Petitioning Creditors v Light Touch Adjournments

Petitioning Creditors v Light Touch Adjournments

By Arno Duvenhage and Jennifer Haworth

The recent judgment of the Bermuda Court of Appeal in The Hongkong and Shanghai Banking Corporation Limited v NewOcean Energy Holdings Limited [2022] CA (Bda) 16 Civ, illustrates an ongoing tug of war in Bermuda when interpreting and applying the principles set out by Neuberger J in Re Demaglass Holdings Ltd [2001] 2 BCLC 63 (“Demaglass”) in deciding whether to grant a winding up order or grant an adjournment for the debtor company to pursue and implement a proposed restructuring.

In response to the presentation of a winding up petition by The Hongkong and Shanghai Banking Corporation Limited (“HSBC”), NewOcean Energy Holdings Limited (the “company”) lodged its own petition in counter-position to that of HSBC and sought relief aimed at the appointment of provisional liquidators on a “light touch basis” (liquidators with limited powers) for the purpose of the company being granted time, through the procedural mechanism of an adjournment, to negotiate, agree and implement a restructuring plan. This approach of the company accords with a long standing practice in Bermuda premised on an interpretation and application by the Bermuda Supreme Court of section 164(1) of the CA as read with section 170(3).

The court of first instance exercised its discretion afforded in 164 of the CA on multiple occasions, all in favour of the company, and adjourned the winding up petition between 14 December 2021 and 9 May 2022, declining to make a winding up order – on the basis of what the court termed to be “exceptional circumstances” as delineated in Demaglass.

In Demaglass, Neuberger J, in considering and formulating some general principles to be applied when hearing an application for the adjournment of the hearing of a winding-up petition, held that “in the absence of a good reason” an unpaid creditor is entitled to a winding up order virtually as of a right and that where a majority of creditors support the proposed winding up, it would require a “wholly exceptional case” (adapted as “exceptional circumstances”) before a petitioning creditor would be denied an order in its favour.

Ultimately, the adjournment granted on 9 May 2022 was successfully appealed by HSBC. Particularly considering Neuberger J`s fourth principle delineated in Demaglass – which emphasised that the views of majority creditors would essentially serve to substantially circumscribe the court`s discretion towards declining a winding up order – the Court of Appeal in evaluating the exceptional circumstances relied upon by the court of first instance, essentially found that the lower court had misdirected itself on a variety of issues within the exercise of its discretion by failing to take into account, amongst others, the following relevant considerations:

• The size of the majority needed to successfully effect a restructuring/compromise in terms of section 99 of the CA.
• The size of the majority of bank creditors who sought a winding up and opposed an adjournment.
• The absence of any opposing majority of creditors.
• The requirements of exceptionality.

Discussion and conclusion

First, the Court of Appeal`s reasoning illustrates that whilst the discretion afforded in terms of section 164 of the CA (with due regard to Demaglass and related authorities) will of course be subject to the facts and circumstances of each particular case, once a petitioning creditor has established an undisputed bona fide debt and, on the objective facts, a convincing and/or sufficient and/or substantial majority of creditors support a winding up order, it is for those weighty creditors to express and pursue their own commercial views and there is no authority for the proposition that a court could formulate and impose its own view on what position a theoretically rational creditor should take up.

Second, the Court of Appeal appears to favour an approach that in circumstances where the Demaglass threshold has been met, any request for an adjournment and commensurately any restructuring proposal supporting said request – would logically have to be seriously scrutinized both practically and as a matter of law for the purpose of making out a “wholly exceptional case”. This approach, from an evidential perspective, we would suggest, essentially entails a rebuttable presumption in favour of winding up.

Finally, as a slight forewarning regarding Bermuda`s long standing practice to appoint liquidators on a light touch basis, the Court of Appeal deemed it prudent to point out that a recent Hong Kong ruling per Trinity (Management Services) Ltd [2021] HKFI 2207, expressed a serious concern regarding the recognition of foreign liquidators appointed in Bermuda on a light touch basis – in aid of proceedings in Hong Kong – considering Hong Kong does not favour “debtor in possession” processes.

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.