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Home , Creditor, Dominion, Liquidation, Scheme of arrangement

Schemes of Arrangement Delivering Global and Reorganisations

Quick Read - Bermuda Bermuda Schemes Schemes of Arrangement of Arrangement What is it? Delivering Global Restructurings >> A compromise or arrangement between a company and a class or classes of its and Reorganisations and/or shareholders. >> Similar to an English under Part 26 of the or a Hong Kong Introduction The Bermuda Scheme scheme of arrangement under Part of Arrangement 13, Division 2 of the new Companies A court-supervised scheme of arrangement Ordinance. is the most straightforward and cost- A Bermuda scheme of arrangement is a effective way to facilitate a corporate rescue court-approved compromise or arrangement What is it used for? or of a company which is between a company and its creditors (or classes >> Effecting solvent reorganisations of a incorporated in Bermuda but has its operations thereof). A Bermuda scheme is most commonly company or group structure, including or listing status in another jurisdiction. As a used to implement a distressed financial by way of merger or take-private, and highly sophisticated, tax-neutral offshore restructuring by varying or compromising the insolvent restructurings by way of a jurisdiction based on English common rights of the relevant stakeholders (ordinarily, -for-equity swap or other debt- law, Bermuda is a jurisdiction of choice for the creditors) of the company, although a reduction strategy. companies listed on the NYSE, Nasdaq, HKSE scheme of arrangement can also be used to and SGX. Bermuda’s statutory scheme of facilitate group restructurings, mergers and arrangement regime (either on a standalone take-privates in a non- context. Who can use it? basis, or in conjunction with a protective >> Any company incorporated in Bermuda, provisional ‘wrapper’) empowers While Bermuda schemes are often invoked including companies which have their such companies to restructure their financial in a corporate rescue context, a standalone operations overseas and are listed on liabilities without endangering their tax status scheme is not a formal insolvency process and an overseas exchange. or duplicating proceedings across the various the directors of a company retain all of their jurisdictions in which such companies may ordinary powers and responsibilities while What are the voting requirements have their operations or creditors. a scheme is formulated and implemented. for a scheme? Directors’ powers are tempered (or in some >> A scheme requires at least 50% in The schemes of arrangement successfully cases curtailed altogether) when a scheme is number representing 75% in value of implemented by Noble Group1 and Titan promoted whilst a company is in provisional those voting in each class to approve Petrochemicals, and the scheme presently liquidation, although in that context the the proposed scheme. being negotiated by Up Energy, provide recent company would gain the significant benefit examples of the efficacy of the Bermuda scheme of a statutory moratorium on unsecured of arrangement process and its importance action for the term of the provisional What about dissenting creditors as the primary tool for the implementation liquidation.2 / shareholders? of complex, cross-border restructurings of >> Provided the requisite statutory companies incorporated in Bermuda. “…[T]his Court frequently approves parallel majorities have been obtained at the schemes linking Bermuda, the UK, Hong scheme meetings, and the Bermuda Court has sanctioned the scheme, the scheme will be binding on all affected stakeholders within the same class, 1 On 14 December 2018, Chief Justice Narinder Hargun made orders appointing a provisional over Noble Group Limited, a global commodities trader incorporated in Bermuda, to facilitate a debt regardless of whether they voted in restructuring by way of parallel schemes of arrangement in England and Bermuda. favour of the scheme or at all. 2 See separate summary of Bermuda’s ‘light-touch’ procedure, available here. Bermuda Schemes of Arrangement Delivering Global Restructurings and Reorganisations

Kong and/or Singapore”3 Hearing”), a draft of the formal Scheme of Is Chapter 15 recognition Arrangement, together with its Explanatory available? The Bermuda Supreme Court has an Statement, is presented, and the Court is >> Yes. The process for obtaining Ch. 15 exceptionally wide jurisdiction in respect of asked to make an order pursuant to section recognition and orders giving full force schemes of arrangement and has the power to 100 of the Act confirming that the contents and effect to the Bermuda Scheme in sanction such schemes in most circumstances of those documents are sufficient to allow the US is relatively straightforward. so long as the company is incorporated in the stakeholders voting on the scheme to Bermuda. This remains the case even when the make an informed decision on the merits of How much does it cost? company is listed on a foreign stock exchange the proposed scheme and their participation and has all, or a substantial majority of, its therein. At the First Hearing, the Court will also >> Typically less expensive (in terms of operations overseas. The Court’s inherent consider the proper formulation of classes for legal expenses) than a ‘full service’ jurisdiction over companies incorporated in the scheme meeting (in the case of a multi- reorganisation procedure such as Ch. Bermuda allows it to cut across borders and class scheme) and give directions in relation 11 proceedings. 4 facilitate the restructuring of companies with to the conduct of the scheme meeting. >> The structure imposed by the statutory complex, cross-border operations. Importantly, the Court is not asked to consider regime means that a scheme can the merits or fairness of the proposed scheme often also be less costly than ad hoc The Statutory Regime – that is a matter for the stakeholders who restructuring efforts. will be voting on the scheme. The statutory provisions applicable to Bermuda How long does it take? schemes of arrangement can be found in Part “It seems to me sensible that the position >> A straightforward scheme can be VII of the Companies Act 1981 (the “Act”), in Bermuda should mirror that in England, completed in 6 to 8 weeks (from the and specifically at sections 99 and 100. The as well as that in other common law date the application is filed with the provisions will be familiar to lawyers practising jurisdictions…”5 under the broadly equivalent provisions of Bermuda Court to the date on which the scheme is sanctioned). English and Hong Kong statute. In essence, Once the First Hearing has been held, the process involves a meeting of each class and the Court has approved the scheme of stakeholder whose rights will be affected documentation and division of scheme classes The Bermuda Court by the scheme. The proposed scheme (if applicable), the company (or its provisional >> The Supreme Court of Bermuda has must be approved by a majority in number liquidators) will convene the scheme meeting extensive commercial, insolvency representing 75% in value of each class of to allow the stakeholders to vote on the and restructuring experience. The stakeholder attending and voting (either in proposed scheme. Bermuda judiciary is made up of highly person or by proxy) at the meeting. The terms respected judges, many of whom have of the scheme will become binding on the Assuming that the stakeholders vote in favour a private practice background in cross- company and all members of the relevant of the scheme at the scheme meeting, the border restructuring and schemes of classes once the necessary statutory majorities final step is for the company (or its provisional arrangement. are achieved, the sanction of the Bermuda liquidators) to approach the Bermuda Court Court has been obtained and the scheme filed to obtain formal sanction of the scheme of with the Bermuda Registrar of Companies. arrangement (the “Sanction Hearing”). Upon Quick Read - Provisional such approval being obtained at the Sanction liquidation in Bermuda The Bermuda Court’s Hearing, and the scheme being filed with the Bermuda Registrar of Companies, the terms What is it? Involvement of the scheme will become effective. Two separate applications must be made to >> An insolvency process subject to the supervision of the Bermuda Court. the Bermuda Court in order to successfully Class Constitution implement a scheme of arrangement. >> Often used to provide a protective The statutory scheme requires that a creditors’ ‘wrapper’ in a restructuring context, At the first of these applications (the First“ scheme must be between a company and its shielding the company from creditor claims while the company formulates and implements a restructuring 3 In the matter of Titan Petrochemicals Group Limited [2014] SC (Bda) 74 Com (23 September 2014), proposal. per Kawaley CJ (as he then was). Justice Kawaley now sits as a judge of the Financial Services Division of the Grand Court of the . >> The ‘liquidation’ terminology is 4 Pursuant to Practice Direction No. 18 of 2017 ‘Guidelines applicable to Schemes of Arrangement somewhat of a misnomer – if a under Section 99 of the Companies Act 1981’, which follows the English Court of Appeal’s decision in restructuring is successful, the Re Hawk Insurance Co Ltd [2001] 2 BCLC 480 and parallels UK Practice Direction ‘Scheme of Arrange- provisional liquidators will be discharged ments with Creditors’ [2002] 3 All ER 96. and the restructured company will 5 Kader Holdings Company Limited v Desarrollo Immobiliario Negocios Industriales de Alta Technologia de Hermosilio, S.A. de CV [2014] CA (Bda) 13 Civ (10 March 2014) per Bell AJ, as cited by Kawaley CJ continue on as a going concern. (as he then was) in Titan Petrochemicals. Bermuda Schemes of Arrangement Delivering Global Restructurings and Reorganisations creditors, or any class of creditors. Each class compromise of owed by the company, What about adverse creditors? of creditors must vote in its own meeting, an unhappy with the terms >> The appointment of provisional and must pass the scheme by the relevant of such compromise cannot ordinarily prevent liquidators invokes an automatic statutory majorities in order for the scheme such scheme from being implemented once statutory moratorium on creditor claims, to be approved. It is customary in Bermuda the necessary statutory majorities have been although it does not prevent secured for the question of creditor classes to be achieved, provided that the scheme process creditors from enforcing their security. determined at the First Hearing, to avoid has not been tainted by fraud or dishonesty.9 subsequent challenges to the validity of Who can use it? the scheme being raised after the scheme Restructuring Timetable meetings have been held. >> Any company incorporated in Bermuda, The procedure and processes to be followed including companies which have their When considering the constitution of classes, in a Bermuda scheme of arrangement are set operations overseas and are listed on the rights of a given class need not be identical, out in the Act and the timing of such steps will an overseas stock exchange. provided they are “not so dissimilar as to make depend in large part upon the complexity of it impossible for them to consult together the contemplated restructuring. As a general What powers do provisional with a view to their common ”.6 proposition, a straightforward scheme will liquidators have? The Bermuda Court typically follows English proceed on the following timetable: >> Powers are bespoke to the facts and jurisprudence as regards the constitution of Week 1: Originating Summons filed with requirements of each provisional classes for voting purposes.7 the Bermuda Court, together with draft liquidation, and are set out in a formal Scheme and Explanatory Statement. Court Order. “[Bermuda’s] statutory provisions derive from the same legal roots [i.e. English common Week 2: Order for directions made by the law] which often apply to companies whose Bermuda Court. How are appointees selected? operations and restructurings traverse Week 5: First Hearing before the Bermuda >> Typically both local and foreign insolvency multiple jurisdictional shores”8 Court. practitioners will be appointed, particularly if the subject company has Week 7: Scheme meeting(s) held. significant operations overseas or is Dissenting Stakeholders Week 8: Sanction Hearing before the listed on a foreign stock exchange. Provided that a majority in number Bermuda Court. representing 75% of the value of each Week 8: Scheme filed with Bermuda What is a ‘light-touch’ stakeholder class vote in favour of a scheme, Registrar of Companies. provisional liquidation? and that the scheme meetings have been >> In a ‘light-touch’ provisional liquidation, convened and held lawfully and in accordance Schemes of arrangement which interact with the provisional liquidators are appointed with the orders made by the Court at the First or impact upon a company’s listing status, with limited powers, enabling them to Hearing, there is relatively little which can be and “parallel schemes” being implemented work alongside the existing board of done to prevent a scheme from taking effect. across multiple jurisdictions, can take directors without completely displacing significantly longer than the indicative the directors’ powers. For example, a scheme of arrangement of a timeline set out above. company in , which provides for the compromise of creditors’ , Is foreign recognition of the cannot ordinarily be upset by shareholders Case Study One – provisional liquidation available? of the company (who might, for example, Restructuring of Titan >> Yes. The provisional liquidation be dissatisfied with the terms of a debt-for- Petrochemicals Group proceedings can be readily recognised equity swap which involves their shareholding Limited in other jurisdictions to allow a global being diluted) because in circumstances where restructuring to be effected. Titan Petrochemicals is a listed company on the a company is insolvent and cannot pay its >> Main Board of the Hong Kong Stock Exchange Typically, the appointment of creditors, those shareholders have no interest provisional liquidators to a Bermuda in and will not be affected by the scheme. and has been a major player in the offshore and marine industry in China since it was founded company will be followed immediately Similarly, in a creditors’ scheme involving a by an application for recognition in the jurisdiction of the company’s operation and/or listing. 6 Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 at 583 per Bowen LJ. 7 Re Petroleum Ltd [2012] Bda LR 8. Cost and speed 8 In the matter of Titan Petrochemicals, above no. 3. >> Provisional liquidators can be appointed 9 The Judicial Committee of the Privy Council in Kempe and another (as Joint Liquidators of Mentor on an expedited basis – depending on the Insurance Ltd) v Ambassador Insurance Co (in liquidation) [1998] 1 WLR 271 has confirmed that a minority creditor is bound by a properly established creditors’ scheme and cannot apply to the particular facts, appointments can often Bermuda Court to vary its terms. be secured on less than 24 hours’ notice. Bermuda Schemes of Arrangement Delivering Global Restructurings and Reorganisations in 2002. However, the oil trading and shipping 2016 following the presentation of winding >> Costs are dependent on the complexity downturns precipitated by the global financial up petitions against the company, first in and length of the subsequent crisis in 2009 forced Titan to restructure its Hong Kong and thereafter in Bermuda. proceedings. debt in 2010 and divest itself of many of its >> Costs will include the fees and expenses profitable assets. By 2012, company creditors On 7 October 2016, provisional liquidators of the provisional liquidators, which were threatening to commence insolvency were appointed to Up Energy by order of are typically paid out of the assets of proceedings and in 2013 petitions were filed the Bermuda Court upon the petition of an the company. with the courts in Bermuda and Hong Kong unsecured creditor in respect of a HK$150 seeking the winding-up of the company. million debt and following the filing of a winding-up petition in Hong Kong earlier Following the appointment of provisional in the year. The provisional liquidators took liquidators to the company by the Supreme office in considerably difficult circumstances: Court of Bermuda on a creditor petition, the the long-standing directors of the company powers of those provisional liquidators were had resigned and there was no unanimity subsequently varied to ‘light-touch’ powers, amongst the unsecured creditor body which to consult with the directors of the company were collectively owed in excess of HK$1 to develop and implement a restructuring billion. Following their appointment, the joint proposal. provisional liquidators advised the Court that in a forced insolvency scenario, the company’s The terms of that restructuring proposal unsecured creditors were likely to recover were presented to the company’s creditors in between 0.62 and 3.77% of the amounts 2014. Essentially, it involved the company’s owed to them by the company. noteholders agreeing to ‘haircuts’ of between 60 and 90% of the value of their respective In appointing provisional liquidators, Kawaley debts, in exchange for cash and share options CJ (as he then was) confirmed the integral in the newly restructured company. Critical role which provisional liquidators play in to the success of the restructuring was the developing and promoting schemes of support of Guangdong Zhenrong Energy arrangement in Bermuda: Co., Ltd, Titan’s major shareholder and ‘white knight’ investor. “It is the involvement of JPLs, embedded with the restructuring troops, which relieves The First Hearing was held on 15 September this Court of the burden shouldered by US 2014, at which time the Bermuda Court Court judges of resolving a approved the Scheme Booklet and made myriad of disputes between the restructuring orders for the convening of the scheme protagonists. A scheme of arrangement is meetings, which were held on 22 October approved in principle by this Court when 2014. Titan’s scheme of arrangement was leave is sought to promote it, typically on sanctioned by the Bermuda Court on 5 an ex parte basis. A scheme of arrangement November 2014, and became effective the is sanctioned, if it attracts the requisite following day upon being filed with the support, in the overwhelming majority of Companies Registry. Following the discharge cases at a perfunctory uncontested hearing. of the provisional liquidators, the company All conflicts are typically resolved before the went on to recover its listing status on the scheme document is finalised, out of court, Hong Kong Stock Exchange. with the JPLs playing a generally unheralded but crucial mediating role. They bring a Case Study Two – high degree of efficiency and economy to Bermudian restructuring proceedings which Restructuring of Up Energy would likely be lost in a proceeding without Development Group the usual appointment”. Limited Under the supervision of the provisional Up Energy Development Group Limited is liquidators, the company made arrangements the holding company for a corporate group for the construction of the coal mines and engaged in the of mining and auxiliary plants which comprise its major processing coking coal in the People’s productive assets, and presented a resumption of China. Trading in the shares of Up Energy proposal to the Hong Kong Stock Exchange. - listed on the Hong Kong Stock Exchange in The company’s ability to restructure its January of 2011 - was suspended on 30 June Bermuda Schemes of Arrangement Delivering Global Restructurings and Reorganisations operations in this manner has been aided by the statutory moratorium on creditor claims Key Contacts which came into effect upon the appointment of the provisional liquidators. Once trading in the company’s shares has resumed, it is the Kevin Taylor Managing Partner, Insolvency & Dispute Resolution provisional liquidators’ intention to present T. +1 441 242 1510 a scheme of arrangement to the company’s E. [email protected] creditors which, if successful, will see a return to creditors significantly in excess of the likely Nicole Tovey return in a forced liquidation context. Partner, Insolvency & Dispute Resolution T. +1 441 242 1512 The Role of Bermuda E. [email protected] Schemes of Arrangement Benjamin McCosker in Cross-border Associate, Insolvency & Dispute Resolution Restructurings T. +1 441 242 1521 E. [email protected] The Bermuda scheme of arrangement is a tried and tested mechanism for implementing the financial and operational restructuring of companies incorporated in Bermuda. A Bermuda scheme proceeds under a defined statutory procedure, with the supervision of the experienced commercial judges of the Bermuda Court and with reference to precedent. The Judicial Committee of the Privy Council in remains an appellate avenue, providing legal certainty and predictability as to outcomes.

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