Introduction
Meetings of creditors and shareholders
Reporting delinquent officers
Declaration of solvency
Disclaiming onerous property
Comment
Historically, Guernsey's insolvency law had limited operational provisions (compared to English law) and was largely developed by a bespoke and flexible application of common and customary law principles by the Royal Court. The old regime will now be updated and revised by the Companies (Guernsey) Law 2008 (Insolvency) (Amendment) Ordinance 2020 (the ordinance), which was passed on 15 January 2020. Although it does not yet have force of law, it is anticipated to become law before the end of 2022.(1)
The Insolvency Rules Committee (IRC) has developed the Insolvency Rules to supplement and to provide helpful additional background and context to the changes that the ordinance will implement and to provide insolvency practitioners and industry-related parties with further guidance on their practical application. The rules have been drafted by the IRC and is based upon input and feedback from insolvency practitioners and lawyers in Guernsey.
The consideration was that there were, among other things, the following deficiencies in the existing corporate insolvency regime:
- a lack of independence for liquidators of insolvent companies;
- minimal requirement to consult with creditors during the course of an insolvent liquidation;
- no positive obligation on liquidators and administrators to report director misconduct to the Guernsey Company Registry and/or the Guernsey Financial Services Commission where appropriate;
- insufficient powers for liquidators or administrators to obtain information from directors and officers; and
- no proof of debt procedure.
The initial Insolvency Rules have been prepared with these issues in mind and will address:
- meetings of creditors and shareholders;
- a duty to report delinquent officers;
- a requirement for a declaration of solvency; and
- the power to disclaim assets.
This article examines the applicable amendment that will be implemented by the ordinance and provides a brief analysis of the proposed content of the applicable insolvency rule.
Meetings of creditors and shareholders
Ordinance
Meetings of creditors and shareholders will now be governed by the ordinance. Section 386A of the ordinance details the applicable provisions relating to meetings of creditors and shareholders and will require liquidators to call an initial meeting of creditors and to send an explanation to creditors of the aims and likely process of the administration. The ordinance specifically gives the IRC the power to make regulations in respect of these meetings.
During the course of a winding up, where a liquidator becomes aware that, despite a declaration of solvency having been made, the company does not in fact satisfy the solvency test, then pursuant to section 398A of the ordinance, the liquidator will be required to convene a meeting of creditors.
Section 398B addresses the scenario where a declaration of solvency has not been made and a liquidator is required to convene a meeting of creditors, unless they are satisfied that there will be no distribution to creditors.
The ordinance also inserts provisions relating to circumstances prior to dissolution of a company where a final meeting of shareholders is called, but no quorum is present.
Draft insolvency rule
The draft insolvency rule covers:
- the requirement for a meeting to be held and to respect specific circumstances when the requirement can be dispensed;
- convening meetings of creditors and general meetings, including the required timeframes for each;
- a notice of creditor meetings and content of notices;
- the location of creditor meetings;
- a quorum at creditor meetings;
- chair of creditor meetings;
- voting at creditor meetings;
- the suspension and adjournment of creditor meetings;
- proxies (including a standard form);
- minutes; and
- electronic communication regarding creditor meetings.
Ordinance
There is currently no positive obligation upon liquidators or administrators to report delinquent officers. Under the ordinance (sections 387A and 421E), administrators and liquidators will now have a duty to report to the Guernsey Registry and, in the case of regulated entities, to the Guernsey Financial Services Commission, if it is considered that there may be grounds for a disqualification order.
Draft insolvency rule
The draft insolvency rule will provide full information on the detail on the format of the report and introduce standard form reports, which will create a welcome standard from a reporting perspective.
Ordinance
In order to distinguish whether a voluntary liquidation is solvent or insolvent, section 391A of the ordinance requires directors to make a declaration of solvency. If a declaration of solvency is not made, the ordinance requires that an independent liquidator is appointed (for example, a person that is not a director or former director of that company) and the liquidator will be required (subject to certain exceptions) to report to creditors and hold a meeting of creditors.
These amendments have been created in order to ensure that liquidators of insolvent companies are independent and will be required to investigate the cause(s) of insolvency, together with the actions of officers of the company, and to ensure that liquidators of an insolvent company communicate adequately with creditors.
Draft insolvency rule
The draft insolvency rule will cover the format of the declaration of solvency in standard form. It is also proposed that the definition of "solvency" is consistent with section 527 of The Companies (Guernsey) Law 2008.
Ordinance
New provisions within the ordinance provide the power to liquidators to disclaim onerous property, even though (as a function of their office) they may have exercised rights of ownership over the property (eg, by taking possession or endeavouring to sell it).
The amendments proposed by the IRC preserve existing contractual rights relating to:
- close-out netting;
- set-off;
- compensation; and
- any rights of enforcement.
Draft insolvency rule
The draft insolvency rule will address:
- the terms of the notice of disclaimer;
- details of a non-effective notice of disclaimer to interested persons for information; and
- circumstances when a notice of disclaimer is presumed valid and effective.
The proposed Insolvency Rules will be a welcome addition to the operation of the corporate insolvency regime in Guernsey, by assisting insolvency practitioners and lawyers through creating certainty and predictability within the existing framework. These additions will also work to the benefit of creditors and stakeholders, to reduce costs that should assist with increasing returns for creditors.
For further information on this topic please contact Alex Horsbrugh-Porter or Michael Rogers at Ogier by telephone (+44 1481 721672) or email ([email protected] or [email protected]). The Ogier website can be accessed at www.ogier.com.
Endnotes
(1) For more information, please see here.