Bermuda Insolvency And Restructuring Law Update

• Published date: 22 December 2022
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Financial Restructuring, Corporate and Company Law, Directors and Officers, Insolvency/Bankruptcy
• Law Firm: Appleby
• Author: Mr John Wasty, Lalita Vaswani and James Batten

Bermuda's insolvency and restructuring landscape is distinct in a number of ways. In this article, we discuss three of those areas with recent developments.

• Bermuda has developed a rescue culture without statutory provisions in support of rescue procedures;
• Bermuda's approach to directors is notably friendlier than many other jurisdictions; and
• Bermuda strives to enable, through regulation, novel corporate activity and structures.

First however, we will begin with a brief overview of the key aspects of Bermuda's insolvency regime.

Bermuda is an overseas territory of the United Kingdom. Its legal system is based on the English common law but, over the years, Bermuda has developed its own distinct jurisprudence in many areas, including insolvency and restructuring.

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. 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. The following insolvency and restructuring processes are available in Bermuda:

• Members' voluntary liquidation;
• Creditors' voluntary liquidation;
• Compulsory winding up by the Court;
• Provisional liquidation; and
• Schemes of arrangement.

Pari passu treatment of unsecured creditors is central to the Bermudian insolvency regime. 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 windingup petitions).

The Companies Act allows liquidators to challenge certain transactions executed by insolvent companies through avoidance or claw-back 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.

BERMUDA'S RESCUE CULTURE

Bermuda enjoys a strong rescue culture. 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 any nominees who, by custom and practice, will be insolvency practitioners with an accounting background and at least one of whom must be resident in Bermuda.

There are two circumstances an order for the appointment of a provisional liquidator will be made:

• 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; or
• where there is a prospect of 'rescuing' an insolvent company through restructuring either with or without the displacement of some or all of the board's executive functions.

The first type of appointment given above mirrors the English jurisdiction for appointment of provisional liquidators and, like in England, is one of the most extreme tools at the Court's disposal, deployed only in exceptional circumstances where an urgent need to preserve assets justifies the immediate appointment of liquidators; it will be unlikely the Company recovers.

The second type of provisional liquidation is a distinct feature of Bermuda's restructuring landscape. Accordingly, where a company is insolvent, instead of making a winding-up order to liquidate the company, the Bermuda court often appoints provisional liquidators with certain, limited powers, known as 'light-touch' powers. This appointment is by far the most common form of provisional liquidation in Bermuda.

The Court of Appeal for Bermuda has recently addressed the law on this second kind of provisional liquidation. On 30 September 2022, the Court of Appeal for Bermuda (the Court) handed down its reasons for making a winding-up order, overturning the Bermuda Supreme Court, in...