Provisional Liquidation As A Restructuring Tool

• Published date: 20 December 2022
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Financial Restructuring, Corporate and Company Law
• Law Firm: Kennedys Law LLP
• Author: Mr Mark Chudleigh and Nick Miles

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 [2006] Bda LR 88:

"In practice, however, in circumstances...