Restructuring and Insolvency jurisdiction guide: Bermuda

Winding up

Compulsory: the Supreme Court of Bermuda may order a company to be wound up on the grounds set out in the Bermuda Companies Act 1981. These include the company’s inability to pay its debts and where the court considers it just and equitable to do so. A winding up petition may be presented by the company, creditors (including contingent or prospective creditors), contributories and in certain circumstances a regulator.

Voluntary: a company may be wound up voluntarily pursuant to a resolution of its members or upon the occurrence of an event specified in its bye laws. Where the directors make the required declaration of solvency, the liquidation proceeds as a members voluntary winding up, otherwise it proceeds as a creditors voluntary winding up.

Restructuring

Provisional liquidation: provisional liquidation is commonly used in Bermuda to facilitate the restructuring of a financially distressed company. The directors generally retain responsibility for day to day management, while the provisional liquidators oversee the restructuring, work with the company on proposals, liaise with creditors and report to the Court. Provisional liquidators may alternatively be appointed with broader powers to take control of and protect the company’s assets pending determination of a winding up petition.

Schemes of arrangement: a scheme of arrangement is a statutory procedure in Bermuda that allows a company to enter a compromise or arrangement with its creditors and/or shareholders. A scheme of arrangement is a court supervised restructuring procedure under the Companies Act 1981. It enables a company to compromise or rearrange the rights of its creditors or members or any class of them and may therefore be used to restructure debt or equity without obtaining unanimous consent from the affected stakeholders. The Scheme’s duration will depend on the complexity of the company’s affairs and the proposals put forward.  

Yes.

Provisional liquidation

Bermuda law provides provisional liquidation as the principal insolvency procedure available on a provisional basis and it may take either a light touch or full powers form. Under section 170(2) of the Companies Act the Supreme Court may appoint a provisional liquidator following presentation of a winding up petition and before the appointment of a liquidator. A full powers provisional liquidation is generally used to protect and preserve the company’s assets pending determination of the winding up petition, including where there are concerns about fraud, misconduct or dissipation of assets. By contrast, light touch provisional liquidation is a tool under which provisional liquidators are granted limited supervisory powers while the directors generally retain responsibility for the company’s ordinary business operations.

Compulsory liquidation

A creditor may petition to wind up a company where it is unable to pay its debts, or a petition may be brought on another statutory ground, including where it is just and equitable to wind up the company. Under section 162 of the Companies Act 1981, inability may be established among other ways, by non-payment of a qualifying statutory demand within three weeks.

Voluntary liquidation

A company may enter voluntary liquidation where its members pass a resolution to wind up the company pursuant to section 201 of the Companies Act 1981 or on the occurrence of an event specified in the company’s bye-laws. Where the company is insolvent, creditors participate in the process, including in relation to the appointment of the liquidator.

Provisional liquidation

Under section 170(2) of the Companies Act 1981 a winding up petition must first be presented before the court may appoint a provisional liquidator. The Court may limit the provisional liquidators powers under section 170(3) including for a light touch appointment intended to facilitate a restructuring.

Scheme of arrangement

Under sections 99 and 100 of the Companies Act 1981, a company may propose a compromise or arrangement with its creditors or members. Each relevant class must approve the scheme by a majority in number representing at least 75% in value of those present and voting, after which the scheme must be sanctioned by the court.

Compulsory liquidation

• petition filed with affidavit, served and advertised
• unopposed petitions may be granted at first hearing
• opposed petitions often adjourned.
• petitioner file certificate of compliance confirming that required affidavits and petition- rule steps have been completed. 
• a person intending to appear at the petition hearing must give notice to the petitioner. If notice of posted, it must reach the stated address not later than 4pm on the day before the hearing. A person who fails to comply is not allowed to appear without special leave of the Supreme Court of Bermuda

Provisional liquidation

Provisional liquidation to support restructuring often involves an initial adjournment of three to six months. If a restructuring is considered feasible, the petition may be further adjourned for such period as is necessary to pursue the restructuring.

Voluntary reorganisation: schemes of arrangement

Schemes commonly progress with a convening hearing in one to four weeks and notice periods of two to six weeks for meetings. This process is initiated by applying for the supreme Court for directions to convene meetings with the various classes of creditors or shareholders affected by the proposed scheme. If the requisite majorities approve the scheme, a sanction hearing follows. The scheme becomes effective once the Courts sanction order is delivered to the Registrar of Companies for registration.

Yes. Voluntary liquidations may be commenced without a court order. A voluntary winding up is generally commenced by a resolution of the company’s members and proceeds in accordance with the Companies Act 1981.

A company may also agree an informal restructuring with its creditors without a court involvement. Such an arrangement is consensual and does not bind creditors who do not agree to it.

In compulsory liquidation, liquidators displace directors and manage the estate under court supervision.

In provisional liquidation the position depends on the terms of the appointment order. Under a light touch approach the directors generally retain day to day management, subject to the powers and supervision of the provisional liquidators. Where provisional liquidators are appointed with full powers, they may take control of the company and safeguard its assets.

In schemes of arrangement, the directors generally remain in control of the company and its assets.

Yes. An automatic stay arises upon a winding up order or appointment of a provisional liquidator, preventing commencement or continuation of proceedings against the company without leave of the court.

The stay does not prevent secured creditors (other than holders of uncrystallised floating charges) from enforcing security out of court.

The court is likely to grant leave where judicial assistance is required to enforce valid security in Bermuda.

A scheme of arrangement does not, by itself, create an automatic moratorium. In practice, an insolvent company may pursue a scheme in conjunction with provisional liquidation and thereby obtain the benefit of the statutory stay.

Yes. Under section 161 of the Companies Act 1981, insolvency is only one of the grounds upon which the court might wind up a company. Other grounds include where the court considers it just and equitable to do so, there is failure to commence its business within a year of its incorporation or where the company suspends its business for a whole year and where the company carries on prohibited or restricted business.

While Bermuda has no statutory corporate rescue regime beyond schemes, the court uses light‑touch provisional liquidation to support restructurings by providing a stay and court supervision, often as a precursor to a scheme of arrangement.

Schemes permit binding compromises with requisite class approvals and court sanction.

Yes. Under section 175(2)(a) of the Companies Act 1981, a liquidator may sell the company’s real and personal property by public auction or private contract, either as a whole or in parcels. Section 175 also gives the liquidator various powers to carry on the company’s business and compromise claims, although certain powers require the sanction of the Court of a committee of inspection. A sale may be implemented as part of the restructuring conducted through provisional liquidation, subject to the powers conferred on the provisional liquidators and any necessary Court sanction. Secured assets cannot be sold without the secured creditor’s consent.

Bermuda has not adopted the UNICITRAL Model Law on Cross Border Insolvency and does not have a statutory regime for the recognition of foreign insolvency proceedings. However the Supreme Court of Bermuda may recognise and assist foreign insolvency officeholders under the common law and principles of comity.

Assistance cannot exceed powers consistent with Bermuda law and the appointing court’s law.

Further, the Bermuda Court cannot grant relief which the foreign court itself could not grant under the law governing the foreign insolvency proceeding.

The Bermuda Court has recognised foreign liquidators and provisional liquidators appointed in overseas insolvency proceedings. Bermuda Courts have also recognised and assisted foreign restructuring proceedings, including proceedings connected with US Chapter 11 reorganisations.

Yes. Bermuda incorporated companies may be subject to foreign insolvency or restructuring proceedings, and the Bermuda court has a well-established practice of co-operating with such proceedings. In particular, Bermuda companies have undergone US Chapter 11 proceedings in parallel with Bermuda provisional liquidation proceedings. In those cases, the Supreme Court may appoint light-touch provisional liquidators to supervise the restructuring and may defer to and support the foreign reorganisation process.

The principal forms of security taken in Bermuda in terms of movable and immovable property are:

Immovable:

• legal and equitable mortgages
• fixed charges
  
  

Movable:

• share charges
• debentures
• fixed and floating charged
• assignments
• pledges and contractual liens

Secured creditors are generally unaffected by the commencement of insolvency proceedings and may enforce their security outside the liquidation in accordance with the terms of the relevant security instrument.

Where a winding up order is made or a provisional liquidator is appointed, section 167(4) of the Companies Act 1981 prevents proceedings against the Company from being commenced or continued without leave of the Court. This does not generally prevent a secured creditor from enforcing valid security by out of court means.

Priority is generally:

• secured creditors (fixed charges that are enforced outside the estate)
• costs / expenses of the winding up (including liquidator remuneration if sanctioned)
• preferential creditors (taxes to the Bermuda Government, wages / salary capped at BMD2,500 per employee, accrued vacation remuneration, pension contribution, employer insurance contract contributions)
• floating charge holders (subject to floating charge terms)
• unsecured creditors (paid pari passu from remaining unpledged assets)
• subordinated unsecured creditors (paid after ordinary unsecured creditors per contract terms)
• shareholders (preferred shareholders first, then ordinary shareholders only if a surplus remains)

In a Bermuda voluntary winding up, liquidation costs and expenses, including the liquidator’s remuneration, are payable out of the company’s assets ahead of all other claims.

Where a provisional liquidator’s appointment ends without a winding-up order, the provisional liquidator has a prima facie right to be paid from company property for properly incurred costs, charges, and expenses. The Supreme Court of Bermuda retains discretion to order otherwise, especially where the petition is struck out or set aside. In recent case law, the Supreme Court of Bermuda directed that the company bear JPL costs “to be agreed or, failing agreement, taxed” on an indemnity basis in Bermuda.

For a liquidator appointed by the Supreme Court of Bermuda who is not the Official Receiver, Companies Act 1981 section 173(2) provides that remuneration is fixed by court direction. The statute expressly allows a percentage basis or another basis.

Section 166 of the Companies Act 1981 provides that any disposition of property of a company (including things in action), and any transfer of shares or alteration in the status of members made after the commencement of the winding up is void unless the Court otherwise orders.

Section 237 of the Companies Act 1981 provides that any conveyance, mortgage, delivery of goods, payment, execution or other act relating to property made or carried out by or against a company within six months before the commencement of the winding up, which would constitute fraudulent preference under applicable bankruptcy law if made or done by or against an individual, is deemed a fraudulent preference of the company’s creditors and is invalid.

Section 239 of the Companies Act 1981 provides that where a company is being wound up, a floating charge over the undertaking or property of the company created within 12 months before the commencement of the winding up is invalid unless it is proved that the company was solvent immediately after the creation of the charge. However the charge remains valid to the extent of any cash paid to the company at the time of, or subsequently to and in consideration for the creation of the charge, together with interest on that amount at the statutory rate.

Liquidators can commence set-aside applications and can disclaim any property belonging to the company that is onerous for the company to hold.

Separately under sections 36A to 36C of the Bermuda Conveyancing Act 1983, an “eligible creditor” who is prejudiced by a disposition made at an undervalue with the requisite intention may bring proceedings to have that disposition set aside.

Yes. Members may be required to contribute to the company’s assets to the extent of any amount unpaid on their shares, subject to the provisions of the Companies Act 1981 relating to contributories. Directors and other officers may also be required to make payments to the company where liability is established. Under section 247 of the Companies Act 1981, the Court may order a director or officer who has misapplied or become liable or accountable for company money or property, or who has committed misfeasance or breach of trust, to repay or restore the money or property, with interest or contribute such sum to the company’s assets by way of compensation as the Court thinks just.

A director may be personally liable to the company in damages for breaching fiduciary duties or duties of skill and care. All directors who participate in the breach will be held jointly and severally liable but as between them, they will have rights of contribution.

Section 246 applies where, in the course of a winding up, business has been carried on with intent to defraud creditors or for a fraudulent purpose. The Court may declare that persons knowingly party to the fraudulent trading are personally responsible for all or part of the company’s debts and liabilities, without limitation.

Where the company is insolvent or likely to become insolvent, directors must have regard to creditors interests. A breach may give rise to personal liability, including under section 247 of the Companies Act 1981 for misfeasance, breach of trust or misapplication of company property.

A director may be disqualified from management if they are convicted of an offence relating to the affairs of the company involving dishonesty (section 95 of the Companies Act 1981).