Receivers and the Rights of Secured Creditors under Bermuda Law
| Author | Ian R. C. Kawaley/Karen Skiffington |
| Pages | 297-326 |
CHAPTER 15
RECEIVERS AND THE RIGHTS OF SECURED CREDITORS UNDER BERMUDA LAW
Andrew Martin
Introduction 298 Rights of secured creditors 300 Types of security 301
Mortgages and charges 302 Pledges and liens 303 Equitable security 303 Execution and stamping of documents evidencing security 304 Priority 305 Unsecured claims 305 Employee claims 306 Floating charges 306 Registration of security 306 Bermuda Registers of Security 307 Meaning of ‘charge’ 307 Registration not compulsory 307 Registration does not constitute perfection 308 Registration under the Companies Act 1981 308
Registration process 308 Effect of registration 309 Benefits of registration 309 Memoranda of satisfaction 309 Notification of enforcement 310 Invalidity of security 310
Regulatory permissions 310 Illegality 310 Financial assistance 310 Ultra vires or absence of capacity 311 Lack of authority 311 Failure to constitute or perfect the charge 311 Title of assets and other liens on secured assets 312 Effect of prohibition or restriction of assignment 312
298 Offshore Commercial Law in Bermuda
Characterisation risks 312 Security over shares 312 Additional considerations in the use of share charges 313 Receivers appointed out of court 314 Duties of a receiver 316 Exclusion of liability 318 Interest and costs 318 Receivers appointed by the court 319 Avoidance of security on insolvency 322 Fraudulent conveyances 322 Fraudulent preferences 323 Avoidance of floating charges 324 Proceeds of Crime Act 1997 325 Conclusion 326
INTRODUCTION
15.1 Bermuda has no commercial code or general legislative framework governing the grant of security, or its enforcement, or for the appointment of receivers and the supervision of the exercise of their powers. For the grant of security, its interpretation and enforcement, except in a few areas where specific legislative provision has been made, Bermuda applies the ordinary general principles of English common law.
15.2 Historically, the general law of England was imported as at the time of settlement (deemed to be July 11, 1612)
15.3 Bermuda shares this common legal heritage with her cousins in the British Virgin Islands, the Cayman Islands, the Turks and Caicos Islands,
Antigua, Anguilla and Barbados, which are all thriving offshore business centres. However, even though the legal principles that apply to the taking of security, and its enforcement, may be based upon similar English common law principles in all of those offshore commercial centres, each of those jurisdictions has a separate system for the registration of security interests, and rules for the recognition and priority of security.
15.4 Every jurisdiction faces its own specific challenges, which are determined by local conditions. In Bermuda, there are numerous local conditions which make the use of security (and its enforcement) idiosyncratic. The enforcement of security against local real property by lenders has been through a number of cycles in the last 30 years. The small number of licensed lending institutions had meant that terms offered were not competitive with onshore lending markets (e.g. as to term and interest rates). Property values have been high and in years past lenders have generally had little difficulty in realising full value on enforcement. Chattel mortgages over assets (such as cars) have been effective security for banks who have issued car and consumer loans, on an island where there are restrictions as to one car per household. Share charges over shares in local companies have been used comparatively rarely as security in local financing arrangements. As a result, until the last few years there had been comparatively little litigation in relation to enforcement of security in respect of local property. Now lenders are for the first time in living memory facing the prospect of less than a full recovery on local property. There has been a noticeable increase in the number of both commercial receiverships (particularly in relation to distressed hotel properties, as well as local businesses) and managed receiverships of properties by the mortgagee in possession. This trend has developed the court’s experience in applying the relevant principles of law in a variety of local circumstances, and a number of useful practical lessons have been learned.
15.5 In international transactions, the use and enforcement of security has been a much more common experience, and the appointment of receivers a more routine event in commercial life. The application of English common law principles has made advising upon and governing parties’ rights more or less certain. However, there are a number of areas where more clarity is required. Legislative amendment has been absent, and some reform is desirable. There is no body of local jurisprudence, nor any published works of authority dealing with local enforcement issues. A number of possible improvements and enhancements may be considered, a few of which are noted at the conclusion of this chapter.
300 Offshore Commercial Law in Bermuda
RIGHTS OF SECURED CREDITORS
15.6 The starting point under Bermuda law is that ‘every creditor is entitled to get and hold the best security the law allows him to take’
15.7 The most fundamental principle of insolvency law is that of pari passu distribution, namely that all creditors shall participate in the common pool of assets in proportion to the size of their admitted claims. However, this principle is in general confined to assets of the company, and does not affect creditors having rights in rem, such as secured creditors.
15.8 Although it is possible for a Bermuda debenture to be limited to property in Bermuda, usually a floating charge covers the property and assets of the borrower, both present and future, and wherever situated. It is well settled in English law that such a charge extends to property and assets of the company abroad
15.9 The assets of the company which are subject to a perfected security interest technically cease to form part of the property of the company to the extent of the security interest, but belong instead to the secured creditor, subject to an equity of redemption in favour of the company. In other words, assets which are subject to a valid security interest do not form part of the company’s estate and therefore do not fall to be distributed among the unsecured creditors of the company.
15.10 As a result, a fully secured creditor is largely unaffected by the liquidation process. He can remove his security from the pool of assets and realise it to satisfy what is due to him, accounting to the liquidator for any surplus.
15.11 If the debtor goes into liquidation, a secured creditor needs to examine his options carefully, and should obtain legal advice on the implications of his proposed actions in the light of prevailing circumstances. A secured creditor may lose his security if he attempts to prove in the liquidation in respect of a claim or liability for which he also holds security.
15.12 Generally, a secured creditor has a number of options. He can surrender his security and prove for the full amount of the debt due to him; he can value his
security in his proof and prove for the balance of the debt; he can realise his security and, if the proceeds are insufficient to cover the amount due, can prove for any deficiency; and he can simply rest on his security without lodging a proof at all. To the extent that he proves for his debt, his claim is subject to set-off, whereas if he rests on his securities without proving, it is not. Typically, a secured creditor does not participate in the liquidation at all, but may be advised, or may be called upon by the liquidator, to value the amount of any estimated shortfall as a contingent claim in the liquidation
15.13 Secured creditors are not in general involved in competition with unsecured creditors, except to the extent that any balance remains due to them after realising their security (or that the liquidator challenges the validity of the security). Secured creditors will compete among themselves, but assuming that all their interests have been duly perfected, insolvency law has nothing to say about this competition, which is governed by the general law. The usual rule is that registered security takes priority in the order of registration by date, and unregistered security takes priority in the order...
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