Restructuring & Insolvency 2022

• Published date: 23 June 2022
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Corporate and Company Law, Insolvency/Bankruptcy
• Law Firm: Kennedys Law LLP
• Author: Mr Nick Miles and Erik Penz

1. OVERVIEW

1.1 Where would you place your jurisdiction on the spectrum of debtor- to creditor-friendly jurisdictions?

Bermuda is a self-governing British Overseas Territory. The systems of law administered in Bermuda are local Bermudian legislation, Bermudian common law (as developed from English common law) and UK legislation expressly made applicable to Bermuda.

Bermuda has its own court system, including a designated Commercial Court which is part of the Supreme Court of Bermuda, with rights of appeal to the Court of Appeal for Bermuda and then the Judicial Committee of the Privy Council in London.

As in other jurisdictions that follow English common law, there are various ways by which a creditor can take security over assets in Bermuda by agreement between the creditor and the debtor including by way of: legal mortgage; equitable mortgage; fixed charge; floating charge; pledge; contractual lien; and assignment.

The nature of the security interest, in any particular case, will be determined by:

1. the terms of the parties' agreement, ordinarily set out in the relevant security documents;
2. the nature of the property being secured; and
3. the nature of the debtor's interest in the property being secured.

There are various statutory provisions relevant to the taking of security in Bermuda including, for example, section 19(d) of the Supreme Court Act 1905, section 1 of the Bonds and Promissory Notes Act 1874, and section 2 of the Charge and Security (Special Provisions) Act 1990.

Bermuda can be described, for the most part, as a very creditor-friendly jurisdiction. Secured creditors can generally enforce their security outside of the insolvency process, and the insolvency legislation is highly pro-creditor. It provides, in particular, for the right of an unsecured creditor with an unpaid debt to apply for an order that the corporate debtor be compulsorily wound up and its assets applied in satisfaction of its debts, and there is no statutory corporate rescue regime beyond the 'Scheme of Arrangement' ('scheme'), discussed below. Nevertheless, the Supreme Court has developed an insolvency practice, through the appointment of 'soft touch' provisional liquidators, which is designed to support formal and informal restructuring plans that have credible prospects of success, and the support of the majority of creditors. In appropriate circumstances, therefore, the Court has the power to approach corporate insolvencies in a 'debtor-friendly' manner, with a view to achieving a corporate restructuring.

1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what extent are each of these used in practice?

There is no provision in Bermuda's legislation for informal work-outs. However, informal work-outs are common in Bermuda, and the Supreme Court has developed certain practices to support and assist them as discussed in our answer to question 3.1.

The only formal restructuring process in Bermuda is the scheme process, discussed in our answer to question 3.2. The scheme is a highly versatile statutory procedure enabling the restructuring of debt (and capital) by 75% majority by value and 50% majority by number (per class of creditor/member) approval and Court sanction. It is frequently used to restructure debt where the consent of all creditors is unlikely to be forthcoming.

The only formal insolvency proceeding is compulsory winding up by the Supreme Court. As we discuss in what follows, the Court's compulsory winding up jurisdiction can serve as a protective device within which to restructure a company's debt with a view to its continued trading. Compulsory liquidations are common in Bermuda.

2. KEY ISSUES TO CONSIDER WHEN THE COMPANY IS IN FINANCIAL DIFFICULTIES

2.1 What duties and potential liabilities should the directors/managers have regard to when managing a company in financial difficulties? Is there a specific point at which a company must enter a restructuring or insolvency process?

Directors' and officers' duties are principally owed to the company itself. To the extent that the company is solvent, such duties are ordinarily owed to the company for the benefit of its present and future shareholders.

When the company enters the zone of insolvency, directors must act in the best interests of the company's creditors. Directors that permit a company to continue to trade whilst it is in financial difficulties face a range of potential liabilities, depending on the precise circumstances and the relevant director's conduct and state of mind (as discussed below).

Fraudulent trading: Section 246 of the Companies Act 1981 provides that any director that has knowingly caused or permitted a company to carry on business with intent to defraud creditors of the company or for any fraudulent purpose may be found personally liable for all, or any, of the debts or other liability as the Court may direct. This would include carrying on the business of the company when it is known to be insolvent.

Personal liability for fraudulent conveyances/fraudulent preferences: It is possible that directors might be held personally liable, in certain circumstances, for fraudulent conveyances or fraudulent preferences, as discussed in our answer to question 2.3 below.

Breach of fiduciary duty and failure to exercise reasonable skill and care: Directors owe duties to the company, both pursuant to section 97 of the Companies Act 1981 and at common law, to act honestly and in good faith with a view to the best interests of the company (which can include the interests of the company's creditors when the company is in the zone of insolvency), and to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Failure to comply with these obligations may result in personal liability on the part of directors. Although not confirmed in statute, the power of the directors of a Bermuda company to petition for the compulsory winding up of an insolvent company has been recognised in Re First Virginia Reinsurance Ltd [2003] Bda LR 47.

Misfeasance and breach of trust: Section 247 of the Companies Act 1981 provides that a director may be personally liable if he has misapplied, retained or become liable or accountable for any money or property of the company, or been guilty of any misfeasance or breach of trust in relation to the company. The scope and effect of section 247 was considered by the Supreme Court of Bermuda in Peiris v Daniels [2015] SC (Bda) 13 Civ.

Unlawful return of capital: At common law and pursuant to certain sections of the Companies Act 1981 dealing with dividends, reduction of capital, share repurchases and share redemptions, a Bermuda company that is not in liquidation cannot lawfully return capital to its shareholders except by way of an approved reduction of capital or by way of authorised dividend, redemption or repurchase. Section 54 of the Companies Act 1981 provides that a company shall not declare or pay a dividend, or make a distribution out of contributed surplus, if there are reasonable grounds for believing that the company is (or would after the payment be) unable to pay its liabilities as they become due or the realisable value of the company's assets would thereby be less than its liabilities.

Miscellaneous offences and liabilities: Sections 243 to 248 of the Companies Act 1981 set out a range of criminal offences that may be committed by directors of companies including, for example, by fraudulently altering documents relating to company property or affairs, falsifying books or accounts with the intention of defrauding any person, or fraudulently inducing a person to give credit to the company. There are also various legislative provisions that impose personal liability on directors for any failure to pay certain taxes and remit pension contributions.

Segregated accounts companies representatives: Section 10 of the Segregated Accounts Companies Act 2000 requires a segregated account representative to make a written report to the Registrar of Companies within 30 days of reaching the view that there is a reasonable likelihood of a segregated account (or the general account of a segregated accounts company) for which he acts becoming insolvent, and section 30 makes it a criminal offence to fail to do so.

2.2 Which other stakeholders may influence the company's situation? Are there any restrictions on the action that they can take against the company? For example, are there any special rules or regimes which apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? Are moratoria and stays on enforcement available?

Creditors with security over an insolvent company's core assets have the greatest influence over the company's situation. Unsecured creditors also exercise considerable influence as a result of the rights they enjoy pursuant to Bermuda's winding up jurisdiction. The greater the value of an unsecured creditor's debt (and the greater the support that it can command from other unsecured creditors), the greater the influence. Minority unsecured creditors have relatively limited influence above and beyond their statutory and contractual rights.

In addition to the Supreme Court (and any foreign courts with jurisdiction over the company), certain regulatory authorities in Bermuda may also influence the company's situation, depending on the circumstances. For example, the Registrar of Companies, the Bermuda Monetary Authority and the Regulatory Authority of Bermuda might, in appropriate circumstances, investigate the affairs of an insolvent company and exercise such regulatory powers as may be appropriate.

Section 165 of the Companies Act 1981 provides that, at any time after the presentation of a winding up petition and before a winding up order has been made...