This article first appeared in the Chambers and Partners Insolvency 2022 Guide. The guide provides the latest legal information on the various types of voluntary and involuntary restructurings, reorganisations, insolvencies and receiverships; out-of-court restructurings and consensual workouts; secured and unsecured creditor rights; international/cross-border issues and processes; and the duties and personal liability of directors and officers.
Focus on provisional liquidation as a restructuring tool
Many of 2022’s restructuring cases illustrate important trends and developments regarding Bermuda’s “light touch” provisional liquidation (or “provisional liquidation for restructuring purposes” as it is also known), a technique used many times over the last 20 years after having been first utilised by the Bermuda Supreme Court in 1999.
Bermuda’s only formal insolvency and restructuring procedures are the winding-up process and the scheme of arrangement under the Bermuda Companies Act 1981 (the “Companies Act”). In the absence of bespoke restructuring legislation (such as Chapter 11 of the US Bankruptcy Code or administration under the UK Enterprise Act 2002) that includes a moratorium on claims, the Supreme Court of Bermuda developed a practice which enables the directors of an insolvent Bermuda company to remain in office under the “supervision” of a “light-touch” provisional liquidator appointed by the Court upon presentation of a winding-up petition (but without a winding-up order being made), while negotiations take place with creditors (and/or shareholders and/or third parties as appropriate), and a restructuring plan is devised and implemented (most conventionally through a scheme of arrangement). The procedure is referred to as “provisional liquidation (for restructuring purposes)” to distinguish it from a provisional liquidation appointment made for the traditionally more conventional purpose of preventing asset dissipation. The appointment of a provisional liquidator carries with it a moratorium on claims against the company pursuant to Section 167(4) of the Companies Act.
The procedure was first used in Bermuda in 1999 in the reorganisation of ICO Global Communications (Holdings) Limited, a case in which there was a strong US creditor base.
Provisional liquidation for restructuring purposes permits a more debtor-led process, with independent supervision, that can complement Chapter 11 proceedings in the USA which otherwise would be undermined if they were not replicated in some way under Bermudian law.
The Honourable Dr Ian Kawaley, formerly Chief Justice of Bermuda, described the process in the following terms in Discover Reinsurance Company v PEG Reinsurance Company Ltd  Bda LR 88:
“In practice, however, in circumstances where no suspicions about the integrity of the directors really exist, the provisional liquidator is appointed as part of legal quid pro quo for receiving the benefit of the stay on proceedings that the appointment guarantees, Bermuda law presently lacking a formal equivalent of the US Chapter 11 regime or the English administration proceedings. It will be anomalous if a Bermuda company files for Chapter 11 protection and cannot be sued by creditors in the US, but is still vulnerable to suit in its own place of incorporation. Proceedings against a company will not be stayed merely by the filing of a winding-up petition, but only if either (a) a provisional liquidator is appointed, or (b) a winding-up order is made.
“So in the restructuring context at least, this Court clearly possesses the jurisdiction to appoint provisional liquidators over companies which are not inevitably liable to be wound-up, and in circumstances where there is no need to displace the existing management altogether.”
The procedure has been implemented in many significant cases with great success and in many respects this has continued during 2022.
Markel CATCo buyout scheme
An interesting example from 2022 is the restructuring of the Markel CATCo business, an insurance-linked securities (ILS) business which went into runoff owing to severe losses in 2017 and 2018 that impaired fund investments. ILS are securities issued by funds whose subscriptions are invested in collateral for typically high-level retro and property catastrophe reinsurance provided to cedants with exposure to natural catastrophe risks. They are a device for allowing reinsurers to access the capital markets and are a well-established alternative asset class for fund managers.
The CATCo business became beleaguered by investor claims seeking damages relating to the losses. In addition, a settlement with the founder and former CEO had taken place which led to indemnities paid and depletion of D&O insurance, increasing exposure to losses in the event of further management-related claims (of which there had been several threats).
Market affiliates of the CATCo business promoted a scheme of arrangement using a buyout transaction by which affiliates would provide funding to allow for accelerated return of net asset value to investors plus cash payment of transaction costs and to provide extra cash recovery. By the transaction, the affiliates would take the downside risk that cedant claims may ultimately exceed reserves. Investors would still retain the right to any upside should fund assets exceed ultimate cedant claims. This, in exchange for releases from scheme creditors against the fund companies and affiliates.
The buyout transaction was promoted within the content of a provisional liquidation for restructuring purposes providing the necessary protection from hostile creditor action. Recognition of the provisional liquidators was achieved under Chapter 15 of the US bankruptcy Code on 4 November 2021. The scheme was approved and successfully implemented in the first half of 2022.
Challenges and opportunities for provisional liquidation for restructuring purposes
The ad hoc nature of provisional liquidation for restructuring purposes carries with it considerable advantages but also challenges.
A number of the restructuring matters before the Supreme Court and resulting in reported decisions during 2022 concerned Bermuda companies owning Hong Kong and People’s Republic of China (PRC) businesses, in most cases where a restructuring was promoted under the protection of a provisional liquidation for restructuring purposes. Often, such a step is taken by a Bermuda company by petitioning the Bermuda court as its court of jurisdiction of domicile to promote the restructuring and also to seek an adjournment of a winding-up petition presented against the company in another jurisdiction (frequently Hong Kong – noting the substantial proportion of companies with securities listed on the main board of the Hong Kong Stock Exchange with a Bermuda domicile) in which the company has carried on business or has securities listed on a stock exchange. Frequently, an adjournment of the foreign petition can be expected if the system of law of the foreign jurisdiction is based on English law given the doctrine of English private international law according to which winding-up proceedings in a non-domiciliary jurisdiction will ordinarily be subsidiary to winding-up proceedings in the jurisdiction of domicile.
However, in the last two years, the Hong Kong Court of First Instance (the “Hong Kong Court”) has shown stricter scrutiny towards the “light touch” provisional liquidation, including a small number of decisions to order the winding-up of Bermuda companies which were the subject of light touch provisional liquidation in Bermuda. Such a winding-up order may prevent a provisional liquidation for restructuring purposes from proceeding. It can also lead to different office holders being appointed in Hong Kong and Bermuda with potentially greater costs overall for the estate.
Focus on Re Ping An Securities Group (Holding) Ltd.
The case of Re Ping An Securities Group (Holding) Ltd. (PAS) was an important Bermuda case in which the Bermuda court devised a creative solution to a deadlock that had occurred in one such case of stricter scrutiny in the context of co-extensive winding-up proceedings.
A creditor’s winding-up petition had been presented in Hong Kong. PAS presented a winding-up petition in Bermuda and made a successful application to the for the appointment of provisional liquidators (JPLs) with “light” powers for restructuring purposes.
The Hong Kong Court initially granted orders for recognition of and assistance to the Bermuda provisional liquidators but subsequently wound up the company in May 2021 owing to procedural and related non-compliance. A first meeting of creditors in Hong Kong approved resolutions to appoint the provisional liquidators as permanent liquidators but, notwithstanding the outcome of the meeting, the Official Receiver of Hong Kong applied to the Hong Kong Court for a Regulating Order (which dispenses with the need for first meetings) and submitted a report claiming that the JPLs were not suitable as liquidators of the company and recommending the appointment of alternatives. Those alternatives were appointed by the Hong Kong Court as permanent liquidators in the Hong Kong proceedings (the “Hong Kong Liquidators”).
These orders kicked the provisional liquidation in Bermuda into touch and the JPLs applied to the Bermuda Court for orders winding up the company and directing the summoning of the first creditors’ meeting. Following the meeting, at which the majority in value of votes cast approved the appointment of the JPLs (a minority approving the nomination of the Hong Kong Liquidators instead), the JPLs made an appointment application to the Bermuda Court to give effect to the result of the vote.
However, the situation left many important questions unanswered about how the international insolvency could proceed given the approach of the Hong Kong Court. What would be the point of giving effect to the Bermuda creditors’ meeting vote if it meant that the appointees would be unable to progress matters in Hong Kong (given the objections underlying the orders made by the Hong Kong court) and would such an appointment not simply result in greater costs and possible conflict?
The Hong Kong Liquidators applied for orders of the Bermuda Court:
- exercising its discretion not to appoint the JPLs as permanent liquidators of PAS (notwithstanding the result of the first creditors’ meeting); and
- appointing the Hong Kong Liquidators as permanent liquidators of PAS.
The Chief Justice rejected the argument made on behalf of the JPLs that for the Bermuda Court to make appointments to conform to the Hong Kong Court’s orders would be to allow a usurpation of the principal liquidation, contrary to settled principles of international law. It was open to the Bermuda Court to make any appropriate orders for the proper operation of the liquidation.
Indeed, the Chief Justice considered that for him to consider afresh (as the JPLs requested) whether the objections which led the Hong Kong Court to make its orders had any validity would have been contrary to comity. He noted that:
- the JPLs declined to exercise any relevant right of appeal in Hong Kong; and
- barring exceptional circumstances, the Bermuda Court will give due deference to the orders made by the Hong Kong Court, in relation to the same matter.
Given the overwhelming insolvency of PAS and the limited resources available to the liquidators, the Bermuda Court found that it was not in the interests of the creditors and the administration of the liquidation that there be parallel appointments of different liquidators. Such an outcome was likely to lead to duplication of work and result in waste of limited resources. It might also lead to conflict between the two sets of liquidators. Such an outcome was clearly not in the interests of the creditors or the efficient operation of the liquidation process and so should be avoided.
The orders were a pragmatic solution that helped to avoid further detriment to the interests of creditors without departing from the ordinary principles of private international law.
The Bermuda restructuring community frequently reviews international trends and consults with government on questions of law reform where there are opportunities to improve the island’s legislation and practice. Provisional liquidation for restructuring purposes has shown itself to be a robust and highly adaptable procedure for facilitating corporate rescue where there is a realistic prospect that the company’s financial affairs may be restructured. There are instances where the terminology and juridical derivation of provisional liquidation for restructuring purposes may be at least nominally unhelpful because (if only from the terminology) investors and overseas regulators may presume that the company is at risk of being wound up. Furthermore, recent cases, including those discussed above, suggest that a slightly more granular articulation of the practice and procedure may help with questions of assistance from overseas courts. It seems likely that, as we move into 2023, these areas will be the subject of consultation and potential development.