Vol 4 (2007) - Issue 2

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The Use of Provisional Liquidators as a Corporate Rescue Tool

For almost a decade now, in a number of jurisdictions, provisional liquidators have been used as ‘rescue tools’ where there are no official procedures for corporate rescues/restructuring. This article aims to examine how a recent Hong Kong decision considering this use of the role of a provisional liquidator compares to the developments in this area.

Flexibility of Bermuda and other jurisdictions

Historically, courts in Bermuda and other jurisdictions have granted provisional liquidators specific powers (akin to those of an English administrator) in order to liaise with companies who are in a chapter 11 debtor in possession process. One of the first examples of this was the case involving ICO Global Communications (Holdings) Limited (‘ICO’) in Bermuda in the late 1990s.
ICO was a global group of satellite communications companies where over USD 2 billion had been spent by the group. The key companies were Bermudian and Cayman entities. The group entered difficulties in early 1999, partly due to a failed share offering, and by mid-1999 the options available were to enter into liquidation, a ‘trade-sale’ or to try and buy time and restructure.
The final option was the only way to preserve value and it was therefore critical to find such a solution. However, there were difficult issues due to the structural complexities of the group, and the facts that administration was not available in either Bermuda or Cayman, and that the group needed protection from US counterparties. It was therefore decided, first, that the group should enter into chapter 11 protection in the US (and these filings were treated as the lead proceedings), and, secondly, that an application should be made to the Bermudian Court that provisional liquidators be appointed with certain powers in an ‘overseeing’ role. This would protect the assets and the directors, involve the jurisdiction of domicile and add an important element of supervision over the group.
Pursuant to Bermudian law, the Court has a very wide discretion as to the basis on which it can appoint a provisional liquidator. While generally provisional liquidators will be given very wide powers, in this case the terms of the appointment were very different from the norm in that, for example, first, the debtor was left to run the business and, secondly, there was ‘negative’ control through a requirement for the provisional liquidators to authorise payments and disposition of the company’s property. The result of this decision was the start of a judicial approach in Bermuda enabling the use of provisional liquidation in a very flexible manner allowing it to work quasi-administration.
A similar approach was followed by the Bermudian Court in a range of subsequent cases, in particular the Global Crossing case in 2002, where, with a view to restructuring its global business, the group simultaneously filed for chapter 11 bankruptcy protection in the US and for provisional liquidation in Bermuda. This approach has also subsequently been adopted in other common law jurisdictions, such as the Cayman Islands and the British Virgin Islands.
Most recently, in December 2006, this approach has again been endorsed and approved by the Bermudian Court in the Refco matter. By way of background, on 19 October 2005, Refco Capital Markets Limited and Refco Global Finance Limited (the ‘Companies’) petitioned for their winding­-up, two days after filing for protection under chapter 11 of the US Bankruptcy Code (the ‘US Proceedings’). On the Companies’ ex parte applications, the court appointed a provisional liquidator. A week later, the provisional liquidator was no longer able to act and, on 26 October 2005, the court appointed two other provisional liquidators (the ‘JPLs’). Their main powers were to monitor the restructuring of the Companies which would remain under the control of their Board of Directors and under the supervision of the Bermudian Court and the United States Bankruptcy Court.