Americas Restructuring Review 2023

• Published date: 14 December 2022
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Financial Restructuring, Corporate and Company Law, Insolvency/Bankruptcy
• Law Firm: Appleby
• Author: Mr John Wasty, John Riihiluoma, Lalita Vaswani and James Batten

This article 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

The principal statutory provisions¹ 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).³ Secured creditors are unaffected by insolvency proceedings in Bermuda and may enforce their security in accordance with the terms of the governing security instrument⁴ (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;⁵
• contributories, subject to certain restrictions; and
• the Bermuda Monetary Authority (or the applicable regulator).

Winding-up proceedings are commenced 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. It is common for the petitioner to annex to the petition documentary evidence of the underlying debt, although this is not strictly necessary. 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 file a certificate of compliance with the Registrar of the Supreme Court certifying that the petition has been properly filed, served and advertised in an appointed newspaper and that other procedural rules have been followed.

Anyone 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.

The court, when considering a winding-up petition, may grant, dismiss or adjourn the petition, or make any other order it thinks fit. If a petition is unopposed, the Court may make an immediate winding-up order at the first hearing. If a petition is opposed, the Court commonly adjourns the first hearing of the petition to allow the parties to prepare their respective cases. The Court may also adjourn a winding-up petition to facilitate a proposed restructuring by the company with the assistance of a court-appointed insolvency practitioner known as a 'provisional liquidator'.

If the court makes a winding-up order (whether at the first hearing or a subsequent hearing), the company's operations will immediately come to an end. The management of the company is taken from the directors and is placed in the hands of a court-appointed liquidator.⁶ 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 up of the company's affairs.

PROVISIONAL LIQUIDATION

Provisional liquidation in Bermuda is the appointment of a liquidator other than for the immediate winding up of the company. A provisional liquidator will be nominated by one or more of the parties. The court must accept the credentials of the nominees who, by custom and practice, will be insolvency practitioners.

There are two scenarios where an order for provisional liquidation will be made:

• where there is a prospect of 'rescuing' an insolvent⁷ company through restructuring without the displacement of all of the board's...