On 24 October 2014, the Commerce & Employment department published its consultation paper on various options for reforming Guernsey's insolvency regime, both for personal and corporate insolvency. Responses to the consultation are due by 31 December 2014. The consultation paper proposes some fairly wide-ranging reforms and seeks responses from industry to a number of questions which, by and large, seek to augment, develop and regularise the insolvency regime in the Island.
The purpose of this note is to examine some of the proposals, to comment on them in brief and to promote discussion with our clients and other interested parties in the consultation. It is not the purpose of this note to provide Ogier's definitive views on the proposals and questions as these will develop in consultation with our partners, clients and industry over the coming months. The local chapter of INSOL International, ARIES, will be providing collective comments on the consultation paper and is organising a breakfast seminar on 26 November in Guernsey to discuss the proposed reforms. Mathew Newman of Ogier is a member of the ARIES committee putting together that response and is able to provide further details of the breakfast seminar on request. The views expressed in this note are not necessarily those of ARIES.
The consultation paper can be found here. Sections 1 to 3 of the consultation paper are introductory sections, providing some background and context to the proposed reforms, with section 6 providing a conclusion and summary; sections 4 and 5 comprise the substantive part of the consultation paper on which this note focusses.
A principal assumption in section 3 is that Guernsey should remain a "creditor-friendly" jurisdiction, by giving creditors control of the insolvency process and, generally, placing the insolvent business in the hands of an independent person rather than allowing the debtor in possession to remain in control of the assets. On balance, this is the correct assumption to make; Guernsey insolvency law is based on UK companies and insolvency legislation and the UK is very much a creditor-friendly jurisdiction. Stakeholders in Guernsey companies are often from the UK, or at least familiar with how UK insolvency law operates and it is perhaps going too far to suggest that Guernsey should start with a blank piece of paper and look at jurisdictions such as the United States for inspiration at this stage.
The balance of this note looks at each of sections 4 and 5 of the paper in turn.
Section 4: General Policy Issues
Section 4 deals with general policy issues, primarily in relation to personal insolvency law reform and the practical way in which corporate insolvency law might be reformed and developed.
In terms of personal insolvency law, the proposal is to maintain the customary law procedures of désastre andsaisie, neither of which are formal insolvency procedures, but as a way of collectively enforcing judgment debts. The criticism is that neither procedure offers rehabilitation and, unlike bankruptcy in the United Kingdom for example, allow the door to be kept open for creditors to continue to enforce their judgments without any time limit. The Loi ayant rapport aux débiteurs et à la renunciation 1929, which is a regime whereby individual debtors can be declared insolvent by the Royal Court, is also criticised for being unduly complex and expensive and thus underused. The consultation paper proposes several possible additions to the current personal insolvency regime, being procedures which are very similar to current UK procedures, such as a low value debt relief order, an individual voluntary arrangement ("IVA") and the ability to allow a trustee in bankruptcy to manage a bankrupt's affairs for the benefit of creditors, for a period of time, after which the bankrupt will be discharged, together with restrictions on what the bankrupt individual can do during the subsistence of a bankruptcy order.
Given the lack of user-friendly formal personal insolvency regimes in Guernsey, we would welcome the introduction of a simple procedure by which a debtor, regardless of whether creditors have obtained judgments against him in Guernsey, can compromise his claims with creditors without fear of further recourse, and which could have extra-territorial effect (which the current regime does not). The IVA process could therefore work in Guernsey as long as it is well-regulated and supervisors of those arrangements are required to be resident on the Island. A more formal bankruptcy process is another matter however as it would require considerable legislation to bring this in, either copying from the UK regime or comparable jurisdiction. It would not be sufficient to update the 1929 Law as this has proved to be unworkable and very outdated for the 21st century but perhaps a codified désastre process might be the answer.
In terms of corporate insolvency, the questions posed in section 4 relate to the type of legislation that should be brought into force. Should the insolvency provisions be separated out from the current regimes in the Companies (Guernsey) Law, 2008 ("Companies Law"), the Limited Partnerships (Guernsey) Law, 1995 ("LP Law") and others and consolidated together in a piece of legislation dealing exclusively with the insolvencies of different types of vehicles, or should things remain as they are? Whilst the Insolvency Act 1986 ("Insolvency Act") in the UK covers both corporate and personal insolvency, the insolvency of, say, limited liability partnerships, is covered by a different piece of legislation. There is also separate legislation in the UK for the disqualification of directors, whilst in Guernsey preferred debts are also dealt with in separate legislation (whereas in the UK they are not). There are many advantages and disadvantages to both types of proposal here, and it may be that, in order to maintain consistency amongst the different types of insolvency regimes for different types of vehicle, that all insolvency provisions for corporate structures (including companies, partnerships and foundations) are consolidated into one piece of legislation. This would also have the advantage of developing the insolvency law in relation to, say, limited partnerships which, under the LP Law, is sparse and which could well benefit from fuller legislative provisions.
In terms of developing insolvency rules, the consultation paper says that insolvency law is procedural and thus in need of procedural rules to assist insolvency practitioners in their day to day administration of an insolvent estate. There are a number of suggestions in the consultation paper for the types of matters that could be dealt with by new rules, and these, it is suggested, a quite similar to the various rules and regulations enacted in the UK by the UK government under the powers given to it by the Insolvency Act. Clearly it would be effective to put in place some rules governing day to day procedures such as proof of debts, quantification of claims, calling of creditors' meetings, investigation into an insolvent estate and standard forms to be used. This would maintain consistency and a required standard amongst Guernsey insolvency practitioners in terms of the practice that they adopt on a day to day level and would, in our view, obviate some applications to court for directions on the day to day administration of the estate.
The last two elements of section 4 relate to the establishment of the office of Official Receiver and a register of insolvency practitioners. There are many advantages to an official receiver's office, least of all that creditors who apply for the winding up of a debtor need not fund the liquidation of that debtor if a government sponsored official takes the role of liquidator. This is, of course, very common in the UK and other jurisdictions, but is expensive and is generally paid for by a large percentage of the court fee going straight to the Official Receiver's office. In Guernsey, the court fee remains relatively low and it would have to increase significantly in order to pay for an Official Receiver role. The question of who the Official Receiver would be, or whether Guernsey could have a half-way house with private insolvency practitioners taking the appointment, paid for by the States on an ad hoc basis, remains open. In short, it is probably a good idea and would lead to the formal administration of many more insolvent estates in Guernsey, but the question of funding would have to be addressed as a priority. In terms of a register of insolvency practitioners, there is already some control by the Royal Court over appointments as compulsory liquidators or administrators to ensure that people with the right experience and suitability are appointed. The problem that Guernsey has had is that many voluntary liquidators have, historically, not been insolvency practitioners, but often the very people administering or managing the company, presumably in order to save costs but this situation gives rise to a multitude of problems, not least potential conflict of interests. However, notwithstanding this issue, in a small jurisdiction, it may be that a register of insolvency practitioners is not necessary or indeed practicable.
Section 5: Corporate Insolvency
The two principal company insolvency regimes in Guernsey are liquidation (voluntary and compulsory) and administration. Both are very loosely modelled on UK procedures but voluntary liquidation covers both solvent and insolvent liquidations and administrations are founded on pre-Enterprise Act 2002 regime in the UK. The insolvency provisions in the Companies Law are brief when compared to other jurisdictions, and the law is silent on a number of important matters which are dealt with by legislation in other comparable jurisdictions. Whilst the Guernsey courts have adopted the pragmatic approach of looking at the practice in England & Wales, this approach is uncertain and potentially costly if legal argument on a particular point has to be made.
Section 5 of the consultation paper proposes a number of potentially "useful additions" to the existing regime:
- Introducing company voluntary arrangements ("CVA") - similar to IVAs but for companies, these allow companies to enter into a contractual compromise with all of their creditors, supervised by an insolvency practitioner, which has the potential to restructure the business and ensure the company's survival. Whilst similar to the existing scheme of arrangement provisions in the Companies Law, having specific legislative provision for CVAs may encourage companies to use this procedure rather than the more expensive and time consuming administration route.
- Introducing an out of court filing system for administrations, similar to that now seen the UK under schedule B1 to the Insolvency Act 1986. This would allow for the speedy and timely appointment of administrators, and, from a commercial point of view, would facilitate group wide restructurings in the form of pre-packaged sales (known as a pre-pack) of insolvent businesses. Is this desirable in a small jurisdiction such as Guernsey? In context, Guernsey has relatively few trading businesses and arguably the need for a regime that supports the pre-pack is not that great compared to the UK or other larger jurisdictions. As a result of the 2002/2003 reforms in the UK, many companies which perhaps might have been placed into voluntary liquidation before then are now placed into administration and it could be argued that a court-controlled process for a process such as administration, with the moratorium on unsecured creditor enforcement, is a good check and balance to ensure that the system is not abused.
- Introducing a duty on administrators to report misconduct of directors to the Registrar of Companies and/or the Guernsey Financial Services Commission. There is no statutory or regulatory obligation on office holders to do this at present, although in practice most regulated insolvency practitioners would do so if their investigations uncovered matters of suspicion. This could be used in tandem with the existing directors' disqualification regime in Guernsey.
- Improving representation of interests of creditors in an administration and the potential for the establishment of a creditors' committee. Many Guernsey insolvency practitioners do this anyway in complex matters where they require the "buy in" of creditors before taking substantive action in relation to assets and it may be that any legislation here would be a welcome addition to what is already happening in practice.
- Adding to the powers of the administrator and exit from administration. Here it is proposed that the administrator be given the specific power to distribute assets to creditors. At present, the administrator does not have this, although the recent case of Re: Montenegro Investments Limited [2013-14] GLR 423 helpfully clarified that the Guernsey court is not bound by UK decisions on this point and that if in the interests of creditors, the court would permit an administrator to distribute notwithstanding the lack of a specific statutory power to do so. Once assets have been distributed from an administration it makes sense to allow the company to be placed into dissolution rather than go through a potentially expensive liquidation first. The principal observation here is that liquidators have fairly extensive statutory and common law powers to investigate the affairs of a company and take certain actions such as clawing back preferences and taking action against directors for fraudulent and wrongful trading, so that if a company avoids liquidation altogether it is important for administrators to be given standing to bring such claims, or at least give creditors the opportunity to place the company into liquidation to allow a liquidator to investigate the company's affairs.
- Changing the winding up regime to distinguish between solvent and insolvent liquidations. This is unlikely to be necessary but it may be, as the consultation paper suggests, useful to provide greater protections to creditors in an insolvent voluntary liquidation, for example by giving them a chance to ratify the members' appointment of the liquidator (as seen in a "section 98 meeting" in the UK) and by allowing them greater control over the conduct and ending of the process which at the moment is purely member-driven.
- Improving the statutory demand procedure by giving debtors the ability to apply to Court to set aside a statutory demand, as at present there is no such ability and the Court, arguably, has no jurisdiction to hear any such applications. Whilst it may be desirable to have a set-aside regime in Guernsey, we would question the purpose that it would serve when the statutory demand of itself has no legal effect other than providing conclusive evidence of cash flow insolvency if the debt is not paid and is not substantively disputed. The question of whether the debt is valid (and whether the dispute of it is genuine and real) could be dealt with if a winding up application is brought rather than as a pre-cursor to it.
- Introducing a proof of debt procedure, including prioritisation of secured creditor claims, dealing with un-liquidated claims and applying insolvency set off. Given the lack of any rules covering these very important matters, it is clear that legislation is required here.
- Providing for a statutory regime in relation to the investigative powers of a liquidator, which would include the requirement for directors to provide a statement of affairs to a liquidation and the introduction of specific provisions, equivalent to sections 234 to 236 of the Insolvency Act, which would require directors and third parties to deliver documents and provide information to liquidators concerning the affairs of the company upon request. At present, Guernsey law relies on the inherent supervision of the Court over liquidators in order to exercise these types of investigate powers, but the introduction of a statutory investigative regime can only save costs and allow liquidators greater scope to conduct their investigations properly and with the full force of the law.
- Exempting companies in liquidation from providing audited accounts. This is a long awaited and sensible reform reflecting current practice in any event.
- Increasing Guernsey's claw back provisions, including the introduction of a provision allowing office holders to attack transactions at undervalue, extortionate credit transactions and charges being granted over property in a period leading up to liquidation. This reflects, almost entirely, the UK position. Guernsey already has the customary law action paulienne which is the equivalent of section 423 of the Insolvency Act (allowing victims of a fraud to trace through the insolvent company into the hands of the recipient of the monies). It seems sensible to bring Guernsey's claw back regime in line with other comparable jurisdictions.
- Introducing the ability of a liquidator to disclaim onerous assets, bringing a Guernsey liquidator into line with a UK liquidator and introducing a system to allow unclaimed dividends to be paid into a government fund. Both of these proposals also seem sensible and desirous and would avoid further, potentially complex, court applications.
- Introducing a system of fixed and floating charges into Guernsey law and a system of registration. While the current Guernsey regime for securing Guernsey-situs personalty does have recognised shortcomings, it is simple, clear and familiar to lenders dealing with Guernsey. The recent Jersey experience of reforming their security regime indicates clearly the complexity and effort required in such an undertaking. It may well be better for amendment to the Guernsey security interest regime to be addressed separately from the wider insolvency reform process so as to ensure that it gets the consideration and attention that it deserves.
- Widening the jurisdiction of the Royal Court to wind up foreign companies with a place of business in Guernsey (at present the jurisdiction extends to Guernsey registered companies only). Again, this appears to be desirous if appropriate.
In sum, many of the proposals in the consultation paper are, on any view, sensible but obviously materially reflect UK insolvency legislation which brings about certainty and a prescribed way of doing things in an insolvency context. Does Guernsey want to slavishly follow the UK's insolvency regime? Should Guernsey develop its own regime, policies and procedures? Should Guernsey keep things simple or prescribe rules that govern the day to day workings of an insolvency? Should a liquidator's powers of investigation and claw-back be widened and should an administrator operate in the same space as a liquidator in certain circumstances? Should Guernsey develop its own modern personal insolvency regimes, preferably with a focus on debtor-friendly arrangements such as IVAs, and should the insolvency professional be properly regulated within the Island?
This is a long-awaited opportunity to reform Guernsey's insolvency laws, in order to keep Guernsey at the forefront of modern day commercial and financial services, and the consultation paper gives all stakeholders the chance to have their say on these extremely important issues. We at Ogier would welcome a discussion with our clients on the proposed reforms and can also talk to you about the best way to have your say in the consultation process.