Bermuda Provisional Liquidation – Insolvency/Bankruptcy

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Bermuda Provisional Liquidation is a distinctive and flexible scheme that works to support businesses in financial difficulty or in support of restructuring.

In 2006, former Chief Justice of Bermuda, Kawaley J (he was then) described the practice of interim liquidation in
Discover Reinsurance Company v PEG Reinsurance Company Ltd [2006] BDA LR 88. Kawaley J noted that companies are routinely put into provisional liquidation to support parallel Chapter 11 proceedings and these are invariably initiated by the company itself. The appointment of provisional liquidators triggered the automatic stay thereby ensuring that the Company cannot be sued in Bermuda while equivalent protection is in place in the United States. Kawaley J acknowledged that the Court “has clear jurisdiction to appoint provisional liquidators of companies which are not inevitably liable to be liquidated, and in circumstances where it is not necessary to completely displace existing management”.

This “soft” provisional liquidation works in the same way as Chapter 11 in the United States or administration in the United Kingdom, but with even greater flexibility. There are no formal legal requirements to be fulfilled before the appointment of a provisional liquidator. The function and roles of a provisional liquidator are defined in the decree appointing the provisional liquidators, which can be adapted to the particular situation without legal constraints. The appointment may have cross-border effect, even in jurisdictions without “light” insolvency proceedings. As a “debtor-possession” procedure, companies can maintain their operations during the provisional liquidation and benefit from the stay of proceedings. Creditors can be assured that the activities of a company in provisional liquidation will be supervised by the provisional liquidator, acting as bailiff.

The provisional liquidation is often considered as a preliminary stage to the realization of a restructuring by way of concordat. The provisional liquidators rely on their expertise to work out restructuring proposals with the company. Basically, a provisional liquidator can liaise with the company’s creditors and advise them candidly on the merits and viability of restructuring proposals. Creditors can rely on the advice of provisional liquidators knowing that they have a duty to advance the interests of creditors first and foremost as independent officers of the Court.

All of these characteristics have unsurprisingly led to the widespread adoption of provisional liquidation in Bermuda. In 2016, Kawaley CJ suggested a lawyer to regarding Up Energy Development Group Limited [2016] Bda LR 94 that he “did not recall a single insolvent arrangement approved by [the] Court which had not been promoted, in part at least, by provisional liquidators. The lawyer in question was unable to contradict the assertion that a single insolvent arrangement promoted without provisional liquidators would be unprecedented.

Chief Justice Kawaley went on to say that provisional liquidators play a central role in insolvent restructurings which “essentially shape the character of related legal proceedings and the role played by this court”, concluding that “all stakeholders s ‘legitimately expect the JPLs to be appointed’. to oversee an insolvent restructuring.

The opinion of these stakeholders, and in particular of the creditors, plays an essential role in the progress of a provisional liquidation. If a provisional liquidation fails, it will generally be in favor of an insolvent liquidation of the Company in question. Often, an order appointing provisional liquidators is accompanied by an order adjourning a motion for full liquidation. It therefore follows that if the creditors become dissatisfied with the progress of the provisional liquidation, the company risks being liquidated.

In Up to the energy for example, the claimant creditor continued its claim after the appointment of the provisional liquidators and continued to seek a liquidation order because it was pessimistic about the prospects of success of the restructuring of the Company’s debt. The Court again considered the application in a 2018 judgment ([2018] Bda LR 100) and has been urged by the claimant creditors to make barring orders which would terminate the Company if sufficient progress is not made in the restructuring.

The Court admitted that it had a wide discretion to adjourn the motion, “for good reason” following Regarding Z-OBEE Holdings Limited [2017] Bda LR 19. Subair-Williams J went on to conclude that “the courts have long recognized the powerful force of a majority objection of unsecured creditors to a liquidation order.” The petitioner’s request was denied as the majority of unsecured creditors still favored pursuing a restructuring, but Subair-Williams J noted that “Any lack of real progress by JPL in the weeks or months ahead will result in likely a decrease in creditor support for further petition adjournments.

In Up to the energy, this decrease in creditor support occurred after JPL ultimately found itself unable to come up with an implementable plan of arrangement. Up Energy was liquidated in 2022 because there was no longer sufficient creditor support to obtain a further deferment.

In another decision, regarding North Mining Shares Company Limited [2020] SC Bda 7 ComSubair-Williams J reflects on his decision in Up to the energy saying:

“In exercising my judicial discretion, I have given due consideration to the wishes of the majority of unsecured creditors. In Re Up Energy Development Group Ltd [2018] Bda LR 100 by Subair Williams J, I have reviewed numerous previous decisions of this Court and of the English High Court which favored the considerable weight to be given to the wishes of the majority of creditors. In this decision, there was a request for adjournment of a motion which sought to allow a possible plan of arrangement. This was supported by a non-statutory majority of unsecured creditors. In this case, the preference expressed by the majority creditors by value should be treated with similar importance and priority since they are, of course, still the real stakeholders.

It is therefore essential in any Bermuda interim liquidation for the charge holders, the company and any claimant creditor to carefully consider the views of the creditors. Consideration should be given to the nature of updates or reports to creditors during a provisional liquidation. Creditors’ meetings are not mandatory in a provisional liquidation but can be a useful tool in the right case to inform creditors and share their views with them.

At an adjourned petition hearing, it is likely that the views of creditors will play a major role. A company wishing to adjourn a request can contact its creditors to obtain their support. An applicant creditor may also approach other creditors to seek their opinion. It is not uncommon to see these views summarized in an affidavit or for correspondence with creditors to be set out in full.

Creditor support is so central that, in Up to the energy a company from the same group as the company in provisional liquidation was considering assigning its security on loans in order to appear among the unsecured creditors. Kawaley CJ’s initial response was that it should be possible.

The opinion of the creditors of a Bermudian provisional liquidation is therefore at the heart of the decisions likely to be submitted to the Court in a provisional liquidation, all the more so if there is a contentious element.

First published in Corporate Live Wire, Bankruptcy & Restructuring – Expert Guide, May 2022

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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