Introduction
Solvency test
Standing and process
Administration purposes
Effect of administration order
Administrator's duties and functions
Remuneration and swearing in
Information and documents
Protection of creditors' and members' interests
Recent decisions
Comment


Introduction

The Companies (Guernsey) Law 2008 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 while the administration order remains in force.

The concept of administration in Guernsey was first introduced for PCCs 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 breathing space in order to maximise realisations and asset values without increasing liabilities, which in turn favours creditors. However, from a creditor's perspective, at the outset there are substantive differences between the process in Guernsey and, for example, that in England.

Pursuant to Section 374 of the Companies Law, a company, PCC, ICC or cell may be placed into administration by the Royal Court on the application of certain parties. During the term of the administration order, the affairs, business and property of the company, PCC, ICC or cell are managed by an administrator appointed by the court for that purpose. The Royal Court will make an administration order only if various requirements are fulfilled, including:

  • that the entity in question fails or is 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 may be achieved by the making of the administration order.

Solvency test

The solvency test, which underpins many substantive provisions in the Companies Law, requires a company to:

  • pay its debts as and when they fall due (ie, the cash flow test);
  • have assets greater than its liabilities (ie, 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).

Standing and process

An administration application may be made in respect of a company by the company itself (or the relevant ICC or PCC), its directors or members, or a creditor, as set out in Section 375 of the Companies Law. In addition, the commission may make the application if the company is supervised. 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 (sometimes at short notice, depending on judge and jurat availability) on a written request from an advocate setting out the reasons for seeking to have an application heard on an urgent basis.

Administration purposes

The two purposes for which an administration order has been made are either or both the survival of the company business 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 commencing or continuing against the company by unsecured creditors and any existing application for the company's winding up will be dismissed. Further, the company cannot be placed into liquidation (either by its shareholders or the court) without the leave of the Royal Court (although a fresh 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 (eg, 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 set-off rights 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 company correspondence (including emails 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.

Administrator's duties and functions

While there is no legal requirement in Guernsey for an administrator to be a qualified insolvency practitioner, existing practice is that the court must be satisfied that the nominated person is appropriately experienced and suitably qualified to take on this 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 and realise assets for the benefit of creditors. He or she has broad management powers, akin to the powers afforded to company directors in the company's constitutional documents. A list of the administrator's management powers is set out in Schedule 1 of 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 custody and control of all of the property to which the company is entitled on the administrator's appointment and manages its affairs and business in accordance with any directions from the Royal Court. The administrator can commence or continue proceedings brought in the name of the company, but under Guernsey law the administrator is unable to bring actions in his or her own name (in contrast with the powers of a liquidator to bring statutory-based actions for preference, wrongful trading and misfeasance).

The administrator may do everything necessary for the management of the affairs, business and property of the company. The administrator is deemed to be an agent of the company when exercising this power, but does not incur any personal liability except where he or she acts in a fraudulent, reckless or grossly negligent manner or acts in bad faith.

An administrator is entitled to remove and appoint company directors and call meetings of company members and creditors. The administrator also has the right to approach the Royal Court for the discharge or variation of the administration order where circumstances permit such actions.

Further, 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 or she is unable to distribute the funds by way of dividend or in specie to creditors. The administrator must apply to the Royal Court to discharge the administration order and to obtain his or her 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

Once the administrator has been appointed, he or she 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. 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. Remuneration will be fixed (or at least the basis of his or her remuneration determined) by the Royal Court when the application is made. As such, it is recommended that any proposed administrator offer evidence of, for example, the hourly charge-out rate when the application is made.

Information and documents

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 written notice within 28 days of the date of the order to all company 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 within 21 days:

  • current and former company officers;
  • parties which took part in the company's formation in the year before the administration order was made (the preceding year); and
  • current and former company employees who were employed in the preceding year.

The statement of affairs must be verified by affidavit of the person submitting it and demonstrate, among other things:

  • the particulars of the company's assets, debts and liabilities;
  • the names and addresses of the company's creditors; and
  • the security held by any of the creditors and an indication of when the security was given.

Unlike in England, the administrator has no specific power to require directors, employees or third parties to provide information or documentation in relation to the company's business and affairs. However, the administrator has a general power to apply to the Royal Court for directions in relation to the performance of his or her functions or regarding any matter arising during the administration. It is likely that the Royal Court will attempt to assist the administrator (as a court-appointed officer) in resolving any third-party enquiries that may assist the administrator, in the same way that the Royal Court has been willing to assist liquidators seeking similar relief in the past. The directors have a statutory duty to comply with the administrator in relation to the management of the company's affairs.

Protection of creditors' and members' interests

Once a company has been placed into 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 or in the case of a supervised company, the commission, is entitled to apply to the Royal Court if it feels that it is being unfairly prejudiced by the manner in which the administrator is managing the property, affairs and business of the company. If such an application succeeds, the Royal Court may regulate future management of the company by the administrator, restrict the administrator's actions or discharge the administration order.

Recent decisions

Re Montenegro Investments Limited (In Administration) (2013-14 GLR 345) was the first scheme of arrangement to be sanctioned by the Royal Court in relation to the restructuring of an insolvent business operated by Guernsey company Montenegro Investments Limited (MIL) (in administration).

MIL was insolvent on a balance sheet and cash-flow basis and was unable to continue to operate as the holding company of overseas vehicles which held numerous real estate sites in Montenegro. The purpose of the administration order was for the survival of the company or the whole or part of its undertaking as a going concern. In order to achieve the statutory purpose, the joint administrators sought to restructure the company's business with support of existing and some new investors and its investment manager. The most effective way in which to achieve the restructuring was through a scheme of arrangement pursuant to Part VIII of the Companies Law.

Shortly after the joint administrators' appointment, they proposed that MIL's existing business be transferred to a new company incorporated in the British Virgin Islands, and that existing shareholders be offered the opportunity to invest in the new company in proportion to their shareholdings in MIL. New investors would also be invited to join. The principal condition of the scheme was that MIL's creditors would be paid in full. This was to be achieved by the new company raising sufficient cash to acquire MIL's assets and provide a fund for future trading of the new company. Two further aspects of the scheme were that the administrators sought approval from the court to distribute funds to creditors and proposed that, under Section 111 of the Companies Law, MIL be simply dissolved after conclusion of the scheme rather than proceed, as would normally be the case, into liquidation and then be wound up.

Like in other jurisdictions, a scheme of arrangement in Guernsey has three stages. The first stage is where on application the court convenes a meeting of the relevant stakeholders required to approve the scheme. The second stage is the meeting itself, where the scheme is approved (or not) by those stakeholders, and the third stage is where the court allows the stakeholders' decision.

At the scheme sanction hearing, the Royal Court concluded that in the circumstances where MIL's creditors had been paid in full (with no more creditors expected, advertisements having been placed several times calling for all creditors to make themselves known), where MIL no longer had a business and where there would be considerable cost savings if MIL was dissolved following the end of the administration, the joint administrators should be allowed to distribute funds to creditors and MIL should be dissolved once the relevant distributions took place.

As a consequence of the hearing and ancillary orders granted, MIL's business was duly transferred to the new company in consideration for payment of a sum equal to the amount due to MIL's creditors (including accrued interests) and the amount payable in respect of the costs of the administration and the scheme of arrangement. Creditors were paid in full and MIL was dissolved shortly thereafter. The new company in the British Virgin Islands now operates MIL's former business with significant cost savings and substantially more investor support to see it through the turbulent economic climate.

Re Esquire Realty Holdings Limited (19/2014) involved recognition by the Royal Court for the first time that a pre-packaged sale of a company's assets immediately following that company being placed in administration would satisfy the statutory purpose of a more advantageous realisation of the company's assets than would be effected in a winding up.

The application was made by Lloyds Bank PLC as security agent on behalf of certain principal creditors of Esquire Realty Holdings Limited and was supported by Esquire. The application was part of a much larger arrangement designed to preserve the operations of a large group of companies engaged in providing specialist adult and children's care homes throughout the United Kingdom.

The Royal Court reiterated the special concerns and issues which may arise with a pre-pack administration order, which were considered by the Joint Insolvency Committee in England and Wales in Statement of Insolvency Practice 16:

  • Administrators should have regard to the interests of the full body of creditors, especially those not represented in the application to court.
  • Professionals advising on the arrangements must be mindful of their duties owed to the company and its creditors, not just to the directors and principal creditors that may stand to gain from the proposed arrangements.

In deciding to grant an administration order and approve the appointment of joint administrators, the Royal Court found that it had carefully considered the position of all creditors, including those that would not benefit from the proposed arrangements, and thereby the special concerns and issues had been adequately addressed.

The court concluded that although it did not expressly approve the detailed arrangements making up the pre-pack sale that would follow with the making of an order, by implication it may appear to have done so. It also noted that while there was no statutory requirement for a Statement of Insolvency Practice 16 report to be produced in pre-packaged administration applications in Guernsey, the report was of great assistance to it in this matter and it recommended that such a report be produced in any similar applications unless there are overwhelming reasons not to do so.

The court also mentioned that when exercising its discretion under the Companies Law, it may take account of the interests of the other Esquire stakeholders. In this instance, the other stakeholders included Esquire employees and those for whom care was provided and the families of those individuals.

Comment

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 difficult financial times, although secured creditors may continue to enforce their rights regardless of the administration order, as may those creditors that can offset 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 (eg, 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 their creditors have taken advantage of the regime.

Finally, these recent Royal Court judgments demonstrate the flexibility of Guernsey legislation and the Guernsey court in dealing with complex restructuring and insolvency matters. The court is unafraid of reaching its own conclusions, without the restraints that prescriptive legislation can bring to bear on it in order to grant just, pragmatic and effective solutions to restructuring problems.

For further information on this topic please contact Mathew Newman at Ogier by telephone (+44 1481 721 672), fax (+44 1481 721 575) or email (mathew.newman@ogier.com). The Ogier website can be accessed at www.ogier.com.