BERMUDA Law and Practice Contributed by: Erik Gotfredsen, Jemima Fearnside and Larina Kenny, Wakefield Quin Limited
themselves that a sufficient direct, indirect or group commercial benefit exists. If the Bermuda entity is insolvent, its directors may be liable for wrongful trad- ing and there is a risk that the guarantee may be void on the basis that it amounted to a fraudulent prefer- ence. 5.4 Restrictions on the Target As older Bermuda companies may still have legacy restrictions in their by-laws, the constitutional docu- ments of the Bermuda guarantor should be checked to ensure it has capacity to grant the contemplated guarantee. A company’s memorandum of association may not set out an express power to provide guaran- tees; however, the company’s objects would typically be sufficiently broad to permit the entry into guaran- tees that are ancillary to the business of the entity. 5.5 Other Restrictions Other than as discussed herein, there are no other restrictions in connection with, or significant costs associated with, or consents required to approve the grant of security or guarantees. There are no works council consents applicable in Bermuda. 5.6 Release of Typical Forms of Security Typically, a deed of release between the chargor and chargee is used to evidence the release of secu- rity. Where security is registered with the Registrar of Companies, submission of the deed of release together with a nominal fee is required to register the satisfaction of the charge. 5.7 Rules Governing the Priority of Competing Security Interests Generally, registration is not required in Bermuda to perfect a security interest. However, to ensure the pri- ority in Bermuda of a security interest granted by a Bermuda company, it needs to be registered at the Registrar of Companies and upon registration, to the extent that Bermuda law governs the priority of the security interest, it will have priority in Bermuda over any unregistered security interest and over any sub- sequently registered security interest. In order to register a security interest, a copy of the fully executed charge instrument will need to be filed with the Registrar of Companies, together with the
appropriate filing fee. The Registrar of Companies will issue a certificate of registration recording the effec- tive date of registration of the security interest. Regis- tration is effective as at the time of filing and not at the time the Registrar of Companies issues the certificate of registration. Mortgages and charges over Bermuda land and ships, aircraft, and aircraft engines registered in Bermuda must be filed with separate registers in Bermuda. Where there are competing security interests between lenders or members of a lender group, these are generally determined by a contractual arrangement, such as an intercreditor agreement or a subordination agreement. The rights of a secured creditor rank ahead of the claims of unsecured creditors of an insolvent Bermu- da entity, save that a floating charge created within 12 months of the insolvency of the chargor is invalid except for the amount of cash paid in consideration for the granting of the charge. Contractually agreed subordination of secured credi- tors generally survives subsequent insolvency, save where there is demonstrably a fraudulent preference, or the arrangements are determined to be unduly onerous by a liquidator. 5.8 Priming Liens Few security interests arise by operation of law that can prime a lender’s security interest that has been properly registered in Bermuda. Recent transactions relating to Bermuda entities involved in US Chapter 11 bankruptcy exits have seen an increase in debtor-in-possession loans with existing secured lenders primed by the exit lenders. Generally, these are perceived as last-resort financ- ing arrangements structured by onshore counsel, with Bermuda involvement ancillary to the principal transaction.
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