Use the Lexology Navigator tool to compare the answers in this article with those from other jurisdictions.

Liquidation procedures

Eligibility

What are the eligibility criteria for initiating liquidation procedures? Are any entities explicitly barred from initiating such procedures?

To bring a winding-up petition against an ordinary company, the company must be either balance sheet or cash-flow insolvent.

Where a company fails or neglects to pay a debt of BDA$500 or more within 21 days of being served with a demand for payment at its registered office, it will be deemed to be insolvent and an application may be made to wind up the company.

In relation to licensed insurers, where the debt relied on is a contingent or prospective debt, the petitioners must have contingent or prospective claims exceeding BDA$50,000 that represent 10 or more policyholders on the basis of a prima facie case of insolvency supported by independent evidence.

No entities are explicitly barred from initiating these procedures.

Procedures

What are the primary procedures used to liquidate an insolvent company in your jurisdiction and what are the key features and requirements of each? Are there any structural or regulatory differences between voluntary liquidation and compulsory liquidation?

There are several different ways to commence a liquidation proceeding in Bermuda. The most conventional method is for a creditor to serve a statutory demand seeking payment of an undisputed liability owed by the company which exceeds BDA$500. If this demand is not paid within 21 days of the statutory demand being served on the company’s registered office, the company is deemed to be insolvent.

A judgment creditor or the holder of a binding arbitration award may seek to use the same procedure.

Another common liquidation method is for the company to bring a petition on the grounds that the board has determined that the company is insolvent or is likely to be insolvent. The petition sets out the basis for the winding-up order and the appointment of a provisional liquidator.

How are liquidation procedures formally approved?

Court-supervised liquidation usually commences with the making of a winding-up order at the hearing of the winding-up petition. At the hearing, the winding-up order sets the date for evaluation of claims and set-off rights is made and a provisional liquidator is appointed.

At the first meeting of creditors and contributories, the general body of unsecured creditors (and contributories) vote on:

  • the appointment of one or more permanent liquidator; and
  • whether a creditors’ committee is appropriate and, if so, who the committee members will be.

The appointed permanent liquidator and committee members are then approved by court order. After appointment, the permanent liquidator has a number of statutory powers, as well as a number of powers that he or she can invoke with the approval of the creditors’ committee (if appointed) or the court. 

What effects do liquidation procedures have on existing contracts?

Except in the case of employment contracts, there is no automatic discharge of contracts by operation of law, unless this has been established in a contractual provision within the agreement.

Section 33 of the Employment Act 2000 provides that the winding up or insolvency of an employer's business will result in the termination of employment contracts within one month of the winding-up order, unless the business continues to operate.

Where there are mutual obligations between a company and its creditors, an automatic set-off will occur once the winding-up order has been issued, whereby any mutual credits and debts will be set-off, such that only:

  • the remaining unpaid obligations will be claimable in the liquidation; and
  • the balance after set-off remaining due to the company may be recovered from the creditor.

What is the typical timeframe for completion of liquidation procedures?

The initiation of a winding-up process – that is, from the date of the presentation of the petition to the date of the making of a winding-up order – is usually completed within four to six weeks. Once liquidation has commenced, there is no set period within which the winding up must be completed.

A members’ voluntary liquidation must be completed within 12 months. If it is not, it becomes a creditors’ voluntary liquidation.

Role of liquidator

How is the liquidator appointed and what is the extent of his or her powers and responsibilities?

The court will appoint a provisional liquidator after hearing a winding-up petition.

Where there is an urgent need to appoint an interim provisional liquidator in order to preserve or protect assets or protect the interests of the creditors as a whole, an application for relief can be made to the court.

The provisional liquidator is initially responsible for gathering and protecting the company’s assets, as well as gathering information from the directors concerning the company’s financial position and the reasons for its failure, so that he or she can make a preliminary report to the creditors at the first meeting of the creditors and contributories.

Once voting is complete, the permanent liquidator and creditors' committee are formally appointed by the court. The permanent liquidator (with the creditors' committee’s approval) has the power to:

  • administer the liquidation;
  • make claims and recover assets;
  • compromise and settle claims;
  • admit proofs of debt from creditors; and
  • make interim distributions of assets to creditors by way of dividend.

If no creditors' committee is established, the court must approve the use of the permanent liquidator's powers to compromise claims and take actions to recover assets. The permanent liquidator may disclaim onerous contracts with court approval and on admittance of a claim for the appropriate value of any contract disclaimed in the liquidation.

Court involvement

What is the extent of the court’s involvement in liquidation procedures?

The court appoints a provisional liquidator and, after the first meetings of creditors and contributories, the creditors' committee (if any) and the permanent liquidator. Where a creditors' committee is appointed, the permanent liquidator can usually take all necessary steps to administer the liquidation without the court’s involvement, except where exceptional or unusual steps are being taken, in which case the permanent liquidator will normally seek the court's approval.

Where no creditors' committee is established, the court must approve the exercise of most of the liquidator’s principal powers with regard to claims, proceedings and compromises with creditors.

Creditor involvement

What is the extent of creditors’ involvement in liquidation procedures and what actions are they prohibited from taking against the insolvent company in the course of the proceedings?

After a winding-up order is made, there is a general automatic stay on all proceedings. The petitioning creditor will normally have an initial involvement in providing the provisional liquidator with information and assistance, and may have a role in providing initial funding for the provisional liquidator's expenses. Otherwise, the creditors have limited rights to pursue any claim against a company in liquidation.

Once the first creditors’ meeting has been convened, the creditors will vote on the appointment of a permanent liquidator and the establishment of an official creditors' committee (formally known as a ‘committee of inspection’).

Once the creditors’ committee is established, the permanent liquidator will:

  • consult with the committee about the actions that it intends to take;
  • obtain approval for the actions, where necessary; and
  • inform the committee about the progress of the recovery of assets and the likely distributions to creditors on an interim basis.

The creditors' committee will:

  • audit the permanent liquidator’s receipts and payment accounts;
  • approve annual accounts; and
  • submit a report to the court annually.

The creditors' committee will often assist the permanent liquidator in determining whether to enter into a scheme of arrangement with the creditors and, if so, on what terms.

The members of the creditors' committee may be reimbursed for expenses, but may not be paid for the time that they devote to acting in this role. Vacancies may be filled if a member resigns.

Director and shareholder involvement

What is the extent of directors’ and shareholders’ involvement in liquidation procedures?

Shareholders Shareholders generally have little involvement in the administration of an insolvent liquidation.

Directors On the making of a winding-up order, the directors’ powers cease. A representative of the directors must attend the first creditors’ meeting, ostensibly to answer questions; but this requirement is often not met in practice.

Directors must assist the provisional liquidator in the preparation of the statement of affairs, but similarly this requirement is routinely not observed in practice.

In some cases, directors may continue to perform their duties (albeit under supervision) during a provisional liquidation, which may enable the company to continue to operate but enjoy protection from actions to enforce claims under the automatic stay provisions of the Companies Act 1981. This is often referred to as a ‘light touch’ provisional liquidation, which may be ordered (usually with the support of an informal creditors’ committee) to protect creditors’ interests and preserve the continuity of management. This is usually a temporary measure, but it can be helpful where a reorganisation is seriously contemplated by way of an agreed plan or scheme of arrangement. 

Click here to view the full article.