54 of the Companies Act 1981 provides that a company shall not declare or pay a dividend, or make a distribution out of contributed surplus, if there are reasonable grounds for believing that the company is (or would after the payment be) unable to pay its liabilities as they become due, or the realisable value of the company’s assets would thereby be less than its liabilities.
Miscellaneous offences and liabilities
Sections 243 to 248 of the Companies Act 1981 set out a range of criminal offences that may be committed by directors of companies including, for example, by fraudulently altering documents relating to company property or affairs, falsifying books or accounts with the intention of defrauding any person, or fraudulently inducing a person to give credit to the company. There are also various legislative provisions that impose personal liability on directors for any failure to pay certain taxes and remit pension contributions.
Segregated accounts companies representatives
Section 10 of the Segregated Accounts Companies Act 2000 requires a segregated account representative to make a written report to the Registrar of Companies within 30 days of reaching the view that there is a reasonable likelihood of a segregated account (or the general account of a segregated accounts company) for which he acts becoming insolvent, and section 30 makes it a criminal offence to fail to do so.
2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the action that they can take against the company? For example, are there any special rules or regimes which apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? Are moratoria and stays on enforcement available?
Creditors with security over an insolvent company’s core assets have the greatest influence over the company’s situation. Unsecured creditors also exercise considerable influence as a result of the rights they enjoy pursuant to Bermuda’s winding up jurisdiction. The greater the value of an unsecured creditor’s debt (and the greater the support that it can command from other unsecured creditors), the greater the influence. Minority unsecured creditors have relatively limited influence above and beyond their statutory and contractual rights.
In addition to the Supreme Court (and any foreign courts with jurisdiction over the company), certain regulatory authorities in Bermuda may also influence the company’s situation, depending on the circumstances. For example, the Registrar of Companies, the Bermuda Monetary Authority, and the Regulatory Authority of Bermuda might, in appropriate circumstances, investigate the affairs of an insolvent company and exercise such regulatory powers as may be appropriate.
Section 165 of the Companies Act 1981 provides that, at any time after the presentation of a winding up petition and before a winding up order has been made, the company or any creditor or contributory may apply to the Court for a stay of any proceedings pending against the company.
Section 167(4) of the Companies Act 1981 provides that, when a winding up order has been made or a provisional liquidator has been appointed, no action or proceeding shall be continued or commenced against the company except by leave of the Court and subject to such terms as the Court may impose.
The Court also has the separate power to order that Bermuda proceedings be stayed in the exercise of its inherent jurisdiction and as a matter of its case management powers under the Rules of the Supreme Court. The Court also has the power, in appropriate cases, to issue an anti-suit injunction or an anti-enforcement injunction with respect to claims being pursued in foreign Court proceedings.
2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of challenge? What remedies are available?
Payments, transfers of assets, and security transactions can be vulnerable to attack in the event of a company’s insolvency or liquidation. Reviewable transactions include fraudulent conveyances, fraudulent preferences, floating charges, onerous transactions, and post-petition dispositions.
Fraudulent conveyances
Sections 36A to 36G of the Conveyancing Act 1983 provide that a creditor of a company may be entitled to apply to the Court to have a transaction set aside to the extent required to satisfy its claim, provided that the dominant intention of the transaction was to put the property beyond the reach of other creditors and the transaction was entered into for no value or significantly less than the value of the property transferred. For these purposes, a creditor is one to whom an obligation is owed at the date of the transfer, or to whom it is reasonably foreseeable an obligation will be owed within two years of the date of the transfer, or to whom an obligation is owed pursuant to a cause of action that accrued before, or within, two years after the date of the transfer.
Fraudulent preferences
Section 237 of the Companies Act 1981 provides that any conveyance, mortgage, delivery of goods, payment, execution or other act relating to property made or carried out by or against a company within six months before the commencement of its winding up shall be deemed a fraudulent preference to its creditors and accordingly deemed invalid. Section 238 provides for the liability and rights of fraudulently preferred persons. In order to fall foul of the provision, the transfer or disposition must have been made within six months prior to the commencement of the winding up. In the case of a compulsory winding up, this would be the date of the presentation of the petition to the Supreme Court of Bermuda. The transfer will be invalid if it was carried out with the dominant intention of preferring one creditor over others at a time when the company was unable to pay all of its creditors in full.
Floating charges
Section 239 of the Companies Act 1981 provides that a floating charge on the undertaking or property of a company created within 12 months of the commencement of the winding up shall be invalid, unless it is proved that the company immediately after the creation of the charge was solvent, except to the amount of any cash paid to the company at the time of, or subsequently to, the creation of the charge, together with interest at the statutory rate.
Onerous transactions
Section 240 of the Companies Act 1981 provides that the liquidator of a company can, with the Court’s permission, disclaim any property belonging to the company or any rights under any contracts that he considers onerous for the company to hold, or is unprofitable or unsaleable.
Post-petition dispositions
Section 166 of the Companies Act 1981 provides that, in a compulsory winding up, any disposition of the property of a company, including things in action, and any transfer of shares or alteration in the status of the members of the company, made after the commencement of the winding up (being the time of presentation of the petition) shall be void, unless the Court otherwise orders by way of a validation order. In the case of an insolvent company, the Court should only make an order validating a post-petition disposition where it can be shown that the disposition will benefit (in a prospective case), or has benefitted (in a retrospective case), the general body of unsecured creditors so as to justify the disapplication of the pari passu principle.
The focus of the test is mainly directed at an objective assessment of the benefit to be obtained by the general body of unsecured creditors, rather than the necessity or expedience of the disposition from the company’s or directors’ perspective. In the case of a solvent company, in contrast, there are four elements which must be established before a validation order may be made: first, the proposed disposition must appear to be within the powers of the company’s directors; second, the evidence must show that the directors believe the disposition is necessary or expedient in the interests of the company; third, it must appear that the directors, in reaching that decision, have acted in good faith; and fourth, the reasons for the disposition must be shown to be ones that an intelligent and honest director could reasonably hold.
Bulk sales in fraud of creditors
Under section 5 of the Bulk Sales Act 1934, certain sales and purchases of stock in bulk are deemed to be fraudulent, and absolutely void as against the vendor’s creditors, unless the proceeds of sale are sufficient to pay the vendor’s creditors in full, and are in fact so applied.
3 Restructuring Options
3.1 Is it possible to implement an informal work-out in your jurisdiction?
Yes, where the consent of all relevant creditors is forthcoming. It is not possible to ‘cram down’ creditors in the absence of a formal restructuring process.
Where there is a risk that negotiations toward an informal work-out may be jeopardised by creditors instituting or continuing proceedings against the company seeking enforcement of their debts, the negotiations may be protected by a ‘light touch’ provisional liquidation, a procedure developed as part of the insolvency practice of the Supreme Court and now commonly used to support work-outs. The procedure is described below.
Following presentation of a petition for the winding up of the company (usually presented by the company itself, if the company contemplates a restructuring), a provisional liquidator may be appointed, who may then apply for a statutory stay of all proceedings against the company while the work-out process continues, whether informally or through the medium of a scheme. The board of directors retains control over the company, and endeavours to effect a work-out under the super vision of the ‘light touch’ provisional liquidator and the Court. If the work-out negotiations are successful, the winding up petition can be dismissed; if they are unsuccessful, the winding up petition can be restored for a final hearing and the company can be wound up and placed into full liquidation. While the work-out plan is negotiated, the hearing of the winding up petition is adjourned (although the company enjoys the protection of the statutory moratorium).
Where an overwhelming majority of creditors oppose a creditor winding up petition on the basis that the company wishes to pursue a restructuring with a reasonable prospect of success, it may be possible for the company to promote and implement a restructuring with the benefit of an order (or series of orders) for the adjournment of the winding up hearing and without the need for the appointment of a provisional liquidator. This was the case in Re Fullsun International Holdings Group Company, Ltd. [2022] Bda LR 54, in which an exempted Bermuda company listed on the main board of the Hong Kong Stock Exchange, successfully sought, with the support of a majority of its creditors, a series of adjournments of the winding up petition until such time as a Scheme of Arrangement in Hong Kong had extinguished the petition debt and returned the company to solvency.
3.2 What informal rescue procedures are available in your jurisdiction to restructure the liabilities of distressed companies?
Bermuda does not have informal procedures such as company voluntary arrangements. If a procedure is required to facilitate a restructuring without the threat of full-blown winding up, the Supreme Court’s jurisdiction to appoint a provisional liquidator following the presentation of a winding up petition has been creatively and extensively used in Bermuda as a protective device to enable management of the distressed company to negotiate and implement a restructure, behind the shield of a statutory moratorium on claims.
A provisional liquidator, or two or three provisional liquidators appointed on a joint basis, is or are appointed with ‘soft’ powers, also known as a ‘light-touch’ appointment, to monitor the proposals and report to the Court on a confidential basis. The Court must be satisfied that a plausible and viable rescue plan is achievable and that, where a scheme will be necessary to implement it, a sufficient majority of creditors are likely to vote in favour of it. (A law reform initiative relating to a new “court appointed restructuring officer” regime, which would supplement the use of provisional liquidators for restructuring purposes, is described in our answer to question 9.1.)
3.3 Are debt-for-equity swaps and pre-packaged sales possible? In the case of a pre-packaged sale, are there any restrictions on the involvement of connected persons?
Yes, both are possible. Debt for equity swaps are used frequently both within the context of a Scheme of Arrangement and outside where all creditors agree and the necessary shareholder resolutions can be obtained. Pre-packaged sales can be achieved after a fashion but a prospective liquidator is unlikely to be able to give more than an equivocal, indicative view about a proposed sale prior to being appointed and will need to consider the proposal afresh upon appointment. Both procedures rely heavily on the valuation of the company and typically a Scheme of Arrangement would be promoted if needed to implement the transactions.
3.4 To what extent can creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram-down dissenting classes of stakeholder?
Outside of the protection of the statutory stay of proceedings that applies upon the appointment of a provisional liquidator (with limited powers where appropriate), there is nothing to prevent creditors from blocking attempts at informal restructuring and it is for this reason that where a consensual process is unlikely the use of the Court’s jurisdiction is likely to be essential. A scheme may be used to cram down a minority (25% by value, less than 50% in number) of creditors voting in a class. However, schemes cannot currently be used to cram down classes. With that said, when it comes to a liquidator’s consideration of a proposed asset sale, the liquidator is entitled (if not required) to identify the ‘value-break’ for the purposes of determining which creditor classes have an interest and are entitled to have their views heard. There is no provision for cramming down creditors outside the scheme procedure.
3.5 What are the criteria for entry into each restructuring procedure?
The scheme procedure may be initiated by application of a creditor, a member, the company itself, or (where one has been appointed) the liquidator. The applicant requests the Court to convene a meeting of the creditors, or the relevant class of creditors, of the company. If the Court so directs (which will almost always be the case, absent exceptional circumstances), creditors must be summoned by notice. Notification commonly includes advertisement of the meeting.
Where, because of differences in their respective rights, two or more creditors are unable to consult together with a view to their common interest, it will be necessary to separate creditors into classes for the purposes of voting on the scheme proposal.
If a majority in number within each class of creditors present and voting (including by proxy) at the meeting, representing 75% by value of that class, votes in favour of the scheme, and the Court approves it, then the scheme will be binding on all creditors. Court approval is a discretionary matter. The Court must be satisfied that the statutory requirements have been met, including the holding of requisite class meetings and approval of necessary majorities, and that each class was fairly represented at each meeting. In addition, the Court must be satisfied that the scheme is fair to creditors generally – in other words, that the majority has not taken unfair advantage of its position.
The scheme is not effective until a copy of the sanction order is delivered to the Registrar of Companies. The scheme order must be annexed to any copies of the company’s memorandum of association issued subsequently to the order.
3.6 Who manages each process? Is there any court involvement?
If the scheme is conducted outside a liquidation, the company’s board of directors and any managers control the process, although a Scheme Administrator is normally appointed to administer the scheme once it is implemented. If the scheme is conducted within a liquidation, the liquidator controls the process.
However, there is a hybrid option, under which the scheme is conducted within a ‘light touch’ provisional liquidation, used to implement a restructuring within the protective environment of a provisional liquidation but without the necessity of winding up the company. The ‘light touch’ provisional liquidation procedure has been described in question 3.1 below. In such cases, the board of directors normally manages the scheme process under the supervision of the provisional liquidator.
3.7 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections are there for those who are forced to perform their outstanding obligations? Will termination and set-off provisions be upheld?
The commencement of a scheme has no automatic effect on contracts, save in the case where the relevant contract contains terms to that effect. If a scheme with creditors is approved, the scheme will govern any issues relating to the termination of contracts with those creditors.
The protections available to parties that may be compelled to perform outstanding obligations will depend on whether the company is seeking to effect a solvent scheme (outside of a liquidation process) or an insolvent scheme (within a liquidation process). If the company commences a liquidation process with a view to promoting an insolvent scheme, parties that are required to continue performing outstanding obligations may be in a position to require security or priority for payment, whether from the company’s liquidators or other stakeholders.
Termination provisions are not per se objectionable provided that they do not conflict with the anti-deprivation rule. Set-off provisions that are inconsistent with insolvency set-off, according to which all mutual debts and dealings are subject to an automatic, self-executing set-off, at the commencement of the liquidation, will not be upheld.
3.8 How is each restructuring process funded? Is any protection given to rescue financing?
The company generally uses its own assets to finance the procedures of voluntary liquidation, compulsory liquidation, and any scheme. However, if the company does not have sufficient assets or liquidity, it is possible for the company, or its liquidators, to enter into funding arrangements with those interested in the outcome of the procedures (typically, creditors) if doing so is necessary for the beneficial winding up of the company.
In such a case, funding liabilities would be expected to be repaid by the company or by the liquidator prior to the repayment of unsecured creditors, although subject to the specific terms of any funding agreement and the Court’s approval. In this context, it is possible to secure protection (or priority treatment) for rescue financing on an ad hoc basis, and by agreement, in appropriate circumstances. In certain cases, the liquidator appointed by the Court is the Official Receiver, a government official with a limited government budget.
4 Insolvency Procedures
4.1 What is/are the key insolvency procedure(s) available to wind up a company?
The formal procedures available for companies in financial difficulties are principally contained in the Companies Act 1981 (the winding up provisions of which are substantially modelled on the UK’s Companies Act 1948). Some provisions of the Bankruptcy Act 1989 are also applied to companies, by virtue of section 235 of the Companies Act 1981, and there is some scope for debate as to the applicability of certain provisions of the Bankruptcy Act 1989 to corporate partnerships. There are specific provisions relating to insurance companies in the Insurance Act 1978, and relating to segregated accounts companies and their general and segregated accounts, in the Segregated Accounts Companies Act 2000. There are also specific provisions relating to banks in the Banking (Special Resolution Regime) Act 2016, although this legislation has not yet been fully brought into force. The rules relating to compulsory winding up of companies are contained in the Companies (Winding up) Rules 1982 and also, to a lesser extent, in the Rules of the Supreme Court 1985.
Insolvent liquidation procedures can generally be divided into compulsory liquidations and insolvent voluntary liquidations (creditors’ voluntary liquidations).
The general purpose of the liquidation process is to gather in and realise assets, to pay off creditors in accordance with their rights and priorities, and then to distribute any remaining assets to the company’s shareholders. However, liquidators in a winding up of a company have the power to promote compromises and arrangements whether by consensual means or using a scheme. Furthermore, where the company is not already in liquidation, the winding up jurisdiction of the Court and statutory machinery may be invoked in order to protect the implementation of a restructuring (as discussed above in connection with ‘light touch’ provisional liquidation).
Liquidators are generally given a degree of discretion as to the time period within which to effect and complete the liquidation, which may depend to some extent on the nature, location, and liquidity of the company’s assets. After the liquidation process is complete, the company can then be dissolved, and it will cease to exist as a legal entity.
Voluntary liquidation
An insolvent voluntary liquidation is initiated by the company’s shareholders through a resolution, based on the recommendation of the board of directors. Although creditors participate in the creditors’ voluntary liquidation procedure, they can only secure the active supervision of the Court by petitioning for the compulsory liquidation of the company.
Compulsory liquidation
The compulsory liquidation process is initiated by one of the following making a petition to the Supreme Court of Bermuda: a creditor, including any contingent or prospective creditor; a contributory (that is, any person liable to contribute to the assets of the company in the event of its liquidation, e.g. a shareholder or member); the company itself (by a shareholders’ resolution if it is solvent and/or by a directors’ resolution if it is insolvent); and, in certain circumstances, the Registrar of Companies or the Supervisor of Insurance (being the Bermuda Monetary Authority).
It is also possible, in exceptional circumstances, for receivers of segregated accounts within a segregated accounts company to petition for the winding up of the whole company, and also for the Court to wind up a company of its own motion.
Section 170(2) of the Companies Act 1981 allows the Court to appoint a provisional liquidator between the presentation of a winding up petition and its final hearing.
4.2 On what grounds can a company be placed into each winding up procedure?
A company may be compulsorily wound up by the Court in any of the following circumstances, under section 161 of the Companies Act 1981:
(a) if the company has, by resolution, resolved that the company be wound up by the Court;
(b) if there is default in holding the company’s statutory meeting;
(c) if the company does not commence its business within a year of its incorporation or suspends its business for a whole year;
(d) if the company carries on any restricted business activity;
(e) if the company engages in a prohibited business activity;
(f) if the company is unable to pay its debts;
(g) if the company’s ministerial consents were obtained as a result of a material misstatement in the application for consent; or
(h) if the Court is of the opinion that it is just and equitable that the company should be wound up.
The Supervisor of Insurance (the Bermuda Monetary Authority) can present a petition for the winding up of an insurance company if it is in breach of the regulatory provisions of the Insurance Act 1978, or if it is in the public interest that the insurance company should be wound up on just and equitable grounds.
Section 34 of the Insurance Act 1978 also provides that the Court may order the winding up of an insurance company subject to the modification that the insurance company may be ordered to be wound up on the petition of 10 or more policyholders owning policies of an aggregate value of not less than $50,000, provided that such a petition shall not be presented except by leave of the Court, and leave shall not be granted until a prima facie case has been established and until security for costs for such amount as the Court may think reasonable has been given.
The Registrar of Companies can petition for the winding up of a company if directed to do so by the Minister of Finance following receipt of a report of an Inspector to investigate the company under sections 110 or 132 of the Companies Act 1981.
A provisional liquidator can be appointed prior to the final hearing of a compulsory winding up petition if there is a good prima facie case that a winding up order will be made, and if the Court considers that a provisional liquidator should be appointed in all the circumstances of the case.
4.3 Who manages each winding up process? Is there any court involvement?
Compulsory liquidation
The liquidator or provisional liquidator appointed by the Court controls the procedure of liquidation, and displaces the company’s board of directors on his appointment. The exercise by the liquidator of his powers is subject to the sanction, supervision and control of the Court, and, to a lesser extent, the Committee of Inspection, if one is appointed. In the same way as the board of directors is displaced, so too are the powers of the shareholders.
‘Light touch’ provisional liquidation
Subject to the circumstances of the case, the Court can order that a provisional liquidator be appointed with limited powers (i.e. a ‘light touch’), and that the directors continue to retain all of their powers or certain limited powers, subject only to the supervisory role to be played by the provisional liquidator (subject, in turn, to the Court’s supervisory role). This can be an important tool for the purposes of effecting a restructuring, especially in the context of international insolvencies, which require parallel restructuring procedures both in Bermuda and in other jurisdictions.
Voluntary liquidation
The liquidator appointed or approved by the company’s creditors controls the procedure of voluntary liquidation. The board of directors is displaced upon the appointment of the liquidator, and their powers are terminated.
4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any restrictions on the action that they can take (including the enforcement of security)?
Subject to any orders dispensing with the need for approval, a number of the powers of a liquidator appointed in an insolvent winding up of a company may only be exercised with the approval of a ‘Committee of Inspection’ comprising representative creditors of the company. It is also possible for creditors to apply to the Court with respect to the exercise or proposed exercise of the liquidator’s powers, under sections 175 and 176 of the Companies Act 1981.
The making of a winding up order brings about a statutory moratorium on proceedings against the company. This will not prevent secured creditors enforcing their security where they can do so without instituting proceedings before the Court. Furthermore, even where judicial assistance is needed, leave will usually be granted to enforce valid security interests notwithstanding the statutory moratorium. A judgment creditor will not be permitted to continue with the execution of its judgment against the company where notice of an order winding up the company is received by the Provost Marshall prior to sale of goods of the company taken in execution or prior to completion of execution by receipt or recovery of the full amount of the levy.
4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld?
Other than the statutory provisions governing contracts of employment discussed in question 6.1 below, as a matter of law, there is no automatic termination of contracts with the company on the commencement of a compulsory liquidation or a creditors’ voluntary liquidation (save where the liquidator disclaims an onerous contract or transaction, or where the relevant contract contains contractual terms to that effect).
However, a contracting counterparty can only claim in the liquidation for debts that exist at the date of commencement of the liquidation, and interest also ceases to run from that date. In these circumstances, there may be a termination or cancellation of contracts in the event of liquidation, because, unless the liquidator elects to adopt the relevant contract, any executory obligations under the contract will go unperformed by the company. Contracting counterparties can also seek to assert claims against the company for damages sustained as a result of any breach of contract caused by the commencement of the liquidation, subject to proof in the liquidation.
4.6 What is the ranking of claims in each procedure, including the costs of the procedure?
In a compulsory liquidation or a creditors’ voluntary liquidation, creditors’ claims are ranked in the following order:
(1) secured creditors enforce their security outside the liquidation but essentially in priority to all other creditors;
(2) the costs and expenses of the liquidation, including all costs, charges and expenses properly incurred in the company’s winding up, including the liquidator’s remuneration if sanctioned by the Court (pursuant to sections 194, 232 and 236(6) of the Companies Act 1981 and Rule 140 of the Companies (Winding up) Rules 1982);
(3) debts due to employees located in Bermuda under section 33(3) of the Employment Act 2000;
(4) preferential debts owed to preferential creditors pursuant to section 236(1) of the Companies Act 1981, including unpaid taxes under the Taxes Management Act 1976, unpaid social insurance/Government pension contributions under the Contributory Pensions Act 1970, liability for compensation under the Workmen’s Compensation Act 1965, and payments of up to $2,500 due to employees of Bermudian companies but resident outside of Bermuda;
(5) debts secured by a floating charge (although higher priority debts must be paid out of any property secured by a floating charge if the assets of the company are not otherwise sufficient to meet them pursuant to section 236(5) of the Companies Act 1981);
(6) unsecured creditors’ debts, including the unsecured balance of secured creditors’ claims (pursuant to sections 158(g), 225 and 235 of the Companies Act 1981);
(7) post-liquidation interest on unsecured creditors’ debt claims;
(8) debts due to shareholders in their capacity as such (pursuant to section 158(g) of the Companies Act 1981); and
(9) shareholders’ equity in the event of a surplus balance, according to their rights and interests under the company’s byelaws.
Each category of debts must be paid in full before payment of creditors in the subsequent category. Creditors in the same category rank equally (or pari passu) among themselves.
The above-mentioned priorities are modified where the company is registered as an insurer under the Insurance Act 1978 so as to give priority, after the payment of preferential debts, to the claims of the company’s insurance creditors (i.e. of its direct and reinsurance policyholders) over the claims of its unsecured general (non-insurance) creditors. Where the insurer carries on both long-term (life) and general (property and casualty) insurance business, debts of all types attributable to each business must be paid out of a separate business fund attributable to the business. The same modified priorities apply to the debts attributable to each business, save that any surplus in a business fund after paying preferential debts of the related business must be used to pay any unpaid preferential debts of the other business before being used to pay policyholder debts of the related business. A surplus available after paying policyholder debts of a business must be used in a similar way before being used to pay general debts of the business.
In the case of the winding up of segregated accounts companies, section 25 of the Segregated Accounts Companies Act 2000 provides that the liquidator shall deal with the assets and liabilities that are linked to each segregated account only in accordance with the segregation principles of the legislation and the relevant governing instruments or contracts for each transaction.
There is some scope for argument as to the order of priority for payment of claims asserted by former shareholders in mutual fund companies, whose shares have been redeemed but who are owed payment of the redemption proceeds at the commencement of liquidation. The general view is that these are debts due to shareholders that rank behind outside trade creditors’ debts, but ahead of shareholders’ equity; however, the legislative provisions, including section 158(g) of the Companies Act 1981, are not entirely clear in this respect, notwithstanding a recent judgment of the Supreme Court of Bermuda that touched on the issue.
There is also scope for argument as to the order of priority of outstanding occupational pension payment liabilities under the National Pension Scheme (Occupational Pensions) Act 1998, and Regulation 56 of the National Pension Scheme (General) Regulations 1999, since the legislative provisions are not entirely clear.
4.7 Is it possible for the company to be revived in the future?
In the course of the liquidation, the liquidator will adjudicate the claims of unsecured creditors and collect the assets of the company. Assets will be distributed (to the extent available) according to the statutory priorities in the form of dividends.
At the end of this process, the liquidator is generally released, and the company is dissolved.
Under section 260 of the Companies Act 1981, the Court has the power to declare a dissolution of a company void in certain circumstances, up to a period of either two years (most liquidation cases) or 10 years (members’ voluntary liquidation) after the date of dissolution. Under section 261 of the Companies Act 1981, the Court has the power to restore a company that has been struck off the Register for up to 20 years after strike-off.
5 Tax
5.1 What are the key tax risks which might apply to a restructuring or insolvency procedure?
There is currently no tax on capital gains or income under Bermuda law. A 15% corporate income tax (CIT) will be applicable to Bermuda businesses that are part of multinational enterprise (MNE) group with annual revenue of EUR 750 million. The proposed tax is expected to take effect in January 2025. How, for example, a loss recognised by a creditor of a company upon a creditor Scheme of Arrangement taking effect will be treated under the CIT is beyond the scope of this chapter.
6 Employees
6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would employees have and where do they rank?
Section 33(1) and 33(2) of the Employment Act 2000 provide that the winding up or insolvency of an employer’s business shall cause the contract of employment of an employee to terminate one month from the date of winding up or the appointment of a receiver unless, notwithstanding the winding up or insolvency, the business continues to operate.
On termination of an employment contract under the Employment Act 2000, employees working in Bermuda may be entitled to recover accrued entitlements (such as salary and payment in lieu of paid leave entitlements), as well as severance pay.
As set out in question 4.6 above, the following claims rank within the list of preferential claims that are to be settled before payment of certain other unsecured debts: (a) debts due to employees located in Bermuda under section 33(3) of the Employment Act 2000; and (b) preferential debts owed to preferential creditors pursuant to section 236(1) of the Companies Act 1981, including unpaid taxes under the Taxes Management Act 1976, unpaid social insurance/Government pension contributions under the Contributory Pensions Act 1970, liability for compensation under the Workmen’s Compensation Act1965, and payments of up to $2,500 due to employees of Bermudian companies but resident outside of Bermuda.
7 Cross-Border Issues
7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction?
Following the decision of the Privy Council in Pricewaterhouse Coopers v Saad Investments Co Ltd [2014] UKPC 35 (discussed in more detail below in question 7.2), it is clear that the Supreme Court of Bermuda currently has no jurisdiction to wind up ‘overseas companies’ that have not been granted a permit by the Minister of Finance to carry on business in Bermuda. A previously used ‘loophole’ under the External Companies (Jurisdiction in Actions) Act 1885 was closed by the Privy Council’s decision.
The Supreme Court currently lacks jurisdiction to order the convening of meetings of creditors in relation to a proposed compromise or arrangement of the debt of an overseas company, unless that company has been registered by the Minister of Finance as a Non-Resident Insurance Undertaking under the Non-Resident Insurance Undertakings Act 1967.
As discussed in the answer to question 9.1, proposals to extend the winding-up jurisdiction of the Bermuda Court, and its juris diction in relation creditor Scheme of Arrangement, to encompass overseas companies with a sufficient connection with Bermuda are the subject of law reform initiatives in Bermuda.
7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your jurisdiction?
Bermuda has no statutory equivalent of Chapter 15 of the US’s Bankruptcy Code, section 426 of the UK’s Insolvency Act 1986, or the UK’s Cross-Border Insolvency Regulations 2006, by which the UK implemented the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency. The Supreme Court of Bermuda has nonetheless confirmed, following the Privy Council decision in Cambridge Gas Transportation Corp v Navigator Holdings plc [2007] 1 AC 508 that, as a matter of common law, the Supreme Court of Bermuda may (and usually does) recognise liquidators appointed by the Court of the company’s domicile and the effects of a winding up order made by that Court, and has a discretion pursuant to such recognition to assist the primary liquidation Court by doing whatever it could have done in the case of a domestic insolvency.
However, the precise scope of Bermudian courts’ common law power to assist foreign liquidations and, in particular, to ‘provide assistance by doing whatever it could have done in the case of a domestic insolvency’ has been the subject of considerable debate, including in two judgments by the Privy Council, on appeals from the Court of Appeal for Bermuda, in Singularis Holdings Limited v PricewaterhouseCoopers [2014] UKPC 36 and PricewaterhouseCoopers v Saad Investments Co Ltd (referred to in our answer to question 7.1).
In summary, subject to the facts of any particular case, the Bermuda Court is likely to recognise the winding up orders of foreign courts, and to assist foreign liquidators to the fullest extent possible, in circumstances where:
(1) there is a ‘sufficient connection’ between the foreign court’s jurisdiction and the foreign company making it the ‘most convenient’ jurisdiction to have made an order for the winding up of the company and appointment of foreign liquidators;
(2) there are documents, assets, or liabilities of the foreign company within the jurisdiction of Bermuda, the foreign company has conducted business or operations within, or from, the jurisdiction of Bermuda, whether directly or by agents or by branches, the foreign company has former directors, officers, managers, agents or service providers within the jurisdiction of Bermuda, and/or the foreign company properly must be involved in litigation or arbitration within the jurisdiction of Bermuda; and
(3) there is no public policy reason under Bermudian law to the contrary (if, for example, there would be unfairness or prejudice to local Bermudian creditors).
However, the Privy Council has stressed that the question of how far it is appropriate to develop the common law to assist foreign liquidations depends on the facts of each case, and on the nature of the power that the Bermuda Court is being asked to exercise. In the context of an application for an order for the production of documents by an entity within the jurisdiction of the Bermuda Court, the Privy Council has noted that such a power is available only where necessary to assist the officers of a foreign court of insolvency jurisdiction or equivalent public officers, but is not available to assist a voluntary winding up, which is essentially a private arrangement. This power is not designed to assist foreign liquidators to do something which they could not do under the law by which they were appointed, and its exercise must be consistent with the substantive law and public policy of the assisting Court in Bermuda.
As discussed in response to question 9.1, there are law reform initiatives in Bermuda which will, if adopted and implemented, clarify and simplify the jurisdiction of the Bermuda Court to provide assistance.
7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice?
Exempted companies incorporated in Bermuda carry on business predominantly or exclusively in foreign jurisdictions, and frequently have their shares and other securities listed on foreign public exchanges. They are accordingly subject to the insolvency regimes of the jurisdictions in which they do business, where these extend to companies incorporated overseas. Proceedings in other jurisdictions – for example: the United States; the United Kingdom; the British Virgin Islands; the Cayman Islands; Hong Kong; and Singapore – affecting insolvent Bermuda exempted companies are common. Where necessary, these are commonly supported by ancillary liquidation proceedings in Bermuda or by judicial recognition and assistance (of the type discussed in question 7.2) from the Supreme Court, in the absence of winding up proceedings in Bermuda.
8 Groups
8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for co-operation between officeholders?
There are no statutory provisions for the treatment of insolvent group companies. The Supreme Court has, however, occasionally appointed the same office-holders as liquidators to multiple companies in the same group of companies, subject to suitable arrangements being made with respect to any conflicts that might arise (including by way of appointment of a ‘conflicts’ liquidator).
In appropriate cases, the Supreme Court has also supported and approved co-operation agreements that have been entered into between separate office-holders of companies within a group of companies.
9 The Future
9.1 What, if any, proposals exist for future changes in restructuring and insolvency rules in your jurisdiction?
The Bermuda Restructuring and Insolvency Specialists Association, the representative body for restructuring professionals in Bermuda which assists with educational, advocacy and law reform proposals, is actively promoting a number of law reform initiatives. These include:
- the introduction of a ‘Court Appointed Restructuring Officer’, whose role will be to monitor and report on a restructuring of a company, a structure that balances the benefits of a moratorium on claims, to permit a debtor-led procedure, with guardrails for the protection of creditors, such as a requirement that the CARO form an opinion on the prospect of a restructuring occurring within a reasonable timeframe which will be in the best interests of creditors and to alert the Court to any change in opinion;
- abolition of the numerosity requirement in member and creditor schemes;
- reduction of the value majority required for a creditors’ scheme from 75% to two-thirds;
- the extension of the Court’s winding up jurisdiction to include overseas companies where a sufficient connection with Bermuda exists and a similar extension of the scheme jurisdiction (as regards creditor schemes specifically); and
- a statutory procedure for foreign representatives to apply to the Bermuda Court for orders ancillary to a foreign bankruptcy procedure for the purpose of recognition, enjoining or staying legal proceedings against a debtor, examination under oath and production of documents and the turnover of property to the foreign representative.
Bermuda