The Bahamas is established as an international financial centre in which foreign companies, complex commercial funds and special purpose vehicles invoke the jurisdiction of the Bahamian Supreme Court to incorporate offshore entities and carry out business. When companies experience financial difficulties or enter into restructuring processes that involve assets, subsidiaries or structures located in The Bahamas, stakeholders are able to engage the Bahamian court not only to use the insolvency regime in The Bahamas, but also its cross-border insolvency procedures.
The Supreme Court's Commercial Division is dedicated to handling complex commercial cases, including assisting financially distressed companies in the execution of cross-border restructuring. Appeals from the Supreme Court are made to the Court of Appeal, and Her Majesty's Privy Council sits at the apex of the Bahamian court system as the final court. The Bahamian court system's competence is evidenced by the fact that Justice Telford Georges, a former chief justice of The Bahamas, and Justice Edward Zacca, a former president of the Court of Appeal, who are eminent Caribbean judges, have both been members of Her Majesty's Privy Council.
Winding-up petitions and anti-suit injunctions
The Bahamas has enacted into its insolvency legislation express provisions whereby a shareholder may petition the Supreme Court to wind up a company in order to seek relief where it is just and equitable to do so. Pursuant to Section 190 of the Companies Winding Up Amendment Act 2011:
(1) An application to the court for the winding up of a company shall be by petition presented either by . . .
(c) any contributory or contributories. . .
(3) [However, a] contributory is not entitled to present a winding up petition unless either:
(a) the shares in respect of which he is a contributory, or some of them, are partly paid; or (b) the shares in respect of which he is a contributory, or some of them, either were:
(i) originally allotted to him, or have been held by him, and registered in his name for a period of at least six months immediately preceding the presentation of the winding up petition, or (ii) have devolved on him through the death of a former holder.(1)
According to Section 191(3):
(3) If the petition is presented by members of the company as contributories on the ground that it is just and equitable that the company should be wound up, the court shall have jurisdiction to make the following orders, as an alternative to a winding up order, namely:
(a) an order regulating the conduct of the company's affairs in the future; (b) an order requiring the company to refrain from doing or continuing an act complained of by the petitioner or to do an act which the petitioner has complained it has omitted to do; (c) an order authorising civil proceedings to be brought in the name and on behalf of the company by the petitioner on such terms as the court may direct; or (d) an order providing for the purchase of the shares of any members of the company by other members or by the company itself and, in the case of a purchase by the company itself, a reduction of the company's capital accordingly.
As it relates to the procedure for a just and equitable winding-up petition, Order 3, Rule 11 of the Companies Liquidation Rules states:
(1) Upon the presentation of a petition by a contributory seeking a winding up order or an order for alternative relief under section 191(3) of the [Companies Winding Up Amendment Act] on the ground contained in section 186(e) the petitioner must at the same time issue a summons for directions in respect of the matters contained in this rule.
(2) Upon hearing the summons for directions, the court shall give such directions as it thinks appropriate in respect of the following matters:
(a) whether or not the company is properly able to participate in the proceeding or should be treated merely as the subject matter of the proceeding; (b) whether the proceeding should be treated as a proceeding against the company or as an inter partes proceeding between one or more members of the company as petitioners and the other member or members of the company as respondents; (c) service of the petition; (d) whether, and if so by what means, the petition is to be advertised; (e) whether the petitioner should serve any further particulars of his claim; (f) service of a defence by the company or the respondents (as may be appropriate in light of the directions given under paragraphs (a) and (b) of this rule); (g) the manner in which evidence is to be given; (h) if evidence is directed to be given by affidavit, directions relating to cross-examination of the deponents; (i) discovery and inspection of documents; (j) oral discovery; and (k) such other procedural matters as the court thinks fit.
(3) A summons for directions under this rule… shall be served upon the company and upon every member whom the petitioner has named or intends to name as a respondent to the petition.(2)
In the cases of In the Matter of Pharmainvest Fund Ltd, Emerging Income Fund Ltd, and Emerging Value Opportunities (Bahamas) Ltd, and In the Matter of the International Business Act(3) (pending), three winding-up petitions were filed by a shareholder seeking to wind up three mutual funds incorporated under the Investment Funds Act based on loss of substratum.
The application involved a master-feeder fund structure in which Bahamian companies were coupled with Delaware partnerships which held similar names to the Bahamian feeder-fund companies. All of the assets of the Delaware partnerships were invested in a master account, which was also a Bahamian company. The structure included:
- three Bahamian international business companies (the Bahamian feeder funds);
- three Delaware-based limited partnerships (the US feeder funds); and
- three Bahamas-based exempted limited partnerships, which acted as master accounts and purportedly conducted all of the principal investment trading.
The two feeder funds were used to receive the underlying participant investors' investments, which were then fed into the master accounts. Together, each of the three entities made up a fund which the offering memoranda said would collectively be invested in securities in emerging markets for pharmaceuticals that were believed to be undervalued but that possessed above-average yield potential.
On 20 March 2018 a contributory petitioned to wind up the three Bahamian companies which had been suspended for more than nine years, essentially converting what was represented as being an open-end fund into a closed-end fund. The petition was for a just and equitable winding up; it was the petitioner's position that the funds no longer had a purpose, given that the purpose of an investment fund was no longer met as required in accordance with Section 1 of the Investment Funds Act 2003.
According to the Investment Funds Act, an 'investment fund' or 'fund' means:
(b) a company (including a limited duration company) that issues or has equity interests the purpose or effect of which is the pooling of investor funds with the aim of spreading investment risks and achieving profits and gains arising from the acquisition, holding, management or disposal of investments -
(i) which is incorporated or registered in The Bahamas; or (ii) of which the administrator, the investment advisor or the investment manager is either a company or companies incorporated or registered in The Bahamas or one or more companies or individuals any one of whom has a place of business in The Bahamas or which uses an address in The Bahamas; or (iii) the administration or management of which (including the control of substantially all of its assets) is carried on in or from The Bahamas; or
(c) a partnership that issues or has equity interests the purpose or effect of which is the pooling of investor funds with the aim of spreading investment risks and achieving profits and gains arising from the acquisition, holding, management or disposal of investments -
(i) of which one or more of the general partners is incorporated or registered in The Bahamas or is a person residing in The Bahamas or uses an address in The Bahamas; or (ii) whose partnership articles are governed by the laws of The Bahamas; or (iii) of which the administrator, the investment advisor or the investment manager is either a company incorporated or registered in The Bahamas or a person who has a place of business in The Bahamas or uses an address in The Bahamas.
The petitioner sought directions that the matters be dealt with jointly and for further relief, including orders that:
- leave also be granted to petition to wind up the master accounts;
- the liquidator (if appointed as the creditor of the master accounts on the company's behalf) be authorised to appoint an interim receiver or that the liquidator be appointed as the receiver in order to take control of the master accounts while the hearing on the application to wind up the master accounts was pending;
- in the event that leave was given to wind up the general partners of the master accounts, those proceedings be joined to the present proceedings;
- the directors of the companies and the investment manager be examined regarding the management and affairs of the company; and
- the chief investment officer of the investment manager provide all documents in its possession to the interim receiver and furnish all information concerning the use of the company's liquid assets, and any securities held on its behalf, to the appointed interim receiver, together with books, records, documents, and financial statements and accounts relating to the company.
The core of the petitioner's complaint was that the companies' liquid funds were pooled and wrongly used for the exclusive benefit of the investment manager and its principal; therefore, the complaint sought an order that the company be treated as the subject matter of the proceedings on the grounds that it was itself a victim of wrongdoing, whether by way of breaches of fiduciary duty or breaches of contract. Further, it was contemplated that subject to the appointment of a liquidator or an interim receiver of the master accounts, leave would be sought for the liquidator or interim receiver to pursue claims against the directors, the investment manager and any other person or entity into which the companies' assets could be traced in order to recover them.
Following the commencement of the winding-up proceedings and prior to the hearing of the summons for directions and winding-up petitions, the Delaware partnerships and two of the Bahamian companies commenced proceedings in Delaware. This gave rise to the petitioner and others seeking an anti-suit injunction to restrain the foreign proceedings.
A further action was therefore filed on behalf of the petitioner and others, requesting that the defendants and their servants or agents be restrained from continuing or prosecuting, or assisting in the prosecution of, certain legal proceedings commenced in the Delaware Court of Chancery, insofar as such proceedings related to and concerned the Bahamian companies subject to winding-up proceedings before the Bahamian Supreme Court. The relief also requested that the defendants be restrained from commencing any further proceedings against the plaintiffs relating to the relevant Bahamian companies in any jurisdiction other than The Bahamas on the basis that:
- the contractual documents relevant to the US and Bahamian proceedings contained an exclusive jurisdiction clause in favour of the Bahamas; and
- the governing law clause would be breached by seeking to refer one of the contractual documents in dispute to the American Arbitration Association, in accordance with the US commercial arbitration rules and mediation procedure.
Leave was also sought to issue and serve on the Delaware partnerships a concurrent writ of summons and notice thereof outside the jurisdiction.
The Supreme Court has the discretion to grant an anti-suit injunction in the context of insolvency proceedings, particularly where the ends of justice require it, as noted in Stichting Shell Pensioenfonds v Krys ([2014] UKPC). Under Section 192 of the Companies Winding Up Amendment Act, the court can stay or restrain proceedings. A stay can be sought under Section 192 at any time after the presentation of a winding-up petition and before a winding-up order has been made.
Where any action or proceeding against the company, including a criminal proceeding, is pending in a summary court, the Supreme Court, the Court of Appeal or the Privy Council, the company or any creditor or contributory may apply to the court in which the action or proceeding is pending for a stay of proceedings therein. Further, where any action or proceeding is pending against a company in a foreign court, the company or any creditor or contributory may apply to the court for an injunction to restrain further proceedings therein. The relevant court may stay or restrain the proceedings accordingly on such terms as it thinks fit.
New investment funds legislation
A draft Investment Funds Bill 2017 has been circulated for public consultation by the Securities Commission of The Bahamas in its capacity as regulator of the investment funds market. The bill is expected to be enacted into law shortly. It will:
- align administrative and fiduciary duties appropriately between parties to an investment fund;
- provide an appropriate regulatory regime for closed-end funds and master-feeder fund structures; and
- comply with the Alternative Investment Fund Managers Directive.
The legislation will establish a regulatory regime for fund managers and a regulatory framework for custodian and segregation of assets. The bill overhauls the current licensing and registration regimes for investment funds and investment fund administrators.
In addition to its compulsory winding-up jurisdiction, the Bahamian court can offer assistance to distressed companies by giving recognition and effect to foreign orders and restructuring arrangements within The Bahamas and pursuant to Bahamian law through its cross-border insolvency regime. As explained above, a company cannot forum shop in an effort to disadvantage its creditors; however, a company can request the assistance of the Bahamian court to give effect to a rehabilitative process aimed at keeping the company as a going concern, which would be beneficial to both stakeholders and creditors. In The Bahamas, foreign insolvency proceedings may be recognised if a foreign company has assets in the country and the foreign representative applies to the Bahamian court to be recognised. The Bahamian court can aid foreign companies that are seeking the recognition of an order appointing a receiver over assets outside insolvency proceedings, and assist in the recognition of a foreign court-appointed officer.
Foreign court-appointed receiver
The procedure for recognition of a foreign representative is prescribed by Rule 4 of the Foreign Proceedings (International Cooperation Rules) 2012:
(1) An application by a foreign representative made under section 254(1) (a) of the Act for a declaratory order recognizing his right to act on behalf of a debtor shall be made by petition in accordance with RSC Order 9.(4)
A 'foreign representative' is defined by Section 253 of Part VIIA of the Companies Winding Up Amendment Act as a trustee, liquidator or other official appointed in respect of a debtor for the purposes of a foreign proceeding.
Where the order appointing a foreign receiver is made outside a formal insolvency process so that it does not fall within the terms of the act, the appointment of a receiver by a foreign court in relation to a Bahamian company or a foreign company whose assets are located within the jurisdiction would be recognised on principles of common law.
At common law, a receiver appointed by a foreign court as an officer of that court in respect of property located in a foreign jurisdiction would be able to exercise their powers in the foreign country only to the extent that the foreign country recognises the validity and effect of the charge and the receiver's power to act.
In recognising the order appointing the receiver, the Supreme Court would not be enforcing the order; rather, it would be recognising the receiver's authority in relation to the assets. KPMG Inc v Pogachar(5) affirms the principle that there is a difference between the court recognising a judgment and the court giving effect to it. As a general principle, where a foreign court is regarded as having competent jurisdiction to issue an order appointing a receiver, comity would require recognition to be afforded. However, certain conditions must be satisfied before the Supreme Court will recognise an order appointing a foreign receiver as having competent jurisdiction.
On hearing an application for recognition, the parties must prove to the court that there was a sufficient connection which enabled the foreign jurisdiction to make the order. The Supreme Court will consider a foreign court as having competent jurisdiction if there is a sufficient connection between the company to which the receiver is appointed (the defendant) and the jurisdiction in which the foreign receiver was appointed to justify recognition of the foreign court's order. An example of a sufficient connection would be an appointment made by a court in the country in which the company is incorporated; however, there may be several circumstances where such a finding may be made.
In order to justify recognition of a foreign court's order as having effect outside the foreign jurisdiction, the Supreme Court will require evidence that:
- any relevant charge given by the debtor was enforceable within The Bahamas;
- the foreign court was competent to make the appointment; and
- there was a sufficient connection between the defendant and the jurisdiction in which the foreign receiver was appointed.
Recognition in this sense is not based on the Reciprocal Enforcement of Judgments Act 1924 as it is arguable whether an order appointing a receiver is an enforceable judgment. Rather, in such cases, the Bahamian court's power to recognise a foreign receiver is part of the court's inherent jurisdiction and is based on well-recognised conflict of law principles. In seeking to take possession of assets, the receiver would still need to make the requisite applications within the jurisdiction and in accordance with Bahamian law. The order would recognise the receiver's authority to take steps towards obtaining possession, whether by agreement or otherwise, and title to the property.
An order recognising the appointment of a receiver would not be granted where to do so would give effect to a law that is contrary to Bahamian public policy or where there is no sufficient connection between the company and the district court's jurisdiction. In Chamberlain v Miss Boots (The),(6) when considering the recognition of a foreign receiver, Judge Thorne stated that "while a court must recognise every judgment it enforces, it need not enforce every judgment it recognises". This is because the court may, in certain circumstances, refuse recognition where this will amount to the enforcement of a negative obligation or an interlocutory order. Recognition is generally granted only in relation to final orders.
Therefore, if on the facts, the appointment of the foreign receiver by the foreign court cannot surpass the 'sufficient connection' test, recognition will not be given.
As it relates to the procedure, such applications must be:
- made pursuant to Section 21 of the Supreme Court Act or based on the inherent jurisdiction of the court by originating summons; and
- supported by affidavit evidence, including an affidavit of foreign law, which would serve to inform the court that the appointing court was competent to appoint the receiver and advise on what the receiver's powers are pursuant to that order.
Recognition and provisional liquidations
The recognition of a foreign court order appointing a receiver does not protect the company from insolvency proceedings initiated within The Bahamas. The only way to protect a distressed company from insolvency proceedings and other claims while the company is being restructured is through the appointment of a provisional liquidator. The court may, at any time after the presentation of a winding-up petition but before the making of a winding-up order, provisionally appoint a liquidator. Applications for the appointment of a provisional liquidator must be made pursuant to Section 199 of the Companies Winding Up Amendment Act by a creditor or contributory of the company or any relevant regulator on the grounds that:
- there is a prima facie case for making a winding-up order; and
- the appointment of a provisional liquidator is:
- necessary to prevent the dissipation or misuse of the company's assets, the oppression of minority shareholders or the mismanagement or misconduct on the part of the company's directors; or
- in the public interest.(7)
An application for the appointment of a provisional liquidator may also be made by the company ex parte on the grounds that the company is, or is likely to become, unable to pay its debts within the meaning of Section 188, and the company intends to present a compromise or arrangement to its creditors.(8) A provisional liquidator has the rights and powers of a liquidator to the extent that is necessary to maintain the value of the assets which are owned or managed by the company or to carry out the functions for which they were appointed and the court may limit the powers of a provisional liquidator in such manner and at such times as it considers fit.
The provisional liquidator would also have the power (with the court's approval) to make any compromise or arrangement with creditors or persons claiming to be creditors or having or alleging themselves to have any claim (present or future, certain or contingent, ascertained or sounding only in damages) against the company or for which the company may be rendered liable. The liquidator also has the power to compromise, on agreed terms, all debts and liabilities which are capable of resulting in debts and all claims (present or future, certain or contingent, ascertained or sounding only in damages) which are subsisting or supposed to subsist between the company and a contributory or alleged contributory or other debtor or person apprehending liability to the company. Finally, the liquidator would have the power to promote a scheme of arrangement pursuant to Section 158 without the court's approval.
In eight cases,(9) the Bahamian court has appointed provisional liquidators over a group of companies that had sought recognition of Chapter 15 proceedings in Delaware within The Bahamas, which ultimately failed. The court held that the appointment of provisional liquidators was necessary to preserve the companies' assets and protect them from further dissipation by the directors of the companies for creditors. The court granted the provisional liquidators the power to promote schemes of arrangements and enter into protocols with creditors and stakeholders.
The appointment of a provisional liquidator in circumstances where there are concurrent bankruptcy proceedings under way in another jurisdiction requires an international protocol to be entered into, with the approval of both the Bahamian court and the foreign court or authority. An international protocol's purpose is to promote the orderly administration of the estate of a company in liquidation and the scope of such an arrangement includes:
- the formulation and promotion of restructuring protocols, including schemes of arrangements;
- the preservation of assets located outside The Bahamas; and
- procedures for the exchange of information between the official liquidator and the foreign office holder.
An application for the appointment of a provisional liquidator will protect a company's assets from creditors and permit applications to be made to other courts for assistance. It provides a means for restructuring procedures to be engaged while preserving assets located within the jurisdiction. The appointment of a provisional liquidator also triggers a moratorium on all claims, including claims for attachment and distress and execution, and protects the company from both existing and new legal proceedings.(10) Section 192 of the Companies Winding Up Amendment Act provides that the court may, at any time after the presentation of a winding-up petition before an order, stay or restrain proceedings whether pending in a Bahamian court or a foreign court against the company. Once such an order has been made, all proceedings against the company will be stayed, which provides the distressed company with the time it needs to restructure and rehabilitate.
The appointment of a provisional liquidator by the Supreme Court in this manner is capable of recognition by a foreign court. The Supreme Court will also recognise the appointment of a provisional liquidator by a relevant foreign country in a foreign proceeding.
The Bahamian legislature continues to examine its existing legislation for ways in which it can promote judicial efficiency by amending and implementing new procedures in its insolvency regime. As the global economy continues to grow and foreign companies and investors increasingly face obstacles arising from the use of offshore structures, the need for cross-border insolvency proceedings and the use of protection afforded to investors will likely continue to increase. The Bahamas, through its dynamic legislation, has demonstrated that it is well equipped to handle complex commercial disputes when these cases arise.
For further information on this topic please contact Sophia Rolle-Kapousouzoglou or Olivia Moss at Lennox Paton by telephone (+1 242 502 5000) or email ([email protected] or [email protected]). The Lennox Paton website can be accessed at www.lennoxpaton.com.
Endnotes
(1) According to Section 183 of the Company Winding Up Amendment Act 'contributory' means: "(a) every person liable by virtue of this Act to contribute to the assets of a company in the event that it is wound up under this Act; and (b) every holder of fully paid up shares of a company."
(2) Section 186 of the Company Winding Up Amendment Act provides the circumstances in which a company may be wound up by the court:
A company may be wound up by the court if (a) the company has passed a resolution requiring the company to be wound up by the court; (b) the company does not commence its business within a year from its incorporation, or suspends its business for a whole year; (c) the company is insolvent; (d) the members are reduced in number to less than two; (e) the court is of the opinion that it just and equitable that the company should be wound up; or (f) a regulator petitions for the winding up of a company over which it has regulatory authority and whose licence or registration has been suspended or revoked.
(3) 2000 Action COM/com 14, 15 and 16 of 2018.
(4) This section continues as follows:
(3) A petition under this rule shall state (a) particulars of the debtor's incorporation; (b) the nature and place of the debtor's business; (c) the court or other authority by which the foreign representative was appointed; (d) the powers and duties of the foreign representative under the law of the place of his appointment; and (e) the reasons for seeking a declaratory order.
(7) Section 199(2) of the Company Winding Up Amendment Act.
(8) Section 199(3) of the Company Winding Up Amendment Act.
(9) Attorney general of the Commonwealth of the Bahamas (in a representative capacity for and on behalf of the government of the commonwealth of The Bahamas, the treasurer of the commonwealth of The Bahamas, The Bahamas Electricity Corporation, the National Insurance Board, the Water and Sewerage Corporation and the Gaming Board) v Baha Mar Ltd; The National Insurance Board of the Commonwealth of the Bahamas v Baha Mar Ltd; The Treasurer of the Commonwealth of the Bahamas v Baha Mar Land Holdings Ltd; The Treasurer of the Commonwealth of the Bahamas v Cable Beach Resorts Ltd; The Treasurer of the Commonwealth of the Bahamas v Baha Mar Properties Ltd; The Water & Sewerage Corporation v BMP Golf Ltd; The Treasurer of the Commonwealth of the Bahamas v BMP Three Ltd; The Gaming Board v Baha Mar Enterprises Ltd [2015] 2 BHS J 97.
(10) Section 193 of the Company Winding Up Amendment Act.
An extract from GRR's The Restructuring Review of the Americas 2019, first published in December 2018. The whole publication is available at globalrestructuringreview.com/edition/1001275/the-restructuring-review-of-the-americas-2019.
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