Provisional Liquidation – A Neglected Tool in the Bahamian Insolvency Toolbox
While the overall economic damage resulting from COVID-19 remains to be seen, one thing is certain – the pandemic has dealt a devastating blow to the global economy. Many businesses, some of which were relatively healthy pre-COVID-19, now find themselves in a liquidity crunch and at risk of insolvency.
For companies in The Bahamas facing financial distress, it is important for directors to be aware of their duties and the tools available to them, while taking steps to stabilise the company’s business.
It is elementary that company directors owe statutory and fiduciary duties to act honestly and in good faith with a view to the best interests of the company and to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. As a general rule, directors’ duties are owed to the company and the company alone. However, where the solvency of the company is questionable, the duties of directors are extended and directors must have primary regard to the interests of the company’s creditors, as a whole.
Against the backdrop of COVID-19, this means in practical terms that directors must not permit the company to enter into transactions with a view to preferring one creditor over other creditors, or avoiding an obligation that may be owed. Additionally, where the writing is on the wall and it is clear that insolvency is unavoidable, the directors must take every reasonable step to minimise the loss to creditors.
One step which is apt to be considered by a company in financial difficulty is a provisional liquidation for the purpose of restructuring the company’s debt, a little used tool since it was introduced by the Companies (Winding up Amendment) Act, 2011 (“the Winding up Act”), which came into force in April 2012. With the introduction of this legislation, a company may, after the presentation of a winding up petition, apply to the court for the appointment of a provisional liquidator on the basis that the company is or is likely to become unable to pay its debts and intends to present a compromise or arrangement to its creditors. The Winding up Act provides that a provisional liquidator shall have the rights and powers of a liquidator to the extent necessary to maintain the value of the assets owned or managed by the company or to carry out the functions for which he was appointed. The court may limit the powers of a provisional liquidator in such manner and at such times as considers fit.”
This type of company-led liquidation is commonly known in other offshore jurisdictions as “soft touch” or “light touch” provisional liquidation in which limited powers are conferred on the provisional liquidators and the directors retain sufficient control of the company’s affairs to pursue a restructuring and return the company to solvency. The implications of this tool are significant. First, there is no formal or statutory corporate rescue procedure in The Bahamas such as can be found in other common law jurisdictions. Second, prior to 2012, seeking the appointment of a provisional liquidator solely to facilitate a corporate rescue was not permitted. Additionally, the provisional liquidation procedure invokes the statutory moratorium on proceedings against the company, including proceedings which may be brought by a disgruntled creditor.
The type of restructuring which may be sought within the context of a provisional liquidation may vary and includes an injection of new money by an investor, a purchase of the company’s distressed debt or a consensual work out. It is also possible that provisional liquidation may be used to pursue a restructuring outside The Bahamas; for example, through parallel Chapter 11 proceedings in the United States.
Companies who wish to take advantage of this tool may do so by presenting their own winding up petition to the court pursuant to section 190 of the Winding up Act. Once that petition is presented, the company may apply, ex parte, for the appointment of a provisional liquidator with limited or “light touch” powers on the grounds mentioned above. Further, upon the appointment of the provisional liquidator, the hearing of the petition may be adjourned.
A “light touch” provisional liquidation will not prevent secured creditors from realising their security. However, it is widely recognised in other jurisdictions as a robust and flexible restructuring option which may enable a company in financial difficulty to continue as a going concern.
Bahamian companies in financial distress and their directors would do well to avail themselves of this far too neglected insolvency tool.
About the Author
Tara Cooper Burnside is a partner in the firm’s Insolvency & Restructuring practice group. She has detailed knowledge of the Bahamian insolvency regime and has worked on a number of cross-border insolvencies and restructurings. She is a Fellow of INSOL International.
The information contained in this article is provided for the general interest of our readers, but is not intended to constitute legal advice. Clients and the general public are encouraged to seek specific advice on matters of concern. This article can in no way serve as a substitute in such cases.
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