Vol 13 (2016) - Issue 6

Article preview

Post-Petition Dispositions and Validation Orders in Bermuda Law

Section 166(1) of Bermuda’s Companies Act 1981 provides that 'In a winding-up by the Court, any disposition of the property of the company, including things in action, and any transfer of shares, or alteration in the status of the members of the company, made after the commencement of the winding-up, shall, unless the Court otherwise orders, be void.'
The broad wording of section 166(1) is similar to section 127 of the UK’s Insolvency Act 1986 and its statutory predecessors.
When an order is made for the winding-up of a company, it is deemed to have commenced from the time of the presentation of the petition.
This means, in practice, that a winding-up order made by the Court has retrospective effect, dating back to the first presentation of the petition. As a consequence, any transactions or dispositions of the company’s assets made by a company during the period between the presentation of the winding-up petition and the making of the winding-up order are void, unless validated by the Court (i.e. void unless the Court otherwise orders).
As another practical matter, banks sometimes freeze a company’s bank accounts once they are put on notice of a winding up petition, absent a validation order with respect to such accounts, although this is not a universal practice in Bermuda.
Despite the frequency with which winding up petitions are presented and winding up orders made in Bermuda, there have only been three reported Bermuda cases that have considered the potential scope, effect and application of section 166(1), all three of which were decided in the context of apparently solvent, rather than insolvent, companies.
In 1997, the Court of Appeal for Bermuda gave judgment in the case of Colica Trust Company Ltd. v Bermuda Cablevision Ltd. and Others 1996 Civil App. No. 13, [1997] Bda LR 3. Justice of Appeal Kempster observed, in his judgment, that 'it is for the Company, prospectively and retrospectively, to seek the validation of payments rather than, in the absence of injunction, to carry on as if no winding-up proceedings were on foot. In an approach analogous to that adopted on the grant of a Mareva injunction the Court may well sanction payments if satisfied that they are necessary to keep a business running'.
These comments suggested, without very much reasoning in support, that the relevant test for securing a validation order would simply be if the proposed payments are 'necessary to keep a business running'.
These comments were strictly obiter, however, as the Court of Appeal for Bermuda held in that case that section 166 did not apply as the petition in question had been brought pursuant to section 111 of the Companies Act 1981 (which provides for an alternative remedy to winding up in cases of oppressive or prejudicial conduct) rather than pursuant to section 161 (which provides for compulsory winding up).