The Companies (Guernsey) Law 200802 Jul 2010
On 1 July 2008, Guernsey's new companies law, the Companies (Guernsey) Law 2008 (the "Law") came into force. This briefing summarises the major changes to this area of law and outlines important administrative steps which need to be taken by company administrators and directors in all sectors.
The Law is a major revision and conglomeration of all companies laws, amendments and ordinances created since 1994. With the inception of the Law came the creation of the Guernsey Registry (the "Registry"), separate from HM Greffe, which now enables the rapid on-line creation of companies and submission of company returns and documentation. The Law consolidated all those ordinances which previously dealt with amalgamation, migration, purchase of own shares, financial assistance, protected cells and incorporated cells. It adds considerable speed to the company formation process, together with added flexibility for Guernsey companies in most corporate transactions and structures.
One of the most fundamental changes implemented by the Law relates to share capital. Guernsey law previously enshrined the concept of fixed share capital for the protection of creditors. However, this made the processes of share redemption, purchase of own shares and distributions complex, cumbersome and often requiring a court approved reduction process. The Law swept away the concept of fixed capital so that it is now possible for a company to reduce capital, make distributions of assets, purchases and redemptions without court approval. Directors are now responsible for considering whether a company meets a new solvency test set out in the Law. For unregulated companies, the test is a relatively simple one of ability to meet debts as they fall due and assets exceeding liabilities. In addition, companies will be able to capitalise profits by the issue of new shares. These provisions enable considerable flexibility in the way in which companies organise their capital, which will be of considerable use to all sectors of the financial services industry. In return for this flexibility, however, directors are now potentially personally liable for failing to consider the solvency question properly.
New provisions – resident agents
The new company formation process does not require separate authorisation by the Guernsey Financial Services Commission (the "GFSC") (except in the case of regulated companies). However, the Law requires every Guernsey company to have a resident agent charged with responsibility for maintaining a register of its beneficial owners. There are certain exemptions, for example, relating to listed companies, supervised (i.e. licensed by the GFSC) companies and investment funds. In most circumstances, the resident agent needs to be the company's existing corporate service provider ("CSP"). However, for private companies, there is a need to appoint and notify the Registry of the details of the resident agent.
Registration of directors and corporate service providers – re-registration of companies
Under the Law, no court process is required to form a company. It is therefore no longer strictly necessary to appoint advocates to act in the preparation of applications to court for the formation of companies. Only regulated and registered CSPs are able to form companies on behalf of clients (i.e. those regulated under the current fiduciary legislation). All CSPs must, however, register with the Registry in order for them to be able to make submissions on behalf of the companies which they administer.
All existing companies should have re-registered their details in the period between July and October 2008. A CSP will have conducted this exercise on behalf of companies. Directors should also have registered in respect of each company for which they are a director. In return, they will have received a pin number enabling them to provide electronic signatures and make submission of electronic documents to the Registry. This should add considerable speed and flexibility to the submission of returns and documents to the Registry. If directors have not registered via a CSP, it will be necessary for them to attend in person at the Registry, together with proof of identity and address. Further details and guidance on this process is available from the Registry's dedicated website at: www.guernseyregistry.com. All directors of Guernsey companies are urged to contact their service providers to ensure that this process has been conducted on their behalf or make their own arrangements for registration via the website.
These provisions have caused some difficulty for local companies (and some licensed managed companies) whose records are not maintained by a CSP. Bedell Cristin is able to offer such services and advise on compliance with certain formal procedures through its licensed trust company, Bedell Trust Guernsey Limited, which is a registered CSP and licensed by the GFSC. Many applications which could previously only be made by advocates, such as migrations of companies, must now be made by a CSP. Bedell Cristin is able to assist or make such applications on behalf of clients via its CSP.
Directors'conflicts of interest
The general corporate governance requirement that directors must state conflicts of interest in connection with transactions is an important part of the Law, and now needs to be taken into account in all transactions with Guernsey companies. Sections 163 and 164 of the Law have proved contentious to the extent that they are already in the process of being amended. All clients familiarising themselves with the Law should note that an amendment law will shortly be approved which changes the provisions of section 163 and 164 of the Law. The most important effect of this is that transactions entered into by a company where a director has a personal interest are capable of being avoided by a Guernsey company in a period of three months after the transaction is disclosed to the board, unless: the transaction has been disclosed to the board; is in the course of ordinary business and on usual terms and conditions; or has been ratified by the members. A director is deemed to be interested in a transaction where he:
- is a party to or derives a material benefit from the transaction;
- has a material financial interest in another party to the transaction;
- is a director, officer or employee or member of another party (other than a party which is an associated company) who may derive a material financial benefit from the transaction;
- is the parent, child or spouse of another party who may derive a material financial benefit from the transaction; or
- is otherwise directly or indirectly materially interested in the transaction.
After 1 July 2009, these provisions will extend to shadow directors, in other words, a person in accordance with whose directions or instructions the directors of a company are accustomed to act.
Many captives, trust vehicle holding companies and investment vehicles, operate in circumstances where the directors of the Guernsey subsidiary may have an indirect interest in a transaction. This may be by way of being an insured person under a policy of insurance, having the benefit of some kind of performance payment or carry benefit in an investment fund, or perhaps as a corporate trustee of a trust or company holding structure. Whilst this has always been a question of good practice, it is now particularly important to ensure that all declarations of interests are noted and recorded at all meetings of Guernsey companies. With effect from 1 July 2009, this will extend to the interests of shadow directors, although there is some concern as to how companies will be able to demonstrate compliance with these proposed provisions. Accordingly, administrators and directors alike will have to consider whether they indeed have a shadow director, and whether such interests could render transactions potentially void.
A number of transitional provisions have been introduced in the Law so as to allow companies in the process of amalgamation, migration or, for example, share capital reduction, to continue that process notwithstanding the coming into effect of the Law.
Standard memorandum and articles and replacement of articles for current companies
The electronic company formation process enables use of standard table memorandum and articles available from the Registry's website. This allows CSPs to form their own companies without recourse to legal advice. There has, however, been considerable debate amongst local practitioners about the contents of the standard table articles. The standard articles omit many matters which would previously have been considered normal for a Guernsey company (such as pre-emption rights for shareholders over the transfer of shares), and also cross-refer extensively to the Law. The Law stretches to some 570 pages, and is a volume which many directors will not have readily at hand when needing to consider the powers and processes contained in their company's articles. Certain important issues, such as giving a chairman an additional casting vote, will be of potential importance, for example, in joint venture and investment companies, and so the use of the standard articles should be considered carefully before they are adopted.
The articles of existing Guernsey companies will need to be brought up to date in order to take advantage, for example, of certain areas of flexibility in the Law. Most standard Guernsey articles, for example, only allow the payment of dividends from profits available for distribution. Under the Law, dividends and distributions can be made generally from assets, subject to the solvency test, so that retaining old style articles may unnecessarily restrict the flexibility provided by the Law. In addition, the indemnities provided to directors in old articles will cease to be effective. Care should be taken before assuming that any provisions in current articles will remain effective.
Since the introduction of the Law, the memorandum of a company is of less importance than was formally the case, because all companies are entitled to conduct any form of business. However, new articles may be of considerable importance in balancing the rights of different classes of shareholder. Where current articles are bespoke, for example, in a multiple share-class company, or in a joint venture company, there may be a need to have those reviewed for appropriate amendment. Bedell Cristin has developed a suite of user-friendly articles of association for a number of different applications which comply with the provisions of the Law. If you would like assistance with the change-over to the Law, please do not hesitate to contact us.