The Companies (Guernsey) Law, 2008 (“Companies Law”) provides for companies, protected cell companies (“PCCs”), incorporated cell companies (“ICCs”) and cells of PCCs and ICCs to be placed into administration and for an administrator to be appointed to manage that entity's affairs whilst the administration order remains in force. The concept of administration in Guernsey was first introduced for PCCs only in 1997 but has expanded its scope to cover all other types of company that can be registered in Guernsey. Administration, like the equivalent procedure in other jurisdictions, provides insolvent companies with a breathing space in order to maximise realisations and asset values without increasing liabilities, which, in turn, favours creditors. However it is important to note, at the outset, that there are substantive differences from a creditor's perspective between the process in Guernsey and, for example, England.
Pursuant to section 374 of the Companies Law, a company, PCC, ICC or cell may be placed into administration by the Royal Court upon the application of certain parties. During the term of the administration order, the affairs, business and property of the company are managed by an administrator who is appointed by the court for that purpose. The Royal Court will only make an administration order if various requirements are fulfilled. These are that the entity in question must fail or be likely to fail the “solvency test” as set out in section 527 of the Companies Law, and that one or both of the purposes of administration (as set out below) may be achieved by the making of the administration order. For the rest of this note, and for the sake of brevity, the term “company” also refers to PCCs, ICCs and their cells, unless otherwise stated.
The solvency test, which underpins many substantive provisions in the Companies Law, requires a company to:
- be able to pay its debts as and when they fall due (i.e the cash flow test);
- have assets greater than its liabilities (i.e. the balance sheet test); and
- pass any of the solvency tests which may be set out in the supervisory legislation (in relation to investment business, insurance, banking or fiduciary businesses that all require supervision in Guernsey, primarily by the Guernsey Financial Services Commission (“Commission”)).
Standing and Process
An administration application may be made in respect of a company by the company itself (or in the case of an ICC or PCC by the respective ICC or PCC), its directors or its members, or a creditor as set out in Section 375 of the Companies Law. In addition, if the company is supervised, then the Commission may make the application. The Court will sit with Jurats to determine the application, and most applications are heard at Ordinary Court which takes place about twice a month on a Tuesday morning, although urgent applications will be accommodated by the Royal Court.
Purposes of Administration
The two purposes for which an administration order is made are either or both of the survival of the business of the Company and a more advantageous realisation of assets than would be effected on a winding up. In order to demonstrate that either or both of the purposes can be achieved, the Royal Court will often require evidence, in support of the application, that at least one of the purposes is achievable.
Effect of Administration Order
Once an application for an administration order is made, a moratorium prevents any “proceedings” being commenced or continued against the company by unsecured creditors and the company cannot be placed into liquidation (either by its shareholders and by the Court) except with the leave of the Royal Court (albeit that a winding up application may be presented to the Court in respect of the company).
The key difference between the Guernsey regime and the regime in other jurisdictions such as England is that secured creditors, including but not limited to those creditors with security granted under Guernsey law, remain entitled to enforce their security regardless of the moratorium. In addition, any creditors with rights of set off may also enforce those rights.
The moratorium continues during the course of the administration absent leave of the Royal Court or consent from the administrator.
Where a company has been placed into administration, all correspondence of the company (including e-mails and websites) must contain the name of the administrator and a statement that the affairs, business and property of the company are being managed by the administrator, unless this is obvious from the context of the correspondence or common knowledge between the parties thereto.
The Administrator’s Duties and Functions
Whilst there is no legal requirement in Guernsey for an administrator to be a qualified insolvency practitioner, the practice is now that the Court will need to be satisfied that the nominated person is appropriately experienced and suitably qualified to take on this very important role. The Court also prefers at least one nominee to be resident in Guernsey. Joint appointments are permitted, and are encouraged for risk management purposes.
The administrator’s functions are to collect in and realise assets for the benefit of creditors. He has broad management powers, akin to the powers afforded to directors of the company in the company’s constitutional documents. A list of the administrator’s management powers is set out in schedule 1 to the Companies Law. The directors remain in office but must not do anything (or omit to do anything) that interferes with the operation of the administrator’s functions.
The administrator takes into his custody and control all of the property to which the company is entitled upon his appointment and manages its affairs and business of the same in accordance with any directions from the Royal Court. The administrator can commence or continue proceedings brought in the name of the company but he is unable, under Guernsey law, to bring actions in his own name (contrast with the powers of a liquidator to bring statutory-based actions for preference, wrongful trading and misfeasance).
The administrator may do all things necessary for the management of the affairs, business and property of the company. He is deemed to be an agent of the company when exercising this power, but does not incur any personal liability except where he acts in a fraudulent, reckless or grossly negligent manner or acts in bad faith.
An important power, amongst others, that may be exercised by an administrator is that he is entitled to remove and appoint directors of the company and to call meetings of members and creditors of the company. He also has the right to approach the Royal Court for the discharge or variation of the administration order where circumstances permit such actions.
Furthermore, the administrator of an ICC must not carry on the administration in such a manner as to prejudice the underlying businesses of its incorporated cells during the administration, and on that basis that administrator must carry on the business of the ICC if necessary to ensure that its cells’ businesses also continue. There are no such statutory protections for the cells of PCCs, but there are provisions governing the inter-relationship of the insolvency processes of a PCC with its cells.
Once the administrator has realised the company’s assets, he is unable to distribute the funds by way of dividend, or in specie, to creditors. He must apply to the Royal Court to discharge the administration order, and to obtain his release from liability, in order to enable either the company or a subsequently appointed liquidator to effect the distribution. In rare circumstances, an administrator may be permitted to distribute the realised assets to creditors, but this is often through a mechanism such as a scheme of arrangement or a trust arrangement which has been approved by the Court.
Remuneration and swearing in of the administrator
Once the administrator is appointed, he will be sworn into office by the Royal Court, to act not only as an administrator in relation to the company, but also as an officer of the Royal Court. As stated above, joint appointments are permitted and the Court may order that the office holders may act jointly or alone.
The remuneration of the administrator and the related expenses incurred in the administration are payable from the company’s assets in priority to all other claims, and his remuneration will be fixed (or at least the basis of his remuneration determined) by the Royal Court when the application is made.
Information and documents to be submitted by and to administrator
Once an administration order has been made by the Royal Court, the administrator is obliged to give immediate written notice of the order to the company and to give, within 28 days from the date of the order, written notice to all the company’s creditors, the Registrar, and in the case of a supervised company, the Commission. The administrator may also require the following persons to submit a statement of affairs to him within 21 days of being required by to do so:
- current and former officers of the company;
- parties who have taken part in the formation of the company within 1 year before the administration order was made (the “preceding year”);
- current and former employees of the company, who are or were employed within the preceding year.
The statement of affairs must be verified by affidavit of the person submitting it and show, inter alia:
- particulars of the company’s assets, debts and liabilities;
- the names and addresses of the company’s creditors;
- the security held by any of the creditors and an indication when the security was given.
Unlike in England, the administrator does not have a specific power to require directors, employees or third parties to provide information or documentation in relation to the company’s business and affairs. The administrator does, however, have a general power to apply to the Royal Court for directions in relation to the performance of his functions or regarding any matter arising during the administration, and it is likely that the Royal Court will attempt to assist the administrator, as a Court-appointed officer, in resolving any enquiries of third parties that he may have if those enquiries assist the administrator in performing his functions, in the same way that the Royal Court has been willing to assist liquidators seeking similar relief in the past. The directors do have a statutory duty to comply with the administrator in relation to the management of the affairs of the company.
Protection of interests of creditors and members
Once a company has been placed in administration and creditors notified, the creditor may send notification of its claim to the administrator.
At any time when an administration order is in force, a creditor or member of the company, and in the case of a supervised company, the Commission, are entitled to apply to the Royal Court if they feel they are being unfairly prejudiced by the manner in which the administrator is managing the property, affairs and business of the company. If such an application is successful, the Royal Court may regulate the future management of the company by the administrator, restrict the actions of the administrator or, in the harshest circumstances, discharge the administration order.
Administration, unlike liquidation under the Companies Law, is not a terminal process. It is a process that provides a company with “breathing space” and stability in trying financial times although, as noted above, secured creditors may continue to enforce their rights regardless of the administration order, as may those creditors who can set off their claims against claims brought by the company. However, the administration order empowers a company to initiate mechanisms to realise assets, ultimately to be distributed to creditors, without facing debt recovery proceedings and other enforcement measures from those same creditors. Administration will also often facilitate the sale of the company’s business as a going concern as goodwill is preserved. It is also often more advantageous to effect a sale of assets through an administration because events of default in funding arrangements (leading to potential enforcement of security) may not be triggered As a result, the company may survive the procedure, or at least ultimately provide a better return to creditors than might have resulted if the company had simply been wound up.
The flexibility of administration allows Guernsey-specific entities, such as PCCs, ICCs and their cells, to enter the procedure and to benefit from its many advantages. Since the introduction of the Companies Law, a large number of Guernsey registered non PCC/ICC companies and/or their creditors have taken advantage of the regime.