The International Comparative Legal Guide To: Corporate Recovery & Insolvency 2017 (Bermuda)

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 Privy Council in London.

The formal procedures available for companies in financial difficulties are principally contained in the Companies Act 1981 (the winding up provisions of which are substantially modelled on the UK's Companies Act 1948). Some provisions of the Bankruptcy Act 1989 are also applied to companies, by virtue of section 235 of the Companies Act 1981, and there is some scope for debate as to the applicability of certain provisions of the Bankruptcy Act 1989 to corporate partnerships. There are also specific provisions relating to insurance companies in the Insurance Act 1978 and relating to segregated accounts companies and their general and segregated accounts in the Segregated Accounts Companies Act 2000. There are also specific provisions relating to banks in the Banking (Special Resolution Regime) Act 2016, although only sections 1 and 10 of that Act are currently in force.

The rules relating to compulsory winding up of companies are contained in the Companies (Winding up) Rules 1982 and also, to a lesser extent, in the Rules of the Supreme Court 1985.

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:

the terms of the parties' agreement, ordinarily set out in the relevant security documents; the nature of the property being secured; and 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.

With this legislative background in mind, 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', 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 does have 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 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 of Arrangement, discussed in our answer to question 3.2. The Scheme of Arrangement is a highly versatile statutory procedure enabling the restructuring of debt (and capital) by majority 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 allow a company to continue to trade while 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 allowed 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 to be 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 as a matter of 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, or 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 recently considered by the Supreme Court of Bermuda in Peiris v Daniels [2015] SC (Bda) 13 Civ.

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?

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 which 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.

2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of challenge? What remedies are available?

Payments...