legal issues. Today's article, by lawyer Ian Kawaley, examines how near-bankrupt companies can be saved and can avoid going into liquidation.

The Bermudian marketplace has many opportunities for liquid entrepreneurs to rescue local companies on the brink of insolvency through acquiring equity in return for injecting fresh capital and restructuring runaway debts with creditors.

A successful corporate rescue venture is likely to open up profit-making opportunities for the new investor, to preserve jobs for the stricken company's employees, and to save the public purse the expense of liquidating an insolvent company while guaranteeing an earlier (albeit reduced) return for unsecured creditors and (possibly) saving the original principals from personal liability under guarantees.

Creditors of Bermudian companies are usually reluctant to force an insolvent company into liquidation, particularly if they have no doubt about the integrity of its management. The result of creditors' tolerance, however, often may be that debts to trade creditors, including Government taxes, will spiral out of control to levels where it is no longer financially viable for the company to do more than limp unprofitably along. When the troubled company inevitably succumbs to liquidation proceedings, its bankers will normally enforce their security against most of the company's assets leaving unsecured creditors (including Government as a preferred creditor) with a nil return, Government with the added expense of funding the costs of the liquidation and the company's employees out of work.

If a new investor can be found and a restructuring arrangement worked out with creditors, however, victory can be snatched from the jaws of defeat. A liquid investor would be likely able to acquire a controlling interest in the insolvent company in return for injecting a lump sum to settle the claims of unsecured creditors on a reliable basis, as would occur in a liquidation where sufficient assets existed to distribute to unsecured creditors. How much would the creditors get? This would be a negotiated amount based on the range of recovery estimated by an independent financial adviser as likely to be recovered if a liquidation ensued.

One deficiency with Bermuda's existing insolvency law is that a troubled company cannot seek the protection of the courts to stay creditors' claims while a recovery strategy is being worked out. This problem would be addressed if proposals currently being considered by the Bermuda International Business Association to implement legislation based on the English Insolvency Act 1986 are implemented. The English Act introduced, among other things, an administration procedure specifically designed to enable a company to continue as a going concern when in difficulties while staying proceedings against it, so as to avoid pressure from impatient creditors which could sabotage a viable rescue plan.

At present, a troubled Bermuda company which wished to restructure its debts and avoid a liquidation must woo creditors into waiting patiently while a workout is explored and expose its directors to liability for having traded while insolvent if a liquidation ensues. The only Court protection that can presently be obtained under Company Act 1981 is for the company itself to present a winding-up petition and appoint a provisional liquidator, whose appointment will operate as a stay of proceedings against the company. In many cases, the announcement that a company is in provisional liquidation may damage the goodwill in a business to such an extent that the viability of a workout would be fatally undermined. In other cases, a provisional liquidator may be reluctant to assume the responsibility of managing a clearly insolvent company under a legislative regime which essentially contemplates the winding-up of companies that cannot pay their debts, rather than rescuing them.

Another major problem faced by those involved in seeking to reach a global compromise with creditors in order to ensure a troubled company's survival as a going concern is that of binding creditors who disagree with the plan. A solution may be found in the provisions of section 99 of our Companies Act 1981, which provides that a scheme of arrangement is binding on all creditors if approved by a majority in number representing three-quarters in value of all creditors voting at a meeting convened to approve the scheme. Schemes have been successfully used in relation to insolvent and solvent Bermuda insurance companies to streamline the run-off of their liabilities. The section 99 procedure is costly, and would rarely be viable for a workout involving a company with very limited resources indeed. Even in the context of insolvent insurance schemes, a December 1994 Department of Trade and Industry Report recommended simplification of the English equivalent of our section 99 so as to make schemes of arrangement a more cost-effective option for insolvent run-offs.

With commercially-minded creditors, it should be possible to work out an informal debt restructuring arrangement by consensus without resorting to the more expensive and formal scheme mechanisms prescribed by section 99 of the Companies Act. Due to Bermuda's small size, if the overwhelming majority of creditors consent to a restructuring plan, considerable moral pressure can be brought to bear on a dissentient minority to toe the popular line. Where a provisional liquidator is in place, court approval for a compromise with creditors could probably be obtained more cheaply under section 175 of the Companies Act, with the same binding effect on a dissenter who was given a right to be heard on the liquidator's court application. Alternatively, if one or more difficult creditors blocked an informal arrangement which was clearly supported by the statutory majority, they could be penalised by the court in costs if they unreasonably caused the company to invoke the section 99 procedure.

How can a successful workout be guaranteed? It is vital for the company's principals to be proactive before the company becomes irretrievably insolvent, to search out potential investors and to seek appropriate professional advice.

The biggest hurdle to overcome will often be locating liquid investors, something which may not always be as simple as putting a sign in the window saying - "Wanted: Rich knight capable of rescuing corporate damsels in distress. Apply within.'' Ian Kawaley is Head of Insolvency & Corporate Rescue at Milligan-Whyte & Smith.