In 2006, the former Chief Justice of Bermuda, Kawaley J (as he then was) described the practice of provisional liquidation in Discover Reinsurance Company v PEG Reinsurance Company Ltd [2006] BDA LR 88. Kawaley J noted that companies were routinely put into provisional liquidation to support parallel Chapter 11 Proceedings and that these were invariably commenced by the company themselves. The appointment of provisional liquidators triggered the automatic stay therefore ensuring that the Company cannot be sued in Bermuda while equivalent protection is in place in the US. Kawaley J recognised that the Court, “clearly possesses the jurisdiction to appoint provisional liquidators over companies which are not inevitably liable to be wound-up, and in circumstances where there is no need to displace the existing management altogether.”
This ‘soft-touch’ provisional liquidation operates in a similar manner to chapter 11 in the US or administration in the UK but with even greater flexibility. There are no formal statutory requirements to be satisfied before a provisional liquidator is appointed. The function and roles of a provisional liquidator are set out in the order appointing the provisional liquidators, which can be tailored to suit the particular situation without statutory constraints. The appointment can have cross-border effect, even in jurisdictions without ‘light-touch’ insolvency procedures. As a ‘debtor in possession’ procedure, companies can maintain operations during provisional liquidation and enjoy the benefit of the stay against proceedings. Creditors can have confidence that the activities of a company in provisional liquidation will be supervised by the provisional liquidator, acting as an officer of the court.
Provisional liquidation is often seen as a preliminary step to achieving a restructuring by way of a scheme of arrangement. The provisional liquidators draw on their expertise to work with the company to develop restructuring proposals. Crucially, a provisional liquidator can liaise with and advise the creditors of the company candidly on the merits and viability of restructuring proposals. Creditors can rely on the advice of provisional liquidators in the knowledge that they have a duty to advance the creditors’ interests above all else as independent officers of the Court.
All of these features have unsurprisingly led to the widespread adoption of provisional liquidation in Bermuda. In 2016, Kawaley CJ suggested to an advocate in re Up Energy Development Group Limited [2016] Bda LR 94 that he, ‘could not remember a single insolvent scheme of arrangement approved by [the] Court which had not been promoted, in part at least, by provisional liquidators.’ The advocate in question was unable to contradict the assertion that a single insolvent scheme of arrangement promoted without provisional liquidators would be unprecedented.
Kawaley CJ went on to say that provisional liquidators play a central role in insolvent restructurings that, ‘pivotally shapes the character of the related court proceedings and the role played by this court’ concluding that ‘all stakeholders have a legitimate expectation that JPLs will be appointed to monitor an insolvent restructuring.’
The views of those stakeholders, and in particular the creditors, plays a critical role in the progress of a provisional liquidation. If a provisional liquidation fails, it will usually be in favour of an insolvent liquidation of the Company in question. Often an order appointing provisional liquidators is coupled with an order adjourning a full winding-up petition. It therefore follows that if the creditors become dissatisfied with the progress of the provisional liquidation, the company is at risk of being wound up.
In Up Energy for instance, the petitioning creditor pursued its petition after the appointment of provisional liquidators and continued to seek a winding-up order as it was pessimistic about the prospects of successfully restructuring the Company’s debt. The Court considered the petition again in a 2018 judgment ([2018] Bda LR 100) and was invited by the petitioning creditors to make unless orders that would wind up the Company unless sufficient progress was made in the restructuring.
The Court accepted that it had a wide discretion to adjourn the petition, ‘for a good reason’ following Re Z-OBEE Holdings Limited [2017] Bda LR 19. Subair-Williams J went on to find that, ‘The Courts have long recognized the powerful force of an objection from the majority of unsecured creditors against a winding-up order.’ The petitioner’s application was refused as a majority of unsecured creditors were still in favour of pursuing a restructuring but Subair-Williams J noted that, ‘any absence of real progress from the JPLs in the coming weeks or months will likely result in a diminishment of creditor support for further adjournments of the petition.’
In Up Energy, that diminishment of creditor support occurred after the JPLs found themselves ultimately unable to advance a scheme of arrangement capable of implementation. Up Energy was wound up in 2022 as there was no longer sufficient creditor support to obtain any further adjournment.
In another decision, re North Mining Shares Company Limited [2020] SC Bda 7 Com, Subair-Williams J reflected on her decision in Up Energy saying:
“In exercise of my judicial discretion, I gave due regard to the wishes of the majority of the unsecured creditors. In Re Up Energy Development Group Ltd [2018] Bda LR 100 per Subair Williams J, I considered numerous previous decisions of this Court and the English High Court which were supportive of the considerable weight to be given to the desire of the majority of creditors. In that ruling, there was an application to adjourn a petition which was aimed to enable an eventual scheme of arrangement. This was supported by a non-statutory majority of unsecured creditors. In this case, the expressed preference of the majority creditors in value should be treated with similar importance and priority since they are, of course, always the real stakeholders.”
It is therefore essential in any Bermudian provisional liquidation for office-holders, the Company and any Petitioning Creditor to carefully consider the views of the creditors. Thought should be given to the nature of updates or reports to the creditors during the course of a provisional liquidation. Creditors meetings are not mandatory in a provisional liquidation but may prove a useful tool in the right case to update creditors and share views with them.
At an adjourned hearing of the petition, it is likely that the creditors’ views will play a major part. A company wishing to adjourn a petition may reach out to its creditors seeking their support. A petitioning creditor may also reach out to other creditors to seek their views. It is not uncommon to see these views summarised in an affidavit or for correspondence with creditors to be exhibited in full.
Creditor support is so central that, in Up Energy a company within the same group as the company in provisional liquidation explored surrendering its security over loans so that it could be counted amongst the unsecured creditors. Kawaley CJ’s initial response was that this ought to be possible.
The views of the creditors in a Bermudian provisional liquidation are therefore central to decisions that are likely to be facing the Court in a provisional liquidation, particularly so if there is any contentious element.
For further information, please contact:
John Wasty, Partner, Appleby
jwasty@applebyglobal.com
