Nothing inherently abusive: Using Winding Up Petitions to Gain Commercial Leverage

Nothing inherently abusive: Using Winding Up Petitions to Gain Commercial Leverage

About Arno DuvenhageArno Duvenhage

Arno Duvenhage is a senior associate in the Dispute Resolution Department. He is an experienced commercial litigator with a focus on company, insolvency, banking and financial law, whilst also being well-versed in the arbitration of a variety of commercial disputes.

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The Supreme Court for Bermuda: In the matter of US Holdings Ltd [2023] SC (Bda) 13 Civ, confirmed that there is nothing inherently abusive in presenting a winding up petition and applying for the appointment of joint provisional liquidators (JPLs) with full powers (as opposed to a more “light touch” appointment), for the primary purpose of gaining commercial leverage over a debtor company and securing some form of payment towards an outstanding debt through a possible restructuring (para 29 of the judgment).

While winding up remains a class remedy aimed at benefitting the general body of creditors, the Supreme Court confirmed the earlier observationof Kawaley CJ in Emerging Markets Special Solutions 3 Ltd v LAEP Investments Ltd [2017] SC Bda 78: that a petitioning creditor with an undisputed and outstanding debt, who invokes the winding up remedy, should at the very least, be regarded as pursuing a partially legitimate purpose and the court should be reluctant to investigate the commercial motivations of such a petitioner, save in cases where there appears to be no legitimate purpose at all (para 23 of that judgment).

The Supreme Court approved of the petitioner`s legal standing and relatively novel approach of seeking to appoint JPLs with full powers, despite not primarily seeking a winding up order. It ultimately decided to invoke its statutory discretion under the concept of “exceptional circumstances” (as highlighted in our previous blog post titled: Petitioning creditors v Light touch adjournments – available to view by clicking here) and adjourn the petition for a short period to allow the debtor company, alongside two recently appointed independent non-executive directors, an opportunity to secure a restructuring themselves (para 36-39 of the judgement).

In our view, in granting an adjournment, the Supreme Court`s driving concern was evidence that the appointment of JPLs with full powers, thereby displacing the existing sole director of the debtor company, would most likely lead to the debtor company defaulting under a contract involving its largest revenue generating asset, which would in turn destroy the commercial value vesting in the debtor company from a restructuring point of view.

This judgment is yet another illustration of the Supreme Court`s creditor friendly approach, under justifiable circumstances, allowing petitioning creditors flexibility when invoking Bermuda`s winding up jurisdiction.

MJM Limited`s Dispute Resolution department has expert knowledge and a wealth of experience in advising on all issues dealt with in this blog post.