Bermuda Corporate Restructuring

Corporate restructuring in Bermuda is primarily governed by the Companies Act 1981, a statute that has evolved to meet the demands of global finance while retaining the stability of English common law principles. For a Bermuda-incorporated entity facing liquidity constraints or over-leverage, the two primary paths are the Scheme of Arrangement and Provisional Liquidation. A Scheme of Arrangement under Section 99 of the Act allows a company to reach a compromise with its creditors or shareholders. This process is not strictly an insolvency procedure; it can be used for solvent reorganisations, mergers, or debt-for-equity swaps. However, its most frequent application for our clients is in the context of distressed debt. The hallmark of the Bermuda system is its flexibility. Unlike the more rigid administrative regimes found in other jurisdictions, the Bermuda Supreme Court facilitates a 'debtor-in-possession' style of restructuring via the appointment of Joint Provisional Liquidators (JPLs). This 'light touch' approach allows the existing management to continue operations under the supervision of the JPLs, who report to the court and act as a bridge between the company and its creditors. This structure is particularly effective for Bermuda holding companies with significant operating assets in Asia or the Middle East, as it provides a stable legal platform to negotiate a comprehensive workout without the immediate threat of asset seizures or hostile winding-up petitions. Precision in defining creditor classes is essential to avoid challenges during the sanctioning phase.

The 'light touch' provisional liquidation is Bermuda’s answer to the US Chapter 11 process, though it operates within a liquidation framework. When a company files a petition for its own winding-up, it simultaneously applies for the appointment of JPLs. The court order appointing the JPLs defines their powers, typically allowing the board of directors to retain most managerial functions while the JPLs focus on the restructuring plan. This creates an automatic stay on proceedings against the company in Bermuda, preventing individual creditors from gaining an unfair advantage through litigation. For international groups, this stay is a critical shield. While the stay is technically limited to Bermuda, the Supreme Court frequently issues letters of request to foreign courts—such as those in the United States, United Kingdom, or Hong Kong—seeking recognition of the Bermuda proceedings. This cross-border cooperation is a cornerstone of Bermuda’s restructuring appeal. The BMA plays a peripheral but important role, particularly for regulated entities in the insurance or digital asset sectors. If the entity holds a licence under the Insurance Act 1978 or the Digital Asset Business Act 2018 (DABA), the BMA must be kept apprised of the restructuring steps to ensure policyholder or client interests are protected. Our role involves coordinating these regulatory communications to ensure that the restructuring does not inadvertently trigger a licence revocation or additional enforcement actions that could jeopardise the recovery value for stakeholders.

A Bermuda Scheme of Arrangement is a powerful tool for cramming down dissenting creditors, provided the statutory thresholds are met. The process involves two court hearings. The first, the 'convening hearing,' asks the Supreme Court to approve the classification of creditors and the mailing of the scheme documents. Classification is a frequent point of contention; creditors whose rights are 'not so dissimilar as to make it impossible for them to consult together with a view to their common interest' must be grouped together. If a class is incorrectly constituted, the court may refuse to sanction the scheme later. Following the convening order, meetings are held where the scheme must be approved by a majority in number representing 75% in value of each class. The second hearing, the 'sanction hearing,' is where the court evaluates whether the scheme is fair and reasonable. The court does not act as a rubber stamp; it must be satisfied that the majority is acting bona fide and that the arrangement is one that an intelligent and honest person, a member of the relevant class, might reasonably approve. Once sanctioned and filed with the Registrar of Companies, the scheme is binding on all members of the class, including those who voted against it. This provides the ultimate legal certainty required for complex debt-for-equity swaps or the issuance of new debt instruments. Xavion Capital ensures that the logistical execution of these meetings meets the rigorous standards of Bermuda law.

Bermuda’s Economic Substance Act 2018 and the related Regulations have added a layer of complexity to corporate restructures. Any 'relevant activity'—including holding company functions, financing, and leasing—requires the entity to demonstrate local management, expenditures, and physical presence. In a restructuring scenario, the question arises as to how these requirements are met when the company is in a state of flux. Generally, the BMA and the Registrar of Companies expect that substance requirements continue to be met as long as the entity is active. However, the appointment of Bermuda-based JPLs can actually strengthen a company's substance profile, as it places a regulated professional and court-officer at the helm of the company’s strategic decision-making within the jurisdiction. Furthermore, the meetings of the board or the JPLs to discuss the restructuring should ideally take place in Bermuda to satisfy the 'directed and managed' test. We advise our clients to document these meetings meticulously. Failure to comply with substance requirements can lead to significant financial penalties and, ultimately, the striking off of the company, which would be catastrophic during a restructuring. Beyond substance, the 'fit and proper' requirements for directors remain in force. If a restructuring involves a change in control or the appointment of new directors by creditors, the BMA must be notified, and in the case of regulated entities, prior approval is often required. Our advisory ensures that the transition of control during a restructure remains compliant with these oversight standards.

The banking landscape for Bermuda entities undergoing restructuring requires proactive management. Most traditional offshore banks have heightened sensitivity to entities in provisional liquidation or those proposing a Scheme of Arrangement. It is common for banks to freeze existing accounts upon the announcement of a winding-up petition, even if it is for a 'light touch' restructure. To mitigate this risk, we work with JPLs to establish new 'estate' accounts, often with specialised distressed-debt friendly institutions or through the use of segregated accounts if the company is an SAC. The Segregated Accounts Companies Act 2000 provides a unique advantage in Bermuda; it allows for the ring-fencing of assets and liabilities within specific cells. In a restructuring, this can prevent a contagion effect where the insolvency of one business line or asset class forces the entire entity into liquidation. This is particularly relevant for multi-strategy funds or insurance companies with distinct portfolios. When restructuring a Bermuda entity, it is also vital to consider the international tax implications. While Bermuda itself has no corporate income tax (notwithstanding the upcoming Global Minimum Tax changes for large multinationals), the restructuring of debt can trigger 'cancellation of debt' (COD) income or other tax events in the jurisdictions where the creditors or subsidiaries are located. We coordinate with tax counsel in the relevant onshore jurisdictions—such as the UK, US, or EU—to ensure that the Bermuda restructuring plan is tax-efficient and does not create unforeseen liabilities that erode the benefits of the debt reduction.