Corporate Restructuring: Some uses and abuses of provisional liquidators A paper for the Chancery Bar Association’s Bermuda Seminar – 10 May 2019 Ian Clarke Q.C. 1. The appointment of “soft touch” provisional liquidators self-evidently has its uses in the context of corporate restructuring, particularly in jurisdictions which do not have an equivalent statutory regime to English administration. 2. The paradigm example of a company, with an essentially profitable business facing immediate, unsatisfiable single-creditor pressure and deciding to take advantage of the protection afforded by being in provisional liquidation with the support of its directors, shareholders and other creditors in order to restructure its business with obvious long- term benefits is easy to imagine, if seldom encountered in practice. At this end of the spectrum, there can be no doubt that provisional liquidation has its (beneficial) use. At the other end of the spectrum (perhaps) is the instance of a provisional liquidation brought about by the directors/majority shareholders in the company, with limited (or no) support from other shareholders and/or from other significant creditors to effect a re-structuring, the outcome of which – in terms of benefits – maybe relatively uncertain in scope or timing. Depending upon one’s standpoint, this may amount to an abuse of the “soft touch” provisional liquidation procedure. 3. The purpose of this paper is not to postulate or debate the detailed, nuanced factual scenario of any particular case, deciding what is useful or abusive but to consider certain aspects which may arise in the context of provisional liquidation which might impact on its usefulness or bear an aspects thought to be abusive. The re-structuring role of provisional liquidation in England & Wales 4. Provisional liquidators are frequently appointed although it is right to say that the significant majority of such appointments are in circumstances where a. the assets of the company are in jeopardy and/or b. it is facing a winding up petition in the public interest brought by the Secretary of State. Such a petition is often advanced in circumstances where there is serious concern about the directors’ conduct and/or the company’s underlying business. In that context, the application for provisional liquidation is brought where it is thought unacceptable for the directors to have unfettered conduct pending the determination of the winding up petition: see for example Re BBH Property 1 Limited [2017] EW HC 2584 (Ch) where Roth J appointed provisional liquidators over 13 companies which have been involved with 2 crowdfunding projects to purchase property in the United Kingdom and Norway and where there was an absence of any proper accounting records, of transparency in relation to the underlying property investments and evidence of the misapplication of invested funds. However, the English Courts do not require, as a precondition of appointment, that the assets of the company are at risk – see Re Brackland Magazines Limited [1994] 1 BCLC 190 (Chadwick J). 5. Provisional liquidation remains, however, a remedy more flexible and widely granted than its more usual application suggests. The English courts have historically used (and currently use) the remedy in varied circumstances which no doubt has encouraged (and should encourage) the development and continuation of this particular jurisdiction in Bermuda. 6. Thus, in circumstances where administration was not available for insurance companies, the English Courts adopted “soft touch” provisional liquidation, and have done so since at least the early 1990s: in English & American Insurance [1994] 1 BCLC 649, Harman J observed at page 650c – in the context of the appointment of provisional liquidators that “[This] is all part of the developing practice of the court of using a petition by the company for its own winding up as the basis for the appointment of provisional liquidators. That practice has been developed to mitigate the difficulties caused by the fact that administration procedures are not available in respect of insurance companies and is a practice which several of the Chancery judges have dealt with and approved. It seems to me a useful practice and I do not wish in any way to cast any doubt or discredit upon it. It is a good system, particularly in cases such as this where there is a hope that in the future there will be a scheme of arrangement under section 425 of the Companies Act 1985”. 7. Smith v UIC Insurance Company Limited [2001] BCC 11 is another example. UIC Insurance Company Limited was a claimant in arbitration, seeking to be relieved of liability under 7 excess of loss reinsurance contracts written in favour of a Lloyd’s syndicate. Provisional liquidators were appointed on 18 August 1996, not only to get in the assets and prepare a scheme of arrangement but also to bring and defend the arbitration. It did so and the cited decision concerned its obligations to provide security for costs. However, it is clear from the narrative of the judgment that the petition to wind up the company remained (in 2000, some 3½ years later) outstanding, having been adjourned from time to time and in circumstances where (in January 2000, when the case was heard) “the directors of the company have no present intention to seek a formal winding up order at any stage. If a scheme can be negotiated and approved, this will be aware of resolving the company’s financial affairs. It is right to say that no such scheme has yet been proposed or even drafted. If such a scheme is implemented and approved, an application will be made to the court to dismiss the pending petition to wind up the company and relieve the joint liquidators of their responsibilities”. 8. Statutory intervention now permits (since 1 June 2002) administration for insurance companies and orders have been made (see Re AA Mutual International Insurance Company Limited [2004] EWHC 2430 (Ch)); nonetheless, provisional liquidation retains a toe-hold in English court-controlled restructuring; provisional liquidation remains the re-structuring route of choice in relation to Lloyd’s members: see Glenrinnes Farms Limited v ACAL Underwriting Limited [2012] EWHC 4336 (Ch), [46]. 9. Finally, the English court is prepared to prefer provisional liquidation as a re-structuring medium over administration where circumstances demand it. Thus, where provisional liquidation (as opposed to administration) would not trigger the loss of a contractual right to payment in the context of a business sale and purchase agreement and where FSA compensation would remain available to the applicant companies’ customers, the Court appointed provisional liquidators: MHMH Limited v Carwood Barker Holdings Limited [2004] EWHC 3174 (Ch) (Evans-Lombe J). Moreover, in that application it was clearly envisaged by the Court that the provisional liquidators would engage in litigation to recover the money said to be due under the business sale and purchase agreement, which activity was recognised as inevitably taking a substantial period of time. Where the companies were not trading, the Court was prepared to make an exception to the rule that a winding up petition must not be left outstanding for a substantial period of time and declined to see this as an impediment preventing the appointment of provisional liquidators. 10. It must be recognised that these circumstances are likely to be tolerably rare. Occasionally, provisional liquidation has been sought as an alternative to administration. In one case, in the context of a shareholder’s dispute, the company was deadlocked and “on a knife edge”, its banking facilities having been terminated. Nevertheless it is underlying business and goodwill remained extant. One shareholder sought administration; the other provisional liquidation, given the conduct of the applicant for administration in connection with the management of the company, the breakdown in trust and concerns over the nominee. In this particular case, the Court ordered administration, considering provisional liquidation unnecessarily intrusive and the Court being unsatisfied with the criticisms of the nominee: Sidpra v One World Logistics Freight Limited [2018] EWHC 264. The point of more general application from this decision is that it serves to reinforce the long-established line of authorities emphasising that provisional liquidation is “the nuclear option” of the Companies Court and thus likely to play second-fiddle to administration; MHMH Limited may represent something of the high-water mark. Use v. abuse: the position of the provisional liquidator 11. Provisional liquidators are officers of the Court and, as such, subject to the ultimate direction of the Court; their authority is derived from the order appointing them, which also determines the scope of their duties: Smith, supra. Self-evidently, care must be taken to formulate those steps which the provisional liquidator may be required to take and, to the extent necessary, to justify the requirement for authority to take those steps in the supporting evidence. 12. Careful thought must therefore be given as to the terms of any order, since it will not only determine the provisional liquidators’ authority and scope of their duties but will also have significant ramifications in terms of the costs that may be recoverable. In Hong Kong, there is a “standard recognition order” promulgated by Harris J – see Re Joint and Several Liquidators of Pacific Andes Enterprises (BVI) Limited [2017] HKEC 146 – which on occasions is (where the evidence justifies it) departed from: see Re Joint and Several Liquidators of HSIN Chong Group Holdings Limited [2019] HKCFI 805. The order made in Re Refco Capital Markets Limited [2006] Bda LR 94 and its variation is apparent from the judgment:[24], [25]. 13. Those orders gave the provisional liquidators the power a. to monitor the continuation of the Company’s business under the control of its directors and under the supervision of the relevant courts; b.