Guernsey modernises its insolvency law

Published March 2020
Authors
Daniel Judd
Alex Horsbrugh-Porter Ogier, Guernsey Alex Horsbrugh-Porter Ogier, Guernsey
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Guernsey modernises its insolvency law

Published March 2020

Guernsey has updated its insolvency law with the Companies (Guernsey) Law, 2008 (Insolvency) (Amendment) Ordinance, 2020, passed on 15 January 2020. The changes include increasing creditor participation in insolvency processes, introducing clearer statutory transaction avoidance provisions, and enhancing the investigatory powers of office holders. The Ordinance brings Guernsey’s insolvency law into line with other commonwealth jurisdictions such as the UK, the Cayman Islands, and the British Virgin Islands. The changes will affect all new liquidations and administrations, and will come into force when Regulations to that effect are made by the Committee for Economic Development. This article sets out the principal changes that affect future administrations and liquidations in Guernsey.

Declarations of solvency in members’ voluntary liquidations

The distinction between a solvent and insolvent members’ voluntary winding up is one of significance. While the company is solvent it is the members with the economic skin in the game, for creditors’ claims can be met in full. The reverse is true when the company is insolvent. The new amendments introduce into Guernsey’s members’ voluntary winding up provisions the requirement of a statutory declaration of solvency by the company’s directors, bringing Guernsey insolvency law into line with other offshore jurisdictions.

Guernsey insolvency law has almost uniquely permitted members to resolve, by special resolution, to wind up their company even when the company is insolvent, subject to creditor ratification. This position has enabled companies to be quickly and cheaply wound up without needing to involve the creditors or a professional insolvency practitioner. The obvious difficulty, however, is the reduced control over the process exercised by creditors. It might have been possible for a director to wind up a company made heavily insolvent as a result of his or her own acts and omissions.

The new provisions now require that, where a company is to be placed into a members’ voluntary liquidation, the directors must declare that the company is able to satisfy the statutory solvency test. If they are unable to make that declaration, the directors can only appoint liquidators who are independent third parties, unconnected with the directors or members of the company. This will normally be a professional insolvency practitioner, ensuring that where a company is insolvent, and the creditors of that company are at risk of being prejudiced, an independent insolvency professional will safeguard the interests of creditors and preserve the assets of the company pending distribution to creditors.

Where a statutory declaration of solvency is not signed by the directors, creditor participation in a members’ voluntary winding up is ensured by a requirement on the liquidators, within one month of their appointment, to call a meeting of all creditors,  unless in their opinion there are no assets for distribution.

 

New statutory powers of investigation for liquidators

The powers of liquidators to consider the company’s affairs have now been put on a statutory footing.

The Ordinance makes it clear that liquidators are able to require any prior officers of the company, anyone employed by the company within the previous 12 months to the liquidation, or indeed any other person (with leave of the court), to produce all documents and information relating to the company that liquidators may reasonably require to carry out their duties. The amendments also enable the liquidator to apply to the Guernsey Court for the appointment of an Inspector to interview officers or former officers regarding the company’s formation, business and affairs, and the conduct or dealings of the company’s personnel. A liquidator is additionally obliged to make such an application as soon as reasonably practicable where requested to do so by one half in value of the company’s creditors.

Before these new amendments there was no statutory power or authority allowing a liquidator to demand documents from directors or employees of the company, or to interview directors or former directors. There was some common law authority following Re Med Vineyards, Royal Court, 25 July 1995 (unreported) permitting the interviewing of directors, but the extent of such common law powers was uncertain and was recently doubted by Lieutenant Bailiff Marshall QC in Re X (a Bankrupt), Brittain v JTC (Guernsey) (2015). The position was certain where the Letters of Request procedure was used, such as under section 426 of the UK Insolvency Act 1986, though this involved a degree of additional delay and cost. All these doubts have been swept aside by clear statutory powers outlined in the amendments.

Additionally, liquidators have now been granted the same powers as administrators to require a statement of affairs (summarising assets and liabilities and providing the names of creditors) from past and present officers of the company, present employees, and those employed in the year preceding the commencement of the liquidation.

It is now clear that Guernsey liquidators benefit from clear and enhanced powers to administer the company’s estate for the benefit of creditors and shareholders, aligning Guernsey insolvency law substantially with the position in the UK and major commonwealth jurisdictions generally.

 

Transaction avoidance claims and extortionate credit transactions

The adjustment of pre-liquidation transactions is an important feature of modern insolvency codes. The new legislation contains a clear provision allowing liquidators to challenge transactions entered into at an undervalue, drafted in similar terms to the familiar rules in section 238 of the UK Insolvency Act 1986. The new law also addresses extortionate credit transactions, as would be found under section 244 of the UK Insolvency Act 1986, but does not independently cover preferences, which are already included in the present company law.

These developments provide a surer basis on which the Guernsey Court can make various orders against third parties where property has been transferred to them for no consideration, or for consideration which is significantly less than that provided by the company.

In situations where reciprocal assistance has been unavailable, Guernsey liquidators have hitherto had to rely on its customary law provisions, the availability of which was recently confirmed in express terms by Lieutenant Bailiff Southwell as well as the Deputy Bailiff in Batty v Bourse [2017] GLR 54. Common law and customary principles of transaction avoidance have a long history, the most famous perhaps being the Roman law actio Paulina. These principles will continue to be useful where the new transaction avoidance provisions do not apply.

Under the new law, transactions will be challenged as made at an undervalue where: (i) the transaction took place within six months of the insolvency proceedings, extended to 2 years where the transaction is with a related party; (ii) the company was insolvent at the time of the transaction, or as a result of it; and (iii) the transaction cannot be justified as entered into in good faith for the purpose of carrying on the business of the company, where there were reasonable grounds that the transaction would benefit the company. If those requirements are met, the Guernsey Court can order that the property is returned to the company, and can make orders against third parties (except for good faith purchasers for value without notice).

Express provision is also made in the new rules for extortionate credit transactions. As with section 244 of the UK Insolvency Act 1986, the new Guernsey law provisions apply to those transactions which take place within 3 years of the commencement of the insolvency and which involve grossly exorbitant terms in relation to the provision of credit or which grossly offend the principles of fair dealing. The Guernsey Court has the power to set aside the transactions and to amend the terms of the provision of credit. There has been relatively little case law on the meaning of “grossly exorbitant” and “grossly contravened ordinary principles of fair dealing”. Cases in England and Wales indicate that the test is “stringent”, by reference to the fact that the test is modelled on the UK Consumer Credit Act 1974. It remains to be seen how the Guernsey courts will approach the provision in the insolvency context.

Disclaimer of onerous property

The recent amendments grant liquidators the power to release the company from ‘onerous property’, such as unprofitable contracts, and property (including real property) which may not be readily saleable or which will lead the liquidator to incur liabilities. The wording of the new provisions bears very close resemblance to section 178 of the UK Insolvency Act 1986.

There are protections in place for persons affected by any disclaimer in that they can force the liquidator to make a decision about whether to disclaim the property or contract or not, and they can also apply to the Court for relief including the vesting of the property in the interested party. The new legislation also makes it clear that any person who suffers loss as a result of the disclaimer would then rank as an unsecured creditor of the company.

For the disclaimer to be effective, a notice must be served by the liquidator on a variety of people including the Registrar, Her Majesty’s Receiver General, and anyone interested in the property to be disclaimed and any person who may incur a liability in respect of the disclaimed property. The property in question must also be identified.

Wider powers in administrations

One particularly useful change effected by the Ordinance is the express power given to administrators to make distributions to secured creditors and preferential creditors. The administrator may make distributions which, in their view, are likely to assist the achievement of any purpose for which the administration order was made. The benefits in making clear that such powers exist are obvious. It was previously doubted whether or not the court’s approval was required, given that the Guernsey Companies Law provided that an administration order would not have any effect on the rights of secured creditors. Administrators in Guernsey can additionally make distributions to unsecured creditors if the court’s permission is obtained.

It is now possible for a company to proceed immediately from administration to dissolution.

In cases where there are no assets to distribute to creditors, Guernsey companies are able to avoid the need for an interim liquidation which may prove costly. This may prove practical and economical, for example, where the company’s estate is exhausted in making distributions to secured and preferential creditors, where it is clear that no distributions could be made to creditors.

Administrations will also involve greater creditor participation. Within 10 weeks of the date of the administration order (unless the Court orders otherwise) Guernsey administrators are now required to send a notice to all creditors inviting them to a meeting and explaining the aims and likely process of the administration.

 

Powers to wind up foreign companies

Guernsey Courts now have the power to compulsorily wind up overseas companies, and the position closely reflects that found in section 221 of the UK Insolvency Act 1986.

A non-Guernsey company may be wound up where: (i) it has ceased
to carry on business or is carrying on business only for the purpose of winding up its affairs; (ii) it is unable to pay its debts under section 407 of the Guernsey Companies law; or (iii) the Court is of the opinion that it is just and equitable that the company should be wound up.

English cases under section 221 of the Insolvency Act 1986 provide that there must be a ‘sufficient connection’ to the jurisdiction in order to wind up a foreign company. The locus classicus is the judgment of Lawrence Collins

J in Re Drax Holdings Ltd [2003] EWHC 2743. Given the nature of financial and business disputes heard in Guernsey courts, it is difficult to conceive of many circumstances in which that will not occur. A place of business, assets, and registered office in the jurisdiction typically suffices. One would expect considerations of comity to be relevant, as they are in England and Wales.

Duties of office holders to report delinquent company officers

Liquidators and administrators are now under an obligation to report to the Registrar of Companies and the Guernsey Financial Services Commission (as regards supervised companies) where they consider that there are grounds for making a disqualification order against a present or past officer of the company. The report must be submitted within six months of the administrator or liquidator vacating office. Office holders are also required to assist the Registrar and Commission by providing them information which they may require.

 

Maintenance of essential services and utilities

The amendments bring Guernsey into line with the UK by allowing the Insolvency Committee to make rules preventing providers of essential services, such as electricity and water, from making it a condition of continued supply that the company in liquidation pay all previous invoices up front. However, providers can ask that the liquidator or administrator personally guarantee the payment of future invoices following commencement of the liquidation. This gives some protection to payments due to service providers whilst disallowing threats to withhold essential services.

 

Conclusion

The new changes are to be welcomed. They ensure that office holders in Guernsey insolvency process have the necessary tools and powers to tackle, draw in and preserve the assets of an insolvent company for the benefit of creditors. A number of powers are placed on a clear statutory footing, ensuring that pre-insolvency transactions can be challenged with greater clarity, and former directors can be questioned and required to produce documents more expeditiously. The changes also save time and cost, as with the new power to dissolve a company in administration. The substantive and procedural changes help bring Guernsey into line with many other Commonwealth jurisdictions, and enable parties and office holders alike to know where they stand with greater certainty.

Alex Horsbrugh-Porter advised on the amendments as a member of the Legal and Regulatory committee of ARIES, the pan-Channel Islands industry body.

The content of the Digest is provided to you for information purposes only, and not for the purpose of providing legal advice. If you have a legal issue, you should consult a suitably-qualified lawyer. The content of the Digest represents the views of the authors, and may not represent the views of other Members of Chambers. Members of Chambers practice as individuals and are not in partnership with one another.
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