What are the duties of directors of a Bermudian company, and how do they change when the company is insolvent or in the zone of insolvency?

The common law imposes on all company officers (directors and secretaries), fiduciary duties and a duty of skill, care and diligence. The Companies Act 1981 (the "Act") codifies certain of the common law duties (but is not exhaustive), such that officers' duties are governed by both common law and statute.

In determining how to cause a company to act in circumstances where a company is insolvent or in the zone of insolvency, the directors must have regard to their fiduciary and common law duties to the company. The interests that the directors must consider when discharging these duties will be dictated by the financial position of the company, and whether it is solvent, in the zone of insolvency, or insolvent. It is for the directors, acting individually and collectively (with the assistance and guidance from professional advisors) to reach a determination as to whether the company is insolvent, in the "zone of insolvency", or solvent at any given time.

Broadly speaking, when considering what steps to take in any distressed scenario, the directors should be continually considering (and documenting) whether the proposed steps are in the best interests of, and maximise returns to, the creditors of the company as a whole, and how the outcome of what is being proposed compares against what the creditors would achieve if the company were to be placed into formal winding up proceedings, assets realised and distributions made to the creditors in accordance with the statutory order of priority.

A key step for the directors to take is to instruct an independent financial advisor to prepare a liquidation analysis. The liquidation analysis should consider whether the returns to the company's unsecured creditors arising out of an insolvency scenario would be more or less than those which would be achievable for the unsecured creditors if the company is able to continue as a going concern. The analysis should (inter alia) contemplate that secured creditors would enforce their security rights leaving unsecured creditors to share proceeds from realisations from unsecured assets and from any surplus realisations resulting from the sale of any secured assets once secured creditor claims have been met. The directors of the company will need to ensure that the liquidation analysis is regularly reviewed and updated to account for the company's evolving financial situation.

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