13 August 2020

Bermuda courts answer key questions relating to 'soft touch' provisional liquidation

Today 'soft touch' provisional liquidation is one of the most commonly deployed tools for facilitating a restructuring of offshore incorporated companies listed in Hong Kong and Singapore. However, when soft touch provisional liquidation was first developed by the Bermuda Court for this purpose, it was regarded as a tool of last resort.

Directors were hesitant to voluntarily deploy a mechanism which not only suggested that the company was in 'liquidation' but had been most often used in England and Wales as 'the nuclear weapon of the companies court' to urgently oust the boards of companies at risk of having their assets dissipated. From a substantive perspective, there were also good reasons to be hesitant. There was little decided authority on issues critical to the success of any restructuring such as whether foreign what principles would apply to determining the identity of the liquidators and whether soft touch provisional liquidators would be recognised in onshore jurisdictions.

Several recent decisions arising in connection with provisional liquidations commenced in Bermuda and elsewhere have given boards and creditors greater certainty on how these issues will be dealt with and are surveyed below.

Appointment of soft touch JPLs to avoid a foreign winding up order

The primary benefit of the appointment of soft touch joint provisional liquidators ("JPLs") is the stay of proceedings that accompanies such appointment. However, it remained to be seen whether the Bermuda Court would act to appoint JPLs where a foreign court with jurisdiction over a substantial part of the undertaking of the company was already seized of pending insolvency proceedings.

In North Mining Shares Company Limited, the Bermuda Supreme Court considered an application for the appointment of JPLs in Bermuda in advance of a winding up hearing scheduled in the Hong Kong Court in relation to a prior filed creditor petition. While the company alleged it was balance sheet solvent, had the support of a majority of unsecured creditors and was engaging in debt restructuring negotiations, it admitted that it had not satisfied the undisputed petition debt in Hong Kong.

The Bermuda Supreme Court granted the company's application for JPLs notwithstanding the active proceedings and pending hearing in Hong Kong, confirming the Bermuda court's broad power to appoint 'soft touch' JPLs to protect a company against legal action by its creditors while pursues a restructuring.

On the issue of comity, the Bermuda Court took into account the fact that the Hong Kong Court did not have the power to JPLs on a 'soft touch' basis, but could recognize an order of such an appointment by the Bermuda Court pursuant to a letter of request from the Bermuda Court. On this basis, the Bermuda court concluded that it could assist the Hong Kong Court by appointing 'soft touch' JPLs. The Bermuda Court considered this would enable the company together with its majority of creditors to pursue a restructuring under the framework of the Bermuda Proceedings and potentially avoid the final destruction of the company. The decision also reinforced the principle that due regard should be given to the wishes of the majority of unsecured creditors in exercise of the power to appoint JPLs.

Principles for determining the identity of the JPLs

It is commonly the case that there are competing views between the company and creditors or between the creditors themselves as to the appropriate individuals to fulfil the role of soft touch JPLs. Inevitably where the relationship between the creditors and the board has broken down, there will be suspicions on both sides about the loyalties of each factions proposed appointees. The Bermuda Court has now determined a series of cases in relation to these issues, providing a clear roadmap for creditors and company alike.

In Up Energy Development Group, the JPLs nominated by the company had been previously retained by the company as independent restructuring advisers. On the basis of this alleged conflict of interest, the company's nominees did not have the support of a majority of creditors. While the Court acknowledged the creditors' concerns about independence, the court concluded that on the one hand it was important to appoint JPLs being able to work effectively with the company's management but on the other, the JPLs should consist of at least one appointee who is both apparently and actually entirely independent of the Company. Accordingly, the court appointed one independent JPLs alongside with one of the company's nominees.

In the very recent decision of Agritrade Resources Limited, the Bermuda Supreme Court provided a further example of the approach it will take to such disputes. The Court in Agritrade held primarily that the exercise of selecting JPLs should be determined by the court on a summary basis, with the object of achieving the successful reconstruction of the company firmly in mind.

In Agritrade the court declined to appoint JPLs proposed by a creditor on the basis that the proposed JPLs (i) were alleged to possess confidential information of the company's major shareholder from a previous engagement which gave rise to an unnecessary risk of future litigation and (ii) lacked the confidence of the second largest creditor, which would impair the their ability to carry out their work effectively. As a result, the Court ordered that the JPLs nominated by the company be appointed.

These decisions highlight the importance the Bermuda Court will place on the JPL's independence and neutrality, and their ability to work effectively with both the company management and significant creditors.

Recognition of soft touch provisional liquidation onshore

A further key issue for companies and creditors intending to commence soft touch provisional liquidation is the extent to which and the circumstances in which the JPLs would be recognised in key onshore jurisdictions. There are now several decisions which clearly set out the relevant principles applied by each jurisdiction and suggest that JPLs appointed in Bermuda and other offshore jurisdictions over insolvent companies are capable of obtaining recognition in key onshore jurisdictions.

Hong Kong

In Re Joint and Several Provisional Liquidators of China Oil Gangran Energy Group Holdings Ltd [2020] HKCFI 825, Mr Justice Harris of the Court of First Instance in Hong Kong granted the recognition order in relation to Cayman Islands court appointed 'soft touch' JPLs and approved the court’s past practice of recognising foreign 'soft touch' provisional liquidation.

Similarly, in Re Joint Liquidators of Supreme Tycoon Ltd [2018] HKCFI 277, Mr Justice Harris of the Court of First Instance in Hong Kong granted the recognition order and assistance to liquidators appointed by the Supreme Court of the British Virgin Islands in a creditors’ voluntary winding-up. Although this case has widened the scope of recognition and assistance to liquidators in a creditors’ voluntary liquidation, this would not extend to solvent liquidations. As pointed out by Mr Justice Harris, a foreign solvent liquidation is not a collective insolvency proceeding, and is more akin to the private arrangement referred to by the Privy Council in Singularis Holdings Ltd v PricewaterhouseCoopers [2014] UKPC 36.

England & Wales

While not a case which concerns soft touch JPLs Re Sturgeon Central Asia Balanced Fund Ltd sets out clearly the circumstances in which Bermuda appointed joint provisional liquidators will be recognised by the English Courts. In a first instance decision on an application made ex-parte by the JPLs the English High Court granted recognition, however this was later discharged on the application of a director. The English high court refused the recognition of the company's liquidation in Bermuda as a foreign main proceeding under the Cross-Border Insolvency Regulations 2006 (UK), because the company had been solvent and was wound up on just and equitable grounds. The court held that the Cross-Border Insolvency Regulations 2006 (UK) only related to debtors that were insolvent or in severe financial distress.

United States

In Re Olinda Star Ltd, the United States Bankruptcy Court confirmed that an offshore 'soft touch' joint provisional liquidation may qualify as a foreign main proceeding and joint provisional liquidators may qualify as foreign representatives under Chapter 15 of the United States Bankruptcy Code, confirming that soft touch provisional liquidation is capable of recognition under the US bankruptcy regime

Judge Martin Glenn of the US Southern District US Bankruptcy Court considered a petition for recognition by the "soft touch" joint provisional liquidator of a BVI incorporated company that had been appointed with limited powers to oversee the exercise of power of the sole director of the company outside the ordinary course of business and ultimately implement a restructuring. Despite the circumscribed scope of the joint provisional liquidators powers, the Judge Glenn granted recognition as sought by the JPLs.

This decision provides an important precedent for creditors and directors of companies with US situate assets or US law governed debt obligations that are considering commencing soft touch touch provisional liquidation in the company's offshore place of incorporation.

 

An original version of this article was published by Asia Business Law Journal, July 2020.

© Carey Olsen 2020.