This article 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 article 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
The principal statutory provisions[1] 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 (i.e., 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 instrument[4] (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.
In relation to a company that operates legally segregated accounts under the Segregated Accounts Companies Act 2000, the Court is empowered to make a receivership order in respect of an insolvent segregated account without affecting the operation of other segregated accounts or the company generally.
Compulsory liquidation
In Bermuda, an unsecured creditor seeking to liquidate a debtor company typically applies to the court for a winding-up order, claiming either the company’s inability to pay its debts or that it is just and equitable to wind up the company. The winding-up process can be initiated 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
- the Bermuda Monetary Authority (or the applicable regulator) in the case of a regulated entity.
To begin proceedings, a winding-up petition is filed with the Supreme Court, supported by an affidavit. While it is common to attach proof of the debt, it is not required. After the court sets a hearing date, the petition must be served on the company’s registered office. Prior to the hearing, the petitioner must file a certificate of compliance, confirming the petition has been properly filed, served, and advertised.
Anyone wishing to appear at the hearing of the petition must notify the petitioner by 4pm on the day before the hearing of the petition, failing which they must seek court approval to appear. At the hearing of the petition, the Court can grant, dismiss, or adjourn the petition, or make another suitable order. If unopposed, a winding-up order may be issued at the first hearing. If opposed, the court usually adjourns the petition to allow the parties time to prepare for a contested hearing.
The Court may also adjourn a winding-up petition to facilitate a proposed restructuring by the company with the assistance of a court-appointed insolvency practitioner known as a ‘provisional liquidator’.
If the court makes a winding-up order (whether at the first hearing or a subsequent hearing), the company’s operations will immediately come to an end. The directors’ powers to manage the company ceases and a court-appointed liquidator is empowered to wind up the company’s affairs.[6] Liquidators are equipped with a wide array of powers to ensure that the liquidation proceeds in an orderly fashion and in accordance with the statutory regime.
Provisional liquidation
Provisional liquidation in Bermuda is the appointment of a liquidator other than for the immediate winding up of the company. A provisional liquidator will be nominated by one or more of the parties. The court must accept the credentials of the nominees who, by custom and practice, will be insolvency practitioners.
There are two scenarios where an order for provisional liquidation will be made:
- where there is a prospect of ‘rescuing’ an insolvent[7] 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.[8]
The second type of appointment mentioned above mirrors the English jurisdiction for the appointment of provisional liquidators and, as in England, is one of the most extreme tools at the Court’s disposal, deployed only in exceptional circumstances.
The first type of provisional liquidation is a distinct feature of Bermuda’s restructuring landscape. Accordingly, where a company is insolvent, instead of making a winding-up order to liquidate the company, the Bermuda court often appoints provisional liquidators with certain, limited powers, known as ‘light-touch’ powers.[9] This appointment is by far the most common form of provisional liquidation in Bermuda.
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:
[Section 170 of the Companies Act 1981 (Power of Court to appoint liquidators)] has for almost 20 years been construed as empowering this Court to appoint a provisional liquidator with powers limited to implementing a restructuring rather than displacing the management altogether pending a winding-up of the respondent company.
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.
A key feature of provisional liquidation is the stay of proceedings against the company triggered by the appointment of provisional liquidators. Creditors are protected, given the independent oversight of provisional liquidators who, as officers of the court, are under a duty to act in the best interests of creditors.
A provisional liquidation may be commenced alone or in combination with another process in Bermuda or abroad, for example, in combination with a US bankruptcy, an English restructuring plan or a Bermudian scheme of arrangement.[10] The combination of restructuring processes in multiple jurisdictions can be a very powerful tool, as demonstrated below in the Noble Group case study.
Schemes of arrangement
A scheme of arrangement is the only statutory 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.
A class of creditors will be made up of creditors whose interests are sufficiently similar so that they can consult together with a view to their common interest.
Cross-class cramdown of a dissenting class of creditors or members is not permitted in a Bermuda scheme of arrangement. If any single class of affected creditors or members does not approve the scheme of arrangement, the court cannot sanction the scheme.
Each class must approve the scheme by both:
- simple majority (in number) of those present and voting; and
- 75 per cent in value of debt of those present and voting.
This double majority requirement can lead to creditors representing small amounts in value, if sufficient in number, causing the rejection of a scheme. This represents significant minority creditor protection from the imposition of a scheme they consider unfavourable.
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 a 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 that 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
The Court recognises the importance of promoting a culture of rescue (where possible) and strives to assist companies in financial distress where it can. The Court will however prioritise the interests of creditors, recognising that rescue attempts do not always maximise creditor value, that sophisticated creditors are often best positioned to decide what serves their commercial interests and that, ultimately, a creditor petitioning for the winding-up of an insolvent company has a prima facie right to a winding up order. Notwithstanding a petitioning creditor’s prima facie right to a winding up order, the Court may exercise its discretion and decline to make a winding up order if it is opposed by a majority of creditors and there is a good reason not to order the company to be wound-up; for instance, if there is a real prospect of a restructuring that would result in a better outcome for creditors. The Court will always look to achieve a creditor-friendly outcome and can adopt a flexible approach, as evidenced by the Court’s development of the provisional liquidation regime.
The Court is particularly alert to the realities and complexities of international commerce and will cooperate with courts of foreign jurisdictions where there is a Bermudian connection, for example, the company is incorporated in Bermuda, has assets in Bermuda or does business in Bermuda.
Hallmark of provisional liquidation – Noble Group Limited
The value of provisional liquidation was highlighted in the high-profile restructuring of Noble Group Limited in 2018. Noble Group, incorporated in Bermuda and listed on the Singapore Exchange, was one of the world’s largest commodity traders with operations across London, Hong Kong, and Singapore. The group faced severe financial challenges due to the drop in commodity prices between 2014 and 2016, with pre-restructuring debt exceeding US$3 billion.
To avoid liquidation, Noble’s directors pursued a complex restructuring involving a debt-for-equity swap, transferring assets to newly incorporated subsidiaries under a new holding company, New Noble. Scheme creditors were to receive new debt instruments and 70% equity in the new group, with the balance split between existing shareholders (20%) and management (10%). A key aim was securing new hedging and trade finance facilities worth US$800 million, provided by a finance creditor and scheme creditors guaranteeing the facility in exchange for senior debt.
Initially, Noble sought to restructure through parallel schemes of arrangement governed by English and Bermuda law. Before launching the English scheme, regarded as the ‘lead’ scheme, the company shifted its main office from Hong Kong to London. Both schemes were approved by a majority of creditors and sanctioned by courts in England and Bermuda in November 2018, followed by recognition from the US Bankruptcy Court via Chapter 15.
However, the Singaporean authorities blocked the transfer of Noble’s listing to New Noble due to an ongoing investigation into Noble and one of its subsidiaries. Unable to implement the scheme as planned, Noble’s directors sought the appointment of light- provisional liquidators, who (unlike the directors) would not be constrained as a result of the investigation. On 14 December 2018, the Bermuda court appointed a provisional liquidator with powers to oversee the restructuring in the creditors’ best interest.
The provisional liquidator facilitated the transfer of assets to New Noble, despite the loss of the Singapore listing. The restructuring was ultimately successful, preventing Noble’s compulsory liquidation and ensuring creditors received better returns than they would have in those circumstances.
Developments in provisional liquidation – HSBC v NewOcean
On 30 September 2022, the Court of Appeal for Bermuda (the Court) handed down its reasons for making a winding-up order, overturning the Bermuda Supreme Court, in Hong Kong and Shanghai Banking Corporation Ltd v NewOcean Energy Holdings Limited [2022] CA (Bda) 16 Civ (re NewOcean).
Companies have often sought the shelter of light-touch provisional liquidation in response to a creditor’s petition. The Court must then consider whether to adjourn the creditor’s petition and appoint joint provisional liquidators (JPLs) or to make an immediate winding-up order, dismissing the application for light-touch provisional liquidation.
This was precisely the situation in re NewOcean when the case was heard before the Supreme Court of Bermuda in December 2021 on a creditor’s petition. NewOcean Energy Holdings Limited (NewOcean) is a Hong Kong-listed, Bermuda incorporated, holding company for a Chinese energy, real estate and shipping group.
In 2020, NewOcean found itself in financial difficulties. It owed upwards of US$800 million to a number of banks. NewOcean entered into negotiations with over 30 bank creditors and tried to restructure its debt by way of parallel schemes of arrangement in Hong Kong and Bermuda. Those schemes were ultimately unsuccessful, having failed to win sufficient support of creditors. On 22 October 2021, the Hong Kong and Shanghai Banking Corporation Ltd (HSBC), one of the bank creditors, presented a petition for NewOcean’s winding up.
NewOcean had failed to respond to a statutory demand served by NewOcean and so was deemed insolvent. The first default to HSBC was on 2 September 2020, and so by the time the petition was heard at the end of 2021, NewOcean was clearly cash-flow insolvent as a matter of fact. NewOcean accepted this in its evidence but claimed that it was balance sheet solvent, namely, that despite its current liquidity issues the values of its assets exceeded its liabilities.
Relying on this fact, among others, NewOcean asked the Court to adjourn the petition and appoint JPLs on a light-touch basis. The Court did so, adjourning the petition. JPLs were appointed on 14 December 2021 and the petition was adjourned on a number of occasions thereafter.
By the end of March 2022, the extent to which creditor sentiment had hardened against NewOcean was very clear: 64.8 per cent of bank creditors opposed any further adjournment and supported an immediate winding-up order. In order to secure its restructuring, NewOcean needed 75 per cent of its creditors to approve its proposed scheme.
On 9 May 2022, the petition was adjourned again for reasons given by Mussenden J in a written judgment dated 31 May 2022. In that judgment, the Court held that four exceptional circumstances that were relied upon by NewOcean were still in existence:
- NewOcean had come before the Court in relation to a scheme previously, showing early engagement with its financial difficulties;
- there was a restructuring plan that could be pursued by NewOcean with the JPLs’ assistance;
- as a listed company with a number of licences issued by the Chinese government, an immediate winding-up order would be value-destructive; and
- NewOcean was a balance sheet-solvent company praying for a short adjournment to attempt a restructuring.
The 31 May 2022 judgment, in particular the decision to adjourn, was appealed by HSBC as the petitioning creditor. The appeal was heard on 25 July 2022, and on 26 July 2022 the Court allowed the appeal, making a winding-up order against NewOcean. The Court’s reasons were handed down on 30 September 2022.
The Court of Appeal found that, in the decision adjourning the petition dated 31 May 2022, the judge had failed to take into account (sufficiently or at all) a number of relevant considerations:
- the size of the majority required to restructure the company’s debt. NewOcean required 75 per cent of creditors in favour but had nearly 66 per cent of creditors against. The prospect of the requisite majority being met and therefore of a restructuring succeeding was remote;
- the fact that so many creditors were opposed to the adjournment. The creditors were experienced bankers and best placed to judge their own interest with no evidence that any creditors were likely to change their mind;
- the absence of a majority of creditors opposing the making of a winding up order;
- the requirements of exceptionality, and that the factors relied upon were not really exceptional;
- that the proposal was an adjournment for time to liquidate assets and that liquidations should really be supervised by liquidators;
- the history of the case, including the time since the defaults and the previous failures to implement similar schemes;
- the absence of any agreement to purchase group assets that would be likely to lead to the debt being repaid;
- NewOcean’s lack of up-to-date financial accounts; and
- the behaviour of the company’s management in breaching the order by failing to provide the JPLs with information, including current financial information, by failing to tell the JPLs about a winding up petition presented in Hong Kong by a trade creditor and by entering into share pledges without informing the JPLs.
The following key points of principle can be derived from the Court’s judgment:
- The interests of the creditors are paramount and it will be a truly exceptional case where the views of the majority are disregarded by the Court, although the Court will not approach this from a strictly arithmetic point of view.
- The percentage of creditors opposed to or in support of the winding-up petition takes on even greater significance when the restructuring plan prayed in aid of an adjournment requires 75 per cent in favour. Where it is clearly unlikely that majority will be achieved, an adjournment should not be granted.
- The absence of creditors opposed to the winding up should be sufficient in most cases to justify an immediate winding up.
- The maintenance of a light-touch provisional liquidation calls for complete transparency and cooperation from the company and non-disclosure of material matters is a strong factor in favour of an immediate winding-up.
This judgment clarifies and strengthens the Bermudian insolvency regime, by making clear the circumstances in which a provisional liquidation will be made and when the Court should instead make an immediate winding-up order. The Court has reaffirmed that the views of creditors take precedence over other considerations and made clear that those seeking to appoint provisional liquidators, must cooperate with them.
Cross-border support
There are two common types of cross-border support cases in Bermuda. First, cases where a winding-up proceeding in Bermuda runs alongside an insolvency process in another country, often to restructure a Bermuda-registered company. In several instances, Bermuda companies involved in Chapter 11 proceedings in the U.S. have seen the Bermuda court appoint provisional liquidators with light-touch powers to supervise the directors and report to the Bermuda court. The Bermuda court generally defers to Chapter 11 proceedings and supports the reorganisation plan. This approach provides independent oversight through provisional liquidators, focused on creditor protection, and triggers a stay of proceedings against the company.
Second, cases arise where foreign liquidators request assistance from the Bermuda court in an ongoing liquidation outside Bermuda, such as ordering Bermuda entities to provide information or compelling individuals to give evidence. The Bermuda court often exercises its common law power to assist, as long as the foreign court could grant similar relief.
The Bermuda court generally cannot wind up overseas companies, except in limited statutory circumstances. In a multinational group, this means the court lacks jurisdiction to wind up companies domiciled outside Bermuda. However, liquidators appointed to wind up a Bermuda company may initiate ancillary insolvency proceedings in jurisdictions such as England or Hong Kong that allow such proceedings.
The Supreme Court of Bermuda has issued practice directions for cross-border insolvencies, modelled on guidelines from the Judicial Insolvency Network.
Looking ahead
Bermuda continues to prove itself as a reliable and stable destination for restructuring, maintaining a sophisticated and diligent approach to corporate structure and regulation. The jurisdiction offers flexible and innovative cross-border restructuring solutions for distressed multinational companies, while keeping creditor interests as a top priority. The Court has considered and determined an increasing number of petitions presented by regulators over the past two years, which further strengthens Bermuda’s reputation as a well-regulated financial hub.
In the Bermuda market so far in 2024, we have experienced increased debt restructuring activity, both in and out of court, reflecting creditors’ continuing belief that rescue procedures can preserve value and demonstrating creditors’ confidence in Bermuda as a restructuring destination.
Creditor forbearance does however, have its limits. There is a noticeable rise in formal enforcement and insolvency actions in Bermuda, with a number of cases arising as a result of prevailing economic conditions, including currency exposure, commodity volatility and sector specific deterioration, for example in the shipping, retail and real-estate sectors. Creditors recognise that financially distressed businesses often face multiple enforcement actions. This can lead to a perception of a ‘first-mover’ advantage, as the creditor initiating a petition may have more control over the timing and early stages of the insolvency process compared to other creditors.
As a result, we anticipate that Bermuda will continue to be an active and significant jurisdiction for rescue, restructuring, and insolvency proceedings. Considering Bermuda’s well-established position as an international financial centre and a preferred place of incorporation for multinational corporations, we anticipate that the trends we have identified will persist well into the foreseeable future.
For further information, please contact:
John Wasty, Partner, Appleby
jwasty@applebyglobal.com
Notes
[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 their appointment is confirmed by a majority vote at the first meeting of creditors and contributories – which usually takes place within three months of the making of the order. Once a liquidator’s appointment is confirmed, they are known as a permanent liquidator.
[7] It is not a requirement that the company be insolvent within the strict definitions set out in the Companies Act 1981. A lower level of financial distress will be sufficient.
[8] When a winding-up order is made, the liquidator appointed will be a ‘provisional liquidator’ until confirmed by the first meetings of creditors and contributories; however, in those circumstances, the company is in winding-up and is not in ‘provisional liquidation’ despite the, perhaps rather confusing, overlap in use of provisional liquidator as a title.
[9] 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.
[10] It is said to be unprecedented for a scheme of arrangement to be promoted by an insolvent company without a concurrent provisional liquidation (per Kawaley CJ at 25 of Re Up Energy [2016] BDA LR 94).
