The European, Middle Eastern and African Restructuring Review 2017 - Guernsey: Overview
Originally posted on Global Restructuring Review. Co-authored by Andrea Harris of KRyS Global and David Jones of Carey Olsen.
The laws that govern liquidation and restructuring regimes in Guernsey are encompassed in the Companies (Guernsey) Law 2008, as amended (the Law). Opinions on Reforming Guernsey’s insolvency regime were sought via a public consultation process from businesses, stakeholders, consumers, industry associations, practitioners, law firms and other interested parties at the end of 2014 and are currently being considered by the States of Guernsey. The current procedures, together with any proposed amendments, are set out below to provide the reader with an understanding as to the remedies available to Guernsey domiciled companies in respect of insolvency and restructuring under the Law.
Introduction to Guernsey insolvency law and procedure
Parts XXI to XXIV of the Law set out Guernsey’s laws relating to corporate insolvency. The Law includes the concept of the statutory ‘solvency test’, which is key to understanding the insolvency process. Section 527(1) of the Law provides that a company satisfies the solvency test for the purposes of the Law if:
- it is able to pay its debts as they become due (the cash flow test); and
- the value of the company’s assets is greater than the value of its liabilities (the balance sheet test).
A company must pass both limbs of the test to be deemed solvent.
In the case of a company supervised by the Guernsey Financial Services Commission (GFSC), the company must also satisfy any other solvency requirements imposed by or under the provisions of various insurance and banking laws, as well as regulation of fiduciaries, administration businesses and company directors.
Types of rescue proceedings
Administration proceedings are outlined in sections 374 to 390 of the Law. An administration order can be made by the Royal Court of Guernsey (the Court) for the purpose of achieving either:
- the survival of the company and the whole or any part of its undertaking as a going concern; or
- a more advantageous realisation of the company’s assets than would occur in a winding up.
The Court must also be satisfied that the company (or a cell of a protected cell company) does not satisfy, or is likely to become unable to satisfy, the solvency test. An application must be made to the Court, supported by an affidavit, seeking an order that the company be placed into administration and setting out the reasons why. The application can be made by various parties, including the company itself, directors, members, creditors or a liquidator. The GFSC can apply in respect of supervised companies engaged in financial services businesses.
Unless the Court orders otherwise, notice of an application for an administration order should be served on:
- the company;
- the GFSC, in the case of supervised companies and companies engaged in financial services businesses;
- each incorporated cell, in the case of an incorporated cell company;
- any persons as the court may direct, including any creditor; and
- the Registrar of Companies.
Once an application for an administration order has been presented:
- no resolution can be passed or order made for the company’s winding up; and
- no proceedings can be commenced or continued against the company except with the Court’s leave (or, if an administration order is in force, with the administrator’s leave). Rights of set-off and secured interests, including security interests and rights of enforcement, are unaffected.
The above applies for the duration of the administration appointment, or until such time that the application is dismissed.
If appointed, the administrator takes into their custody or control all the property to which the company is or appears to be entitled. The administrator manages the company’s affairs, business and property in accordance with any Court directions.
The administrator can do all things necessary or beneficial for the management of the company’s affairs, business and property. Schedule 1 to the Law also sets out some powers of an administrator, unless the Court orders otherwise. The administrator can also apply to the Court for directions in relation to the extent or performance of any function in any matter arising in the course of the administration.
In performing its functions, an administrator is deemed to act as the company’s agent, but shall not incur personal liability except to the extent that he is fraudulent, reckless, grossly negligent or acts in bad faith.
On the making of an administration order, any extant application for the company’s winding up is dismissed. It is important to note that the rights of secured creditors are not affected by the administration moratorium in Guernsey.
At any time, the administrator may apply to the Court for the administration order to be discharged or varied, and shall apply to the Court for the administration order to be discharged or varied if it appears that:
- the purposes specified in the order for appointment have been achieved, or are incapable of achievement; or
- it would otherwise be desirable or expedient to discharge or vary the order.
Schemes of arrangement
A scheme of arrangement is a procedure available under the Law (sections 105 to 112, Part VIII) through which a company may make a compromise or arrangement (a scheme) with its creditors or members (or any class of them).
One of the key advantages of a scheme is that it is binding on all creditors or members (or relevant class of each), provided the appropriate approvals and Court sanction are obtained. Further, what makes schemes particularly useful, especially in situations such as insolvent restructuring, is their inherent flexibility. A scheme can be moulded to suit the individual needs of a company.
The first step to obtaining a Court-sanctioned scheme is an application to the Court for an order directing that a meeting of the creditors or members, or class of them, take place so that they can consider and vote on the scheme (the meeting). This application is more often than not made by the company, but can be made by its members or creditors, a liquidator, administrator or receiver.
Once a meeting has been directed, notice of it must be given to the company’s creditors and members. Each notice must include a statement explaining the effect of the scheme. That same statement must also declare any interest of the directors and the effect of those interests on the scheme, insofar as they differ in effect from the like interests of other people. If the scheme affects the rights of debenture holders, a similar explanation must be given in respect of the trustees of any deed for securing the issue of the debentures. If a company fails to provide such a statement, it, and any director or trustee, could be found guilty of an offence (sections 108(5) and 109(2) of the Law).
Providing at least 75 per cent of the members or creditors entitled to vote at the meeting agree to the scheme, the Court may sanction it. The Court is not bound to sanction a scheme, however, simply because the majority have voted in favour of it. When deciding whether or not to sanction a scheme, the Court may consider whether the majority is acting in good faith in the interests of the creditors or members it professes to represent, and whether the different interests of creditors or members are such that they could be treated as belonging to a different class of creditors or members.
It is highly likely, however, providing it can be shown that the scheme is in the interest of the members or creditors, and the appropriate provisions of the Law have been complied with, that the scheme will be sanctioned.
A copy of the Court’s order sanctioning a scheme must be delivered to the Registrar within seven days after its making. A failure to do so could result in a company being guilty of an offence and liable for a daily default fine (section 110(6) and 111(6) of the Law). Likewise, if a scheme has the effect of amending a company’s memorandum or articles, a copy of the amended articles or memorandum must be delivered to the Registrar at the same time (section 112(5) of the Law).
Despite being a court-driven procedure, there is inherent flexibility in schemes, which can be of considerable value to companies considering restructuring, merging (section 111 of the Law), conversion or migration. Guernsey has seen a number of high-profile schemes of arrangement within the past few years and we see no reason why this trend should not continue.
Compulsory winding up
Sections 406 to 418 of Part XXIII of the Law discuss provision for the Court to order a compulsory liquidation of a company and appoint a liquidator. The liquidator’s role is to collect and realise the company’s assets and to distribute dividends to creditors according to a statutory order of priority.
An application, supported by an affidavit, must be made to the Court seeking an order that the company be wound up and setting out the reasons why. The company, any director, member, creditor, or any other interested party can make the application. In certain limited circumstances, the GFSC or the States of Guernsey can make an application.
There are several grounds on which a company can be wound up, including:
- a company’s members have by special resolution resolved that the company be wound up by the Court;
- a company is unable to pay its debts; or
- it is just and equitable that the company be wound up.
Any application for an order for the compulsory liquidation of a company supervised by the GFSC will not be heard unless a copy of the application is served on the GFSC at least seven days before the application hearing.
On the making of a compulsory liquidation order the Court will appoint a liquidator nominated by the applicant, or where no person has been nominated the Court will make such appointment as it thinks fit. The liquidator can:
- bring or defend civil actions on behalf of the company;
- carry on the business of the company to the extent beneficial for winding up the company;
- make capital calls (that is, demand money promised by an investor);
- sign all receipts and other documents on behalf of the company;
- do any other act relating to the winding up; and
- do any Court-authorised act.
Unlike the administration regime, there is no schedule to the Law in respect to a liquidator’s powers. In practice, a proposed liquidator may request inclusion of specific powers in the application to the Court. As with administration, a liquidator may seek the Court’s directions in relation to any matter arising in the liquidation of the company and upon such an application the Court may make such order as it sees fit.
Upon the appointment of a liquidator in a compulsory liquidation, all powers of the directors cease, except to the extent that the liquidator or the Court sanctions their continuance. Any person who subsequently purports to exercise any powers of a director is guilty of an offence.
When a company has been placed into compulsory liquidation and the liquidator has realised the company’s assets, the liquidator must apply for the appointment of a court commissioner to examine his or her accounts and distribute the funds derived from the company’s assets to creditors and thereafter, any surplus to members. Following approval of the final accounts and the payment of claims, the liquidator may seek dissolution of the company by application to the Court.
All costs, charges and expenses properly incurred in the compulsory liquidation, including the remuneration of the liquidator, are payable from the company’s assets in priority to all other claims. The liquidator’s fees shall be estimated in the application for their appointment and fixed by the Court in accordance with Practice Direction 3 of 2015.
Voluntary winding up
Under sections 391 to 405 of the Law the shareholders of a company may decide that it should be wound up and appoint a liquidator. There is no distinction between solvent or insolvent voluntary liquidations. The liquidator’s role is to collect and realise the company’s assets and to distribute dividends according to a statutory order of priority. Voluntary liquidation is an out-of-court process.
A company can be voluntarily wound up by ordinary resolution if either the period fixed by the memorandum or articles expire, or if an event stipulated in the memorandum or articles occurs. On the other hand, a company can be wound up voluntarily if its members pass a special resolution that it be wound up voluntarily and the winding up commences on the passing of the resolution.
A special resolution is passed when a majority of at least 75 per cent of voting members (unless the company’s articles differ from the requirements of the Law) vote in favour of that special resolution. An ordinary resolution to appoint the nominated liquidator requires a simple majority (that is, more than 50 per cent) of voting members.
Once appointed, the liquidator’s powers and duties resemble those of a liquidator in a compulsory liquidation. Company assets are initially applied in satisfaction of creditor’s claims and any surplus is distributed to members according to their respective entitlements.
On the appointment of a liquidator, all powers of the directors cease, except to the extent that the company by ordinary resolution, or the liquidator, approves their continuance. As with a compulsory liquidation, any person who subsequently purports to exercise any powers of a director is guilty of an offence.
As soon as the company’s affairs are fully wound up, the liquidator should both:
- prepare an account of the liquidation, giving details of the liquidation and the disposal of the company’s property, among other things; and
- call a general meeting to present and explain the account.
After the meeting, the liquidator must give notice to the Registrar of Companies of the holding of the meeting and its date. The Registrar of Companies publishes the notice along with a statement that the company will be dissolved three months after the notice is delivered.
The Judgments (Reciprocal Enforcement) (Guernsey) Law 1957 (the 1957 Law) creates the right to have certain foreign judgments registered in the Court in certain circumstances and the foreign judgment will thereafter have effect as if it had been given by the Court and entered by it on the date of its registration. The Judgments (Reciprocal Enforcement) Rules 1972 stipulate the procedures surrounding registration.
The Judgments (Reciprocal Enforcement) Ordinance 1973 specifies the reciprocating countries to which the Law extends. Registration of a foreign judgment is available where:
- the judgment is of a superior court of a reciprocating country;
- the judgment is final and conclusive (although a pending appeal does not matter for these purposes);
- a sum of money is payable under the judgment (other than taxes, fines or other penalty); and
- the court of the relevant country had jurisdiction to grant judgment.
The process commences with the judgment creditor applying to the Court on an ex parte basis within six years of the date of the judgment to be registered, seeking leave for the judgment to be registered in the Court.
If the Court is satisfied that the judgment should be registered, it will grant the application and register the judgment. The order will also state the period within which an application to set aside the registration may be filed by the judgment debtor. Following registration, the judgment can be enforced as if it were one granted by the Court.
Until the English Supreme Court’s decision in the case of Rubin v Eurofinance, it was commonly accepted that the 1957 Law did not apply to insolvency judgments. However, it was the judgment of the Supreme Court that the English equivalent (in broadly the same terms) of the 1957 Law did apply to insolvency judgments. It may, therefore, be the case that that the 1957 Law can (and should) be utilised when seeking recognition of a judgment in insolvency proceedings.
Enforcement at common law
Where the Law does not apply, the common law applies and can permit recognition and enforcement of a foreign judgment. However, certain conditions must be met. The foreign court that granted the judgment must have been of competent jurisdiction. Further, the Court will apply conflict of law rules in determining whether or not this was so.
Under the common law, a foreign judgment is regarded as a debt; in effect, the liability arising on the implied promise to pay the amount of the foreign judgment. Therefore, a judgment creditor must sue on the debt, and then apply for summary judgment.
- If a foreign judgment is sued upon, it is impeachable only on the following limited grounds:
- the foreign court had no jurisdiction;
- there was fraud on the part of the party obtaining the judgment;
- enforcement of the judgment would be contrary to public policy in Guernsey; or
- the proceedings in which the proceedings were obtained were contrary to natural justice.
If the defendant has essentially submitted to the jurisdiction in question, and the judgment itself cannot be impeached (and the judgment is not one to which the 1957 Law applies) then the defendant has few, if any, defences in Guernsey.
Recognition of insolvency appointments
Guernsey is not a signatory to the UNCITRAL model law nor is it a member of the EU and, as such, the EC Regulation on Insolvency Proceedings is not applicable. However, the Court has a long history of providing assistance to overseas insolvency office holders in appropriate circumstances.
Recognition can essentially be divided into two types. Firstly, section 426 of the UK Insolvency Act 1986 has been extended to Guernsey by the Insolvency Act 1986 (Guernsey) Order 1989. The consequence is that the Court is able to provide judicial assistance to the Courts of England and Wales, Scotland, Northern Ireland, the Isle of Man or Jersey in insolvency matters.
The procedure under section 426 involves the office holder applying to the court in their home jurisdiction for an order that the home court sends a letter of request to the Court for assistance. Generally, the Court must comply with the request unless it offends public policy or the outcome is oppressive. Further, section 426(5) provides the Court with the means to apply the insolvency law of either Guernsey or the foreign jurisdiction in relation to comparable matters falling within its jurisdiction.
The second type of recognition is under the common law. This is an area that has been subject to substantial development in other jurisdictions in recent decisions, particularly those of the English Supreme Court in Rubin v Eurofinance. However, the broad position remains that Guernsey will cooperate in foreign insolvency proceedings especially where there is a sufficient connection between an office holder, appointed in the jurisdiction where the company is incorporated or individual domiciled, and the company or individual has submitted to the jurisdiction of the Court by which the appointment was made.
Although the Royal Court still retains discretion under the common law, where there is a sufficient connection the Court will typically grant the relief sought.
Litigation and the funding of litigation
Since the global financial crisis took hold, Guernsey has seen a marked increase in antecedent transaction or directors’ misfeasance litigation pursuant to the provisions of the Law. As the number and complexity of insolvencies have increased, so has the volume of litigation. Various funding methods include:
- Self funding (company assets) – funding of litigation in Guernsey is generally done by the litigant directly. A successful party can expect to recover about 50 to 60 per cent of their costs from the unsuccessful party.
- Creditor and third-party litigation funding – in certain circumstances funding for litigation is permissible in Guernsey as long as such funding is not champertous and does not constitute unlawful maintenance. Effectively, a litigant can be funded as long as it retains control of the litigation and gains the benefit of a substantial proportion of any award made.
- Contingency and conditional fees – the terms of the Guernsey Bar Code of Conduct do not make it possible for Guernsey advocates to enter into conditional or contingency fee agreements with their clients. However, this does not preclude a compulsory liquidator or administrator appointed by the Court from considering such arrangements.
Practical considerations include:
- appointees must retain control whereas a funder may seek to control the actions being undertaken; therefore, it is necessary to strike a balance between the practitioner’s requirements and the funding party’s expectations;
- it would be prudent for the practitioner to seek the Court’s approval of any funding agreement to confirm its appropriateness;
- dealing with adverse costs orders and setting a reserve;
- mechanism for and timing of funding payments;
- out-of-pocket costs; and
- application of laws in foreign jurisdictions where litigation might be commenced (eg, England and Wales and how such courts perceive funding alternatives).
Alternatives to litigation
Alternative dispute resolution methods, such as mediation or arbitration, are also growing in popularity in Guernsey, with an increasing number of claims going to either mediation or arbitration. Provision is made in the Royal Court Civil Rules 2007 for the Court to encourage parties to resolve matters through alternative dispute resolution.
Reporting obligations to the Court and statutory authorities
An administrator or compulsory liquidator is obliged to send a copy of the order appointing them to the Registrar of Companies within seven days of having been appointed. In voluntary liquidations, the company is required to send a copy of the resolution that the company be voluntarily wound up to the Registrar of Companies within 30 days of the resolution. The registrar gives notice of the fact that the company has passed a resolution for the voluntary winding up, or that the company is being compulsorily wound up. In practice, most practitioners would also place a notice in La Gazette Officielle advising of the liquidation and calling for any claims in the liquidation estate to be lodged with them.
There are no minimum reporting requirements to creditors or members in the Law with respect to administrations or compulsory liquidations, however, the Court can direct an office holder to prepare reports when it makes a winding up or administration order. In a compulsory liquidation, the office holder is required to furnish the Commissioner of the Court with an account of the winding up and outline any director misfeasance, fraudulent trading or wrongful trading.
When the administrator has discharged the purpose of the Administration Order they are required to apply to the Court for the Administration Order to be varied, or discharged and appoint a liquidator. The application will generally involve the administrator providing the Court with an account of the administration and overview that the purpose of the administration order has been met.
Practitioners are obliged to investigate circumstances when they have reasonable grounds for suspecting money laundering or terrorist financing. A practitioner also has a positive obligation to file a Suspicious Activity Report with the Financial Intelligence Unit, a division of the Guernsey Border Agency, if any such activity or transactions are identified.
After an initial round of public consultation, the States of Guernsey published a report on the responses received, the main highlights of which are set out below:
- The introduction of insolvency rules to offer guidance on procedural matters with the aim of ensuring a uniform approach is taken to these matters by practitioners.
- In the voluntary winding up of an insolvent entity:
- Introducing a requirement that a liquidator be independent to avoid conflicts of interest.
- Requiring notice of a liquidator’s appointment be sent to creditors with the aim of explaining the liquidation process.
- Obliging a liquidator to call at least one initial meeting of creditors within a given time frame.
- Creating a statutory obligation to report to creditors and shareholders.
- A legislative requirement to advise creditors of an administration appointment with the aim of explaining the administration process.
- Statutory powers for the appointee to require production of a Statement of Affair, documents and information from any person involved in the promotion of the company or with knowledge of its affairs, and to enable the appointee to examine the directors (and former directors).
These proposed amendments are currently being considered by the States of Guernsey’s Finance Sector Development Committee. Further information can be found at the States of Guernsey website (www.gov.gg).
Guernsey is an important offshore financial centre. Consequently, a wide range of significant insolvency assignments have arisen in the jurisdiction encompassing banks, investment funds, multi-jurisdictional groups and local trading entities. The current statutory framework in Guernsey, coupled with an accommodating court system willing to look to other jurisdictions for practical solutions, has been successful in providing workable solutions to a wide array of issues arising from those assignments. Improvements to the current regime can only serve to increase Guernsey’s credibility as an insolvency jurisdiction.