The questions and answers which follow are intended to provide a synopsis of the treatment of the issues by reference to the laws of The Commonwealth of The Bahamas. The Bahamas, as it is more popularly referred to, is an archipelagic nation comprising some 700 islands, only a small number of which are populated. The Bahamas is a common law jurisdiction, having in the 18th century statutorily adopted the common law of England save where that law had been altered by certain statutes: Declaratory Act 1799 s 2, Chapter 4, Statute Law of The Bahamas (2000 edn). All future references to statute law and subsidiary legislation are, with the exception of the Segregated Accounts Companies Act 2004, intended to refer to the 2000 edition of the Statute Law of The Bahamas and the 2000 edition of the Subsidiary Legislation of The Bahamas. Under the Declaratory Act a number of English Acts and statutes were also declared to be in force in the Bahamas including the Companies Act 1868. The common law in the Bahamas has since been codified, modified or replaced by statute in many areas and today, the companies legislation and the insolvency regime are governed by primary legislation contained principally in the Companies Act 1992, Chapter 308, Statute Law of The Bahamas (the ‘CA’), the International Business Companies Act 2000, Chapter 309, Statute Law of The Bahamas (the ‘IBCA’) and by subsidiary legislation comprising the Companies (Winding-Up) Rules, Chapter 308, Subsidiary Legislation of The Bahamas (the ‘Rules’). To a limited extent as indicated below, some insolvency provisions as they relate to segregated accounts companies are also to be found in the Segregated Accounts Companies Act 2004 (the ‘SACA’).
The rights and obligations in the insolvency context created under both primary and subsidiary legislation are enforceable through proceedings in the Bahamian courts. Those courts comprise, at first instance, the Supreme Court of the Bahamas, and at the appellate level, the Court of Appeal and ultimately, the Privy Council in London, England which sits as a Bahamian court to hear appeals from the Court of Appeal of the Bahamas. Domestically, there is one judiciary and one central court system under which sittings of the Supreme Court and the Court of Appeal take place in the two main cities of Nassau and Freeport. Public registries where court documents are issued and company records are filed are maintained in both Nassau and Freeport. As a matter of practice, judges, the court building and the public registry located in the city of Freeport serve the northern region of the Bahamas while all other regions of the Bahamas are served by judges, the court building and the public registry located in the capital city of Nassau.
A. DOMESTIC FAMILY OF COMPANIES
1. If insolvency proceedings must be commenced for the family of companies, does your law permit a joint proceeding, ie, a single court file, a single judge, a single list of creditors, single notice list, or must the case for each member of the family proceed separately with no practical acknowledgment of the related proceedings?
There is no statutory provision which would allow a joint insolvency proceeding under Bahamian law. Each company in the group is regarded as a separate legal entity and, consequently, a separate insolvency proceeding must be commenced for each entity within the group. While it may be possible to make application under the Rules of Court for a consolidation of the individual insolvency proceedings, from a practical standpoint this may be of little utility given that separate lists of creditors and notices to creditors may be required in any event.
However, in cases involving fraud, it might be possible to treat the members of a family of companies as one single entity. In such cases, where it can be proved that fraud has permeated the family of companies and that their respective operations involved a common fraudulent scheme whereby its constituent members were in truth and substance a single entity, an application to the court to pierce the corporate veil of the numerous companies and wind up the group in a single proceeding is likely to succeed.
(a) What if the members of the family are organised under, or operate in, different locations within your country? Can a company from a distant location in your country commence its bankruptcy proceeding where its affiliate is located, if the affiliate has already commenced its bankruptcy proceeding?
Given the size of the Bahamas, and that legal proceedings can only be commenced in one of two locations (ie Nassau or Freeport), it is unlikely that this issue will arise in very many cases. Insolvency proceedings fall within the jurisdiction of the Supreme Court of the Bahamas which sits in two locations in the cities of Nassau and Freeport: Supreme Court Act 1996 s 53, Chapter 53, Statute Law of The Bahamas. Consequently, a company which was incorporated in the Bahamas and which operates in any location within the Bahamas may choose to commence its insolvency proceeding in the courts sitting in either Nassau or Freeport. In practice, the company usually commences its insolvency proceedings in the location which is nearest to its registered office and general area of business as this will usually facilitate easier access to the officers and records of the company and may be more geographically convenient for the creditors of the company. However, notwithstanding its place of business in the Bahamas, a company may commence insolvency proceedings in the same location where its affiliate previously filed such proceedings.
(b) To the extent your country has different types of insolvency proceedings (such as Chapter 11 reorganisation and Chapter 7 liquidation in the US), do the members of the corporate family all have to proceed under the same type of proceeding?
There is nothing in Bahamian law which is akin to the distinction in the US between a reorganisation under Chapter 11 and a liquidation under Chapter 7. However, insolvency proceedings in the Bahamas may take one of three forms: a voluntary winding up of the company; a voluntary winding up which is continued under the supervision of the court; or a compulsory winding up by the court. A voluntary winding up occurs where the members of the company, or in the case of an international business company, the directors or the members, pass a resolution to wind up the company voluntarily: CA s 225; IBCA ss 131 and 132; SACA s 45. Subsequent to the commencement of a voluntary winding up it may be considered appropriate for a number of reasons to have the voluntary winding up continued under the supervision of the Supreme Court. This will usually be the case where it is anticipated that the winding up will raise highly complex or contentious issues on which the court’s intervention and supervision may be considered desirable. In those circumstances, unless removed and replaced, the liquidator appointed under the voluntary winding up continues to discharge his duties as liquidator under the court’s supervision.
Alternatively, a compulsory winding up may ensue where a petition is presented to the Supreme Court seeking the compulsory winding up of the company by the court. The presentation of the petition may be at the instance of the company which has passed a resolution to that effect or at the instance of a director, a contributory, one or more creditors or a combination of the above: CA s 189; IBCA s 95. It should be noted that a segregated accounts company which has been established in accordance with the provisions of the SACA, will also be a company incorporated under either the CA or the IBCA. Accordingly, insolvency proceedings in relation to a segregated accounts company must proceed in accordance with the insolvency provisions of either of those two statutes.
There is no requirement that all members of the corporate family must proceed under the same type of proceeding ie voluntary, under court supervision or compulsory, and each member of the group may be wound up by a different method, as appropriate.
2. Does your law permit, or prohibit, a single administrator/trustee/ receiver to administer the assets and the liabilities of the entire corporate family?
The same person, or indeed more than one person, acting jointly, may be appointed as the liquidator/s of each of the companies in the group provided that there is no material conflict of interest between the companies in the group and there is no opposition to the appointment. If there is opposition to the appointment of a particular liquidator, in a voluntary winding up, it seems that only a contributory, ie any person who is liable to contribute to the assets of the company in the event of the company being wound up (see CA s 183; IBCA s 89) can apply to the court to remove a liquidator and appoint another: CA s 235; IBCA s 137. If a creditor objects to the appointment of a liquidator in a voluntary winding up, the proper course would be to petition the court either to bring the voluntary winding up under the supervision of the court, or for a compulsory winding up order, and apply under the petition to remove the liquidator and appoint another. In a voluntary winding up continued under the supervision of the court or in a compulsory winding up by the court, a creditor may apply to the court to have the liquidator removed from office and another liquidator appointed to fill the vacancy: CA ss 198, 200 and 246; IBCA ss 95 and 142–145.
(a) If so, is there a hearing for the court to determine whether the administration by a single party is appropriate? Are secured and unsecured creditors or other parties in interest allowed to object or be heard at such hearing?
There is no hearing as a matter of course to determine whether the same liquidator/s should act for all of the companies. The appropriateness of any appointment of a liquidator will be considered separately in each winding up proceeding. If the winding up is voluntary, the liquidator will be appointed by resolution of the company and there will be no court hearing to determine who the liquidator/s should be or whether it is appropriate to have one person act as liquidator for all of the entities in the group. If a creditor objects to the appointment of a liquidator under a voluntary winding up, he must petition to bring the voluntary winding up under the supervision of the court or for a compulsory winding up order. At the hearing of the petition, the creditor may object to the appointment of the liquidator in the voluntary winding up proceedings and in those circumstances the court will determine whether any existing liquidator/s should continue in office and will decide if it is appropriate to have the same liquidator/s act for all of the entities in the group: CA ss 198, 200, 246, 247(2) and 248(2); IBCA ss 104, 144, 145(2) & 146(2).
In a compulsory winding up, on the hearing of the petition to wind up the company, the court will generally decide who the liquidator should be. The court will usually have regard to the wishes of the creditors and, if objection is raised, may consider whether the same person/s should be permitted to act for all of the entities in the group: CA ss 198 and 246; IBCA ss 104 and 144. It should be noted that in the context of a group, the liquidator must be appointed separately in each company whether or not the same person is to act as the liquidator of all the group companies. If an international business company is being wound up under court-supervised voluntary proceedings then a creditor may apply to the court to remove and replace existing liquidators: IBCA ss 145(2) and 146(2).
(b) What about joint representation by other professionals, such as law firms or accounting or auditing firms?
There is no prohibition against joint representation by other professionals such as law firms or accounting or auditing firms. However, it is always open to creditors or other interested parties under a compulsory winding up, or a voluntary winding up continued under the supervision of the court, where liberty to apply is granted under the winding up order, to apply to the court to remove or replace other professionals engaged in the winding up if there is a material conflict of interest. Statute provides that the court is to have regard to the wishes of creditors and contributories as to all matters relating to the winding up: CA ss 198(1) and 246(1); IBCA ss 104(1) and 144(1).
3. Does your law encourage or discourage overlapping boards or management teams for separate members of a corporate family?
Bahamian law neither encourages nor discourages overlapping boards or management teams for each member of the corporate family. In practice, members of the same corporate family will usually share one or more board members and/or officers.
(a) If the directors of a parent company are not directors of the subsidiary, but they either directly or indirectly manage the affairs of the subsidiary anyway, do your country’s laws render such people de facto or ‘shadow’ directors of the subsidiary?
At common law, a person who acts as a director but who has not been validly appointed as such may be regarded as a de facto director: Re Canadian Land Reclaiming and Colonising Co: Coventry and Dixon’s Case (1880) 14 Ch D 660. A de facto director may either be the sole person managing the affairs of the company or one who manages the company equally with other directors, both de jure and de facto: Re Richborough Furniture Ltd [1996] BCC 155; Secretary of State for Trade and Industry v Hickling [1996] BCC 678. In addition to a de jure director and a de facto director, some jurisdictions recognise a third category of director referred to as a ‘shadow’ director. That term refers to a person in accordance with whose directions or instructions the directors of the company are accustomed to act. However, neither statute nor common law specifically recognise ‘shadow’ directors in the Bahamas.
(b) Do the duties or responsibilities of officers or directors of a family of companies change when the companies become insolvent? For example does their duty shift from a responsibility to the shareholders to a responsibility to the creditors. What if only one of the companies is insolvent?
The duties and responsibilities of the directors and officers of a company or a family of companies while the enterprise remains a going concern are to the company alone and not to the individual shareholders or the creditors: CA ss 81(1)(a) and 81(2); IBCA s 55. This does not change if the company becomes insolvent unless it is placed into liquidation. In that event, upon the appointment of a liquidator or provisional liquidator, the powers of the directors cease. In the case of a voluntary winding up, unless the company is an international business company, the shareholders’ resolution placing the company into liquidation can also include a provision for the continuance of all or some of the powers of the directors: CA s 229(d).
Generally speaking, the position is no different if only one of the companies in the group is insolvent since each company is treated as a separate entity.
4. Are there rules and do they change regarding members of the corporate family transferring assets among one another (such as by way of loans, capitalisation, other transactions) when the members are insolvent?
As a general rule, members of a corporate family may transfer assets among themselves for adequate consideration. Outside of an insolvency context, the rules which govern the entity’s ability to grant loans or capitalise a related entity will be contained largely in the by-laws of the company or, if the company carries on business in a sector which is regulated, such as an insurance company or a bank or trust company, it may be subject to capital adequacy requirements or other regulatory restrictions. In circumstances of insolvency in relation to one company in the group, it may be possible in certain circumstances for another solvent member to transfer assets or grant a loan to the insolvent member. However, where the members are insolvent, any transfers of assets between them may be liable to be set aside by the court as constituting an undue or fraudulent preference: CA s 262; IBCA s 160.
(a) Are cash sweep procedures allowed, that is, all cash from all subsidiaries is swept out to one account controlled by one of the family entities and then redistributed among the family members to pay bills?
To the extent that cash sweep procedures ignore the separate estates of the individual companies comprising the group they are not permitted under Bahamian law. Again, because of the separate corporate identity of each subsidiary, the cash or assets of one subsidiary may not be used by another subsidiary to satisfy its liabilities. However, it is possible for one member of the group to act as the treasury provided that proper intercompany accounts are maintained to reflect the creditor/debtor relationship between the company acting as treasurer and the member companies.
(b) What if the redistribution results in a healthy subsidiary funding the shortfalls in another subsidiary that is losing money?
As stated above, cash sweep procedures are not permitted for the very reason that the members of the group are regarded as separate corporate entities which cannot pool assets thereby using them as a single fund for the benefit of all members of the group.
5. How does your law treat claims of one member of a corporate family against other members of the corporate family?
As a general rule, the claims of one member of the corporate family against another member of the group will be treated in the same manner as a claim by any other creditor and (unless a priority is established under the relevant documentation) will rank pari passu with all unsecured creditor claims. The general rule may be displaced if a contrary intention can be shown. Accordingly, if it is established that funds allegedly advanced by way of loan to a subsidiary were not intended to be repaid but were intended to capitalise the subsidiary then, arguably, a case could be made that the loan was in fact an investment and not recoverable through a creditor claim.
(a) Are such claims invalid or unenforceable?
Such claims are not, prima facie, invalid or unenforceable purely by virtue of the fact that the claimant is a member of the same group of companies. Bahamian law recognises the separate legal identity of each member of the family of companies. In the absence of fraud, illegality or proof of intent to give an undue preference to a related entity, the legitimate claims made by one member of a corporate family against another member/s of the same corporate family are, prima facie, valid and enforceable.
(b) If not, are such claims on equal footing with those of third party creditors, or are they subordinated, or is there other treatment required or permitted under your law?
Generally speaking, such claims are treated on an equal footing with those of third party creditors. However, it is not uncommon for agreements to be entered into which provide that in the event of insolvency, the claim of a related entity or even a shareholder of the company is to be subordinated to the claims of third party creditors. In the absence of such agreement, there is no automatic subordination of such claims.
6. Does your law allow for the pooling of assets and liabilities of all members of the corporate family, so that a creditor of one member becomes, in essence, a creditor of all members sometimes referred to as ‘substantive consolidation’?
In the insolvency context, a creditor of a Bahamian company is entitled to share pari passu in the estate of the entity which is indebted to him and no other. Thus if the debtor (Company A) has insufficient assets to satisfy its liabilities, the creditor should not expect the shortfall to be made up from the assets of another member of the corporate family (Company B). On the other hand, if Company A is not insolvent and has sufficient assets to discharge all of its liabilities, the creditor of Company A is entitled to be paid in full. If Company A is in liquidation, any surplus of assets will then be distributed to the shareholders of Company A and, notwithstanding the insolvency of Company B, cannot be applied in discharge of liabilities to creditors of Company B.
(a) If so, is such pooling automatic or does it require a factual showing and court involvement?
For the reasons stated above, in the absence of fraud, there can be no pooling of assets, automatically or otherwise.
(b) What proceedings (motion, request, trial, etc) are required for the court to order the pooling of assets and liabilities?
If it can be established that the group of companies was involved in a fraudulent scheme which permeated the corporate structure the court could be invited to treat the group of companies as a single entity thereby collapsing the structure and treating all creditors as creditors of the single entity. That would require the court to hear evidence of the fraud by appropriate witnesses and, if taken in the context of a court-supervised or compulsory liquidation, could be made by an interlocutory application filed in the general liquidation action. Outside of such liquidation proceedings, a separate commercial action would have to be commenced leading to a trial of the allegations of fraud.
(c) Does your country’s law contemplate any partial pooling of assets and liabilities?
Bahamian law does not contemplate any partial pooling of assets and liabilities.
(d) If the pooling of assets and liabilities is called for, are there any protections for certain types of creditors, such as creditors with a lien or other security interest in particular assets?
The position of a secured creditor has to be considered in the context of the overall fraudulent scheme. The decision in any given case is likely to be fact-sensitive and so is not subject to a general statement of the law. However, it can be said that in order to be upheld, the secured nature of the claim would have to be supported by clear and unambiguous language in the applicable documentation.
7. How are secured creditors treated with respect to a family of companies? For instance, if a creditor has a security interest in the assets of one member of the family, and a guarantee from another member of the family, are both such claims valid in insolvency proceedings of the entire family?
If all the constituent corporate members of a group are in liquidation, claims against specific companies do not translate into claims against all of the other members of the group. The creditor must proceed against the specific company that has the obligation to the creditor. Again, this is subject to cases involving fraud.
With specific reference to the question, if the security interest and the guarantee are in respect of a single obligation, albeit from two different members of the group, it is not possible to recover more than the full amount of the debt. If that is achieved by realising the security then there will be no residual claim under the guarantee from the other member of the group. However, if there is a shortfall after the security is sold, the creditor is able to recover the balance under the guarantee from the other member of the group.
Alternatively, if the security interest is in respect of a different transaction from that of the guarantee, the creditor must be content to realise the security and file a creditor’s claim in respect of any shortfall. At the same time, the creditor could claim under the guarantee in respect of the other transaction, but unless expressly permitted to do so by the provisions of the guarantee, it is not possible to recoup any shortfall under the guarantee after selling the security.
8. Do your laws or courts provide for post-insolvency commencement of new financing that allows continued operation of the business and provides adequate protection to the lender who made the loan? Explain.
As a general rule, Bahamian law does not allow for post-insolvency commencement new financing.
9. Are directors and officers subject to civil or criminal sanctions if:
(a) Fraud or misrepresentation of a company’s finances are discovered?
Directors and officers may be subject to both civil and/or criminal sanctions. Subject to the prerequisites of an actionable misrepresentation, directors and officers may be liable in damages for any loss arising from misrepresentations made by them. In addition, if it appears that any officer or director has misapplied or retained any monies belonging to the company, or has been guilty of any misfeasance or breach of trust in relation to the company, the court may, on the application of any liquidator, creditor or contributory of the company, notwithstanding that the offence is one for which the offender is criminally responsible, examine the conduct of such director, manager, or other officer and may compel him to repay any monies so misapplied or retained, or for which he has become liable or accountable together with interest at such rate as the court thinks just. Alternatively, the court may order the director or officer to contribute such sums of money to the assets of the company by way of compensation in respect of such misapplication, retainer, misfeasance or breach of trust as the court thinks just: CA s 263; IBCA s 161.
In a voluntary winding up if it appears to the liquidator that any past or present director, manager, officer or member of such company has been guilty of any offence in relation to the company for which he is criminally responsible, the liquidator may refer the matter to the Attorney-General who may institute and conduct a prosecution or prosecutions of such offence: CA s 265; IBCA s 163. Where the company is being wound up by the court or subject to the supervision of the Court, any person interested in such winding up may apply to the court, or the court of its own motion may direct the official liquidators to refer the matter to the Attorney-General who may institute and conduct a prosecution/s of the offence: CA s 264; IBCA s 162.
(b) They allow the company to continue to operate while knowing it does not have the ability to pay the debt being incurred?
Directors and officers do not, as a general rule, apart from fraud, incur either civil or criminal sanctions by virtue of their continuing to operate the business in the knowledge that the company does not have the ability to pay the debts being incurred. There is no statutory provision in Bahamian law is akin to the fraudulent or wrongful trading provisions found in the English Insolvency Act. Directors and officers have a responsibility to the company only and if their alleged conduct results in a loss to the company they could incur sanctions under the provisions mentioned in paras 8 and 8(a) above. It seems, however, that if they continue to trade in the above circumstances the only party which is likely to suffer injury is the creditor. As Bahamian law presently stands, there is no statutory protection against operating in such circumstances.
(c) Same as (b) above but the directors believe that if some event occurs (eg chance to obtain new contract in prospect, new equity infusion, or new financing) it will be able to save the company and pay its bills?
As stated above, Bahamian law does not impose sanctions on directors or officers who continue to operate the business of the company with knowledge that the company is unable to pay its debts. Consequently, it is irrelevant whether the directors believe that there is a chance to save the company and pay its bills.
B. INTERNATIONAL FAMILY OF COMPANIES
1. If one or more members of the corporate family is incorporated under or governed by the laws of another country, does that change your answers to any of the questions set forth above?
The other members of the corporate family which are incorporated under the laws of another country can pursue separate insolvency proceedings in the country of their incorporation. The Bahamian company, however, must be wound up in the Bahamas. Bahamian courts do not usually accept jurisdiction to wind up a company incorporated outside the Bahamas. It has been argued that in certain circumstances the Bahamian Court has jurisdiction to wind up an international business company that was incorporated in the Bahamas but was subsequently continued in another jurisdiction. This point is currently before the Supreme Court but at the time of writing this chapter no judgment has yet been delivered: Re Mosaic Composite Ltd, Action No 2006/COM/com/00015.
2. If insolvency/restructuring proceedings are instituted for corporate family members in different countries:
(a) What controls as to where the case must be filed (eg, centre of main interests, principal place of business, location of parent, etc)?
Under Bahamian law, the primary factor for purposes of instituting insolvency proceedings is the place of incorporation since it is the laws of that jurisdiction which define the existence of the company.
(b) Do the courts attempt to exercise jurisdiction over the assets of the company filing domestically no matter where located (for example, overseas), or do they limit their jurisdiction to only those assets located in your country?
As a general rule, if a company is being wound up in the Bahamas, the liquidator is expected to obtain control over all assets wherever located thereby subjecting them to the overall jurisdiction of the Bahamian Court. That position is not based on the court exercising an in rem jurisdiction over the overseas assets but rather an in personam jurisdiction over the liquidator who must seek to secure control of all of the company’s assets.
(c) Would your courts enforce a court order from a foreign country that attempted to exercise jurisdiction over assets located in your country but owned by the company that is subject to the foreign insolvency proceedings?
The Bahamian Courts will recognise the authority of a liquidator appointed by a foreign court under the law of the country of incorporation. In appropriate circumstances, it may also recognise an order appointing a liquidator which is made by a foreign court in the place where the company is carrying on business or in any other place if the foreign order is recognised under the law of the place of incorporation.
The question of the enforcement in the Bahamas of a court order from a foreign country is determined by reference to the Reciprocal Enforcement of Judgments Act as amended, Chapter 77, Statute Law of The Bahamas (the ‘REJA’). The REJA provides for the registration and enforcement of any judgment or order given or made by certain superior courts outside the Bahamas in any civil proceedings: REJA ss 2 and 3(1). Under the REJA, where the Governor-General of the Bahamas is satisfied that reciprocal provisions have been made by the legislature of any country for the enforcement in that country of judgments of the Bahamian Supreme Court, the Governor-General may by Order declare that the provisions of the REJA shall extend to judgments of the superior courts of that country: REJA s 6(1). The countries to which the provisions of the REJA have, to date, been extended by Order of the Governor-General are Barbados, Bermuda, Jamaica, Leeward Islands, St Lucia and Trinidad: OG 1924 p 228; British Guiana: OG 1925 p 279; British Honduras: OG 1928 p 110; Australia: SI 16/1969; and the United Kingdom: SI 106/1999.
Once it is established that the judgment is of a superior court of one of the countries listed above, the judgment creditor must make application to the Bahamian Court within 12 months of the date of the foreign judgment, or such longer period as the court may allow, to have the foreign judgment registered in the Bahamian court. If the court is satisfied that it is just and convenient that the judgment be enforced, it may order the foreign judgment to be registered: REJA s 3(1). Once registered, the foreign judgment becomes a judgment of the Bahamian court which can be enforced in a similar manner to any other judgment of the Bahamian court.
(d) Has your country adopted any procedures (such as the Model Law on Cross-Border Insolvency) to address the various issues that arise in dealing with cases of cross-border insolvency?
The Bahamas has not yet adopted the UNCITRAL Model Law on Cross-Border Insolvency adopted by the United Nations Commission on International Trade Law.
