Bermuda: Disputing Debts Will Not Always Defeat A Winding Up Petition In Bermuda

Belvedere Insurance Company Limited (In Liquidation) v. Caliban Holdings Limited, In the Supreme Court of Bermuda Companies (Winding-Up) 1999: No. 80, 26 March 1999 (Mitchell J.)

In Belvedere Insurance Company Limited (In Liquidation) v. Caliban Holdings Limited, Mr. Justice Mitchell gave judgment on 26 March 1999 on the hearing of a Petition for a winding-up order brought by the joint liquidators of Belvedere Insurance Company Limited ("Belvedere") against its parent company Caliban Holdings Limited ("Caliban"). The joint liquidators of Belevdere had been appointed interim joint provisional liquidators of Caliban , by ex parte order dated 5 March 1999. Caliban, citing well-known English and Bermudian authorities, sought to dismiss the petition and discharge the appointment of the provisional liquidators, on the grounds that the debt which formed the basis of the petition was disputed. That debt was a dividend of $2.2m paid by Belvedere to Caliban in 1996. The joint liquidators argued that the dividend was unlawful because Belvedere was insolvent at the time that it was declared and paid. Caliban contended that the petition was an abuse of process and that Belvedere should be required to pursue its claim to recover the alleged debt by ordinary action. Belvedere argued that at least part of the debt was indisputably due, being $662,500 of the 1996 dividend, which was paid by Belvedere in breach of section 31C of the Bermuda Insurance Act 1978. Belvedere argued that at least part of the debt was indisputably due. Alternatively, Belvedere argued that, in the unusual circumstances of the case the court should exercise its discretion to adjourn the petition, continue the appointment of the provisional liquidators and try the dispute in the winding up proceedings.

Belvedere relied upon affidavit evidence which disclosed the following background facts. Belvedere was incorporated in Bermuda as an insurance company in 1978. Belvedere Underwriting Agents Limited ("BUAL") was the wholly owned subsidiary of Belvedere. Between 1981 and 1983 BUAL underwrote on behalf of both Belvedere and GTE Reinsurance Company Limited ("GTE Re"). Belvedere ceased underwriting and went into run-off in 1994. In 1995 and 1996 Belvedere paid a total of $8.6M in dividends to Caliban. In 1996 Caliban paid a dividend of $5.35M to its shareholders. From 1996 onwards, on the face of the consolidated financial statements the solvency of Belvedere (and Caliban) depended upon the existence of a purported asset known as "the agency receivable". The purported asset appearing in the balance sheet of both Belvedere and Caliban was a claim brought by BUAL against GTE Re. That claim was the subject of an arbitration between BUAL and GTE Re in 1998. At the time of the arbitration the Official Receiver had been appointed as provisional liquidator of Belvedere. The day after the commencement of the arbitration, acting upon the advice of Queen’s Counsel, the Official Receiver agreed to withdraw BUAL’s claim against GTE Re and GTE Re agreed to withdraw its cross-claims against BUAL, Belvedere and Caliban. Belvedere was ordered to be wound-up by the Supreme Court of Bermuda shortly thereafter.

Caliban relied upon affidavit evidence which disclosed the following facts. The 1996 dividend was declared on the basis of the audited financial statements for the year ended 31 December 1995 which were unqualified and showed that Belvedere was solvent with a surplus which exceeded the amount of the dividend. The "agency receivable" was not included as an asset in the 1995 accounts. The prior approval of the Minister of Finance for the 1996 was not obtained because the management of Belvedere were not aware that this was a requirement. When the error was brought to the directors' attention by the auditors in 1997, Belvedere applied for and purportedly obtained retrospective approval for the dividend.

"Given the background to this case, I am not happy about dismissing the petition. The Petitioner comes to me alleging a debt of $2.2 million owed by the Company. That is based on payment of a dividend of that amount in June 1996, by the Petitioner to the Company.

The Petitioner says the dividend was illegal because the Petitioner was insolvent at the time that it paid the dividend. The extant accounts at the time of the dividend were those for the year ending 31 December 1995. They were unqualified and showed that the Petitioner had substantial assets. It may well be that by the time the dividend was paid, the Petitioner, or rather, those in control of the Petitioner, knew or otught to have known that it was insolvent. However, I am satisfied that the debt can be disputed.

I am then faced with the argument that $662,500 of that dividend was illegal because it was paid out of capital; and for it to have been legal, the prior permission of the Minister of Finance should have been obtained under Section 31C of the Insurance Act 1978, and it was not. Therefore at the time of the payment, it was illegal. There is little, if any, argument about that. The Company says that subsequent to payment of the divident, retrospective approval was obtained. The Petitioner says that that approval was ultra vires and of no effect. The Petitioner may be right, but that is an issue which needs to be fully litigated and examined before the Court can determine the effect of the retrospective approval.

For these reasons, I am saisfied that both of the debts are disputed. In normal circumstances I would dismiss the Petition. The Petitioner would have to deal with those debts in the normal course and sue the Company. However, the circumstances in this case are most unusual. I am not dealing with application of several creditors, but of only one creditor which is, and was, a creature of the Company. According to the affidavit of Mr. Butterfield, the Petitioner has been a wholly owned subsidiary of the Company since 31 December 1995. Mr. O’Connor says that it has been a subsidiary since 12 December 1989. Whatever the correct date is, there is no doubt that Belvedere is Caliban’s creature.

Belvedere is in liquidation. Its statement of affairs showed a net deficit of $7.5 million. In circumstances such as these, I am told that I have a discretion to order the existence or otherwise of these debts to be litigated within the winding-up proceedings. I believe that to be the just course. I ask the parties to submit to me agreed draft directions for the speedy resolution of these issues.

I decline to dismiss the petition and it shall continue in effect. The provisional liquidators are to continue in office and to continue to have their powers. The costs of this hearing are to be costs in the Petition."

The general rule that a winding-up petition will be dismissed if the debt which forms the basis of the petitioning creditor’s locus standi is disputed on bona fide and substantial grounds is a rule of practice of the English Companies Court, not an inflexible rule of law. Since there is no separate Companies Court in Bermuda, there is no particular reason why the Supreme Court of Bermuda should follow the English practice although hitherto it has done so. Mr. Justice Mitchell exercised his discretion not to dismiss the winding-up petition on the basis of the "most unusual" circumstances of the case. But one can easily imagine cases, with less unusual facts, where it would be unjust for a creditor to have to pursue his claim against a company by litigation or arbitration while the company was able to continue paying other creditors until it eventually runs out of money. Consider, for example, the case of reinsurance companies in run-off, many of which notoriously take a "can’t pay, won’t pay" approach towards creditors and which seldom, if ever, become more solvent with the passage of time.