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On 15 January 2020 the States of Guernsey passed the Companies (Guernsey) Law 2008 (Insolvency) (Amendment) Ordinance 2020, making Guernsey an even more desirable forum for insolvency proceedings. The new legislation is set to modernise Guernsey insolvency law, bringing the jurisdiction into line with not only the United Kingdom but also other offshore jurisdictions such as the British Virgin Islands and the Cayman Islands. These changes will affect all new liquidations and administrations and will come into force when regulations to that effect are made by the Committee for Economic Development.
The necessary legislative tools are now in place to ensure that liquidators and administrators can quickly and efficiently gather in the assets of insolvent companies and return them to the creditors.
A number of these new tools are set out below.
One of the more unique aspects of Guernsey insolvency law is the ability of members to resolve (by a special resolution) to wind up their company – with creditor ratification – even when the company is insolvent. Neither the United Kingdom nor any other major offshore jurisdiction bestows such a power on the members of a company. The advantages of such a power are clear: it enables a company to be quickly and cheaply wound up without needing to involve the creditors or a professional insolvency practitioner. However, there are some obvious drawbacks. For example, creditors lose visibility over, and control of, the process and there is nothing to prevent a director of a company winding up the company, even though it may be heavily insolvent as a result of the acts and omissions of that director.
This potential lacuna has been remedied by the new amendments of the law, which specify that where a company is to be placed into a members' voluntary winding up, the directors must declare that the company can satisfy the statutory solvency test. If they are unable to make that declaration, the company must be wound up by an independent third party (unconnected to the directors or members of the company), which will normally be a professional insolvency practitioner. This ensures that where a company is insolvent and the creditors of that company are at risk of being prejudiced, an independent insolvency professional will be appointed to make sure that creditors are adequately protected and that the assets of the company are preserved pending distribution to the creditors.
Further, if a declaration of solvency is not signed by the directors, the liquidators must call a meeting of all creditors within one month of their appointment unless, in their opinion, there are no assets for distribution.
Before the new amendments, no statutory power or authority allowed a liquidator to demand documents from directors or employees of the company or interview directors or former directors. There was some common law authority outlined In Re Med Vineyards allowing a director to be interviewed. However, the extent of such powers was uncertain and had recently been doubted by Lieutenant Bailiff Marshall QC In Re X (a Bankrupt), Brittain v JTC (Guernsey) (2015). All of these doubts have been swept aside by clear powers outlined in the amendments.
Liquidators can now require (by court order if necessary) the following parties to provide all of the documents that the liquidator may reasonably need to perform their duties:
- former directors;
- employees; and
- those who were employed by the company within the past 12 months (preceding the commencement of the liquidation).
Further, liquidators can now apply to the Guernsey Court to interview an officer or former officer of a company about matters such as:
- the formation of the company;
- the company's business and affairs; and
- the interviewee's conduct or dealings in relation to the company.
In addition, liquidators have been granted the same powers as administrators to require a 'statement of affairs' (ie, a summary of a company's assets and liabilities and the names of its creditors) from:
- past and present officers of the company;
- present employees; and
- those employed in the year preceding the commencement of the liquidation.
All of these legislative tools give liquidators considerable powers to assist the interests of creditors and shareholders, bringing Guernsey substantially in line with the United Kingdom and other major commonwealth jurisdictions.
This new power has been copied almost verbatim from similar UK legislation. The main purpose behind it is to allow liquidators to release a company from unprofitable contracts as well as responsibility for property (including real property in Guernsey) that cannot easily be sold or is likely to incur liabilities for the liquidator. A good example may be a rusting ship moored in the harbour which is incurring storage fees and practically valueless.
For the disclaimer to be effective, the liquidator must serve notice on:
- various government entities, including Her Majesty's Receiver General;
- any person interested in the property to be disclaimed; and
- any person who may incur liability in respect of the disclaimed property.
There are protections in place for persons affected by any disclaimer. Specifically, they can force the liquidator to decide whether to disclaim the property or contract and they can apply to the court for relief including the vesting of the property in the interested party. The new legislation also makes it clear that any person who suffers loss as a result of the disclaimer would then rank as an unsecured creditor of the company.
One of the more obvious gaps in recent Guernsey insolvency legislation has been the lack of a provision allowing liquidators to clawback sums from third parties where assets or monies have been sold or diverted to them for no or little consideration. In recent years, liquidators in Guernsey have had to rely on a customary law device known as a 'Pauline action', which has its origins in Roman and Justinian law which in the United Kingdom has legislative effect in Section 423 of the Insolvency Act 1986. This customary law principle allows a liquidator to reclaim assets which have been fraudulently transferred by a company to a third party in order to place assets beyond the reach of creditors. The principle was confirmed in the Jersey case of Re Esteem (JLR 53 (2002)) and referred to by Lieutenant Bailiff Southwell in the Guernsey case of Flightlease Holdings (Guernsey) Limited (2005) and by the deputy bailiff in Batty v Bourse (GLR 54 ).
The new law incorporates a section modelled on Section 238 of the UK Insolvency Act 1986, which provides the Guernsey Court with the jurisdiction to make various orders against third parties where property has been transferred to them for no consideration, or for consideration which is considerably less than the value of the property.
The following criteria must be met before the court can act:
- The transaction must have occurred within six months of the company entering insolvency, or within two years if the third party is connected to the company.
- The company must be insolvent at the time of the transaction or as a result of it.
- The transaction at undervalue cannot have been entered into, in good faith, for the purposes of carrying on the business of the company and where there were reasonable grounds for believing that the transaction would be of benefit to the company.
The Guernsey Court can make various orders, including that property be returned to the company, but cannot take action against a third party which had acted in good faith, paid full value and had no knowledge of the circumstances giving rise to the action – except where these third parties were party to the transaction themselves.
It is worth noting that Pauline actions will still be useful to liquidators or administrators where the transactions lie outside the six-month or two-year period outlined above.
In relation to extortionate credit transactions, the provisions will apply to those transactions which occur within three years of the insolvency and which involve grossly exorbitant terms in relation to the provision of credit or grossly offend the principles of fair dealing. The Guernsey Court has the power to set aside the transactions and amend the terms of the provision of credit. As with transactions at undervalue, these provisions are closely based on the UK Insolvency Act 1986 – in this case, Section 244. There has been little UK case law on the meaning of 'grossly exorbitant' and 'grossly contravened ordinary principles of fair dealing', although the leading academic texts suggest that the courts will impugn a credit transaction only where it is grossly unfair and the transaction is one to which no reasonable company would agree in normal circumstances.
One of the more useful changes to the law in relation to administrations is the express power to make distributions to secured and preferred creditors without needing court approval. Previously, there was some doubt as to whether administrators could make distributions to secured creditors, even though the Companies Law specifies that administration orders will have no effect on the rights of secured creditors. This ambiguity has now been resolved and distributions can even be made to unsecured creditors with court approval.
The new law also allows companies in administration to go straight into dissolution without the need for an expensive interim liquidation when there are no assets to distribute to creditors. Administrators can presumably now distribute all assets to the secured and preferred creditors and, if there are no assets left over for unsecured creditors, apply immediately to go into dissolution. This could avoid considerable costs.
Creditors are further protected following the introduction of a requirement for administrators to send a notice to all creditors inviting them to a meeting and explaining the aims and likely process of the administration. This meeting must be held within 10 weeks of the date of the administration order, unless the court orders otherwise.
Similar to Section 221 of the UK Insolvency Act, non-Guernsey companies can now be wound up. According to the legislation, a foreign company can be wound up where:
- it has ceased to carry on business or is carrying on business only for the purpose of winding up its affairs;
- it is unable to pay its debts under Section 407 of the Companies Law; or
- the court is of the opinion that it is just and equitable that the company should be wound up.
UK case law (which is of persuasive authority in Guernsey) suggests that only foreign companies with a sufficient connection to Guernsey will be wound up here. Due to the nature of financial business in Guernsey, it is difficult to conceive of many circumstances in which this would not occur. Clearly, what constitutes a 'sufficient connection' will need to be defined and tested and will undoubtedly depend on the facts of each case.
Once more, this amendment brings Guernsey into line with the United Kingdom in relation to the maintenance of essential services. It allows the Insolvency Committee to make rules preventing the provider of essential services, such as electricity and water, making it a condition of continued supply that the company in liquidation pay all previous invoices up front. However, these providers can ask that the liquidator or administrator personally guarantees payment of all future invoices post the commencement of the liquidation.
This allows service providers to be protected in terms of future payments but stops them being able to threaten to withhold services unless all previous invoices are paid.
A duty has been imposed on both liquidators and administrators to make a report to the Registrar of Companies and the Guernsey Financial Services Commission (as regards supervised companies) where they consider that there are grounds for making a disqualification order against a present or past officer of the company. This report must be submitted within six months of the administrator or liquidator vacating office.
The new changes are to be welcomed and show that Guernsey is a modern progressive jurisdiction which is prepared to arm insolvency office holders with the necessary tools and powers to tackle, draw in and preserve the assets of an insolvent company for the benefit of creditors. Former directors can no longer refuse to provide documents or answer questions and third parties that hold diverted company assets can now be forced to return those assets. Further, administrations are likely to be cheaper as administrators can now distribute assets to secured and preferential creditors and then place the company straight into dissolution if there are no further assets to distribute and liquidators can now rid themselves of unwanted contracts and property. All of the changes discussed will likely save money and preserve assets for creditors. Thus, they are a welcome and substantive change which finally brings Guernsey into line with many other commonwealth jurisdictions.