What restructuring and rescue procedures are available in the jurisdiction, what are the entry requirements and how is a restructuring plan approved and implemented? Does management continue to operate the business and/or is the debtor subject to supervision? What roles do the court and other stakeholders play?
Restructuring & Insolvency
Spanish Insolvency Act provides for out-of courts and in-courts rescue finance procedures to solve insolvency problems.
The standard out-of courts procedure is implemented by a refinancing agreement reached with a certain majority of the finance creditors of the debtor. The refinancing agreements must fulfilled the requirements set forth in the Spanish Insolvency Act, to benefit from the irrevocability of the transactions and securities granted under such refinancing agreement, as those refinancing agreements are not subject to third parties claw-back action pursuant to article 71 of the Spanish Insolvency Act.
Pursuant to article 71.bis.1 of the Spanish Insolvency Act, the refinancing agreement must be signed by, at least, 60% of the total creditors of the debtor certified by the auditor and it must imply an additional financing and an amendment of the existing liabilities and extent their final maturity date, in accordance with a viability plan that reflects the continuity of the company in a short and medium term. All those documents shall be formalized in a public document before a Notary
According to article 71.bis.2 of the Spanish Insolvency Act, singular refinancing agreement with some of the creditors could benefit from avoiding claw-back risks if certain measures pro-debtor are included therein (a proportional increase of the assets against the liabilities, the short term assets are higher than the short term liabilities, the interest rate applicable could not increase over 1/3 additional to the previous interest rate, the assessment of the security could not be higher than 9/10 of the company liabilities). Singular refinancing agreement must be formalized in public documents also.
The restructuring agreements can be sanctioned by a judicial procedure (“homologación”) which provides additional protection to claw-back actions and extent the effects of the refinancing agreement to dissident finance creditors. To be beneficiary of the court sanctioned procedure, the refinancing agreement must be signed at least by the 51% of the finance creditors of the debtor, and additional majority are required in case of requests to extent the effects to dissident creditors (between 60% and 80% of the finance creditors of the debtor depending on the nature of the measures included in the refinancing agreement (capitalization of debts, write-offs and extensions on the maturity) and if the dissident finance creditors are deemed secured or unsecured).
The in-court rescue procedure are less likely as the Spanish Insolvency Act does not provide for certain tools requires to achieve such result. Thus, not provision of debt-in-possession financing is possible and liquidation rate is over 90% when a company is declared bankrupt in Spain. New money in an insolvency procedure will require the prior authorization of the insolvent administrator and even the judge if the new financing will imply granting of new security by the debtor.
In an out-of court restructuring procedure, the management continues with the normal administration of the company and no supervision is required. In an in-court restructuring procedure, the most likely scenario is that the management will keep the administration of the company but certain transactions must be approved by the insolvent administrator or the judge. Only if a certain negligence in the administrators’ behavior in the management of the company is proved and a third party is the one filing for insolvency, the managers could be replaced of its management faculties of the company.
Public creditors are not affected by the refinancing agreements, and labor credits has certain privileges and prior ranking in payments. Commercial creditors do not usually take part of the restructuring process. Thus, the financial creditor provides working capital financing to satisfy the key suppliers or providers of the debtor to continue with its activity during the restructuring process.
There are two types of restructuring procedures in Japan: civil rehabilitation proceedings (minji-saisei) and corporate reorganisation proceedings (kaisha-kosei).
a. Civil Rehabilitation Proceedings
The entry requirement for the civil rehabilitation proceedings is that (i) there is a risk that the debtor will not be able to pay its debts as they become due or that a debtor’s debts exceed its assets or (ii) the debtor is unable to pay its debts already due without causing significant hindrance to the continuation of its business.
In civil rehabilitation proceedings, the board of the debtor company remains in control and has the power to manage the company’s business. However, the court may require the debtor to obtain permission of the court in order to conduct certain types of activities, including (but not limited to): (i) disposing property, (ii) accepting the transfer of property, (iii) borrowing money, (iv) filing an action, (v) settling a dispute or entering into an arbitration agreement, and (vi) waiving a legal right. In practice, the court appoints a supervisor in most cases and grants him or her the authority to give such permission to the debtor on its behalf in respect of the debtor’s activities.
The debtor must propose and submit to the court a rehabilitation plan within the period specified by the court. A registered creditor also has the right to propose and submit a rehabilitation plan. The rehabilitation plan must be approved at a creditors meeting by a majority in number of creditors present and voting at the meeting and a majority by value of all creditors who hold voting rights. If approved, the court authorises the rehabilitation plan, which will bind the company and the creditors.
b. Corporate Reorganisation Proceedings
The entry requirement for corporate reorganisation proceedings is that (i) there is a risk that the debtor will not be able to pay its debts as they become due or that a debtor’s debts exceed its assets or (ii) the debtor is unable to pay its debts already due without causing significant hindrance to the continuation of its business.
In corporate reorganisation proceedings, a trustee must be appointed for the corporate debtor. The trustee has control and possession of the debtor’s business and its assets. The trustee is appointed by the court and is usually an attorney who has expertise in insolvency cases. However, a trustee can also be a business person who is deemed to be a fit person to operate the debtor’s business.
There have been an increasing number of cases in which the court appoints trustees from the current management. Such proceedings are called debtor in possession-type (‘DIP-type’) reorganisation proceedings, as opposed to traditional ‘administration-type’ proceedings. In those cases, the court usually also appoints a supervisor, who monitors management’s activities. Thus, the proceedings look similar to civil rehabilitation proceedings.
The trustee must propose and submit to the court a reorganisation plan within the period specified by the court. The debtor company, a registered creditor or a stockholder may also propose and submit a reorganisation plan. The reorganisation plan must be submitted to and approved at a stakeholders meeting. If approved, the court authorises the rehabilitation plan, which will bind the stakeholders. Different classes of stakeholders (e.g. unsecured creditors, secured creditors and shareholders) vote separately, and approval must be obtained from each class. The Corporate Reorganisation Act sets forth different thresholds for different classes (for example, for unsecured creditors the requisite majority is a majority by value).
Restructuring may be applied to individuals and businesses. In-court restructuring against a debtor may only commence if the debtor is insolvent and if the debtor or creditor requests that the insolvency court commence such proceedings.
It is a condition of in-court restructuring that the restructuring proposal includes a compulsory arrangement with the creditors and/or a transfer of the business.
In case of in-court restructuring the insolvency court will appoint a restructuring administrator (typically an attorney) and a restructuring accountant for the debtor.
The restructuring administrator presents the restructuring proposal to the creditors that vote on the approval of the restructuring proposal. If the restructuring proposal is not approved, insolvency proceedings will commence against the debtor. As a starting point the proposal will be approved if not more than 50% of the creditors present at the meeting disapprove of the proposal.
The management of the debtor continues as a starting point if the creditors or the insolvency court do not decide otherwise. The management must not make important decisions without the consent of the restructuring administrator.
The insolvency court is only a supreme authority and is not to approve transactions but only to ensure that the administration takes place in accordance with the Insolvency Act.
Restructurings and other informal work outs can be pursued in Australia provided adequate attention is paid to the prohibitions on insolvent trading under Australia’s stringent insolvent trading laws. One way to alleviate directors’ concerns about their insolvent trading obligations is for the company to enter into forbearance or standstill arrangements with its creditors pursuant to which creditors might agree not to enforce any rights that might otherwise arise during the restructuring or work out period. In doing so, the company will have an opportunity to restructure what might otherwise be current debt obligations.
Outside a fully consensual debt restructuring, there are two ways to effect a restructure of a company’s debts under Australian law:
- through a deed of company arrangement (DOCA); and
- through a scheme of arrangement.
A DOCA is a flexible restructuring tool in terms of outcomes that it can deliver. These include debt-for-equity swaps, a transfer of equity, moratorium of debt repayments, a reduction in outstanding debt and the forgiveness of all, or a portion of, outstanding debt. DOCAs also have the benefit of being fast and subject to low voting thresholds (50% in number and value).
A DOCA takes place in the context of a voluntary administration (i.e. a formal insolvency appointment). It is a creditor approved arrangement governing how a company’s affairs will be restructured. As a voluntary administrator is formally appointed, they take over the management and control of the company’s business and affairs for the term of the appointment. A DOCA is effectively a contract or compromise between the company and its creditors. Whilst it is a feature of voluntary administration, it should in fact be viewed as a distinct regime, where the rights and obligations of the creditors and the company differ to those under voluntary administration.
Once a company is in voluntary administration, a DOCA can be proposed by anyone with an interest in the company. Creditors are required to vote to resolve that the company should execute the DOCA. Once the terms of the DOCA are approved (by the relevant threshold majorities), the instrument must be executed within 15 business days of such a resolution. A DOCA can be varied by either a subsequent resolution of creditors or by the court.
A DOCA binds not only creditors (other than secured creditors) but also the company, directors and shareholders. Whilst binding on shareholders, it is recognised in scenarios where a shareholder has limited interest in the company under administration and is not entitled to vote in the DOCA in its capacity as shareholder. The statutory priority afforded to employees in a liquidation scenario must be the equivalent in a DOCA (unless the employees vote otherwise). In this way, employees are afforded a level of protection under a DOCA.
Upon the execution of the DOCA the voluntary administration ends. The outcome of the DOCA is generally dictated by the terms of the DOCA itself. Typically, however, once a DOCA has achieved its goal it will terminate. The recourse of the court is available to creditors to set aside the DOCA if it does not achieve its goal or is challenged by creditors on grounds that they are unfairly prejudiced in a relative sense.
Schemes of arrangement
A scheme of arrangement is a court approved process binding the creditors and/or members to some form of rearrangement or compromise of pre-existing rights and obligations. Schemes may involve the deleveraging of a business or the reduction of outstanding debt in exchange for the issuing of equity. There are two types of schemes of arrangement:
- a members’ scheme of arrangement (between the company and its members); and
- a creditors’ scheme of arrangement (between the company and its creditors).
Schemes of arrangement can be implemented without the commencement of a formal insolvency process. As such, the company and its directors can remain in control of the business during the proposal and approval phase (and, depending on the terms of the scheme, after its implementation).
The approval process is heavily regulated and involves a number of steps, including the preparation of explanatory statements and scheme booklets, notification to the corporate regulator, the Australian Securities & Investments Commission (ASIC), an application to court to convene scheme meetings, the holding of those meetings, court approval of the scheme and finally, the filing with ASIC of the court approved scheme. The timeline for scheme approval is typically between 3 months (but can often take between 4 to 6 months) from the commencement phase through to the final approval and implementation phase.
Schemes of arrangement must be approved by a majority of 50% in number and 75% in value of the voting class (of affected members and/or creditors) at the scheme meeting. Classes are determined by reference to commonality of legal rights and only those whose rights will be compromised or affected by the scheme need be included. Unlike a DOCA, a scheme can bind secured creditors who vote against it and release third party claims.
The key element to the success of a scheme of arrangement is the willingness of creditors (most commonly financial creditors, as opposed to trade and operational creditors) to work with the management of the distressed company as well as other stakeholders. The starting point for the negotiation will often involve an agreement or undertaking on a standstill or forbearance period, during which the company will look to refinance its current debt structure (often through the injection of new capital and/or equity).
There are two main statutory proceedings allowing for a rescue / restructuring of a company's operations and debts:
1. Scheme of Arrangement
A scheme will allow a debtor company to enter into an agreement with its shareholders / or creditors (or any class of them) pursuant to section 86 of the Companies Law for the purpose of either:
- Restructuring its affairs to allow the company to continue to trade and avoid a winding up; or
- Reaching a compromise or arrangement with creditors (or any class) following the commencement of liquidation proceedings.
- A scheme will be subject to the supervision of the Grand Court and can be implemented by the company, any creditor or shareholder or a provisional liquidator applying to the Court for an order convening a meeting of creditors, shareholders or any class of them as directed by the Court.
In order for a scheme to be implemented, a majority constituting at least 50% in number and 75% in value of the creditors, shareholders or each class of them present and voting at the meeting must agree to the compromise or arrangement. Subject to obtaining the requisite approvals, the party proposing the scheme must then apply to the Court for an order approving the scheme.
In the event that a scheme is proposed outside of liquidation, the directors will maintain control of the company's affairs. If the scheme is implemented in a provisional liquidation scenario, the provisional liquidator will control the company's affairs, subject to the supervision of the Grand Court.
2. Provisional Liquidation
The purpose of a provisional liquidation is usually to preserve and protect a company's assets pending the hearing of a winding-up petition in respect of the company.
However, the 'soft touch' provisional liquidation regime may be implemented by a company for the purpose of appointing court appointed provisional liquidators to protect itself from creditors and restructure its business whilst effecting a compromise or scheme of arrangement with a company's stakeholders. The use of this procedure is comparable to the UK administration procedure and the Chapter 11 process in the United States.
Any creditor, shareholder or the company itself can apply for the appointment of provisional liquidators in the period following the presentation of a winding up petition and prior to the hearing of the petition.
Upon appointment, the provisional liquidators will be subject to the court's supervision and may only carry out the functions set out in the order appointing them. In the event that a company restructuring is proposed, existing management may be permitted to retain control of the company subject to the supervision of the Court and the provisional liquidators.
The issue of whether a company's directors have the power to present a winding up petition the absence of a resolution of its shareholders has been the subject of judicial debate in the jurisdiction, with the recent decision of Justice Mangatal In Re China Shanshui Cement Group Limited (Grand Court, Mangatal J, 25 November 2015), laying down a restrictive interpretation of directors' powers to present a winding up petition in the name of the company without the approval of the company in general meeting or the power to present such a petition in the company's articles of association.
However, in a recent first instance decision In Re CHC Group Ltd (Grand Court, McMillan J, 17 January 2017), Justice McMillan held that in circumstances in which a creditor's petition has been presented against a company, its directors could seek the appointment of provisional liquidators, notwithstanding the absence of an express power in the company's articles of association or a resolution of the company's shareholders.
As discussed at section 19 below, it is anticipated that this area of the law will be subject to legislative reform in the near future, thereby bringing section 94 of the Companies Law in line with section 124 of the UK Insolvency Act, in addition to introducing a new statutory regime allowing a company to petition for the appointment of restructuring officers to obtain a stand-alone restructuring moratorium.
Composition proceedings may be used to restructure a creditor as follows:
- Composition proceedings may be used as a mere restructuring moratorium which can be terminated with the approval of the court once the debtor is financially recovered. There is no cram-down element to this procedure. An individual agreement must be reached with each single creditor who is expected to make a concession.
- Where a mere restructuring moratorium is not sufficient, a debtor may choose to offer a composition agreement to its creditors which may take the form of (i) a debt-rescheduling agreement where the debtor offers the creditors full discharge of claims according to a fixed time schedule or (ii) a dividend agreement where the debtor offers the creditors only a partial payment of their claims. A combination of both elements is possible. A composition agreement must be approved by the creditors which requires the affirmative vote by a quorum of either a majority of creditors representing two-thirds of the total debt, or one-fourth of the creditors representing three-fourths of the total debt. Creditors with privileged claims and secured creditors will not be entitled to vote on the composition agreement (and will not be subject to its terms). After approval by the creditors, the composition agreement requires confirmation by the composition court and, with such approval, becomes valid and enforceable on all (approving, rejecting and non-participating) creditors.
The competent court initiates composition proceedings based on a request typically brought forward by the debtor. First, a provisional moratorium of up to four months will be granted. In this context, the court can also appoint a provisional administrator. If the court finds that there are reasonable prospects for a successful reorganisation or that a composition agreement is likely to be concluded, it must thereafter grant the definitive moratorium for a period of four to six months (which can be extended to a maximum of 24 months) and appoint an administrator. See section 4 above for the continuing management of the debtor by existing management and the restructuring by means of a corporate moratorium or postponement of bankruptcy.
German insolvency law knows only a single, uniform procedure (Einheitsverfahren), of which the below procedures are only variations designed to facilitate restructurings (see question 4).
If certain conditions are met, the insolvency court may allow the debtor's management to run the business. The management is supervised by a trustee (Sachwalter) charged with protecting the creditors’ interests. If the creditors’ interests are negatively affected by management’s actions, the insolvency court may rescind the self-administration order and appoint an insolvency administrator.
The opening of insolvency proceedings will nearly always be preceded by preliminary proceedings (see question 4), which may be conducted as preliminary self-administration proceedings (vorläufige Eigenverwaltung) with a preliminary trustee (vorläufiger Sachwalter) being appointed instead of a preliminary insolvency administrator.
Protective Shield Proceedings (Schutzschirmverfahren)
Introduced in 2012 to encourage a rescue culture, they constitute a variation on preliminary insolvency proceedings, combining preliminary self-administration and a stay on execution by creditors. They are designed to permit the debtor to draft an insolvency plan and find their conclusion in opened insolvency proceedings (see question 4), normally as self-administration proceedings, which are necessary to adopt and implement an insolvency plan.
Both the debtor’s management and the insolvency administrator, if standard insolvency proceedings (see question 4) have been opened and an insolvency administrator has been appointed, may initiate an insolvency plan. In such a plan the distribution of the insolvency estate as well as the liability of the debtor may be treated differently than laid out in the Insolvency Code. Submission and implementation of an insolvency plan requires that insolvency proceedings have been commenced, but pre-packaged plans can be submitted with the insolvency filing.
The plan must be approved by the different creditor groups with majority consent being required in each group. The composition of these groups is defined by the plan, but the court may reject the draft plan if the creditors have not been divided into reasonable groups.
At least secured creditors, unsecured creditors and subordinated creditors, if their claims are not waived, and the shareholders must form separate groups to the extent that their rights are infringed upon by the stipulations in the insolvency plan. In practice, separate groups are often contemplated for employees, the pension insurance association and/or the tax authorities; creditors with different levels of seniority may be placed in different groups (Sec. 222 Insolvency Code).
The vote of a dissenting group may be crammed down and the plan deemed to be accepted, if such group
- does not receive less than it would in straight liquidation;
- receives appropriate benefit from the plan; and
the majority of the groups has accepted the plan (Sec. 245 Insolvency Code).
After the plan has been accepted and if all procedural requirements are met, the court has to issue its final approval.
The Concurso Mercantil is considered a restructuring proceeding as the Mediation Stage is designed to restructure the debts of an insolvent entity. In order for a Reorganization Agreement to become effective, it is required to be entered into by the insolvent entity and those Recognized Creditors that represent more than 50% of the sum of (a) the amount of all Recognized Claims of all unsecured Recognized Creditors and Subordinated Creditors of the insolvent entity, plus (b) the amount of all Recognized Claims of those secured Recognized Creditors that enter into the Reorganization Agreement.
However, if the Recognized Claims of Subordinated Creditors of the insolvent entity (including certain unsecured related party claims) represent 25% or more of total amount of all Recognized Claims, then such subordinated claims will not be taken into account for the voting requirements described above.
With respect to the management, supervision and the role of the court during the Mediation Stage, please refer to our answer to Question 4 above.
British Virgin Islands
For companies seeking to reorganise a company’s capital or debts there are three main routes available:
- Plans of arrangement;
- Schemes of arrangement; and
- Creditors’ arrangements.
Plans and schemes of arrangement are governed by the BCA and creditors’ arrangements are governed by the IA.
None of these routes is directly analogous either to the English regime relating to company voluntary arrangements under Part 1 of the Insolvency Act 1986 or to that concerning company reorganisation under Chapter 11 of the United States Bankruptcy Code.
Unlike other offshore jurisdictions, such as the Cayman Islands and Bermuda, the BVI does not use provisional liquidators for restructuring; rather, provisional liquidators tend to be appointed simply to preserve assets until the application for the appointment of a full liquidator can be heard.
Plans of arrangement were first introduced into the BVI by the International Business Companies Act 1984. Section 177 of the BCA defines the term “arrangement” as including—
- an amendment to the memorandum or articles;
- a reorganisation or reconstruction of a company;
- a merger or consolidation of one or more companies that are companies registered under the BCA with one or more other companies, but only if the surviving or consolidated company is incorporated under the BCA;
- a separation of two or more businesses carried on by a company;
- any sale, transfer, exchange or other disposition of any part of the assets or business of a company to any person in exchange for shares, debt obligations or other securities of that other person, or money or other assets, or a combination thereof;
- any sale, transfer, exchange or other disposition of shares, debt obligations or other securities in a company held by the holders thereof for shares, debt obligations or other securities in the company or money or other property, or a combination thereof;
- a dissolution of a company; and
- any combination of any of the things specified in paragraphs (a) to (g).
This definition is clearly very broad. If a company’s directors determine that it is in the best interests of the company, or the creditors or members of the company, they may approve a plan of arrangement. The plan must contain details of the proposed arrangement, and once the directors have approved the plan, the company must apply to the court for approval.
If the company is in voluntary liquidation, the voluntary liquidator may approve a plan of arrangement and apply to the court for approval; if, however, the company is in insolvent liquidation, the liquidator must authorise the directors to approve the plan and take the other steps set out in the BCA.
On hearing an application for approval, the court may make a variety of directions as to how the plan is to proceed, including requiring the company to give notice of the plan to specified persons or classes of persons, determining whether or not the approval of another person or class of person must be obtained, determining whether or not any shareholder or creditor of the company is entitled to dissent from the plan, conducting a hearing in relation to the adoption of the plan, and deciding whether to approve or reject the plan. If the court determines that a shareholder is entitled to dissent from the plan, that shareholder is permitted to demand payment of the fair value of his shares. If the fair value of shares cannot be agreed between the shareholder and the company, there is a statutory framework for referral of the question to a panel of appraisers, whose decision is binding.
Once the plan has been approved by the court, the directors (or voluntary liquidator) must then confirm the plan and comply with the court’s directions relating to notice and obtaining the approval of specified parties. Once this has been done and the necessary approvals have been obtained, the company must execute articles of arrangement, which must contain the plan, the court’s order, and details of the manner of approval. These articles must then be filed with the Registrar of Corporate Affairs, who will issue a certificate. The arrangement comes into effect when it is registered and its implementation is overseen by the company’s directors.
There is no statutory moratorium available in relation to plans of arrangement; therefore, throughout the devising, proposing, and approval phases of a plan of arrangement, the company remains vulnerable to creditors’ claims.
The second type of restructuring procedure is referred to as the scheme of arrangement, though this term is not referred to in the statute: section 179A of the BCA refers to ‘compromise or arrangement’ and further provides that ‘arrangement’ includes a reorganisation of the company’s share capital by the consolidation of shares of different classes or by the division of shares into shares of different classes or by both of them.
The section does not contain a great deal of detail with regard to the procedure for obtaining the court’s sanction of a scheme of arrangement; consequently, the BVI court has based its approach on the practice followed by the English courts and, in particular, in the Chancery Division’s Practice Statement (Companies: Schemes of Arrangement)  1 WLR 1345, hence the adoption of the English terminology.
Whereas plans of arrangement may be very broad, schemes of arrangement specifically relate to the company’s relations with its shareholders and/or creditors. Schemes are aimed at facilitating an agreement that can enable the company to continue as a going concern and avoid formal insolvency proceedings. They are only available in relation to companies that have been formed under the BCA or companies incorporated under earlier BVI legislation or incorporated in another jurisdiction but continued under the BVI legislation, including companies in solvent or insolvent liquidation.
If the company proposes to enter into an arrangement with its creditors or members (or a class of either of those groups), the company will apply to court for an order that it should convene a meeting of creditors or members, as the case may be, to vote on whether or not to approve the scheme (the Convening Hearing). An application for such an order may be made by the company, a creditor, a member, or, if the company is in liquidation (whether solvent or insolvent), the liquidator.
At the Convening Hearing the court will consider issues concerning class composition and jurisdiction. As with an English scheme of arrangement, members and creditors are divided into classes depending on the respective rights that exist between them and the company, and the extent to which those rights stand to be varied by the scheme. The result is that often different classes of creditors and members are treated differently and a separate scheme meeting will be required for each different class.
If, at the meeting(s), a majority in number representing 75 per cent in value of the company’s creditors or shareholders (or class thereof) present or by proxy vote to approve the scheme, the scheme will bind—
1 all creditors or shareholders (as the case may be),
2 the company,
3 any liquidator that has been appointed, and
4 any contributory,
subject only to the court’s approval. If the majority rejects the scheme, it will not be approved.
If the creditors and/or shareholders vote to approve the scheme, then an application must be made for the court’s approval. The court will not rubber-stamp the scheme simply because it has been approved at the scheme meetings: it will have to be sure that the scheme is fair and reasonable, and that it will be efficacious.
Once a scheme has been sanctioned it must be filed with the Registrar of Corporate Affairs. The scheme takes effect from the moment of filing, and from that date onwards every copy of the company’s memorandum issued after that date must have a copy of the order annexed to it.
As with plans of arrangement, there is no moratorium available in the context of schemes of arrangement, so they remain liable to upset by creditors’ claims until sanctioned by the court.
If an order is made approving a scheme of arrangement, the provisions of the BCA relating to mergers and consolidations of companies, plans of arrangement, disposition of large assets, redemption of minority shareholdings, and the rights of dissenters cease to apply.
The third restructuring procedure referred to is the creditors’ arrangement, which is governed by Part II of the IA. The aim of a creditors’ arrangement is to facilitate arrangements between a financially distressed company and its unsecured creditors in order to stave off or mitigate the risk of insolvency. This is designed to be a simple process without any court involvement. A company may enter into a creditors’ arrangement even where it is in liquidation.
A creditors’ arrangement may affect all or part of the company’s debts and liabilities and may affect the rights of creditors to receive all or only part of the debts they are owed with the exception that the rights of secured creditors cannot be compromised without their written consent. Also, a creditors’ arrangement cannot result in a preferential creditor receiving less than he would in liquidation without their written consent.
The arrangement may be proposed by any person, but a majority of 75 per cent of the company’s unsecured creditors by value must vote in favour of the arrangement in order to approve it and bind dissenters. A licensed insolvency practitioner must be appointed as supervisor of the arrangement to oversee its implementation. A disgruntled creditor or member may apply to the court for relief on the basis that their interests have been unfairly prejudiced.
By contrast with plans and schemes of arrangement under the BCA, a creditors’ arrangement does not require the court’s approval or registration with the Registrar of Corporate Affairs. This appears to be in order to make it a quicker and simpler procedure to invoke; however, there have been relatively few creditors’ arrangements in the BVI since the provisions were enacted.
Again, there is no moratorium; however, as stated above, the effect of the decision by the majority of the company’s unsecured creditors to adopt a plan is to cram down any creditors who may have dissented, even where they did not receive notice of the meeting at which the arrangement was considered (although in such a case they may be able to bring a claim for unfair prejudice).
There are two key restructuring procedures available in Bermuda: schemes of arrangement and the appointment of restructuring provisional liquidations to “hold the ring” while a scheme is being promoted.
Schemes of Arrangement
A scheme of arrangement, once sanctioned by the Court, creates a binding compromise between a company and its creditors and/or shareholders (section 99 Companies Act 1981). Schemes of arrangement are available to both solvent and insolvent Bermuda companies.
The company itself or any member or creditor can initiate a scheme. Where a permanent liquidator has been appointed, the liquidator will propose the scheme rather than the company and may act in conjunction with the company’s directors.
Proceedings are started by applying to the Supreme Court for directions as to the classes of creditors and/or shareholders proposed to be compromised by the scheme, and to convene meetings, on notice, of the various classes.
Once approved by each class of creditors and/or shareholders, the court will exercise its discretion to sanction the scheme if satisfied that:
- The requisite statutory requirements have been met and the directions made at the convening hearing have been complied with;
- Each class of creditors or shareholders has been fairly represented;
- The arrangement is fair to creditors and/or shareholders generally; and
- There is otherwise no blot on the scheme.
The scheme must be approved by the various classes of creditors and/or shareholders affected by the scheme's proposals. A majority in number representing 75% in value of those present (either in person or by proxy) and voting at each class meeting must vote in favour of the scheme in order for the scheme to proceed to the sanction stage.
There is no automatic stay preventing actions against the company during the period when the scheme is being proposed and implemented. However, it is possible to place a company into provisional liquidation, as elaborated below, to take advantage of the automatic stay whilst attempting to conclude a scheme.
Once the court has sanctioned the scheme and a copy of the sanction order is lodged with the Registrar of Companies, it is binding on the company and all affected creditors and shareholders, regardless of whether they voted.
Restructuring provisional liquidation
The Supreme Court has the power under sections 164(1) and 170 of the Companies Act 1981, when read together, to appoint provisional liquidators to aid in the restructuring of an insolvent company (Re Titan Petrochemicals Limited  Bda LR 76]. The primary purpose for appointing restructuring provisional liquidators is to trigger the statutory stay on proceedings being commenced or continued against the company (section 167(4) of the Companies Law 1981) thereby giving the company breathing space to attempt a restructuring without fear of winding up proceedings being brought against it by a disgruntled creditor.
In order to appoint restructuring provisional liquidators, it is first necessary for a winding up petition to be presented so as to found the jurisdiction of the Court. Typically, the petition will be presented by the company although where a creditor’s petition has already been presented, the company may apply for the appointment of restructuring provisional liquidation in the course of the creditor’s proceeding. In the case of a company’s petition, the application will typically be made ex parte. Upon the appointment being made, the hearing of the winding-up petition will be adjourned.
The view of the Supreme Court is that provisional liquidators play a central role in insolvent restructurings, a role which pivotally shapes the character of the related court proceedings and the role played by the Court. As such, there is a strong starting assumption in favour of the appointment of restructuring provisional liquidators (In re Energy XXI Ltd  SC (Bda) 79 Com (18 August 2016); In re Up Energy Developments Group Limited  SC (Bda) 83 Com (20 September 2016)). As elaborated below, the same principle applies where the restructuring is to take place in a foreign jurisdiction.
The Court has a broad discretion as to the scope of the powers it grants to restructuring provisional liquidators and which powers will remain with the company’s directors. Often times, the provisional liquidators will be given ‘light touch’ powers where they simply act in aid of a restructuring being otherwise proposed by the company – effectively playing a monitoring and reporting role. However, that will not always be the case especially where it may be inappropriate for the company’s directors to promote the restructuring or if the directors consider it to be more prudent or practical for the promotion to be done by provisional liquidators (as was the case in In re Z-Obee Holdings Limited  SC (Bda) 16 com (17 February 2017)). Ordinarily, the separation of powers between the provisional liquidators and the directors will be agreed prior to the making of the application and presented to the Court on a consensual basis.
If a compromise is reached and a scheme is sanctioned by the Court, the provisional liquidation will be terminated and the company will continue as a going concern. If not, then the company will be wound up.