Bermuda leads with ‘soft touch’

By Henry Tucker, Carey Olsen
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Earlier regarded as a last resort, soft touch provisional liquidation is today a commonly deployed tool for restructuring offshore companies listed in Hong Kong and Singapore, writes Carey Olsen counsel Henry Tucker

Soft touch provisional liquidation, when first developed by Bermuda courts, was regarded as a tool of last resort. Today it is one of the most commonly deployed tools for restructuring offshore companies listed in Hong Kong and Singapore, writes Carey Olsen counsel Henry Tucker

Directors were hesitant to voluntarily deploy a mechanism that 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.

provisional liquidation
Henry Tucker
Counsel at Carey Olsen
in Hong Kong
Tel: +852 3628 9000

There was little decided authority on issues critical to the success of any restructuring, such as what foreign principles would apply to determining the identity of the liquidators, and whether soft touch provisional liquidators would be recognized in onshore jurisdictions.

A soft touch provisional liquidation basically means that day-to-day control of a company remains under the directors, but it is protected against actions by individual creditors in order to give the entity the best restructuring opportunity.

Several recent decisions 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.

Appointment of soft touch liquidators 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 an appointment. However, it remained to be seen whether a Bermuda court would act to appoint JPLs where insolvency proceedings had already been commenced in a foreign court with a substantial part of the undertaking of the company within its territorial jurisdiction.

In the case of North Mining Shares, the Bermuda Supreme Court considered an application for the appointment of JPLs in Bermuda in advance of a winding-up hearing scheduled in Hong Kong 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 they pursue 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 appoint 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. On this basis, the Bermuda court concluded that it could assist the Hong Kong court by appointing “soft touch” JPLs.

The Bermuda court considered that this would enable the company, together with a majority of its creditors, to pursue a restructuring under the framework of 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.

Determining identity of 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 faction’s proposed appointees. The Bermuda court has now determined a series of cases in relation to these issues, providing a clear road map 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 JPL alongside one of the company’s nominees.

In the recent decision on Agritrade Resources, the Bermuda Supreme Court provided a further example of the approach it will take to such disputes. The court 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 their ability to carry out 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 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 recognized in key onshore jurisdictions. There are now several decisions that 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 [2020], Justice Jonathan 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 recognizing foreign soft touch provisional liquidation.

Similarly, in Re Joint Liquidators of Supreme Tycoon [2018], Justice Harris granted a 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 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 v PricewaterhouseCoopers [2014].

England and Wales

While not a case that 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 recognized 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.

The United States

In Re Olinda Star, the US 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 US 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 Bankruptcy Court, considered a petition for recognition by the soft touch joint provisional liquidator of a British Virgin Islands 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 JPLs’ powers, Judge Glenn granted recognition as sought by the JPLs.

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


Carey Olsen Hong Kong
Suites 3610-13
Jardine House, 1 Connaught Place
Central, Hong Kong
Tel: +852 3628 9000

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