Provisional Liquidation In Bermuda

• Published date: 03 June 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 and James Batten

Provisional liquidation in Bermuda is a distinctive, flexible regime that operates to support companies in financial distress or in support of a restructuring.

In 2006, the former Chief Justice of Bermuda, Kawaley J (as he then was) described the practice of provisional liquidation in Discover Reinsurance Company v PEG Reinsurance Company Ltd [2006] BDA LR 88. Kawaley J noted that companies were routinely put into provisional liquidation to support parallel Chapter 11 Proceedings and that these were invariably commenced by the company themselves. The appointment of provisional liquidators triggered the automatic stay therefore ensuring that the Company cannot be sued in Bermuda while equivalent protection is in place in the US. Kawaley J recognised that the 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."

This 'soft-touch' provisional liquidation operates in a similar manner to chapter 11 in the US or administration in the UK but with even greater flexibility. There are no formal statutory requirements to be satisfied before a provisional liquidator is appointed. The function and roles of a provisional liquidator are set out in the order appointing the provisional liquidators, which can be tailored to suit the particular situation without statutory constraints. The appointment can have cross-border effect, even in jurisdictions without 'light-touch' insolvency procedures. As a 'debtor in possession' procedure, companies can maintain operations during provisional liquidation and enjoy the benefit of the stay against proceedings. Creditors can have confidence that the activities of a company in provisional liquidation will be supervised by the provisional liquidator, acting as an officer of the court.

Provisional liquidation is often seen as a preliminary step to achieving a restructuring by way of a scheme of arrangement. The provisional liquidators draw on their expertise to work with the company to develop restructuring proposals. Crucially, a provisional liquidator can liaise with and advise the creditors of the company candidly on the merits and viability of restructuring proposals. Creditors can rely on the advice of provisional liquidators in the knowledge that they have a duty to advance the creditors' interests above all else as independent officers of the Court.

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