It is established practice in Bermuda that in the face of corporate insolvency where there are prospects for a successful restructuring, the Bermuda Supreme Court will appoint 'soft-touch' provisional liquidators ("PLs") (typically on the presentation of the company's own petition, but usually unopposed on a creditor petition), with limited powers to supervise the restructuring process and without displacing management.
However in the matter of Up Energy Development Group Limited Supreme Court (Comm) Bda 2016: No. 183; a company incorporated in Bermuda and listed on the Hong Kong Stock Exchange with underlying coal mining assets in the PRC and Canada, the appointment of 'soft touch' PLs on a creditor's petition was opposed by the company with the support of a majority of its unsecured creditors.
The unprecedented question for Chief Justice Kawaley of the Bermuda Supreme Court ("Court") was in the circumstances; subject to what conditions the discretion to appoint PLs should be exercised, where it was common ground that the petition ought to be adjourned to explore a restructuring. Further the Court grappled with whether it ought to place the same weight on the views of unsecured creditors when deciding whether to appoint PLs, as it would when deciding to adjourn a petition for restructuring purposes rather than immediately winding up; it being well settled that the views of the majority of unsecured creditors on the latter will often hold sway.
Until now, there has been no clear local guidance on these discreet points.
Following Up Energy Development Group Limited (the "Company") defaulting on convertible notes in January 2016, a petition to wind up the Company was filed in Hong Kong on 29 March 2016. Subsequently, Credit Suisse, the holder of HK$150 million of the convertible notes, served a statutory demand on the Company for payment of the debt at its Bermuda registered office. The Company failed to satisfy the demand and a winding up petition was filed on 6 May 2016. A summons for the appointment of PLs was issued by the petitioner on 30 June 2016. On 4 July 2016 at the adjourned first hearing of the petition and summons, the Company opposed the appointment of PLs principally on grounds that it had engaged RSM Corporate Advisory (Hong Kong) Limited as independent restructuring advisors to assist with an unsupervised restructuring, and deference should be given to the views of the majority of unsecured creditors. The petition and summons were adjourned to 9 September 2016.
On the adjourned hearing, the Court was guided by in Re Titan Petrochemicals Ltd  Bda LR 761 in which the company, admittedly insolvent but proposing a restructuring, opposed a PL appointment and was able to fend off a winding up petition for a year while pursuing an unsupervised restructuring, before PLs were finally appointed. Ultimately after three years, a successful scheme was approved under the supervision of PLs, but the case demonstrated the perils of allowing an insolvent restructuring to limp along independently, and the likelihood that the appointment of PLs will encourage a more efficient and successful process.
The Court in Up Energy recognised that despite Titan, it is established practice in Bermuda not to permit a company to develop a restructuring scheme without PL supervision where a winding up petition has been presented. The historic application of PL appointments in circumstances where there is an urgent need to preserve assets pending winding up proceedings, has matured with substantial flexibility to enable a form of administration-like procedure, not otherwise available under Bermuda law, with a view to resolving financial difficulty.
This established Bermuda practice, coupled with a consideration of all the relevant circumstances of the case, (not merely danger to assets or misconduct of company management) comprise the test ultimately applied by the Bermuda Court in determining that PLs ought to be appointed to the Company. Relevant facts taken into account were the existence of conflicting creditor groups, questions over the source and amount of funding required for the restructuring, the recent resignation of attesting directors, and lack of unanimity of unsecured creditors.
The Court further noted the practical functions a PL appointment can serve such as effecting a stay of proceedings against the company, the utility of officers answerable to the Court rather than to the company, PL approval and sanction of expenses, and relieving at least some of the burden on the Court of resolving disputes between various stakeholders in an unsupervised restructuring.
The Chief Justice set the bar for future cases by stating this: "...there is a strong starting assumption in favour of the appointment of PLs, and the burden of displacing that assumption will be a heavy one. The Court has no obligation to blindly follow the wishes of the majority of the creditors."
The ruling did leave the door open for insolvent restructurings which may not warrant PLs in the future, for example where the scheme is substantially advanced and already approved, but Up Energy was not that occasion.
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