On 1 July 2008, the Companies (Guernsey) Law, 2008 (the "Companies Law") came into force. This Briefing considers the impact of the Companies Law and identifies issues which have arisen during its first year of operation.
The Companies Law consolidates the various companies laws enacted from 1994 to 2008 and all of the Ordinances made thereunder (including, for example, the Protected Cell Companies Ordinance 1997 and the Incorporated Cell Companies Ordinance 2006) as well as introducing a number of entirely new concepts into Guernsey law. The Companies Law has already been amended and supplemented by numerous pieces of legislation1.
Prior to the introduction of the Companies Law, all Guernsey companies were created by order of the Royal Court of Guernsey. This process was abolished by the Companies Law, which introduced the new Guernsey Registrar of Companies (the "Guernsey Registrar" or "Guernsey Registry"). The Guernsey Registrar is now responsible for all company formations in Guernsey. Furthermore, it is no longer necessary to obtain the consent of the Guernsey Financial Services Commission (the "GFSC") or HM Procureur (the Attorney General) in Guernsey to the formation of Guernsey companies.
The role of the court in a number of other processes such as name changes, amalgamations, migrations and conversions has also been abolished. However, GFSC consent is still required in respect of the formation of certain special classes of companies such as protected and incorporated cell companies.
The new Guernsey Registry is accessible online and, accordingly, documentation required for the formation of a Guernsey company can now be submitted electronically. This means that Guernsey companies can be incorporated in very short order. Standard turnaround time is 24 hours but there are also express services offering 2 hour or 15 minute incorporations subject to payment of an additional fee.
Guernsey companies which are not listed or regulated must appoint a resident agent (the "Resident Agent") who is either an individual resident in Guernsey who is also a director of the company, or, a licensed corporate services provider. The Resident Agent is responsible for ascertaining the identity of the persons who are the beneficial owners of shares in the company. The Resident Agent is required to keep a record of the details of beneficial ownership at the registered office of the company. The Resident Agent may require members to disclose details of any beneficial ownership of their shareholding and there are penalties for members who fail to comply. The details of beneficial ownership are confidential although the Resident Agent may be obliged to disclose them in connection with criminal and regulatory investigations.
Guernsey companies are required to submit an annual validation to the Guernsey Registry before 31 January in each calendar year. That validation must contain details of the company's registered office, directors, resident agent, principal business activities, whether it is exempt from audit, the registration number of each of its incorporated cells (if it is an incorporated cell company) and confirmation that the company's register of members was current as at 31 December in the year to which the validation relates. Notably, unlike the position under the old companies law, the annual validation does not require a company to disclose details of its shareholders. Accordingly, it is no longer possible to obtain any information concerning the shareholders of a company from a search at the Guernsey Registry.
The Companies Law requires that a Guernsey company's name must appear on all its correspondence (unless the company's identity is otherwise readily ascertainable) and the company's particulars (meaning its name, registered number and registered office) must appear on all order forms and formal business letters and on its website. Constitutional issues
The Companies Law extends the prohibitions on the use of certain names to cells of protected cell companies as well as to registered companies. Accordingly, a cell of a protected cell company cannot have a name which is the same as a name currently appearing on the Guernsey Registry, or that has been reserved. Since cells of protected cell companies are not separately registered entities, there is no register of cell names and, accordingly, it is not possible to check whether the name chosen for a new cell of a protected cell company is the same as or is similar to that of an existing cell of another protected cell company.
The Companies Law prohibits companies from having a name which is misleading. Accordingly, the use of words such as "fund", "investment" and "management" in a company's name must be used with care and often only after consultation with the GFSC and the Guernsey Registrar to ensure that no misleading impression will be conveyed.
Memorandum of incorporation
Unless a company's memorandum of incorporation specifically limits the objects for which that company has been formed, the objects of that company are deemed to be unrestricted. Accordingly, the memorandum of incorporation of a typical Guernsey company has become significantly shorter. It is no longer necessary to list every conceivable object and power that a Guernsey company will or might require (as was the old practice). It also means that concerns about a company acting outside the scope of its powers or objects should be dispelled.
As was the case under the old law, the memorandum of incorporation of a Guernsey company cannot be replaced in its entirety although many of its provisions can be amended. On the other hand, articles of incorporation can be amended in part or rescinded and replaced in their entirety.
A Guernsey company is required to have at least one member. Previously, the minimum was two members and it was common for nominee shareholders to be used to hold the necessary second share.
The articles of a Guernsey company may contain certain "entrenched" provisions which may only be amended or repealed if certain conditions are met or procedures complied with that are more restrictive than a special resolution. This possibility runs counter to the general principle that a company's articles of incorporation can always be amended by special resolution. A provision may be entrenched in this way, either on formation of the company or subsequently by amendment of the company's articles by unanimous resolution. An entrenched provision of a company's articles may only be amended by unanimous resolution or by order of the court. A unanimous resolution means a resolution agreed to by every member of the company. Notably, it does not mean a resolution agreed to by every member attending a general meeting of the company. The ability to entrench provisions into the articles of a Guernsey company could supplant the requirement for shareholders to enter into separate shareholders' agreements in certain instances.
A Guernsey company is required to have at least one director. Unless the company is regulated, there is no legal requirement to appoint a Guernsey resident to the board. Directors are subject to new eligibility criteria and are required to be registered with the Guernsey Registrar. The definition of director includes alternate directors. Accordingly, they must also be registered with the Guernsey Registrar. This can prove cumbersome since companies generally do not want to have to register and de-register an alternate each time he or she is appointed. However, this difficulty may be overcome by appointing permanent alternates registered with the Guernsey Registry but utilising an internal arrangement whereby such an alternate is only authorised to act when expressly authorised to do so by the principal director.
One of the significant changes brought about by the Companies Law is the introduction of greater restrictions on a Guernsey company's ability to exempt or indemnify its own directors in respect of liability, as set out below.
Any provision that purports to exempt a director of a company from any liability for negligence, default, breach of duty or breach of trust is void.
Any provision by which a company indemnifies its own directors against any liability for negligence, default, breach of duty or breach of trust is void except that:
- a company can purchase insurance in respect of a director against any liability; and
- a company can indemnify its directors against liabilities incurred to persons other than the company itself or an associated company provided that the company does not indemnify against:
(a) criminal fines or regulatory penalties;
(b) any liability incurred by the director:
(i) in defending criminal proceedings in which he is convicted;
(ii) in defending civil proceedings brought by the company or an associated company in which judgment is given against him; or
(iii) in connection with an application for relief under the Companies Law in which the court refuses to grant him relief.
The transitional arrangements (described below) provide for the delayed implementation of these provisions in respect of companies formed before 1 July 2008.
Disclosure of directors' interests
The articles of a Guernsey company invariably require directors to disclose their interests. However, the Companies Law introduces a statutory regime for the disclosure of directors' interests and imposes severe penalties for failure to disclose.
A transaction entered into by a company in which a director is "interested" is voidable by the company at any time within 3 months after the date the transaction is disclosed to the board of directors unless:
- the director's interest was disclosed to the board prior to the company entering into the transaction;
- the transaction is ratified by the shareholders of the company; or
- the company received fair value for the transaction.
These provisions do not apply to transactions between the director and the company and transactions entered into in the ordinary course of the company's business and on usual terms and conditions.
Annual general meeting
A company may waive the requirement to hold an annual general meeting by a waiver resolution passed by 90% of members. The waiver may be rescinded at any time by members holding more than 10% of the voting rights in the capital of the company.
Where a company is regulated, there may be regulatory restrictions preventing a company from waiving the requirement to hold an annual general meeting. Nonetheless, we understand that there would be no objection, for example, to a licensed insurance company in Guernsey waiving the requirement to hold an annual general meeting.
Unfortunately, the current requirement that a company wishing to be exempt from the requirement to be audited must pass a resolution each year has meant that many Guernsey companies have been unable to take advantage of the ability to waive the requirement to hold an annual general meeting. However, it is hoped that these difficulties might be addressed in the near future.
Notice of meetings
Although the articles of a Guernsey company invariably do so, notices of general meetings of a Guernsey company are now legally required to state that members have the right to appoint a proxy at such meetings.
The Companies Law specifies that the quorum for a meeting of any class of shareholders convened to approve a variation of the rights attaching to the relevant class of shares is two persons holding at least one third of the voting rights of the class in question. Notably, this requirement overrides any contrary provision in the memorandum and articles of incorporation. Accordingly, care must be taken to ensure that the memorandum and articles of any Guernsey company are consistent with this new requirement.
Vote of chairman
The Companies Law provides that the chairman of a general meeting of the company has a second or casting vote on any resolution unless otherwise provided by the company's memorandum or articles. Therefore, it will be important to ensure that the memorandum and articles reflect the company's intention in this regard.
Provision to members
Every Guernsey company must keep accounting records which disclose the financial position of the company. It is no longer necessary to circulate a directors' report 10 days prior to the company's annual general meeting. However, the accounts, directors' report and auditor's report (where the company is audited) must be sent to each member of the company within 12 months after the end of the financial year to which they relate. Again, shorter time limits may be imposed in respect of regulated entities.
If a company holds a general meeting, it must lay before that meeting copies of its most recent accounts, directors' report and auditor's report. This requirement applies to all general meetings and not just to annual general meetings.
Notably, the memorandum or articles of a protected cell company may now provide that a member of a cell of the protected cell company only has the right to be provided with so much of the protected cell company's accounts as relate to that cell. This is intended to assuage concerns that a shareholder of one cell may obtain financial information in relation to other cells of the same protected cell company.
The members of a company may, by a resolution passed by 90% of the members, exempt a company from the requirement to have its accounts audited. Subject to the transitional provisions, the waiver resolution must be passed in the financial year before the financial year to which the exemption relates.
Companies which meet two of the following criteria:
- an annual net turnover of £6.5 million or greater;
- a net balance sheet of £3.26 million or greater;
- an average number of employees of 50 or more;
and which are not:
- dormant companies within the meaning of paragraph one of schedule two of the Companies Guernsey Law, 1994;
- asset holding companies; or
- companies with 10 or fewer members
are not eligible to be exempt from audit.
The requirement that the waiver resolution is passed prior to the commencement of the financial year for which the company wishes to be audit exempt and the requirement that the waiver resolution be passed in each year has created difficulties for a number of companies. There are proposals to amend these provisions such that the waiver resolution may be passed at any time during the financial year in respect of which the company wishes to be audit exempt and that a waiver resolution will be effective indefinitely unless revoked by members of the company holding more than 10% of the voting rights. Further details on this proposal are expected later in 2009.
Capital and shares
The Companies Law permits the issue of redeemable shares which are not preference shares. Accordingly, a Guernsey company's share capital can now comprise entirely of redeemable shares. Under the old law, only preference shares could be redeemed and so it was always necessary to create an ordinary class of shares over which the redeemable shares had preference.
For the avoidance of doubt, the Companies Law provides that shares may be issued which do not entitle the holder to voting rights or entitle the holder only to restricted voting rights.
A Guernsey company may only issue fractions of a share if authorised to do so by its memorandum and articles of incorporation. Companies which wish to issue fractions of a share must continue to include that power within their memorandum or articles of incorporation.
A Guernsey company is no longer required to have an authorised share capital. Instead, the directors may issue shares of such type and of such value as they determine, subject to the authorisation requirements described below.
The Companies Law contains restrictions on the powers of directors to issue shares. Where a company has more than one class of shares, the directors may only issue shares if they are authorised to do so by the company's memorandum or articles of incorporation, or by resolution of the company. The authorisation can extend only for a maximum period of 5 years whereupon it must be renewed.
However, under the Companies (Transitional Provisions) Regulations, 2008 as amended by the Companies (Transitional Provisions) (Amendment) Regulations, 2009, these provisions do not come into force until 1 July 2011. Some concern has been expressed about the difficulties the implementation of these restrictions may cause. Accordingly, it may be that these provisions will not in fact be brought into force, at least in their present form.
Where shares are issued by the board, the directors are required to approve a certificate confirming the consideration received in respect of that issue of shares. This is the case whether the shares are issued for cash or non-cash consideration. It is of note that under those parts of the Control of Borrowing Ordinance, 1959, as amended, which remain in force, it is still necessary for a company to obtain the consent of the GFSC in respect of an issue of shares for non-cash consideration.
Distributions and dividends
The Companies Law has abolished the principle of maintenance of capital pursuant to which a company was not permitted to reduce its share capital other than with the consent of creditors and through a special court approved process. Under the new regime, a Guernsey company may pay dividends or make other payments to shareholders (referred to as "distributions") out of any source of funds whatsoever, provided that the company will meet the relevant solvency test immediately after such payment is made, and that the directors sign a certificate to that effect.
Notwithstanding the freedom granted by the Companies Law to Guernsey companies to make such payments, subject to solvency, it is very important to consider the provisions of the memorandum and articles of incorporation of the relevant company before meeting any such payment. Prior to the Companies Law coming into force, Guernsey companies could only pay dividends out of profits available for the purpose. Therefore, the articles of incorporation of many Guernsey companies will contain provisions restricting the ability to make dividend payments other than from profits. Companies formed before 1 July 2008 which wish to take full advantage of the greater freedom accorded them under the Companies Law may need to amend their articles of incorporation.
The solvency test requires that the company is able to pay its debts as they become due and that the value of its assets is greater than the value of it liabilities. In addition, where the company is regulated and is subject to additional solvency requirements as a result of that regulation (for example, under the Insurance Business (Bailiwick of Guernsey) Law, 2002, or the Protection of Investors Law (Bailiwick of Guernsey) Law 1987, as amended), then the company must also meet any additional solvency requirements imposed under those regulatory regimes.
A dividend or distribution made at a time when the company did not satisfy the solvency test may be recovered by the company save in certain limited circumstances. If a dividend or distribution payment is made in breach of the requirements of the Companies Law or at a time when there was no reasonable grounds for believing that the company would satisfy the solvency test then any director who voted to approve the solvency certificate is personally liable to the company to repay so much of that distribution as cannot be recovered from the members.
These provisions are slightly more lenient in their application to the redemption of shares by open-ended investment companies.
Redemption and repurchase
As a result of the abolition of the capital maintenance regime, shares in a Guernsey company may be redeemed or repurchased out of any source of funds, provided the relevant solvency test is met and subject to any restrictions contained in the memorandum or articles of incorporation. Both redemptions and repurchases constitute distributions.
The Companies Law explicitly permits a Guernsey company or any of its subsidiaries to give financial assistance directly or indirectly for the purpose of or in connection with the acquisition of shares before or at the same time as the acquisition takes place.
The provision of financial assistance is deemed to be a distribution. Accordingly, the company must meet the solvency test in order to give financial assistance. Notably, the Companies Law states that financial assistance in respect of overseas companies which are subsidiaries of Guernsey companies is now covered by the Guernsey financial assistance regime. Under the old law, non-Guernsey subsidiaries of a Guernsey company were not caught by the Guernsey financial assistance provisions.
Restructuring and insolvency
The Companies Law introduces new provisions permitting the compulsory acquisition of a Guernsey company. If an offer to acquire shares in a Guernsey company is approved by 90% of holders of the shares affected, the offeror is entitled to compulsorily acquire the shares of the dissenting shareholders if he so wishes.
Provisions enabling Guernsey companies to enter administration as an alternative to liquidation were introduced a year or so prior to the implementation of the Companies Law. Those provisions have been repeated in the Companies Law.
Pursuant to those provisions, if the Guernsey court is satisfied that a company (or a cell of a protected cell company) does not satisfy or is likely to become unable to satisfy the solvency test and considers that the making of an administration order may achieve one or more of the following purposes:
- the survival of the company (or cell) and the whole or any part of its undertaking as a going concern; and/or
- a more advantageous realisation of the company's (or cell's) assets then would be effected on a winding-up
then the court may make an order under appointing an administrator to manage the affairs of the business and property of the company (or cell).
An administration order may be made notwithstanding that an order for the company's winding-up has previously been made by the court or that the company has passed a resolution for voluntary winding-up. In these circumstances, the order for the company's winding-up will be discharged or suspended and the resolution for voluntary winding-up will cease to have effect.
Applications for an administration order may be made by the company, directors, members, any creditor, the GFSC, a liquidator, an incorporated cell in respect of an incorporated cell company, an incorporated cell company in respect of an incorporated cell or a protected cell company. Once an administration application or order has been made, no resolution can be passed or order made for the company's winding-up and no proceedings can be commenced or continued against the company without the leave of court.
Schemes of arrangement
The Companies Law permits a Guernsey company to enter into a binding compromise or arrangement with its creditors or its members.
There are two parts to the process. First, an application is made to the court in Guernsey seeking an order convening a meeting of members or creditors. At that meeting, the scheme is proposed and, if approved by the requisite majority of members or creditors present and voting (i.e. 75% in value of the members, class of members, creditors or class of creditors), a second application is made to the court to sanction the compromise or arrangement. A court sanctioned compromise or arrangement is binding on all creditors and members as well as on the company itself.
The scheme of arrangement has existed for many years in the United Kingdom but its introduction into Guernsey should provide a very useful additional tool to enable restructurings of Guernsey entities to take place.
Transitional provisions made under the Companies Law modify or delay the implementation of a number of provisions of the Companies Law in respect of companies formed prior to 1 July 2008. For example:
- Provisions of a company's memorandum or articles of incorporation which were valid under the old law but have become invalid under the new law remain valid until 1 January 2011.
- The restrictions on the ability of a Guernsey company to indemnify its directors do not apply until 1 January 2010.
- The provisions in relation to avoidance of transactions in which directors are interested do not apply to any transaction entered into before 1 July 2008.
- In relation to the financial year of a company which straddles the coming into force of the Companies Law (1 July 2008), the company is able to pass a waiver resolution exempting the company from audit at any time during that financial year.