BERMUDA Law and Practice Contributed by: Erik Gotfredsen, Jemima Fearnside and Larina Kenny, Wakefield Quin Limited
7.3 Length of Insolvency Process and Recoveries It is difficult to determine the length of a typical insol- vency process in Bermuda, as in many cases provi- sional liquidation orders are sought in tandem with a US Chapter 11 proceeding or a scheme of arrange- ment in another jurisdiction, to enable a cross-group moratorium on enforcement actions and allow breath- ing room for restructuring proposals to be finalised. 7.4 Rescue or Reorganisation Procedures Other Than Insolvency Bermuda has no equivalent to US Chapter 11 pro- ceedings to enable company rescues or reorganisa- tions outside of insolvency proceedings. A hybrid, light-touch alternative is a provisional liquidation order granted by the Bermuda court in tandem with a Chapter 11 proceeding, or scheme of arrangement in another jurisdiction, to enable a cross-group morato- rium on enforcement actions. A scheme of arrangement is a compromise between the company and its creditors that, with the approval of the Bermuda court, allows a company to implement the compromise. The scheme must be a compromise between the company and its creditors as opposed to the creditors themselves. A scheme of arrangement requires a meeting of each class of affected creditors to be convened. The statutory supermajority vote that must be obtained at the scheme meeting is a majority representing at least 75% in value of each affected class of creditors in attendance and voting. Following the relevant vote, a hearing would be held before the court to sanction the implementation of the scheme. If the scheme is sanctioned by the court, it is binding on all creditors. A minority creditor is bound by the scheme and cannot apply to the Bermuda court to vary its terms. The provisional liquidation process has been used extensively in Bermuda for a variety of reasons. It is used where it is desirable to restructure an insolvent company rather than to wind it up and liquidate its assets. A provisional liquidation order is a court-overseen supervision process with court-appointed provisional liquidators working with existing management to max-
imise creditor returns. Applications for provisional liq- uidation orders may be commenced by creditors or by the company, demonstrating support from creditors for the proposal, and are seen as a key interim step to allow for restructuring ahead of winding-up orders. Under a provisional liquidation, a moratorium on legal proceedings typically would be granted so long as the provisional liquidators stay in office. 7.5 Risk Areas for Lenders The following provisions relating to reversible ante- cedent transactions may result in certain transactions being rendered void or invalid. Fraudulent Preference Any conveyance or other disposition of property made by a Bermuda company within six months prior to the commencement of its winding-up will be considered invalid if it was made with the intent to fraudulently prefer one or more of the company’s creditors at a time when the company was unable to pay its debts as they became due. A payment to a secured party would not typically be considered preferential. How- ever, if the intention exists, a granting of security could be considered preferential and set aside. The com- mencement of a company’s winding-up is the date that the company resolved to be wound up and, if no such resolution exists, the time of presentation of the court petition that led to the company’s winding-up. Fraudulent Conveyance Under the fraudulent conveyance provisions of the Conveyancing Act 1983, a creditor may seek to set aside a disposition of property (including the crea- tion of a security interest) if the disposition was made when the transferor’s dominant purpose was to put the property beyond the reach of a person (or class of persons) who is making, or may make, a claim against the transferor and the disposition was at an under- value. Such a claim can only be made by an “eligible creditor”, which is a person who: • is owed a debt by the transferor within two years after the disposition; • on the date of the disposition, is owed a contingent liability by the transferor, where the contingency giving rise to the obligation has occurred; and
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