Duties of directors of insolvent Jersey companies
05 November 2020
Directors of Jersey companies owe a number of statutory and customary law duties. These general duties are explained in our briefing on directors' duties. The aim of this briefing is to highlight the particular duties that a director of a Jersey company will owe when the company is insolvent or facing insolvency.
Duty to take into account the interests of creditors
When a company is insolvent, the directors owe a duty to take into account the interests of creditors (the "Duty to Creditors").
The leading English law case on this duty is the Court of Appeal decision in BTI 2014 LLC v Sequana S.A.  EWCA Civ 112. The courts of Jersey are likely to adopt the principles in this case.
The Duty to Creditors will also arise at a point in time before insolvency. The Duty to Creditors will be engaged when the directors know or should know that the insolvency of the company is likely.
When the interests of creditors prevail
Ordinarily, the directors of a company will owe a duty to act in the interests of the company (the "Duty to the Company"). This means that the directors should manage the business of the company in the interests of the shareholders as a whole.
Where the insolvency of the company is only probable, it is likely that the Duty to the Company and the Duty to Creditors will operate alongside each other. However, where the insolvency of the company is more certain, it is likely that the Duty to Creditors will take precedence over the Duty to the Company. In other words, the interests of creditors will prevail over the interests of the shareholders.
There are two primary insolvency proceedings which apply to Jersey companies: a creditors' winding up and a désastre.
Under the Companies (Jersey) Law 1991 (the "Companies Law"), a creditors' winding up is commenced by the shareholders of the company passing a special resolution. A liquidator will then be appointed to administer the winding up.
A désastre requires an application to court pursuant to the Bankruptcy (Désastre) (Jersey) Law 1990 (the "Bankruptcy Law"). The application may be made by the company, a creditor with a liquidated claim of not less than £3,000 and certain other persons. If the court makes a declaration of en désastre, the property of the company will vest in the Viscount (the executive officer of the Jersey courts) who will realise the assets of the company for the benefit of creditors.
Under the wrongful trading provisions contained in the Companies Law and the Bankruptcy Law, the liquidator (if there is a creditors' winding up) and the Viscount (if there has been a declaration of en désastre) may apply to court for an order to be made against a director of the company.
If such an application is made, the court may order that a director shall be personally liable (without limit) for all or any of the debts or other liabilities of the company arising after a particular time.
The particular time is when the director:
- knew that there was no reasonable prospect that the company would avoid a declaration of en désastre or a creditors' winding up ("Condition A"); or
- on the facts known to him or her was reckless as to whether the company would avoid a declaration of en désastre or a creditors' winding-up ("Condition B").
Wrongful trading – the statutory defence
There is, however, a statutory defence to wrongful trading.
Under the statutory provisions, the court cannot make an order against a director if, after Condition A or Condition B was first satisfied, the director took reasonable steps with a view to minimising the potential loss to the company's creditors.
Depending on the facts, the taking of reasonable steps may mean that the company has to permanently cease trading. However, depending on the facts, the permanent cessation of business may not be the only or best way forward. Indeed, the carrying on of the company's business with a view to the company trading out of its financial difficulties may be in the best interests of creditors.
Depending on the facts, it would be prudent to implement the following measures:
- The directors should obtain independent professional advice from lawyers and accountants.
- The directors should consider the possibility of the company borrowing new funds or obtaining additional equity investment.
- The directors should consider the possibility of the company restructuring its existing borrowings.
- The company should communicate with its creditors on a regular and proactive basis.
- Any continued trading should be conducted on a fair basis between creditors so that individual creditors do not suffer disproportionate losses when compared to other creditors.
- The directors should ensure that frequent board meetings are held in order to monitor the financial position of the company. Up to date management accounts and cash flow forecasts should be tabled at these meetings. The discussions and decisions of directors should be fully minuted.
- The cash flow forecasts of the company should be regularly updated to reflect changing circumstances.
- The directors should actively manage cash flow. This could involve improving policies relating to the collection of debts; disposing of surplus assets; reducing stock levels; curtailing capital expenditure; and identifying other ways to cut costs and improve cash flow.
There are also statutory fraudulent trading provisions.
Under the statutory provisions, an order may be made by the court if it appears that any business of the company has been carried on with intent to defraud the creditors of the company or the creditors of another person, or for a fraudulent purpose.
In such circumstances, the court may order that the persons who were knowingly parties to the carrying on of the business in that manner are to be liable to make such contributions to the assets of the company as the court thinks proper.
An application for such a court order may be made by the Viscount (in the case of a désastre) or a liquidator (in the case of a creditors' winding up).
A possible example of fraudulent trading would involve a company accepting advance payment for orders when it is known that the orders cannot be fulfilled.
A further possible example of fraudulent trading would involve a company incurring new liabilities when it is known that the liabilities cannot be discharged.
The Companies Law allows the court to make an order prohibiting a person from being a director or taking part in the management of a company. The court may grant the order if it is satisfied that the person's conduct in relation to a body corporate makes the person unfit to be concerned in the management of a body corporate.
Additional matters to consider
There are likely to be other matters which a director will want to consider when the company is facing insolvency.
These may include the following:
- A director may wish to review the terms of any D&O insurance.
- A director may want to consider the terms of any indemnities that have been given to the director by the company. However, the ability of a company to indemnify a director is limited by the Companies Law.
- A director may be a director of more than one group company. In this situation, the possible conflicts of interest will need to be managed.