In September 2012, Grant Thornton were appointed by the Royal Court of Guernsey as joint administrators of a Guernsey company called Montenegro investments limited (MIL) - a Guernsey property Investment Fund.. The joint administrators then appointed Ogier.
Current Status of MIL
MIL was insolvent on a balance sheet and cash flow basis and was not able to continue to operate as the holding company of overseas vehicles which held numerous real estate sites in the Balkan state of 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, joint administrators sought to restructure the company's business with support of its 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 (Guernsey) Law, 2008 (Companies Law). It is thought that this was the first scheme of arrangement to be sanctioned by the Royal Court in relation to the restructuring of an insolvent business.
The principal reason for MIL's insolvency was that, whilst it had significant property assets on paper, these had, in reality, been devalued due to the recent economic crisis and the state of the property market in Montenegro. Cashflow to the extent that it had incurred large debts to its service providers in Guernsey and was being eroded was soon to be unable to continue to trade. As a consequence the directors took the decision to place MIL into administration whilst assessing their options in order to try and rescue the business. Administration was considered to be a more appropriate procedure than liquidation because it would offer a good degree of flexibility for the joint administrators to continue to trade, whilst preserving what value there was within MIL and protecting MIL from debt enforcement by creditors. The Royal Court ordered that the administration order take effect for nine months with provision to extend that time if so required.
Restructuring Proposals
A number of restructuring proposals involving the survival of the Company were considered. However, rules governing concert parties prevented supportive investors keen to invest in the Company’s survival from doing so without making an offer to acquire all the shares (absent the Company complying with a potentially expensive and time consuming "white wash" procedure which the mandatory offer requirements is waived), even in the situation of a company in Administration.
Shortly after their appointment, the scheme proposed by the joint administrators was that MIL's existing business would be transferred to a new company, incorporated in the British Virgin Islands, and that existing shareholders would 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 the creditors of MIL would be paid in full. This was to be achieved by the new company raising sufficient cash to acquire the assets of MIL and to provide a fund for the future trading of the new company.
Scheme of Arrangement
Like in other jurisdictions, a scheme of arrangement in Guernsey has three stages. The first stage is where the Court, upon application, 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 sanctions the decision of the stakeholders.
As creditors were to be paid in full, it was proposed that the stakeholders whose approval should be sought were the members of MIL. At the first hearing, Advocate Mathew Newman, a partner at Ogier, appeared for the joint administrators and the Royal Court held that there were two classes of members: investors, who held redeemable preference shares, and the investment manager, which held management shares. The Court, at this stage, also extended the term of the administration order by a further three months to enable to scheme to take place.
Two meetings of the separate classes were duly called. Creditors had been consulted beforehand and had approved the joint administrators' proposals. At the meetings of members, approval of over 90% of members present and voting was achieved and there were no dissenting voices. The joint administrators had presented the scheme as the only realistic option for saving the business of MIL, the other option being a liquidation of MIL's assets which would have given rise to a minimal return to members over a considerable length of time. The approval by the shareholders showed confidence that the business would be rescued through the new BVI vehicle that had been incorporated.
At the sanction hearing on 2 July 2013, the Royal Court held, agreeing with Advocate Newman's submissions, that the principles guiding sanction in Guernsey are those same principles summarised in the English case of Re TDG Plc [2008] EWHC 2334, Ch at paragraph 29, per Morgan J. The first is that the court must be satisfied that the provisions of the statute and procedural requirements have been complied with. The second is that the classes of shareholder were fairly represented at the meeting, that the majority acted bona fide and that there is no oppression of minorities such that eh result of the meeting of each class fairly reflected the views of the members concerned. Further the court can disregard the views of members with special or personal interests. Third, the Court must be satisfied that the terms of the scheme are fair such that an intelligent and honest man from a member of the class concerned might reasonably approve. Lastly, the Court must be satisfied that there is no "blot" on the scheme which the Court held is another way of saying that the Court can take any other factor into account when exercising its discretion. The Court duly sanctioned the scheme.
Insolvency Law
There were two further interesting aspects of the scheme which are point of insolvency law.
The first is that the administrators sought approval from the Court to distribute funds to creditors. They were mindful of authority in England (relating to the administration regime in England before 2003 when the regime was reformed, as the Guernsey regime is based on those pre-2003 provisions) that, in general, prohibited administrators from making distributions to creditors because it was outside of their powers to do so - see Re: The Designer Room [2004] EWHC 720 Ch. However, the Royal Court's attention was drawn to the authority of Lune Metal Products [2006] EWHC Civ 1720 in which the English Court of Appeal held that administrators could effect a distribution if such an application to Court was made at the same time as an application to discharge the administration order so that the distribution is, in effect, a final distribution from the estate rather than an interim distribution during the term of the administration order. In the case of MIL, the joint administrators had made an application to discharge the administration order conditional upon sanction of the scheme being granted and upon the various stages of the scheme taking place in a timely fashion thereafter. In its judgment, the Royal Court held as follows:
English decisions in insolvency matters are of assistance in this jurisdiction, especially when they are interpreting legislative provisions which our legislature have chosen to copy in identical terms. However, they are not binding on the Royal Court and we are not required to follow them in every case. In my view, the Royal Court when dealing with insolvency matters has to be aware that our statutory regime and the regulations thereunder are not as prescribed as English legislation. In some instances the local legislation provides the basic framework or bare bones of an insolvency procedure whilst leaving the Royal Court greater scope and flexibility in deciding how to apply its powers in any particular situation. Where it is appropriate to do so, the Court may adopt a pragmatic approach to applications and adjust its procedures in order to deal with issues as and when they arise during the course of any insolvency, as long as it is at all times mindful of the powers bestowed on it by the legislature and always acts within the limitations and constraints of the legislation.
This helpful passage underlines the Royal Court's pragmatic and flexible approach to insolvency matters, and its unwillingness to be tethered to the problems sometimes found through the English court's interpretation of the UK's insolvency legislation. As Guernsey's insolvency legislation is at present much less prescribed than legislation in other jurisdictions, it makes sense for the Court to control an insolvency process in whatever way it sees fit within the bounds of the legislation.
The second interesting aspect of the scheme is that it was proposed that, under section 111 of the Companies Law, MIL simply be dissolved after conclusion of the scheme rather than proceed, as would normally be the case, into liquidation and then be wound up. It is possible to do this under section 111(2) if the scheme is made for the purposes of a reconstruction or merger. As the scheme was not providing for a merger, the Court examined the meaning of the word "reconstruction" and adopted the helpful definition set out by Buckley J in Re South African Supply and Cold Storage Co, Wild and South African Supply Cold Storage Co [1904] 2 Ch 268 at 286 where it was held as follows:
“What does ‘reconstruction’ mean? To my mind it means this. An undertaking of some definite kind is being carried on, and the conclusion is arrived at that it is not desirable to kill that undertaking, but that it is desirable to preserve it in some form, and to do so, not by selling it to an outsider who shall carry it on - that would be a mere sale - but in some altered form to continue the undertaking in such a manner that the persons now carrying it on will substantially continue to carry it on. It involves, I think, that substantially the same business should be carried on and substantially the same persons shall carry it on. It does not involve that all the assets should pass to the new company or resuscitated company, or that all the shareholders of the old company shall be shareholders in the new company or resuscitated company. Substantially the business and the persons interested must be the same.”
Conclusion
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 costs saving if MIL was dissolved following the end of the administration, MIL should be dissolved.
As a consequence of the sanction 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 BVI is now operating MIL's former business, with significant cost savings, and substantially more investor support to see it through today's turbulent economic climate.
This case demonstrates the flexibility of Guernsey legislation and the Guernsey court in providing, in a very capable manner, for complex restructuring and insolvency matters. The Royal Court of Guernsey is becoming used to seeing high value and complex insolvency matters before it and is not afraid 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.
Jamie Toynton and Alan Roberts were the directors of Grant Thornton appointed by The Royal Court of Guernsey as joint administrators of this Guernsey company. Mathew Newman, partner at Ogier led the Ogier team on this matter.
