Bermuda Insolvency Law in 60 Seconds
21 Mar 2023
Insolvency law in Bermuda is principally regulated by the Companies Act 1981 and the Companies (Winding-Up) Rules 1982, supplemented by a wide body of case law.
The following guidance is a summary only.
- Under Bermuda law a company may be wound up on the basis of insolvency if it is unable to pay its debts as they fall due. A company is treated as unable to pay its debts if it fails to satisfy a valid statutory demand, execution on a judgment is returned wholly or partly unsatisfied, or it is otherwise proved to the satisfaction of the court that the company is unable to pay its debts. The courts are also prepared to wind up a company if it is shown that the value of a company's liabilities is greater than the value of its assets.
- Upon making an order for the appointment of a liquidator, the commencement of the liquidation is deemed to relate back to the time of the presentation of the petition, and all dispositions of the company's property between the date of the petition and order are void unless the court otherwise orders.
- Establishing insolvency will enable a creditor to petition the court for the appointment of a liquidator, and may also have other consequences (for example, when a company is insolvent, directors must exercise their powers in the best interests of the company having primary regard to the interests of its creditors). The members of a company can also voluntarily place the company into liquidation by passing a members’ resolution. If at the time of the resolution the directors are unable to confirm and declare that the company is solvent, then the voluntary winding up will be conducted under the control of the creditors who will, for example, be entitled to nominate and appoint the liquidators.
- Liquidation is a class right under Bermuda law. Once appointed, the liquidator's primary duty is to collect in all of the company's assets and then distribute them pari passu to the company's creditors in accordance with the statutory scheme of distribution, and the legislation confers wide powers upon the liquidator to do so. Once a liquidator is appointed, unsecured creditors cannot commence legal proceedings against the company in Bermuda without the permission of the court and rights of action against the company are converted into claims in the liquidation process. Secured creditors generally do not participate in the liquidation process, and may continue to proceed with any enforcement action directly against their collateral pursuant to a valid security interest. Bermuda law only provides for a relatively small class of preferential creditors.
- Under Bermuda law, a liquidator has the power to disclaim onerous property or unprofitable or unsaleable contracts with the approval of the court. Any person who suffers a loss as a result of the disclaimer shall be deemed to be a creditor and may prove in the liquidation for the amount of the debt.
- When a company goes into liquidation, any mutual debts between the company and a creditor will be mandatorily set-off. However, any creditor who extended credit to the company at a time when it had notice that the company was in difficulties cannot set-off. There are no supplementary provisions under Bermuda law relating to contractual netting.
- A liquidator may challenge transactions entered into in the twilight period prior to insolvency where such transactions constitute a fraudulent preference. The company must have been unable to pay its debts at the relevant time or the transaction caused it to become unable to pay its debts. In the case of fraudulent preferences, the relevant period is within six months of the commencement of the liquidation. To set aside such payments, it is necessary to show that there was a dominant "intention to prefer" the relevant creditor(s). A floating charge granted in the 12 months prior to the commencement of the liquidation may also be set aside unless it can be proven that the company was solvent immediately after the creation of the charge. Further, any eligible creditor may challenge a transaction entered into by a company if the disposition was at an undervalue and the dominant purpose of the transaction was to put assets beyond the reach of creditors. Beyond this, there is no separate avoidance regime for undervalue transactions.
- A liquidator can also pursue past and present directors (including shadow or de facto directors) and officers of the company for breach of duty, misfeasance or fraudulent trading. If it appears that any person has been carrying on the business of the company to defraud creditors or for any fraudulent purpose the liquidator may apply to the court for an order that such persons make a contribution to the company's assets.
- It is also possible for an insolvent company to enter into a scheme of arrangement to restructure its debts. Companies proposing to implement a scheme of arrangement will often apply to the court for the appointment of a provisional liquidator to stay claims by any unsecured creditors whilst they seek to implement the scheme; however, this does not affect the rights of secured creditors. A majority in number and representing 75 per cent in value of those creditors present and voting must vote in favour of a scheme of arrangement, and the scheme must be sanctioned by the court in order for the compromise to be binding on dissenting creditors.
- In order to be appointed sole liquidator, a person must be resident in Bermuda and their credentials accepted by the court. Where two or more persons are to be appointed liquidator, at least one of them must be resident in Bermuda with credentials acceptable to the court.
- There are no statutory provisions in Bermuda relating to the conduct of cross-border insolvency proceedings or for cooperation with foreign office holders. However, there are various judicial decisions providing guidance in this area and show that cross-border cooperation under the court’s common law powers of recognition and assistance will be carefully considered.