Insolvency: A Fraudulent Scheme?
London and Bermuda Newsletter
Bermuda is renowned for its user-friendly regulatory environment and speedy incorporation procedures. However, the efficiencies that can be achieved at the front end of corporate existence are matched by a legislative regime that facilitates the orderly winding-up of corporations at the conclusion of their corporate life.
One method for bringing a Bermuda company’s affairs to a close is through a court-sanctioned scheme of arrangement whereby a company reaches an agreement with the holders of its securities or its creditors, usually with a view to the company being wound up and, ultimately, dissolved. For example, (re)insurers who are insolvent or have been placed into run-off may use them to secure agreements with policyholders who accept a one-off payment in return for putting an end to existing and future claims.
While the overwhelming majority of schemes of arrangement are uncontroversial, the Bermuda Supreme Court recently had to grapple with the consequences of discovering, several years later, that its decision to sanction a scheme had been influenced by fraudulent representations. As a consequence, the judge had to consider whether to take the “unprecedented step” of setting aside an order sanctioning a scheme of arrangement.
In Fidelity Advisor and others v. APP China Group Ltd  Bda L.R. 35, Kawaley J took a pragmatic approach. Although he acknowledged that a judgment obtained by fraud is liable to be set aside, he ruled that, even if the defendant had disclosed the true position at the outset, the scheme would nevertheless have been approved by the court. Finding that thebenefits of setting aside the scheme were outweighed by the demonstrable prejudice that would be caused to third parties, he declined to set aside the scheme. He came to this conclusion despite his acknowledgement that, “[t]here is an obvious public interest in protecting the integrity of Bermuda as a financial centre, by deterring persons in distant parts from harming other persons in distant parts, and utilizing this court as an unwitting instrument of fraud”.
The defendant did not, however, escape without punishment and was ordered to pay, on a penal indemnity basis, the plaintiffs’ legal costs of the original sanction hearing as well as those of their unsuccessful application to set aside the scheme of arrangement.