It is usually held that Bermuda insolvency law follows English insolvency law, so far as possible, applying the same principles that would have applied immediately before the introduction of the English Insolvency Act in 1986.  That is a fair summary, but it does not tell the whole story. 

There are a large number of provisions in the pre 1986 English insolvency law which were re-enacted in the 1986 Act, with or without modifications.  As a general rule, a Bermuda judge will still apply the more recently decided English case law to the interpretation of the “old” pre 1986 provisions, provided that there has been no material addition to the statutory regime that the Bermuda version does not contain.

There are also gaps and differences in the Winding-up Rules, and a few home grown practices have evolved in a number of areas.  These practices are not always universally applied.

There are also so unique provisions which have been added to the English model, or which have amended the English model for local purposes.

The purpose of this short introductory piece is to identify a number of features of the Bermuda insolvency system that are useful to know.

On the Solvency Test                                   

The solvency test includes a “cash flow” and a “balance sheet” test requiring a company to be able to pay, (or secure or compound, ie meet) its undisputed liabilities as they fall due and that its assets meet or exceed its liabilities on balance sheet basis.

An unsatisfied judgment or statutory demand in respect of an undisputed debt exceeding a value of BD$500 will justify the making of a winding-up order at the instance of a creditor, without the need to adduce further evidence.  If this threshold is passed, the company is deemed to be insolvent so that the court will make a winding-up order.  Alternatively, the company may present its own petition in the event that it is, or is about to become, insolvent.

Prospective or contingent creditors may petition for a winding-up order on giving security and showing a prima facie case that the company is insolvent.  In the case of insurance companies, ten or more policyholders owning policies of more than a value of BD$50,000 with contingent claims may petition for a winding-up order in the event that a prima facie case of insolvency has been established.

On Secured Creditors

Generally second creditors will enforce their rights outside a liquidation proceeding, and except in limited circumstances where the validity of the security is under challenge, do not need any court permission to do so.

Secured creditors must not vote at a meeting of creditors in respect of the value of the security held or the creditors will be deemed or required to surrender the whole security interests.  But, a secured creditor may vote the value of any unsecured shortfall of this claim.  Valuation of the unsecured portion of the claim may be tricky, so caution is advised.  Creditors may be required to value their contingent claims, which can also be tricky when it comes to an unsecured shortfall.

On Proofs of debt

A proof of debt must be submitted at the first meeting of creditors.  Usually the proof of debt at the first meeting is for voting purposes at that meeting, not for dividend purposes.  Practice varies, but it is not uncommon for the initial proof of debt used for voting purposes at the first meeting to be “expunged” thereafter and a new proof of debt to be required when a dividend is about to be declared.  Sometimes, the initial proof of debt will be accepted for both initial voting and dividend.

The proof has to be supported by an affidavit from someone who has authority to verify the debt from the creditor’s organization, and documentary evidence in support is required (eg the contract or the invoice for the goods purchased etc).

On Schemes of Arrangement

A scheme of arrangement by or between the company and its creditors, or any class(es) of creditors, may be sanctioned by the court after having been approved by a majority in number and three quarters in value of each class of creditors who vote in favour of a re-organization of the debt or obligation. A scheme may be approved within or outside a winding up proceeding.  The essential point is to ensure the classes of creditor are correctly identified having a sufficiently similar commercial interest to be able to vote at the proposed as part of the same class.  This is to ensure that any resolution is binding on a dissenting minority of 25% or less.

On Assignments

Section 19D of the Supreme Court Act 1905 provides that an absolute assignment in writing of any debt or other legal chosen action is deemed to be effective where notice is given to the debtor, and they then be enforced by the assignee.  Section 1 of the Bonds Promissory Notes Act 1874 authorizes the assignment of bonds and other debts and authorizes the assign to bring an action in his own name against the debtor.

Assignments or dispositions of property after the commencement of the liquidation are void.  Transfers of shares after the commencement of the liquidation are invalid unless the court sanctions the transfer of shares.

Creditors may not “traffick” in debt, namely they are not allowed to accumulate claims from other creditors in order to take advantage of the rules on mandatory set off.

On Floating Charges

Floating charges given within twelve months of the commencement of a winding-up are invalid unless it can be proved that the company was solvent immediately after the granting of the charge, except to the amount of any cash paid to the company at the time of the creation of the charge. Charges are registered, and have priority in date order of registration. An unregistered charge is not void against the liquidator.

Prior to Re Leyland Daf: Buchler –v- Talbot [2004] UKHL9, the established rule under English law had been that a floating charge ranked behind preferred creditors applying the analysis in a previous series of cases.  However following academic criticism, the UK legislature amended the position to reinstate the common law position that applied prior to the Leyland Daf decision.  Bermuda has not made any statutory amendment, so as things stand, Bermuda would likely follow the Leyland Daf decision and treat floating charge holders as fully secured creditors (subject to any challenges within twelve months of the grant of the floating charge).

On Foreign Judgments

A foreign judgment against a Bermuda company may form the basis of a statutory demand, even if the judgment has not been registered as a judgment under Bermuda law, provided that the jurisdiction of the foreign court is not disputed on genuine grounds. 

Foreign judgments may be registered under the Judgments (Reciprocal Enforcement) Act 1958, as amended, in respect of judgments issued or given by any other Commonwealth jurisdiction.  However, a foreign judgment from a non-Commonwealth jurisdiction may not be registered as a judgment and separate proceedings must be commenced to obtain a Bermuda judgment, often on the basis of an application for summary judgment, provided the original court had jurisdiction over the defendant.

Separately, a New York Convention arbitration award may be registered as a judgment and enforced in a similar way.

Only money judgments may be registered, and no foreign judgment which is based on a multiple of damages awarded may be registered, except to the extent of the basic monetary award.

 

On Creditors’ Voluntary Liquidations

Voluntary liquidations which are not concluded within twelve months of the commencement of the voluntary winding-up or which, although they may have begun as solvent liquidations, become insolvent liquidations.  In those cases the liquidator will be required to convene a meeting with creditors and to conduct the liquidation as a creditors’ voluntary liquidation.  These types of creditors’ voluntary liquidations are less common, and are not ordered by the court, although the court will entertain applications for directions in a creditors’ voluntary liquidation as and when necessary.

On Provisional Liquidators

After appointment, the Provisional Liquidator is required to convene a first meeting of creditors and contributories within 30 days, but the time is usually extended.  The Provisional Liquidator will normally seek to establish from the directors a Statement of Affairs or other financial summary of the financial position of the company and the extent of the shortfall, and the value of any of the principal assets.  The Provisional Liquidator is also charged with the responsibility of securing and gathering in assets under his or her control, and taking steps to ascertain and report on the principal reasons for the failure of the company.

In cases where there is an urgent need to take steps to preserve, protect, gather in the assets of the company, or otherwise there is a need to have an immediate appointment of an office holder, an interim provisional liquidator may be appointed after the filing of the petition, and before the making of a winding up order (sometimes called an interim Provisional Liquidator).  The powers of the interim Provisional Liquidator will normally be spelled out in detail in a schedule of powers and duties.

Where there are proceedings elsewhere, or the actions of the Provisional Liquidators need to be taken in other jurisdictions, special power needs to be sought, and the authority of the court must be obtained for Joint Provisional Liquidators to act “severally”, in order to remove the need to take all actions jointly.

On Onerous Contracts

A permanent liquidator may disclaim an onerous contract on behalf of the company; this is normally a lease or continuing obligation of that type, which the company cannot honour according to its terms. But it appears a provisional liquidator may not normally disclaim an onerous contract.  Compensation must be paid to the contract holder, and this must be valued in the context of allowing and paying a proof of debt in the liquidation.

On an Informal Creditors’ Committee

Prior to the first meeting of creditors it is not unusual for the provisional liquidators to approach representatives from the creditor base to act as an "informal" creditors' committee and to seek guidance and support for initial actions and information gathering efforts.  This might include, for example, a decision to conduct private examinations of former directors or auditors for the purposes of understanding the background to the company's business, the reasons for its failure, and to get information about what its assets are, or who may have information about the assets and liabilities of the company.

On Contributories

The Provisional Liquidator is required to convene a meeting of contributories to vote upon the appointment of a permanent liquidator, and to vote upon whether there should be a Committee of Inspection and if so to propose members to that committee.  However, a contributory is defined as a shareholder who is under an obligation to make a contribution to the company's capital under a subscription agreement, and generally speaking unpaid subscriptions are rare in modern trading companies.  However, the conventional practice is to convene a meeting of the former shareholders as "contributories" and to seek their votes on the appointments of Permanent Liquidator and Committee of Inspection.  It is not uncommon that no shareholders attend, resulting in an in-quorate meeting, and requiring an application to court to dispense with convening a further meeting of contributories.

Where there is a meeting of contributories which proposes nominees for the Permanent Liquidator and a Committee of Inspection, then these will be taken into account.  Where there is a dispute over who should be nominated, the views of the creditors will (normally) be given preference.

If a member of the contributories is appointed to the Committee of Inspection, then that member will participate in the Committee's decisions in the normal way, and will receive information.  Often this can create complications and conflicts which may need to be managed.

On Private Examinations

The former directors and officers may be required to attend a private examination to provide information and documents relating to the company's affairs and assets, as well as assist the liquidator in understanding its liabilities.  These requirements can be challenging to enforce in practice, as often the directors of the company will be based in other countries and regions, and the costs and impracticalities of seeking assistance involuntarily may be significant.

On Funding Agreements

The expenses of the liquidation are paid in priority to ordinary claims, but ordinary operating expenses of the business are generally not treated as expenses of the liquidation.  Therefore when there is a shortfall or potential shortfall in the assets required to meet the expenses of continuing to operate the business, it is not uncommon for a liquidator to enter into a funding agreement with a creditor whereby the creditor is granted a priority in the recovery of the amounts lent over ordinary creditors, but this type of arrangement must be approved by order of the court.

Usually a business will not be carried on in liquidation for a long period of time, and it is more common to see a provisional liquidator continue to operate the business in a provisional liquidation (and commonly under a “soft touch” appointment) while the terms of a re-structuring plan are worked out and presented for approval to the creditors under a Scheme of Arrangement.  The time frame for such a contraction of the business will vary according to the type of business, the geographic location and the length of time required to realize achieve a sale or a successful re-structuring.

On Bankruptcy Priority

Section 235 of the Companies Act incorporates by reference to a corporate insolvency the rules governing the respective rights of secured and unsecured creditors and to debts provable, and the valuation of future and contingent liabilities, as they are applied in a personal bankruptcyUnliquidated damages claims are therefore not provable in an insolvent liquidation.

Personal bankruptcies are governed by the Bankruptcy Act 1989, which is an approximate replication of the English Bankruptcy Acts 1914-18 with a few added modernizations.  The old English case law decided under the Bankruptcy Acts 1914-18 will still apply.

On set off

A mandatory set off between creditors and the insolvent will be applied in respect of all mutual dealings between the parties.  The set off is self executing, and is calculated as at the date of the winding up Order, as are any conversions into foreign currency values.  It is not possible to contract out of the rules of set off.

A company may not set off an unliquidated claim against an unsatisfied liquidated claim in order to defeat a petition for winding-up based on the unsatisfied liquidated claim.

On Taxation and Payment of Costs

Rule 140(2) of the Winding-up Rules requires fees and expenses of attorneys, managers, accountants, auctioneers, brokers or other persons (except to the extent allowed by the Court under the Act to be taxed and allowed by the Registrar of the Supreme Court.  However there is no scale of costs or procedure built into the rules, so that usual practice is to obtain an order disapplying the rule or specifically allowing payment of the costs periodically by specific order of the court.  At the same time, the rule that the Committee of Inspection shall set the remuneration of the liquidator can be dispensed with under rule 112, because there is no default scale of fees.

On Preferential Employee Claims

After liquidation expenses, the preferential claims are generally taxes, wages, accrued holiday pay, and unpaid pension contributions and workers compensation claims up to the date of the winding-up order.

Wage claims under this provision are limited to $2,500 per employee.  However, under the Employment Act 2000 this priority is extended to include all accrued vacation, all unpaid wages and any severance allowance, (which is up to a maximum value of 26 weeks wages).  The Employment Act also prioritizes the payment of these claims above any tax claims from the government.

Wage claims do not include tips, expenses, or the monetary value of benefits in kind, but will include any unpaid bonus or contractual termination payment.

On Security by Liquidators

Under rule 41 of the Winding-up rules, provision is made for security to be given by a liquidator.  In practice, liquidators who are employed by a local accounting practice (or law firm) are generally not required to provide security.  Overseas liquidators may be so required, but dispensation may be sought, and is generally granted, for liquidators who are regulated in the jurisdiction where they practice.

On Records and Records of Account

A liquidator must retain, or make arrangements to retain the records of the liquidation for five years after the completion of the liquidation.  A liquidator is now also required to ensure that the company’s records of account which are provided to him or her at the commencement of the liquidation are retained for five years following the conclusion of the liquidation as well. The records of account for the company are extensive and include the underlying accounting records for the company’s trading activities.  These records may be kept in electronic form.

On Recognition of foreign office holders

The Bermuda court has an inherent jurisdiction to assist a foreign office holder provided that:

  • the foreign office holder is a liquidator or similar officer appointed by a foreign court exercising insolvency jurisdiction
  • the purpose of the application is to assist that foreign court to overcome the difficulties of administering an insolvency in two or more jurisdictions
  • it is necessary for the performance of the foreign office holder’s duties, and
  • the assistance is consistent with Bermuda’s substantive laws and public policy.

The court cannot however grant the types of statutory relief available to a liquidator under Bermuda law under the companies act unless the company is incorporated in Bermuda or a permit company registered in Bermuda, and cannot grant relief which is not available to the foreign office holder which are not available under the law governing his or her appointment. 

In Singularis Holdings Limited v PwC [2014] UKPC 36 the Privy Council held that the statutory powers could not be invoked by the liquidator of a foreign office holder who wished to get assistance from the Bermuda court to examine former directors of a foreign company who were resident in Bermuda, but did grant relief for the production of documents and oral disclosure of information from the former auditors who were based in Bermuda, subject to certain limitations.

On the Centre of Main Interests

Bermuda has not adopted the UNICTRAL Model Law on cross border insolvency proceedings, and so COMI is strictly not a concept which applies under Bermuda Law.  COMI may be relevant to the grant of relief in certain cases, but based on traditional notions of jurisdiction under rules of private international law, and comity between jurisdictions exercising jurisdiction over the same party or parties in a cross border insolvency.  The place of the company’s incorporation and registered office will normally be an important feature which will grant jurisdiction as of right over the company.  The principal place of business (including its decision making and management) will also be highly significant.  Other factors, including the nature of the business, contractual submissions to foreign jurisdiction and performance of obligations may all be relevant matter.  Although it has been suggested that there is a concept of COMI at common law, COMI is strictly a concept which derives its origin from the UNCITRAL Model Law and the EU Regulations on Insolvency Proceedings.  That having been noted, the concept may still be a relevant factor when a Bermuda court is faced with assessing the competing claims of foreign office holders to recognition in Bermuda insolvency proceedings.