The credit crunch has put pressure on a wide range of structures, resulting in lenders, borrowers and other counterparties looking more closely at the impact of possible insolvency proceedings. As Jersey companies are often used in cross-border finance transactions, it is important to be aware of the differences between Jersey and English insolvency procedures.
Main insolvency procedures
The main insolvency procedures for a Jersey company include:
- a creditors' winding-up under the 1991 Companies (Jersey) Law. This is commenced by a special resolution of the shareholders. The procedure is broadly similar to a creditors' voluntary winding-up under the 1986 UK Insolvency Act; and
- a désastre under the 1990 Bankruptcy (Désastre) (Jersey) Law. This may be commenced on application to the Royal Court by a creditor owed a liquidated sum of no less than £3,000, the company itself or, in some circumstances, the Jersey Financial Services Commission. If a creditors' winding-up has already commenced when a declaration of désastre is made, the winding-up terminates.
The 1991 law also contains provisions on just and equitable winding-up, summary winding-up (similar to a members' voluntary winding-up) and schemes of arrangement, which are broadly similar to the equivalent procedures under the 1986 UK Insolvency Act and the 1985 UK Companies Act.
No Jersey law has insolvency procedures equivalent to the UK administration or administrative receivership or the US Chapter 11 bankruptcy procedures. Jersey insolvency proceedings do not combine parent and subsidiary companies' assets into a single pool; insolvency is on a company-by-company basis.
Effect of commencement of insolvency procedures
On a creditors' winding-up, liquidators are appointed, usually by the creditors. The liquidators stand in the shoes of the directors and administer the winding-up, gather in assets, settle claims and distribute assets as appropriate. After the winding-up begins, no action can be taken or continued against the company, except with the leave of court. This does not prevent secured creditors from enforcing their pre-existing security against the company's property. The corporate state and capacity of the company continue until the end of the winding-up procedure, when the company is dissolved.
On a declaration of désastre, title and possession of the debtor's property are automatically vested in the viscount – a Royal Court official. With effect from the date of declaration, a creditor has no other remedy against the property or person of the debtor, and may not commence or continue any legal proceedings to recover the debt. This does not prevent secured creditors from enforcing pre-existing rights against the property now vested in the viscount, as the viscount takes the debtor's property subject to security. Shares of a company that is subject to a creditors' winding-up or désastre may not be transferred without consent from the liquidators or the viscount, as the case may be.
Powers of liquidators or the viscount
On a creditors' winding-up, the liquidators may exercise all powers of the company as required for its beneficial winding-up; they have express power to pay the company's debts. On désastre, the viscount has wide powers to:
- sell all or part of the debtor's property;
- carry on the business of the debtor as far as is necessary for its beneficial disposal;
- pay debts;
- enter into compromises and arrangements with creditors; and
- exercise any authority and power in respect of the debtor's property which the debtor could otherwise have exercised.
The liquidators and the viscount may apply to the Royal Court for an order that:
- the directors are personally responsible for the debts and liabilities of the company on the grounds of wrongful trading (there may also be claims personally against the directors for breach of their fiduciary duties to the company);
- persons that were knowingly party to the company carrying on business with the intention to defraud creditors of the company, or that for some other fraudulent purpose are liable to contribute to the company's assets; and
- where shares of the company were redeemed or bought back in the 12 months before the commencement of the creditors' winding-up or the declaration of désastre, the persons from which such shares were redeemed or bought back, as well as the directors, may be required to contribute to any shortfall in the assets of the company.
Set aside transactions
The liquidators (on a creditors' winding-up) and the viscount (on a désastre) may:
- disclaim any onerous property (including unprofitable contracts, but excluding Jersey real property) by giving notice to interested persons;
- apply to the Royal Court for an order setting aside any transactions at an undervalue or preferences entered into or given within a relevant period before the commencement of the creditors' winding-up or the declaration of désastre; and
- apply to the Royal Court for an order setting aside extortionate credit transactions entered into in the previous three years.
On a désastre, the viscount may apply to the Royal Court for an order setting aside excessive approved pension arrangement contributions. These statutory provisions are broadly similar to the equivalent UK statutory provisions.
Distribution of assets on creditors' winding-up or désastre
The liquidators or the viscount, as the case may be, will apply the realised assets of the company as follows:
- payment of the fees and expenses of the liquidators or viscount. The viscount's fees can be material, consisting of 10% of the value of all assets realised and 2.5% of the value of all assets distributed;
- payment of up to six months' salary and employees' holiday pay and bonuses (subject to statutory limits);
- certain amounts due in respect of health insurance, social security, income tax, rent and parish rates; and
- payment of all proved debts.
Where property is subject to security under the Security Interests (Jersey) Law 2012, the proceeds of sale are applied in accordance with the 2012 law. Any surplus after deduction of the enforcing security party's reasonable costs and the monetary value of the secured obligations will be used to pay:
- any person with a subordinate security interest;
- any other person (other than the grantor) which has given the secured party notice of a proprietary interest in the collateral; and
- the grantor (or, in the case of the grantor's insolvency, the relevant official).
Article 34 of the 1990 law provides for mandatory set-off of mutual credits, mutual debts and other mutual dealings between a debtor and creditor (this is similar to Rule 4.90 of the 1986 UK Insolvency Rules). Article 34 also applies, by extension, to a creditors' winding-up. By virtue of the 2005 Bankruptcy (Netting, Contractual Subordination and Non-Petition Provisions) (Jersey) Law, contractual set-off provisions may survive the bankruptcy of any party or other person and will be enforceable in accordance with their terms, regardless of any lack of mutuality.
Insolvency and Jersey trusts
A Jersey company may act as trustee of a Jersey law trust (eg, a Jersey property unit trust). As a matter of Jersey law, a trust is not a separate legal person, but acts through its trustee. The insolvency procedures in the 1991 law and the 1990 law relate to the insolvency of a legal person and do not apply to a trust. If the assets of the trust are less than its liabilities, the trustee will likely apply to the Royal Court for directions.
If the company acting as a trustee becomes insolvent, its personal creditors have no right or claim against the trust assets. If a company that acts as a trustee is the subject of a declaration of désastre, it must resign as trustee forthwith.
Article 49 of the 1990 law provides that the Royal Court must assist the courts of prescribed countries and territories (currently the United Kingdom, Guernsey, the Isle of Man, Finland and Australia) in all matters relating to the insolvency of any person to the extent that it sees fit. However, this does not exclude the pre-existing customary law right of the Royal Court to exercise its inherent jurisdiction to assist non-prescribed countries or to regard the rules of private international law.
Although the EU Insolvency Regulation does not apply in Jersey, the Royal Court may still bear it in mind when determining where the debtor's centre of main interests is when considering applications to commence insolvency proceedings. It may be possible to place a Jersey company into administration under English law, by making an application for a letter of request from the Royal Court to the English court. It will be necessary to show in the application that the English administration would be likely to achieve the best possible outcome for the debtor and creditors (as opposed to local alternatives, such as a creditors' winding-up or a désastre).
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