Explaining Bermuda Insolvency Law
Updated: Apr 16
Bermuda insolvency law primarily follows English insolvency law, and is regulated by the Companies Act 1981 and the Companies (Winding-Up) Rules 1982, as well as supplemented by a wide body of case law. However, there are unique provisions which have been added to the English model, and which have amended it for local purposes.
In this post, we’re summarising the basics of Bermuda insolvency law. Should you need advice about your specific circumstances, please contact us here.
Debts and insolvency
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 debt. The Courts are also prepared to wind up a company if it is shown that the value of the company's liabilities is greater than the value of its assets.
When a company goes into winding-up, 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.
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 upon the liquidator wide powers to enable him 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.
Liquidator appointment and power
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 regard to the interests of its creditors rather than its members). The members of a company can also voluntarily appoint a liquidator by passing a resolution of members, and if the company is unable to pay its debts as they fall due then the voluntary winding-up will be conducted subject to the control of the creditors.
Upon making an order for the appointment of a liquidator, the commencement of the winding-up 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.
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 the amount of the debt.
A liquidator may also 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 winding-up. To set aside such payments, it is necessary to show that there was a dominant "intention to prefer" the relevant creditor(s). There is no separate avoidance regime for undervalue transactions. A floating charge granted in the 12 months prior to the commencement of winding-up may also be set aside if granted for no consideration. Further, any eligible creditor may challenge a transaction entered into by a company if the dominant purpose of the transaction was to put assets beyond the reach of creditors.
Finally, a liquidator can pursue former directors (including shadow or de facto directors) and officers of the company for either 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.
Schemes of arrangement
It is also possible for an insolvent company to enter into a scheme of arrangement to try and restructure its debts. Companies proposing to try and 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 try 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 present and voting at each class meeting must vote in favour of a scheme of arrangement.
Requirements and provisions
There is no licensing requirement under Bermuda law in relation to acting as the liquidator of a company. There are also 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 which provide guidance in this area and show that cross-border cooperation will be carefully considered.
These are just some of the unique provisions within Bermuda insolvency law. For more information, we would recommend reading the Chambers & Partners Bermuda Insolvency Practice Guide.