Restructuring And Insolvency In Bermuda: Overview

A Q&A guide to restructuring and insolvency law in Bermuda.

The Q&A gives a high level overview of the most common forms of security granted over immovable and movable property; creditors' and shareholders' ranking on a company's insolvency; mechanisms to secure unpaid debts; mandatory set-off of mutual debts on insolvency; state support for distressed businesses; rescue and insolvency procedures; stakeholders' roles; liability for an insolvent company's debts; setting aside an insolvent company's pre-insolvency transactions; carrying on business during insolvency; additional finance; multinational cases; and proposals for reform.

To compare answers across multiple jurisdictions, visit the Restructuring and Insolvency Country Q&A tool.

This Q&A is part of the global guide to restructuring and insolvency law. For a full list of jurisdictional Q&As visit www.practicallaw.com/restructure-mjg.

Forms of security

1. What are the most common forms of security granted over immovable and movable property? What formalities must the security documents, the secured creditor or the debtor comply with? What is the effect of non-compliance with these formalities?

   Immovable property

   Common forms of security and formalities. The most common forms of security taken over immovable property are:

   Mortgages. There are two forms of mortgage: Legal mortgage. The lender holds legal title to a debtor's property as security for a debt. The debtor retains possession of the property and recovers legal ownership once the secured debt is satisfied in full; Equitable mortgage. The borrower or mortgagor transfers the beneficial or equitable interest in the debtor's property to the lender and retains possession and legal interest in the property. An equitable mortgage does not take priority over a third party who, without notice of the security interest, subsequently acquires legal title to the property in good faith and for value. Fixed charge. The creditor is given a right to take possession of the charged property (including the right of sale) when a specified event of default occurs. The legal title over the property is not transferred to the creditor. When a default occurs, the creditor can sell the charged property and use the proceeds to satisfy the amounts due to it from the debtor without reference to other creditors and regardless of whether the debtor is subsequently liquidated. The charged property is not deemed to be an asset of the debtor in the event of insolvency. The debtor cannot dispose of any property that is subject to a fixed charge without the creditor's consent. The charge will be released once the debt has been discharged in full. Legal mortgages over certain property must be created by deed and validly executed.

   Equitable mortgages and fixed charges must be in writing and are commonly created by deed. Deeds can be executed either under company seal or by a duly authorised signatory or signatories.

   Mortgages and charges over real property in Bermuda must be registered with the Registrar General. Charges can also be registered with the Registrar of Companies, including a charge on assets outside of Bermuda.

   Effects of non-compliance. If a mortgage or charge over real property is not registered with the Office of the Registrar General, that mortgage or charge will not have priority over a mortgage or charge over the same real property that is created later but is deposited for registration with the Office of the Registrar General.

   If a charge created over certain property and assets of a company is not registered with the Registrar of Companies by the chargee, that charge will not have priority in Bermuda. If the chargee subsequently creates a charge over the same property and assets and registers that new charge, the new charge will have priority over the first (unregistered) charge, regardless of the fact that it was created later.

   The deposit and registration of a security determines priority but will not affect the validity and enforceability of the security interest.

   Movable property

   Common forms of security and formalities. The most common forms of security taken over movable property are:

   Mortgages. See above, Immovable property. Mortgages over movable property are most common for property such as ships and aircraft. Fixed charges. See above, Immovable property. Floating charges. A floating charge can be taken over a class of assets that change from day to day. Typically, a floating charge is taken over a debtor's entire business and undertaking. Unlike a fixed charge, a floating charge does not attach to a particular asset, but floats over one or more assets. While the floating charge is in place, the debtor can dispose of the secured assets without the creditor's consent. However, on the occurrence of a specified event of default, the floating charge crystallises and converts into a fixed charge that attaches to the debtor's specific assets at that time. The property secured by a floating charge forms part of the debtor's assets in the event of insolvency. Pledges. A pledge gives a creditor the right to take possession of the pledged asset and to sell it in the event of the debtor's default. Lien. A lien gives a creditor the right to retain possession of an asset until the debt is satisfied. However, the creditor is not entitled to sell the asset if the debtor defaults. Mortgages are generally created by deed. Specific statutory registration rules apply to mortgages over certain assets, such as aircraft and ships.

   Fixed and floating charges can be created in writing but are usually created by deed. They can be registered with the Registrar of Companies.

   Pledges are created by contract and perfected by actual (or constructive) delivery of the pledged asset to the creditor (for example, the delivery of stock certificates to transfer possession of shares).

   Liens are created by:

   Contract. Statute, in the case of certain types of creditors, such as solicitors. The common law, for example, a workman's lien on the item worked on. There are specific registration requirements, in certain cases, for security interests created over the assets of partnerships.

   Effects of non-compliance. As for immovable property (see above, Immovable property), the date of registration of the security governs the order of priority. Failure to register the applicable security over movable property may result in a mortgage or charge not having priority over mortgages or charges that are created over the same movable property at a later date.

   Failure to register does not make the security invalid or unenforceable.

   Creditor and contributory ranking

2. Where do creditors and contributories rank on a debtor's insolvency? Assets secured by a mortgage or fixed charge are not assets to which the company is beneficially entitled and therefore fall outside the scope of wind up proceedings. The secured debts are satisfied from the proceeds of sale of the property. The liquidator, however, will typically:

   Review the circumstances of the creation of the security to ensure that it is valid. Seek to claim sums recovered from the sale of the property that are above the amount payable to the creditor under the mortgage or fixed charge. If the proceeds from the sale of the property do not fully satisfy the debt secured by the mortgage or fixed charge, the secured creditor is an unsecured creditor for the remainder of the debt (see below).

   Creditors and shareholders are paid in the following order:

   Costs of insolvency proceedings. All costs, charges and expenses properly incurred in the company's winding-up are paid as a matter of priority, including the liquidator's remuneration (section 232...