A consultation process to update the insolvency laws and practices in Guernsey has been launched by a government department in the island with businesses, industry bodies, lawyers and insolvency practitioners being invited to respond to the process before 31 December 2014. 

David Jones a restructuring and insolvency expert from Carey Olsen was invited to participate as part of the Commerce and Employment Department’s working party that reviewed the laws which raise a number of key areas for change.

The Present Landscape for Insolvency Proceedings in Guernsey

Currently, Guernsey has no singular personal insolvency law with the jurisdiction’s personal insolvency laws being largely based around ancient customary law procedures and two antiquated pieces of seldom used legislation.

Guernsey’s corporate insolvency regime is contained within the Companies (Guernsey) Law, 2008 as amended. A full guide to those procedures can be found here.

What Components does the Consultation seek to address?

The consultation seeks to address the full spectrum of insolvency issues in Guernsey encompassing both personal and corporate procedures. There is no doubt that this is the first step on a very long road to improving the current legislation for dealing with financial distress. Having the correct framework in place to deal with insolvent individuals and corporate entities is of ever increasing importance to a major financial centre like Guernsey especially given the financial climate of the last 6 years.

Since its introduction in the 2008 Law, the corporate insolvency regime has, despite its limits in terms of the depth of legislation, provided a solid framework through which a number of major, complex insolvencies have been successfully managed; HMV and the Leadenhall Triangle Portfolio, for example. One of the biggest questions for the consultation will be to determine to what extent the current regime needs amending and to what extent.

One option is a complete overhaul of all corporate insolvency procedures (governing each type of corporate entity from cell companies to limited liability partnerships). That would inevitably require a substantive drafting exercise culminating in a bespoke piece of standalone legislation as is available in England and Wales.

The alternative is to develop the existing regime and augment it in the areas which require improvement.

There is support amongst practitioners for both options. What seems to be universally accepted is that a number of key areas could be improved as set out below:

The Issue: The appointment of administrators in Guernsey still requires an “old fashioned” application to the Court. Many other jurisdictions allow the appointment out of court on paper. The out of court route is generally more costly and time consuming.

The Proposal: The paper canvasses opinion on introducing an out of court appointment.

Comment: The distinct advantage of adopting the appointment would be speed given the current difficulties that may arise in coordinating appointments in cross border assignments where multiple appointments across the globe are required at the same time. The cost may also be reduced. The downside is in determining which creditors ought to have the right to appoint out of court and the mechanism for doing so. The legislative framework required to introduce the system is complex and may also necessitate a review of the Island’s security laws.

The Issue: The exit route from administration. Currently, when an administration reaches its conclusion, the options are handing the company back solvent to its directors or moving to liquidation.

The Proposal: It would be sensible for administrators to have the options of ending the life of the company if all matters have been fully resolved rather than forcing administrators into the extra expense and administrative burden of liquidation.

Comment: This is a relatively straightforward change that can be made easily. It does require a change giving administrators the power to make distributions to unsecured creditors which they don’t currently have.

The Issue: Proof of debts in liquidation. The only current mechanism for paying sums to unsecured creditors of insolvent Guernsey companies is via liquidation. The law contains a procedure for “finalising” the liquidation accounts and having them reviewed by a Jurat Commissioner prior to any distribution. That is the only stage of the process that, at present, requires any form of public advertisement.

The Proposal: Most other insolvency regimes have a standardised procedure for corralling claims by advertising to creditors for them to come forward and requiring them to prove debts. That ought to be a relatively simple system to introduce by borrowing from existing legislation.

Comment: If the system were introduced, liquidation could be streamlined and simplified and it would allow liquidators to pay interim dividends to creditors (which is not currently legislated for although it is possible to achieve).

The Issue: Regulation of Insolvency Practitioners and the creation of an Official Receiver. This is a very contentious area. Currently, the only really cost effective way to dispose of an insolvent entity is through a voluntary winding up. That process is instigated by shareholders who also choose the liquidator. There is no restriction on who can take the appointment at present; it can be any legal person and that person need not have any formal qualification nor be regulated. That situation carries with it concerns with an increase in the use of the voluntary procedure for insolvent companies when there is no Court supervision of the process. 

The Proposal: There is appetite amongst some practitioners for some form of register of appointment takers. That creates cost concerns if insolvent entities have to pay a “qualified/registered” IP to take appointments. It is not desirable for the directors of insolvent entities to be discouraged from taking action and to continue trading because of the costs of insolvency proceedings. The alternative is to form some sort of Official Receiver to take those appointments where no one else is interested or there are no funds.

Comment: Creating an Official Receiver would pose a large statutory, administrative and cost burden that may be insurmountable in a jurisdiction of this size. Perhaps the solution is reform of the compulsory winding up procedure to streamline it to make sure court supervision is available even in more minor cases.

Why is the consultation important?

What is certain is that the consultation process will play a very important step in shaping the future insolvency laws and that the impact of those laws reaches well beyond insolvency practitioners and lawyers. Anyone who uses Guernsey structures will need to be aware of the proposed changes and may wish to participate. The wider the range of responses, the more complete the consultation and ultimately the reform will be.

When are the new laws expected to come into force?

The process is in its very early stages. The consultation is open until 31 December 2014. It seems unlikely given the scale of potential changes that any draft legislation will be produced much before the end of 2015.

The consultation document can be found here.