Following our recent advisory on the Bermuda Supreme Court decision in the matter of Up Energy Development Group Limited Supreme Court (Comm) Bda 2016: No. 183, which clarified the basis for the appointment of provisional liquidators ("PLs") in furtherance of a restructuring in Bermuda ( click here to view), the parties remained at odds over the identity of the nominated PLs which ought to be appointed.
The residual differences between the petitioner and Up Energy Development Group Limited (the "Company") were resolved by the Chief Justice by appointing the Company's Hong Kong nominee, Mr Osman Mohammed Arab and Mr Lai Wing Lun of RSM Corporate Advisory (Hong Kong) Limited ("RSM") together with the petitioner's Bermuda nominee, Mr Roy Bailey of EY Bermuda Ltd.
The decision was an unusual one; the circumstances leading to which have not arisen previously in Bermuda. Ordinarily where a company seeks to restructure, its officeholders would approach and nominate potential PLs. However in this instance, the Company opposed the appointment of PLs altogether, advocating an unsupervised restructuring.
The day before the adjourned first hearing of the petition and the application to appoint PLs, the Company appointed RSM as independent restructuring advisors in an effort to stave off a winding up order or PL appointment. Not surprisingly, upon the court's order to appoint 'soft touch' PLs, the Company viewed Mr Arab and Mr Lun of RSM as the appropriate appointees (together with a Bermuda based nominated appointee1); RSM having been in place for 4 months as restructuring advisors there were economies of cost and acquired knowledge, in addition to an existing working relationship.
The petitioner objected to the appointment of Mr Arab and Mr Lun on the basis that they were conflicted and could not be trusted to act independently in the interests of all creditors, having received instructions from and reported to the Company for the duration of the appointment of RSM as restructuring advisor. The petitioner further claimed that its nominated appointee was better qualified to assess the value of the Company's assets, which mainly consist of coal mines.
The creditor body was equally divided on the issue.
The Chief Justice described the appointment of PLs to supervise a restructuring against the will of the management in place as "..akin to a 'shotgun marriage'" and noted the importance of PLs striking a balance between winning the confidence of both the creditors and the Company. The Court recognised that an unworkable relationship between the Company's management and the PLs is not just an impediment to a successful restructuring in general, but the existence of tension would likely also result in increased PL costs, over and above the duplication of costs in the event RSM were replaced. In making his determination, the Chief Justice considered efficiencies of the alternative PL's costs, the need for both perceived and actual independence, and ensuring the appointed PLs have a functional relationship with management of the Company in order to facilitate an efficient restructuring process.
Ultimately, it was the need for this working relationship which trumped the petitioner's Hong Kong nominee. However, in order to maintain the perception of independence2, and to ensure companies do not seek to avoid engaging with the court process in the future, the court also appointed the petitioner's Bermuda based nominee, Mr Bailey.
Further finessing the nuances of this case, and to alleviate concerns of cost duplication, the Chief Justice guided the appropriate division of labour as between the PLs, stating that the primary function of the Bermuda PL is to serve as an "independent filter" to protect the interests of the minority unsecured creditors, and that the primary carriage of work in each jurisdiction should be conducted by the relevant PL in that jurisdiction.
1 While there is no specific legislative requirement, it is settled custom in Bermuda to have at least one Bermuda based liquidator appointed to any liquidation of a Bermuda registered company.
2 The Court did not doubt the professionalism of Mr Arab and Mr Lun to act as independent PLs nor the independence and professionalism of the Company's Bermuda nominee
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