This country-specific Q&A provides an overview of the legal framework and key issues surrounding restructuring and insolvency in Bermuda.
This Q&A is part of the global guide to Restructuring & Insolvency.
For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/restructuring-insolvency/
What forms of security can be granted over immovable and movable property? What formalities are required and what is the impact if such formalities are not complied with?
Mortgages and fixed charges are the most common form of security taken over immovable property. There are two forms of mortgage:
- Legal mortgage: the mortgagor conveys legal title to the mortgagee as security for a debt and recovers legal title once the debt is repaid (Santley v Wilde  2 Ch 474).
- Equitable mortgage: the mortgagor transfers the beneficial interest in its property to the mortgagee as security for the debt. The mortgagor retains legal title. An equitable mortgage will not take priority over a bona fide purchaser for value who acquires legal title without notice of the equitable mortgage.
The most common forms of security taken over movable property are:
- Mortgages, both legal and equitable: Legal mortgages are mostly used in relation to real property and chattels such as ships and aircraft.
- Fixed charges: A charge over a specific moveable or immoveable asset.
- Floating charges: A floating charge can be taken over a class of assets that change from day to day. The instrument creating a floating charge can provide that it crystallises, either on notice or upon some specified event (In re Brightlife  1 Ch 200), and converts into a fixed charge that attaches to the debtor's specific assets at that time.
- Pledges: A right to take physical possession of the pledged asset and to sell it in the event of the debtor's default.
- Liens: The right, pursuant to contract or statute, to retain possession of an asset until the debt is satisfied. The creditor is not automatically entitled to sell the asset if the debtor defaults.
- Charge backs: A bank may take security over its client’s credit balances (section 2 Charge and Security (Special Provisions) Act 1990).
What practical issues do secured creditors face in enforcing their security (e.g. timing issues, requirement for court involvement)?
There are three methods by which a secured creditor may enforce its security:
- A sale of the secured property through appointment of a receiver out of court pursuant to the terms of the security documents.
- A sale of the secured property pursuant to statutory provisions, where available, governing a sale (for example, a statutory sale of mortgaged real property under the Conveyancing Act 1983).
- Commencing debt recovery proceedings against the creditor, and on procuring a judgment, obtaining an order for the sale of the secured property. Such a process is only relevant where the security documents for the debt do not allow for a sale of the secured property or where the security is faulty.
The effect of registration of security interests on priorities is an important practical issue. The date of registration of the security governs the order of priority for security interests capable of registration. Mortgages and charges over immovable property in Bermuda must be registered with the Registrar General. Fixed charges and floating charges over moveable property can be registered with the Registrar of Companies, as can a charge on assets outside of Bermuda. Specific statutory registration rules apply to mortgages over certain other moveable assets such as ships and aircraft.
What is the test for insolvency? Is there any obligation on directors or officers of the debtor to open insolvency procedures upon the debtor becoming distressed or insolvent? Are there any consequences for failure to do so?
A company will be insolvent if it is “unable to pay its debts” (section 161(e) Companies Act 1981). There are two tests for insolvency: the cash flow test and the balance sheet test (section 162(c) Companies Act 1981; In the matter of LAEP Investment Ltd  Bda LR 35). In making a determination of insolvency, the concept of liabilities is extended and will include contingent liabilities.
In the event that there may be some doubt as to whether or not a company is insolvent, or if proving insolvency may be difficult or costly, a creditor may issue a statutory demand for payment. If the demand has not been satisfied or set aside within 21 days, the company will be deemed to be insolvent.
Directors are not required to file liquidation proceedings where a company becomes insolvent. However, if they do not, they risk personal liability for breach of fiduciary duties, fraudulent trading and/or misfeasance.
What insolvency procedures are available in the jurisdiction? Does management continue to operate the business and/or is the debtor subject to supervision? What roles do the court and other stakeholders play? How long does the process usually take to complete?
Liquidation procedures can be divided into compulsory and voluntary liquidations. The purpose of both is to realise assets, pay off creditors, and distribute any remaining assets to the shareholders. The company can then be dissolved and will cease to exist.
Where a company is insolvent, there are two forms of liquidation that will be relevant: compulsory liquidation and creditors’ voluntary liquidation. Both are creditor driven processes whereby the liquidator takes over the company’s management.
The permanent liquidator is typically a chartered accountant in a local firm of accountants. When the company has assets and creditors in foreign jurisdictions, it is usual for the local accountant to be appointed jointly with a chartered accountant from an affiliated firm in the foreign jurisdiction. A liquidator does not need to be a licensed insolvency practitioner nor resident in Bermuda.
Compulsory liquidation is conducted under the supervision of the Court.
It is initiated by a petition presented to the Court by one of:
- a creditor, including contingent or prospective creditors;
- a contributory (that is, any person liable to contribute to the assets of the company if it is liquidated including fully paid shareholders);
- the company itself (by a directors' resolution);
- the power of the directors themselves to petition for the compulsory winding up of an insolvent company in certain circumstances has been recognised by the Court (In re First Virginia Reinsurance Ltd.  Bda LR 47).
- in certain circumstances, the Registrar of Companies (section 163 Companies Act 1981) the Supervisor of Insurance (section 35 Insurance Act 1978) or the Bermuda Monetary Authority (under, e.g., section 36(1)(b) of the Investment Funds Act 2006).
The liquidator of a company in Bermuda is described as a permanent liquidator (in contrast to a provisional liquidator). On appointment, an automatic stay comes into effect staying creditor actions, though secured creditors remain entitled to enforce their security (section 167(4) Companies Act 1981).
Once the liquidator has realised all the company's assets and made distributions to creditors and shareholders, the liquidator must apply for a release from the Court and the company will be dissolved.
Creditor’s voluntary liquidation
There are two types of voluntary liquidation:
- members’ voluntary liquidation (MVL) under which a solvent company is wound up under the control of shareholders;
- creditors’ voluntary liquidation (CVL), which applies to an insolvent company and is controlled by creditors of a company.
Whilst a creditors’ voluntary liquidation is controlled by creditors, somewhat incongruously, it must be initiated by the company's shareholders through a resolution, usually based on the recommendation of the board of directors (section 216 Companies Act 1981). Shareholders of the company approve the liquidation by a simple majority vote (unless the company's bye-laws specifically provide otherwise), after which a creditors' meeting must be held within 24 hours. At that meeting, a majority by value of the creditors present and voting appoint the liquidator and may also appoint a committee of inspection and fix the liquidator's remuneration.
The automatic stay on proceedings being commenced or continued against the company does not apply in a voluntary liquidation. However, the Court can consider a liquidator's application to grant such a stay of creditor action.
At the conclusion of the voluntary liquidation, the liquidator must convene final creditors' and shareholders' meetings.
- CVL: The liquidator must convene final creditors’ and shareholders’ meetings. Within seven days of the meetings, the liquidator must notify the Registrar of Companies of the meetings and provide an account of the liquidation.
- MVL: the company is deemed to be dissolved following the final general meeting of the shareholders. The liquidator must notify the Registrar of Companies within seven days of the meeting.
Role of stakeholders
Those with an economic interest in the company will have influence during the process. In an insolvent liquidation (whether compulsory or voluntary) the unsecured creditors play a significant role. In a CVL, secured creditors can determine the course of the liquidation through their representatives on the committee of inspection.
In a compulsory liquidation, the liquidator may carry on the business of the company so far as is necessary for its beneficial winding-up and during such period, the liquidator will have the power and authority to supervise those overseeing the conduct of the business on a day-to-day basis. In the case of a voluntary winding up however, the company shall, from the commencement of the winding up, cease to carry on its business, except so far as may be required for the benefit of the liquidation.
Length of process
The length of time the process takes varies greatly depending on matters such as the size and complexity of the company and its debts.
How do creditors and other stakeholders rank on an insolvency of a debtor? Do any stakeholders enjoy particular priority (e.g. employees, pension liabilities)? Could the claims of any class of creditor be subordinated (e.g. equitable subordination)?
Debts which are secured by a mortgage or fixed charge will be satisfied from the proceeds of sale of the property secured (rule 73 Companies (Winding-Up) Rules 1982). The liquidator, however, will review the security and monitor the sale process since any excess amount a secured creditor recovers will be payable to the liquidation estate for distribution to stakeholders. If the proceeds from the sale of the property do not fully satisfy the debt secured, the creditor will be an unsecured creditor for the remainder of the debt.
Creditors and shareholders are paid in the following priority:
- Costs of insolvency proceedings: costs and expenses incurred in the company's winding-up, including the liquidator's remuneration.
- Sums due to employees under their employment contracts.
- Preferred payments, including:
a. unpaid taxes;
b. contributions to occupational pension schemes; and
c. liability for worker’s compensation.
- Debts secured by a floating charge.
- Unsecured debts.
- Debts due to shareholders in their capacity as shareholders.
- Any residual value or equity after all valid creditor claims have been satisfied in full will be returned to shareholders pari passu according to their shareholdings.
Each category must be paid in full before payment of creditors in the subsequent category. Creditors in the same category rank equally among themselves but a company can enter into an agreement with its creditors, prior to the commencement of a liquidation, under which certain debts are contractually subordinated to other debts.
Can a debtor’s pre-insolvency transactions be challenged? If so, by whom, when and on what grounds? What is the effect of a successful challenge and how are the rights of third parties impacted?
The following transactions entered into by a company that subsequently becomes insolvent can be set aside, with the aim of clawing back the proceeds to restore the company to the position that it was in before the transaction:
- Fraudulent preferences (section 237, CA). Any conveyance or other disposition of property (including any inter-group disposition) made within six months before the commencement of its winding-up is void if it was made:
- with the intention to fraudulently prefer one or more of the company’s creditors;
- at the time that the company was unable to pay its debts as they became due.
In addition, a conveyance or assignment by a company of all its property to trustees for the benefit of its creditors is effectively void. Applications concerning fraudulent preferences are most likely to be brought by the liquidator.
- Invalid floating charges (section 239, CA). A floating charge is considered invalid in a liquidation where it can be shown that it was created:
- within 12 months of the commencement of insolvency proceedings; and
- immediately following the creation of the charge, the company was insolvent,
except to the amount of cash paid to the company at the time or subsequently, in consideration of the charge, plus statutory interest.
- Fraudulent conveyances (sections 36A to 36G Bermuda Conveyancing Act 1983). An eligible creditor can set aside a transaction or disposition of property at an undervalue where it can be shown that the transferor’s dominant purpose was to put the property beyond the creditors’ reach. An eligible creditor is a person who:
- is owed a debt by the transferor on, or within two years after, the transfer;
- on the date of the transfer is owed a contingent liability by the transferor, where the contingency giving rise to the obligation has occurred; or
- on the date of the action to set aside the transfer is owed an obligation arising from a cause of action that occurred before, or up to two years after, the date of the transfer.
- Disclaimer of onerous/unprofitable contracts (section 240 Companies Act 1981). The liquidator of a company can, with the court’s permission, disclaim any property or contracts that it considers to be onerous, unprofitable or unsaleable.
In addition, any disposition of the property of the company, including things in action, and any transfer of shares, or alteration in the status of the members of the company, made after the commencement of the winding-up, shall, unless the Court otherwise orders, be void (section 166 Companies Act 1981). In a voluntary liquidation any transfer of shares or alteration in the status of the members made after the commencement of the winding up will be void unless sanctioned by the liquidator.
The “commencement of the winding up” is the date of the resolution in the case of a voluntary liquidation and the presentation of the petition in a compulsory liquidation.
- Fraudulent preferences (section 237, CA). Any conveyance or other disposition of property (including any inter-group disposition) made within six months before the commencement of its winding-up is void if it was made:
What form of stay or moratorium applies in insolvency proceedings against the continuation of legal proceedings or the enforcement of creditors’ claims? Does that stay or moratorium have extraterritorial effect? In what circumstances may creditors benefit from any exceptions to such stay or moratorium?
In a compulsory liquidation, once a winding-up order is made or a provisional liquidator appointed, an automatic stay prohibits creditor action (but without extraterritorial effect).
Secured creditors remain entitled to enforce their security.
The automatic stay does not apply in a voluntary liquidation. However, the court can consider a liquidator’s application to grant a stay of creditor action from the date of the shareholders’ resolution, which is when the MVL or CVL is deemed to commence.
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?
Although the Companies Act 1981 makes provision for restructuring through merger or consolidation, the most often used restructuring tool is a scheme of arrangement either with or without the appointment of restructuring provisional liquidators to “hold the ring” while a scheme is being promoted.
Schemes of Arrangement
Under a scheme of arrangement, a company can restructure its debt and/or equity by entering into a binding compromise or arrangement which, if approved by the prescribed statutory majorities, will be crammed down on dissenting creditors and/or shareholders. Although not strictly an insolvency procedure, schemes of arrangement are frequently used in this context. A scheme is available to both solvent and insolvent Bermuda companies.
The company itself or any member or creditor can initiate a scheme. Where a provisional liquidator has been appointed, he/she will usually propose the scheme rather than the management of the company. Proceedings are started by applying to the Supreme Court for directions to convene meetings, on notice, with the various classes of creditors and/or shareholders who will be affected by the proposed scheme.
Once approved by each class of creditors and/or shareholders, an application is made to request the Supreme Court’s sanction of the scheme.
The court must be satisfied that the:
- Applicable statutory requirements have been met.
- Each class of creditors or members has been fairly represented.
- The arrangement is such as a reasonable man of business would approve.
If there are no objections to the scheme, the court will generally accept that it is fair on the basis that it has been approved by a requisite majority. To be effective, a copy of the sanction order must be delivered to the Registrar of Companies, following which it must be annexed to any copies of the company’s memorandum of association issued subsequent to the order.
The scheme must be approved by the various classes of creditors and/or shareholders affected by the scheme’s proposals. A majority in number and 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.
Supervision and control. This depends on the company’s solvency:
- Insolvent: a winding-up petition is typically presented to the court in advance of the scheme and a provisional liquidator is appointed (See Restructuring Provisional Liquidation). The provisional liquidator can be given the power to put forward the scheme, or his powers can be limited to overseeing the company’s board and management. At the conclusion of the scheme, the winding-up petition will be dismissed and the provisional liquidator released.
- Solvent: the company’s ordinary management is in place and normal principles of corporate governance apply.
Protection from creditors. There is no automatic stay preventing actions against the company during the period when the scheme is being proposed and implemented. However, the Supreme Court of Bermuda often makes use of the ability to place companies in provisional liquidation to achieve such a stay. Once a company is placed into provisional liquidation, there will be an automatic stay and the company will be protected from its creditors during the implementation of the scheme. On successful implementation of the scheme, the liquidation proceedings will be discontinued without ever entering full liquidation.
Length of procedure. The duration of the scheme process varies depending on the following:
- The complexity of the company’s affairs.
- The scheme’s proposals.
- The scheme’s purpose.
Once the court has sanctioned the scheme and it is lodged with the Registrar of Companies, it is binding on the company and all of the affected creditors and shareholders, regardless of whether they voted or were aware of its proposals.
Once the scheme’s terms have been carried out, the company continues to operate as a going concern subject to changes imposed under the scheme’s terms.
Restructuring provisional liquidation
The 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 liquidators 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 centrally 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, 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.
Can a debtor in restructuring proceedings obtain new financing and are any special priorities afforded to such financing (if available)?
In a liquidation, a permanent liquidator or provisional liquidator (unless his powers under section 170(3) of the Companies Act 1981 have been restricted) can raise finance, including finance from existing creditors, to the extent necessary for the beneficial winding-up of the company (section 175(2)(e) of the Companies Act 1981). This is often advisable. Repayment of this finance depends on the negotiated terms which must be approved by the Court and which would usually take priority over existing creditors as a debt in the winding up.
In a scheme of arrangement, the company may obtain additional financing from its existing creditors.
Can a restructuring proceeding release claims against non-debtor parties (e.g. guarantees granted by parent entities, claims against directors of the debtor), and, if so, in what circumstances?
Subject to the law governing the underlying obligation, it is possible as part of a restructuring to release non-debtor parties from liabilities to the debtor.
See question 12 below in respect of directors.
Is it common for creditor committees to be formed in restructuring proceedings and what powers or responsibilities to they have? Are they permitted to retain advisers and, if so, how are they funded?
It is common for a restructuring to involve a creditors’ committee (if appointed) or at the very least an informal committee of creditor representatives.
Expenses incurred by the creditors’ committee may be reimbursed but members of the committee cannot be paid for their time spent.
How are existing contracts treated in restructuring and insolvency processes? Are the parties obliged to continue to perform their obligations? Will termination, retention of title and set-off provisions in these contracts remain enforceable? Is there any an ability for either party to disclaim the contract?
What conditions apply to the sale of assets/the entire business in a restructuring or insolvency process? Does the purchaser acquire the assets “free and clear” of claims and liabilities? Can security be released without creditor consent? Is credit bidding permitted? Are pre-packaged sales possible?
What duties and liabilities should directors and officers be mindful of when managing a distressed debtor? What are the consequences of breach of duty? Is there any scope for other parties (e.g. director, partner, shareholder, lender) to incur liability for the debts of an insolvent debtor?
Do restructuring or insolvency proceedings have the effect of releasing directors and other stakeholders from liability for previous actions and decisions?
It is not unusual for the terms of a restructuring proposal to contain provision for directors to be released from liability for previous actions and decisions. However, the inclusion of such a release is often a vexed and hotly debated issue for creditors. Absent express exclusion in the terms of the scheme, directors will remain liable for their prior acts.
Will a local court recognise concurrent foreign restructuring or insolvency proceedings over a local debtor? What is the process and test for achieving such recognition? Has the UNCITRAL Model Law on Cross Border Insolvency been adopted or is it under consideration in your country?
Given the reality that Bermuda companies are often part of a group of companies which carry on business outside of Bermuda, the courts have adopted a flexible and pragmatic approach using common law principles. Rather than requiring parallel schemes of arrangements to be promulgated in Bermuda in all cases of a global restructuring, the courts have instead held that they may recognise and enforce (by way of a stay of any Bermuda proceedings) a foreign restructuring order which extinguishes claims against an insolvent Bermuda company.
There is no statutory provision regarding the treatment of concurrent proceedings in other jurisdictions. Bermuda courts, however, have historically co-operated with foreign proceedings, allowing them to take the lead role where it can be shown that to do so would be in the best interests of the company, especially where the foreign court has the closest connection to the business of the company or is the most appropriate jurisdiction to make an order.
More recently, in March 2017, the Bermuda courts adopted new rules for communication and co-operation between courts in cross-border insolvency matters. The Commercial Court Practice Direction No. 6 of 2017 gives effect, with minor modifications, to the Singapore-founded Judicial Insolvency Network (JIN) Guidelines. Bermuda is one of the key commercial jurisdictions to adopt the JIN Guidelines (with minor modifications), along with the United Kingdom, the US Southern District of New York, Delaware, Singapore and the British Virgin Islands.
The JIN Guidelines are designed primarily to enhance communication between courts, insolvency representatives and other parties in the context of global restructurings and insolvency. As a result of the increased efficiency, it is hoped that stakeholders will see a reduction in delay and cost. The guidelines address issues including communication between courts, acceptance of foreign process, and joint hearings.
Bermuda has not adopted the UNCITRAL Model Law on Cross-Boarder Insolvency or any similar cross-border initiatives.
Can debtors incorporated elsewhere enter into restructuring or insolvency proceedings in the jurisdiction?
No. It was held by the Privy Council in PricewaterhouseCoopers v Saad investments Company Limited  UKPC 35 that the Bermuda Court’s jurisdiction to wind up companies is wholly statutory in nature and the provisions of the Companies Act 1981 do not extend to a foreign company unless it has been granted a permit by the Minister of Finance to carry on business in Bermuda.
How are groups of companies treated on the restructuring or insolvency of one of more members of that group? Is there scope for cooperation between office holders?
Where related companies enter into insolvency or restructuring, the corporate veil remains in place.
Liquidators’ duties will be owed only to the creditors of the company to which they were appointed. In practice, where a number of entities in a corporate group enter liquidation, it would be usual for the same persons to be appointed liquidators over each of the insolvent entities, and the Court will generally favour that approach where faced with competing candidates for appointment. In relation to cooperation generally, see the discussion under the preceding heading.
Is it a debtor or creditor friendly jurisdiction?
The statutory scheme of Bermuda casts it as a creditor friendly jurisdiction with the emphasis being on creditor recoveries. There are no regimes in place akin to a UK administration or a Chapter 11 proceeding under the US Bankruptcy Code. In recent years however, there has been a strong judicial move in Bermuda, through case law, to embrace a culture of corporate rescue notwithstanding that the Companies Act 1981 does not expressly support such an approach. This has in turn has moved Bermuda away from its previous status as being creditor friendly. To date, it is only decisions at first instance which have promoted this approach and it remains to be seen whether the Courts of Appeal take a similar interpretation of the relevant statutory provisions.
Do sociopolitical factors give additional influence to certain stakeholders in restructurings or insolvencies in the jurisdiction (e.g. pressure around employees or pensions)? What role does the state play in relation to a distressed business (e.g. availability of state support)?
Sociopolitical factors do not play a significant role in commercial restructurings in Bermuda. Typically, one is dealing with entities that are part of a wider business operating in a transnational sector such as insurance, finance, transport or international trade. Issues such as employees and pensions are therefore unlikely to be substantial. Bermuda is committed to its role as a hub for offshore commerce and any action to prejudice that position is unlikely.
What are the greatest barriers to efficient and effective restructurings and insolvencies in the jurisdiction? Are there any proposals for reform to counter any such barriers?
Bermuda is a creditor friendly jurisdiction and restructurings and insolvencies can generally be conducted efficiently and effectively.
The process of restructuring provisional liquidation will benefit from greater certainty as more cases are decided and the parameters of the procedure become more defined.
As Bermuda companies so often form part of larger corporate structures, one of the primary barriers to efficient restructurings is coordinating a restructuring/insolvency with processes in other jurisdictions. As noted above, the Courts have demonstrated a willingness to be flexible when dealing with cross-border restructurings and insolvencies, in particular in relation to recognizing and assisting foreign processes, but case law in this area is still developing.
There are currently no formal proposals for reform before the government of Bermuda. The need for reform has, however, been cited by various interested parties, most notably the Chief Justice of the Supreme Court of Bermuda. Therefore, such proposals may be presented in the near future.