The full strength of the economic headwinds facing the UK economy is not yet clear, but a helpful recent report by insolvency and restructuring adviser Begbies Traynor provided some useful numbers around the attitudes of businesses.
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The report found that in the three months to the end of June, 1,957 companies were in a state of “critical financial distress” – 37% more than the same period in 2021. A further 582,000 companies were in “significant financial distress”, and perhaps most worrying, the period between April and June saw 5,629 businesses in the UK becoming insolvent – the worst three-month period since the Autumn of 2009.
Against that backdrop, it seems inevitable that there will be an impact on businesses with an offshore element to their structuring – and it is far from clear that lenders and creditors will be prepared to offer the same forbearance and flexibility that they did during the Covid-19 pandemic. Over the past few years, Walkers’ transactional teams have routinely been asked for offshore law advice on enforcement options at the outset of transactions – it is likely that this advice will be dusted off and options reviewed in the coming weeks and months, as the picture of the scale and length of the change in economic fortunes becomes clearer.
With that in mind, it is a good time for secured creditors with Bermuda, British Virgin Islands (“BVI”) and/or Cayman Islands (“Cayman”) law governed share security to consider practical steps that they can take now, together with the development of a potential enforcement strategy, to make a future enforcement of that security as efficient and straight-forward as possible.
Such steps would include:
- ensuring that fully executed and dated copies of the relevant security documents are in hand (including any amendments or variations thereto) (whether on electronic file or available in a transaction bible);
- ensuring that any contractual, ancillary deliverables under the security documents are in hand (including any signed but undated share transfer form(s), original share certificates (if any), irrevocable power(s) of attorney, annotated registers of members, undertakings that the company will register the share transfer form(s) upon enforcement, and other ‘self-help’ deliverables);
- ensuring that the relevant local law security documents and deliverables have been reviewed by Bermuda / BVI / Cayman counsel (as applicable) and that any issues that may impact on enforcement have been addressed;
- ensuring that any relevant public searches have been undertaken in conjunction with legal counsel (for example, searches at the BVI Registry to review the status of the BVI target company and public registration of security in the BVI, and obtain (as applicable) copies of filed, annotated Registers of Members or Certificates of Registration of Charge);
- arranging for full CDD/KYC information to be collated up-front and in advance for (i) any potential transferees of the secured shares (i.e. the secured creditor or its nominee(s)) and (ii) new directors of the BVI or Cayman company that the secured creditor may wish to appoint using the voting rights on the secured shares;
- engaging with valuation experts and developing a plan for the valuation and marketing of the secured assets;
- carrying out a review to check that there are no regulatory or other consents required in connection with the proposed enforcement steps (for example, the consent of the Bermuda Monetary Authority is generally required prior to a transfer of shares in a Bermuda company and the entity in question may be a regulated entity in the relevant jurisdiction) ; and
- ensuring that where the security has been given in support of a foreign law loan obligation (which will typically but not always be English law), the proposed enforcement steps are consistent with the terms of the foreign law loan documentation and the enforcement process is coordinated amongst both Bermuda / BVI / Cayman and foreign law counsel (as applicable).
Whilst clearly certain secured creditors will have already addressed some, if not all, of these steps in previous routine security reviews and planning , it is nevertheless likely that some of the work, with respect to pre-enforcement planning, strategy and practical preparation, will need to be refreshed in the coming weeks and months.
Walkers’ cross-disciplinary teams have significant experience in advising on pre-enforcement steps and enforcement action under Bermuda, BVI and Cayman law, respectively, and work with teams of experts in Guernsey, Irish and Jersey law from our offices in Europe, Asia and the Americas.
If you have any queries on the above or would like to discuss in more detail please do not hesitate to contact us or your regular Walkers contact.