Worldwide: Americas Restructuring Review 2021

First published in Global Restructuring Review, December 2020

This chapter discusses the defining features of Bermuda's insolvency landscape and the primary insolvency and rescue procedures available under Bermuda law, including compulsory liquidations and schemes of arrangements. The restructuring of Noble Group Limited is presented as a case-study, to illustrate the use of provisional liquidation to facilitate a restructuring via a scheme of arrangement. The chapter also reviews the role of the Bermuda court in cross-border insolvencies and the creditor-friendly nature of the insolvency regime in Bermuda.

Legal framework

Bermuda is an overseas territory of the United Kingdom and its legal system is based on the English common law comprising statute and case law. Bermuda has developed its own body of common law and statutes and this has been influenced by several jurisdictions including England, Canada, Australia and New Zealand. Decisions of the English Courts are not binding on a Bermuda Court, although they are highly persuasive. The decisions of the Privy Council, however, are generally binding on the Bermuda courts, unless they are based on a reference from a jurisdiction with considerably different statutory provisions and policies. The Privy Council is Bermuda's highest appellate court and sits in London.

Bermuda's insolvency landscape

Bermuda insolvency law consists of statute and common law. The principal statutory provisions¹ governing corporate insolvency and restructuring are contained in Part XIII of the Companies Act 1981 (the Companies Act) and are supported by the Companies (Winding-Up) Rules 1982 (the Winding-Up Rules). The Companies Act is based on the English Companies Act 1948 and the Companies Winding-Up Rules are based on the English Companies (Winding-Up) Rules 1949.² No substantive changes have been made to Part XIII of the Companies Act and the Winding-Up Rules since they were enacted, although there have been minor amendments.

At the heart of Bermuda insolvency law is the principle of pari passu treatment of unsecured creditors (ie, where the company does not have sufficient assets to satisfy its debts to unsecured creditors, each unsecured creditor would receive an equal distribution on a rateable basis according to the quantum of their claim).³ Secured creditors are unaffected by insolvency proceedings in Bermuda and may enforce their security in accordance with the terms of the governing security instrument⁴ (although they have standing to present winding-up petitions).

A key feature of Bermuda insolvency law is that the Companies Act provides the ability to challenge certain transactions executed by insolvent companies through avoidance or clawback provisions. This includes the avoidance of preferential payments to creditors and transactions at an undervalue. The Companies Act also provides remedies for fraudulent trading and dispositions of company property after the commencement of the winding-up.

Corporate insolvency and rescue procedures

The primary insolvency and rescue procedures available under Bermuda Law are:

• liquidation under the supervision of the court, commonly referenced as 'compulsory liquidation' or 'compulsory winding-up';
• provisional liquidation for the purpose of restructuring; and
• schemes of arrangement.

Bankruptcy procedures are relevant in the context of insolvent funds and individual insolvencies. The remedy of receivership is an important mechanism used when a segregated accounts company is insolvent.

Compulsory liquidation

Typically, a creditor seeking to place a debtor company into liquidation in Bermuda will apply to the court seeking such relief on the grounds the company is unable to pay its debts or that it is just and equitable for the company to be wound up. Compulsory winding-up proceedings can be commenced by any one or more of the following:

• the company itself;
• creditors, including any contingent or prospective creditors;⁵
• contributories, subject to certain restrictions; and
• regulator (if applicable).

The mode of beginning winding-up proceedings is by filing a winding-up petition with the Supreme Court of Bermuda, which is supported by a standard form affidavit verifying the contents of the petition. Once the court fixes a date for the hearing of the petition, the petition must be served on the company at its registered office. Before the hearing of the petition, the petitioner must obtain a certificate of compliance from the registrar of the Supreme Court certifying that the petition is ready for hearing because it has been properly filed, served and advertised in an appointed newspaper.

Those intending to appear at the hearing of the petition, including those who wish to oppose the petition, are required to provide advance written notice to the petitioner within a prescribed time frame, failing which they require special leave of the court to appear at the hearing.

On hearing a winding-up petition, the court may grant, dismiss or adjourn the petition, or make any other order it thinks fit. It is unlikely that the court would grant a stay of winding-up proceedings, except in exceptional circumstances. However, the court may adjourn a winding-up petition in order to facilitate a proposed restructuring by the company with the assistance of a court-appointed insolvency practitioner known as a 'provisional liquidator'.

On the making of a winding-up order, the company's operations come to an end and the control of the company is taken from the directors and is placed in the hands of a court appointed liquidator.⁶ Liquidators are equipped with a wide array of powers to ensure that the company adheres to a statutory process contained in the Winding-Up Rules. This process is intended to promote a systematic and orderly winding down of the company's affairs.

Provisional liquidation

Provisional liquidation occurs in two scenarios, being:

• where the Bermuda court appoints an officer (typically an insolvency practitioner) with clearly defined powers that may be used where there is a prospect of 'rescuing' an insolvent company through restructuring without the displacement of all of the board's executive functions; or
• where it is necessary for the court to appoint an officer to protect and prevent a dissipation of the company's assets in the intervening period between the filing of a petition and the making of a winding-up order.

The former type of provisional liquidation is a distinguishing feature of Bermuda's restructuring landscape. Accordingly, where a company is insolvent, rather than making a winding-up order immediately upon hearing the petition, the Bermuda court often appoints provisional liquidators with certain, limited powers, known as 'light' or 'soft-touch' powers.⁷

In a light-touch liquidation, a company may continue its business operations as usual, pending the implementation of a restructuring plan. This would normally occur where the court is satisfied that a restructuring will produce a better result than a winding up for creditors. As explained by Kawaley CJ in Z-OBEE Holdings Ltd (2017) Bda LR 19:

The Bermuda court has used provisional liquidation as a tool to restructure the affairs of a company, preserve value in a business and provide a platform for distressed companies to recover – which together promotes the sustainability and success of cross-border business.

The benefits of this approach include the stay of proceedings against the company triggered by the appointment of provisional liquidators and independent oversight of the restructuring by court officers focused on protecting creditor interests.

Schemes of arrangement

A scheme of arrangement is the only court-supervised reorganisation procedure in Bermuda, provided for in Sections 99 and 100 of the Companies Act. A scheme of arrangement may be initiated by the company, any member or creditor of the company or, where applicable, a liquidator who has been appointed in relation to the company. A proposed scheme must represent a compromise or arrangement between the company and its creditors or members, or any classes thereof.

Proceedings are started by applying to the Bermuda court for directions to convene meetings with the various classes of creditors or shareholders who will be affected by the scheme's proposals. Once the meetings have been convened, a further application is made to the court to approve or 'sanction' the scheme.

Classes of creditors are determined by the requirement for a class to be confined to those persons whose rights (as affected by the proposed scheme) are not so dissimilar as to make it impossible for them to consult together with a view to their common interest.

For a scheme to be presented to the Bermuda courts for sanction, a majority in number representing 75 per cent in value of the creditors or members present and voting either in person or by proxy at each creditors' or members' class meeting, as the case may be, must approve the scheme.

Cram-up or cramdown (as those terms are generally understood in reorganisation proceedings) of a scheme of arrangement on to any dissenting class of creditors or members is not permitted in a Bermuda scheme of arrangement. To the extent that any single class of affected creditors or members fails to approve the scheme of arrangement by the requisite majority, the scheme will fail in its totality.

Expedited restructurings

The Companies Act does not provide for an expedited reorganisation, such as a reorganisation by way of a pre-pack arrangement. However, as a matter of practice, a reorganisation may be informally negotiated with a liquidator prior to his or her appointment on the informal understanding that the liquidator will approve the pre-negotiated arrangement once appointed. This type of informal arrangement will have similar effect to a pre-package deal but the details of the arrangement will be bespoke to the particular circumstances of the case.

Receivership

Receivers are generally appointed by secured creditors pursuant to the terms of a security agreement. The function of the receiver is to realise the relevant secured assets of the company for the benefit of the security holder. Assets of a company that have been validly secured as security for a company's indebtedness are exempted from the claims of creditors in insolvency. On completion of the receivership, therefore, there can be a winding up of the assets not realised by the receiver for the benefit of the company's unsecured creditors.

There is a separate insolvency regime that applies to segregated accounts companies incorporated in Bermuda under the Segregated Accounts Companies Act 2000 (sometimes referred to as protected cell companies or segregated portfolio companies in other jurisdictions). This regime provides for the appointment of receivers over the segregated accounts (or cells) of the segregated accounts company which are unable to meet their liabilities as they fall due. A liquidator may be appointed over a segregated account company's general account if it is insolvent. There are relatively few statutory rules underpinning this regime when compared to the winding-up regime that applies to limited liability companies incorporated in Bermuda. It is thought that the Bermuda court would model its approach to the winding up of a segregated accounts company on the court's established practice in relation to limited liability companies.

Bankruptcy

Corporate insolvency generally refers to the winding-up regime under Part XIII of the Companies Act and the Winding-Up Rules. Bankruptcy is a term that only applies to individual insolvency and limited partnerships, the latter being the corporate vehicle regularly used for investment funds.

Observations

Creditor-friendly jurisdiction

On the surface, the statutory rules governing the winding up of companies are not clearly creditor friendly. The regime is ostensibly designed to ensure that insolvent companies come to an end by having liquidators appointed to realise the company's assets, in order to satisfy creditors' claims before the Bermuda court dissolves whatever remains of the company. However, in practice, the Bermuda court is adept at applying the statutory regime with enough flexibility to achieve creditor-friendly results. In fact, a prominent characteristic of the insolvency regime is the Bermuda court's development of a rescue culture. When a company is insolvent, rather than making a winding-up order immediately upon the winding-up petition, the Bermuda court often appoints provisional liquidators on a light touch basis, allowing the company to continue its business as usual (under the supervision of court appoint office holders) pending the implementation of a restructuring plan through a scheme of arrangement.

Another defining feature of the insolvency landscape is the Bermuda court's willingness to work in tandem with, and lend assistance to, foreign courts and be receptive to companies having interests in other jurisdictions where there is a substantial international creditor or asset base. By way of illustration, in 2017, the Bermuda Supreme Court and the Supreme Court of Singapore signed a Memorandum of Understanding of References of Questions of Foreign Law in order to facilitate legal cooperation between the two jurisdictions.

Hallmark of provisional liquidation – Noble Group Limited

The value of provisional liquidation was demonstrated in the widely publicised restructuring of Noble Group Limited in 2018. Noble Group was incorporated in Bermuda and listed on the mainboard of the Singapore Exchange. It was the ultimate holding company of a group of companies that was one of the world's largest commodity traders, with hubs in London, Hong Kong and Singapore. The group managed a portfolio of global supply chains that involved marketing, processing, financing and transporting across the world. The restructuring was highly complicated owing to the very wide range of creditors involved and the global scale of the group's business.

Noble Group experienced grave financial difficulties because of the industry wide decline in commodity prices between 2014 and 2016. Noble Group's pre-restructuring debt exceeded US$3 billion dollars. To avoid liquidation, the company's directors pursued a financial restructuring based on a debt for-equity swap and provided for the transfer of Noble Group's assets to newly incorporated subsidiaries of a newly incorporated holding company, New Noble. Noble Group itself was to be dissolved. Scheme creditors were to be issued with new debt instruments and 70 per cent equity in the new group. The remaining equity was to be apportioned, with 20 per cent issued to existing shareholders and 10 per cent issued to existing management. One of the main goals of the scheme was to provide the new group with access to new hedging and trade finance facilities (US$800 million). These facilities were to be provided by a finance creditor, but also by scheme creditors who chose to guarantee the facility in exchange for senior debt instruments.

The company originally sought to achieve the restructuring solely by entering into parallel schemes of arrangement with its creditors (which were governed by both English and Bermuda law processes). Prior to presenting the English scheme of arrangement, which was regarded as the 'lead' scheme, Noble Group took steps to shift its centre of main interests from Hong Kong to England, including by relocating its main office to London from Hong Kong.

The English and Bermuda schemes of arrangement were approved by an overwhelming majority of scheme creditors and were sanctioned by the courts in both jurisdictions. The English scheme was sanctioned on 12 November 2018 and the Bermuda scheme was sanctioned two days later. The US Bankruptcy Court granted recognition of the scheme in the United States, via Chapter 15 of the US Bankruptcy Code, on 15 November 2018. Thereafter, all that remained was for the company's directors to implement the scheme.

Following sanction of the schemes, however, the Singaporean authorities blocked the transfer of Noble Group's listing on the Singapore Exchange to New Noble because of an ongoing investigation of the company and one of its subsidiaries. It was previously anticipated that Noble Group's listing status in Singapore would be transferred to New Noble and the company's directors had received prior shareholder approvals to pursue the restructuring on this basis. For various reasons – importantly, the stance taken by the Singaporean authorities – the directors were prevented from implementing the scheme in the manner contemplated.

Noble Group's directors consequently pursued its restructuring using liquidation on a light-touch basis. On 14 December 2018, the Bermuda court appointed a provisional liquidator with light-touch powers over Noble Group. The significance of this appointment lies in the fact that the provisional liquidator was not subject to the same constraints faced by the company's directors. His mandate would be solely guided by the best interest of the creditors, while at the same time being subject to the supervision of the court and having the benefit of a stay of proceedings against the company.

In the context of Noble Group, the provisional liquidator was granted sufficient latitude to implement the transfer of the company's assets to the New Noble, provided that the scheme creditors were not prejudiced, even if that meant that the New Noble would no longer have a listing on the Singapore Stock Exchange as previously envisaged. Today, the New Noble is fully operational and the restructuring was a success. Had the Bermuda court not appointed a provisional liquidator, the company would have undergone a compulsory liquidation, its business would have come to an end and creditors would have received a significantly smaller dividend.

Cross-border support

There are two main types of cases involving cross-border support that frequently arise in Bermuda. First, there are cases in which a winding-up proceeding is commenced in Bermuda to run parallel to, or in tandem with, an insolvency proceeding taking place elsewhere for the purpose of restructuring a Bermuda-registered company. Specifically, there have been a number of cases where Bermuda companies have been the subject of Chapter 11 proceedings in the United States, in which the Bermuda court has appointed provisional liquidators with light-touch powers to supervise the directors in the conduct of the Chapter 11 proceedings and to report to the Bermuda court. The Bermuda court will generally defer to the Chapter 11 proceedings and give effect to the Chapter 11 plan or reorganisation. As mentioned above, the advantages of this approach include independent oversight of the restructuring by court officers (ie, the provisional liquidators) focused on protecting creditors' interests and achieving a stay of proceedings against the company which is triggered by the appointment of provisional liquidators.

Second, there are cases in which a foreign office holder (eg, liquidator) applies to the Bermuda court for relief to assist with a liquidation taking place outside Bermuda, for instance, by asking the Bermuda court to order Bermuda entities to produce information or orders compelling individuals in Bermuda to provide witness evidence. The Bermuda court may exercise its common law power to assist in these cases, and has demonstrated a general willingness to do so, provided that the foreign office holder could obtain the same relief from the court in the country where the liquidation is taking place.

In relation to the topic of cross-border support, the Bermuda court does not have jurisdiction to wind up overseas companies, save for certain statutory exceptions. In the context of a group of companies, this restriction means that the Bermuda court lacks jurisdiction to wind up a multinational group of companies, as it is not possible to obtain an ancillary winding-up order from the Bermuda court in respect of a company within the corporate group that is domiciled outside Bermuda.

On the other hand, where the Bermuda court has appointed liquidators to wind up a Bermuda company, the liquidators may commence ancillary insolvency proceedings in other jurisdictions that permit ancillary proceedings (eg, in England or Hong Kong).

Although there are no formal protocols or agreements for coordinating the interaction between the Bermuda court and foreign courts in cross-border insolvencies, the Supreme Court of Bermuda has issued practice directions relating to cross-border insolvencies – most recently, the Guidelines for Communication and Cooperation between Courts in Cross-Border Insolvency Matters dated 9 March 2017 (which is modelled on the draft guidelines adopted by the Judicial Insolvency Network in October 2016).

Looking ahead

In 2020, many companies have had to consider whether their financial standing and existing business models are strong enough to withstand the negative economic effects resulting from covid-19. Important decisions relating to the most appropriate and effective 'business rescue' methods are being made on an urgent basis. Bermuda has always been viewed as a creditor-friendly jurisdiction that promotes restructuring and light-touch provisional liquidation – the hallmark of Bermuda's insolvency regime – will provide a number of those companies with a much-needed lifeline to restructure their debts in a practical, structured and sustainable manner.

While there remains a need to clarify and formalise the parameters of provisional liquidation by the enactment of legislative updates, comfort can still be taken that Bermuda's current restructuring framework (largely dictated by evolving case law) has been tried, tested and has successfully promoted cross-border business even in these most challenging of economic environments.

Footnotes

1. Certain provisions within the Bankruptcy Act 1989 apply to companies under section 235 of the Companies Act.

2. English insolvency law has been reformed significantly since the English Companies Act 1948 and the Companies (Winding-Up) Rules 1949.

3. In certain circumstances, employees may have a preferential status.

4. The stay of proceedings that occurs when a winding-up order is made does not prevent secured creditors from exercising their rights under validly created security.

5. However, the court will not give a hearing to a winding-up petition presented by a contingent or prospective creditor until security for costs has been given and a prima facie case for winding up has been established.

6. Technically, the liquidator appointed on the making of a winding-up order is a 'provisional' liquidator until his or her appointment is confirmed by a majority vote at the first meeting of creditors and contributories – which usually takes place within a month of the making of the order. Once a liquidator's appointment is confirmed, he or she is known as a permanent liquidator.

7. Authority for provisional liquidators with 'light touch' powers is not found in the Companies Act or any other legislation, but rather in Bermuda common law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.