Bermuda: Recovering re-insurance

By Lynda Milligan-Whyte, Senior Partner,Lynda Milligan-Whyte & Associates, Bermuda (09/01/2007)

THE OVERRIDING CONCERN of most creditors of Bermuda insurers is to recover monies due, or a significant portion thereof, in the most efficient manner and at the least possible expense while respecting the fraudulent preference rules under Bermuda law.

Apart from commutation and arbitration, which are outside of the scope of this article, there are three principal means of collecting liquidated sums in Bermuda from a Bermuda insurer or reinsurer.

1. Civil proceedings commenced by a specially endorsed writ;

2. A statutory demand under section 162(a) of the Companies Act 1981.

3. Winding-up proceedings under Section 161-163 of the Companies Act 1981.

 The Companies Act 1981 of Bermuda is substantially based on England’s 1948 Companies Act. Its relevant provisions include that a company may be wound up by the court if it is unable to pay its debts (Section 162(e)); a company is deemed to be unable to pay its debts if a creditor to whom the company is indebted in a sum of more than US$500 has served a written demand for the sum due on the company and the company has neglected to pay the sum for three weeks thereafter (section 162(a)); and a creditor may apply to the court by petition for a company to be wound up (Section 163(1)).

Statutory demand

A statutory demand under Section 162(a) may not be an appropriate collection procedure where there is an ongoing commercial relationship between the parties. A winding-up petition based on statutory demand cannot be properly presented where a debt is disputed (either as to liability or quantum). A debt which is not disputed on bonafide or substantial grounds may form the basis of a statutory demand, however. The utility of this procedure is most likely to arise either where the creditor company is seeking to enforce a commutation agreement, civil judgment or arbitral award, or in cases of near insurance insolvency where the debtor has clearly failed to pay an admitted debt.

Winding up petition

Under Section 163(1) of the Companies Act 1981, a winding-up petition may be presented, inter alia “by any creditor or creditors, including any contingent of prospective creditors”. However, in Mutual Fire Marine & Inland Insurance Company (In Rehabilitation) v Chesapeake Insurance Company Ltd1 the Bermuda Court of Appeal held that a single contingent creditor of an insurance company could not petition to wind up an insurance company by virtue of the provisions of Section 34 of the Insurance Act 1978.

Section 34 of the Insurance Act 1978 provides that an insurance company may be wound up on the petition of 10 or more policy holders (ie, contingent creditors). The Supreme Court in Mutual Indemnity Insurance Company v Aneco Reinsurance Underwriting Ltd2 had previously ruled that Section 34 of the Insurance Act 1978 merely provided an additional ground for winding up an insurer and did not restrict the right of a single contingent creditor to petition for the winding up of an insurance company (this was overruled in an appeal argued at the same time as the Mutual Fire case).

For the time being only creditors of an insurance company (as opposed to contingent creditors of general trading companies) may present a winding-up petition. The right of the company itself, its shareholders or the Registrar of Companies to present a petition falls outside the present discussion.

Grounds for winding up

For all practical purposes in a debt collection context the sole ground on which a winding-up petition presented by the creditor of an insurance company will be granted is where the company is unable to pay its debts within Section 161(e) of the Companies Act.

Under Section 162 of the Companies Act 1981, a company will be deemed to be insolvent if a debt is unpaid three weeks after a statutory demand is served on it (assuming, of course, the debt is not a disputed one); if a judgment is unsatisfied after execution has been levied; or if the company is proved to be unable to pay its debts (ie, proved to be commercially insolvent).

A creditor should have no great diffi culty in obtaining a winding-up order based on a statutory demand or judgment; the proof of commercial insolvency will be more challenging and costly.

Commercial insolvency

A debtor insurance company may be wound up where the petitioning creditor can establish that the company is commercially insolvent in that it is unable to pay its debtsas they fall due.

This approach is not free from difficulty. However, it may be an effective means of debt collection where the existence of a debt (in a liquidated amount) is clear and the debtor company is plainly insolvent.However, it is necessary to read Section162(c) of the Companies Act with the solvency requirements of the Insurance Act 1978 and related regulations which impose more stringent solvency standards on insurers than general trading companies.

Although only a bona fide dispute on substantial grounds as to the existence of liability (as opposed to quantum) can justify striking out a petition based on commercial insolvency (as opposed to statutory demand) the Bermuda courts are only likely to accede to a winding-up petition in very clear cases (see, for instance Mutual Fire, Marine and Inland Insurance Company v Focus Insurance Company Ltd 19903) where both significant indebtedness in a liquidated amount and insolvency were admitted.

In contrast, the decision in Mutual Fire v Chesapeake 1991 held that the petitioning creditor’s refusal of the respondent’s inspection request constituted substantial grounds for disputing the debt. More recently in 1997 the Court of Appeal for Bermuda has confirmed that the existence of cross claims asserted by the debtor does not impede a petitioning creditor who is clearly owed something from seeking to wind the debtor company up.

Commercial insolvency may often be difficult to establish and is generally the least effective collection mechanism of the three statutory bases for a windingup petition. The exception to this is in cases where a winding-up order is desired (as opposed to payment) to prevent the dissipation of assets to the detriment of the general body of creditors of the debtor company.

In conclusion…

The selection of the most appropriate mechanism for collecting liquidated sums from insurers will depend on a variety of factors, such as the size and nature of the claim and the commercial relationship between the parties. The success will largely depend on the ability of the creditor company to document clearly that an undisputed liquidated sum is due.

In cases where collection difficulties are anticipated, creditors of Bermuda insurers would be well advised to try to obtain admissions of specific quantified liabilities in open correspondence and/or to conclude commutation agreements in respect of specific amounts.

Where collections are made by means of any of the mechanisms discussed above from companies which are subsequently held to have been insolvent, the law of fraudulent preferences in Bermuda will not normally be problematic for the recipients of payments made as a result of commercial and/or legal pressure to pay.

So while it may be mistakenly assumed that reinsurance recoveries are hard to make in offshore domiciles, winding-up procedures under Bermuda law may prove to be highly effective collection devices. n

1 Civil Appeal 1991: No 7. The appeal was heard jointly with Mutual Indemnity Insurance Co v Aneco Reinsurance Underwriting, Civil Appeal 1991: No. 18.

2 Supreme Court of Bermuda, Civil Jurisdiction 1991 No 179, decision of July 4, 1991. Supreme Court of Bermuda, Civil Jurisdiction 1990: Nos. 369 and 370, Sir James Astwood, CJ, decision of December 18, 1990.

3 Supreme Court of Bermuda, Civil Jurisdiction 1991 No 179, decision of July 4, 1991. Supreme Court of Bermuda, Civil Jurisdiction 1990: Nos. 369 and 370, Sir James Astwood, CJ, decision of December 18, 1990.