Cross-Border Recognition
of Insolvency Proceedings Involving Bermuda, the
British Virgin Islands, and
the Cayman Islands

Bermuda, the British Virgin Islands (BVI), and the Cayman Islands are all self-governing British Overseas Territories with stable and sophisticated legal and judicial systems including final rights of appeal to the Privy Council in London.

Most international business companies incorporated in these territories conduct their business activities in foreign jurisdictions, whether that is the U.S., Europe, Latin America, the Middle East, or Asia.

Many of these companies have their securities listed on foreign stock exchanges (including in New York and Hong Kong), with assets, liabilities, and creditors in multiple locations and with contracts governed by various governing laws.

Indeed, a majority of companies whose shares are listed on the Hong Kong Stock Exchange are incorporated in either Bermuda or the Cayman Islands. Many of these companies have operating businesses in China or Asia more broadly, several of which have been showing signs of financial distress in recent months, increasingly giving rise to the risk of default on their international debt obligations.

As a result, a wide range of international companies are subject to the bankruptcy jurisdiction of not only their ‘home court’ (whether that is the Supreme Court of Bermuda, the High Court of the British Virgin Islands, or the Grand Court of the Cayman Islands), but also the courts of the foreign jurisdictions in which they operate or have other relevant connections with.

There are also occasions where a financially distressed foreign counterparty, or a related company within a corporate group, is placed into a foreign bankruptcy proceeding. During this process, the foreign bankruptcy trustee or liquidator (or an equivalent officer) may need to secure recognition and assistance from the courts of the various jurisdictions. This is often for something as routine as securing access to ‘offshore’ bank accounts, or production of documents and information, but is sometimes for something more controversial or litigious (such as a substantial claim for damages, or insolvency clawbacks).

The legal and accounting professions, and the courts in Bermuda, the British Virgin Islands, and the Cayman Islands therefore have extensive experience of resolving cross-border insolvency and restructuring issues, including issues associated with recognition of, and assistance to, foreign bankruptcy trustees or liquidators, and foreign debt restructuring plans.

Parallel Bankruptcies

There have been several bankruptcy scenarios involving the offshore jurisdictions in which international companies or corporate groups have been placed into compulsory liquidation, or bankruptcy proceedings, in two jurisdictions simultaneously (or one after the other). In these situations, one of the courts is recognised as the “primary” court, and the other as the “ancillary” court.

The issue of which court should be granted “primary” status and which court should be granted “ancillary” status with respect to the liquidation of an international company is a matter for determination by the respective courts in accordance with applicable law and protocols.

In this context, there have been many successful applications over the years by:

companies entering into Chapter 11 proceedings in the United States while at the same time applying for the appointment of provisional liquidators with limited powers to supervise a restructuring alongside a Chapter 11 trustee, thus obtaining mandatory stays of proceedings in both the offshore jurisdiction and the U.S.; and
liquidators of Bermuda, Cayman Islands, or BVI companies for recognition under Chapter 15 of the U.S. Bankruptcy Code (and its statutory predecessors), subject to occasional debate as to the proper characterisation of the relevant company’s ‘Centre of Main Interests’ at the relevant point in time.

Parallel Bankruptcies

In this context, there have been many successful applications over the years by:

companies entering into Chapter 11 proceedings in the United States while at the same time applying for the appointment of provisional liquidators with limited powers to supervise a restructuring alongside a Chapter 11 trustee, thus obtaining mandatory stays of proceedings in both the offshore jurisdiction and the U.S.; and
liquidators of Bermuda, Cayman Islands, or BVI companies for recognition under Chapter 15 of the U.S. Bankruptcy Code (and its statutory predecessors), subject to occasional debate as to the proper characterisation of the relevant company’s ‘Centre of Main Interests’ at the relevant point in time.

Parallel Restructurings and Schemes of Arrangement

Over the years, several restructuring cases have involved insolvent international companies with a Bermuda or Cayman Islands connection on the one hand, and U.S., Latin American, or Asian connections on the other. These companies have been restructured or liquidated with the use of parallel schemes of arrangement (or equivalent restructuring plans) sanctioned by the home court and appropriate foreign courts.

Parallel schemes can provide a strong legal foundation for a successful international restructuring (binding in all creditors and shareholders), but they do have the potential for duplicative expense.

There have also been various recent cross-border cases involving both Hong Kong and Bermuda and the Cayman Islands, in which the Hong Kong judiciary has required insolvent companies, whether acting by their directors or by provisional liquidators appointed for restructuring purposes, to:

There will continue to be some cases in which parallel schemes of arrangement will be necessary and appropriate, but in others, the costs associated may be out of proportion to the potential benefits, particularly when regarding the interests of all creditors involved.

An alternative option is an application to a ‘home’ court for recognition and enforcement of a foreign court-sanctioned debt restructuring scheme. That said, this approach is not suitable in every case, and it is not without its potential complications and legal uncertainties, which could result in a false economy in the event of legal challenge.

Indeed, there is some potential legal uncertainty as to whether a foreign scheme of arrangement or related procedure can be recognised and enforced in these territories if all relevant parties do not expressly submit to the jurisdiction of the foreign court. This includes all creditors and shareholders if, for example, the restructuring contemplates a ‘debt for equity’ swap, or a variation of shareholder rights.

Parallel Restructurings and Schemes of Arrangement

International Insolvencies: Recognition and Assistance of ‘Home’ Insolvency Proceedings in Foreign Jurisdictions

The BVI, Cayman Islands, and Bermuda courts have frequently issued letters of request to foreign courts, including those in Singapore, Hong Kong, the U.S., Canada, and Australia, asking for recognition of, and assistance to, liquidators of companies appointed in each of their respective jurisdictions. It is also possible for provisional liquidators, whose appointment has principally been made for restructuring purposes, to be granted recognition by foreign courts, including in jurisdictions such as Hong Kong.

Subject to certain local rules and legislative provisions, the courts in these territories may – and usually do – recognise liquidators appointed by the court of the foreign company’s domicile. The courts will also recognise the effects of a winding up order made by the foreign court, and have a discretion pursuant to such recognition to assist the primary liquidation court by doing whatever they could have done in the case of a domestic insolvency.

However, the precise scope of each of the courts’ powers to assist foreign liquidations has been the subject of considerable debate in several recent judgments. Given the specific statutory and common law rules in each territory, there are nuances between each of the separate jurisdictions.

At an appellate level, the Privy Council has stressed that the question of whether it is appropriate to develop the common law in jurisdictions such as Bermuda to assist foreign liquidations depends on the facts of each case, and the nature of the power that the court is being asked to exercise.

In the context of an application for an order for production of documents by an entity within the Bermuda court’s jurisdiction, for example, the Privy Council has noted that such a power is only available to assist the officers of a foreign court of insolvency jurisdiction or equivalent public officers where necessary, but it is not available to assist a voluntary winding-up, which is essentially a private arrangement.

The court does not have a power to assist foreign liquidators to do something which they could not do under the law by which they were appointed, and the court’s exercise of its power must be consistent with the substantive law and public policy of the assisting court in Bermuda.

In another recent case, on unusual facts, the Supreme Court of Bermuda declined to recognise the appointment of a UK liquidator, in circumstances where no active assistance had yet been requested. Any such potential assistance would probably have been refused, given pending litigation in England and Wales and other information-gathering mechanisms available to the parties.

These cases tend to suggest that the courts in Bermuda, BVI, and Cayman Islands will be increasingly careful to detect, and prevent, any demonstrable abuse of cross-border recognition and assistance remedies for the purpose of inappropriate strategic advantage.

International Insolvencies: Recognition and Assistance of ‘Home’ Insolvency Proceedings in Foreign Jurisdictions

Looking Forward

Looking forward, we anticipate an increasing number of cross-border insolvency and restructuring proceedings involving Cayman Islands, BVI, and Bermuda-registered companies with business interests in China and Hong Kong, but with U.S. creditors and shareholders in the U.S.

Given China’s traditional approach to cross-border insolvency proceedings, these cases will likely throw up a number of novel and complex issues, engaging the courts of Hong Kong, the U.S., Bermuda, the BVI, the Cayman Islands, and possibly also the courts of Canada and England & Wales.