Guernsey company distributions and dividends: practical benefits of the solvency model
20 June 2023
A key differentiator of Guernsey companies law is the solvency model, as opposed to the traditional maintenance of capital regime applicable to companies established in other jurisdictions, such as the United Kingdom.
This solvency model permits a Guernsey company to make distributions or pay dividends out of any of its assets provided that, taking into account all relevant circumstances, the board of directors of the company (the "Board") determines that the company will meet the statutory solvency test (on a "cash flow" and "net assets" basis) immediately after the distribution is made.
There is no requirement for the company to have distributable profits available or to make the distribution, including share redemptions or buy backs, out of any specific capital account or reserve. Shareholder approval is also not required unless the company's articles include such a requirement; nor is any court process required.
This flexibility, among other things, provides a key benefit for Guernsey companies serving as investment companies, collective investment schemes or asset holding vehicles, whether tax resident in Guernsey, the United Kingdom or elsewhere and whether listed or unlisted.
Distributions and dividends
Under the Companies (Guernsey) Law, 2008 (as amended) (the "Companies Law"), distributions and dividends are broadly defined. A "distribution" includes:
- the direct or indirect transfer of money or property, other than the company's own shares, to or for the benefit of a member; or
- the incurring of a debt to or for the benefit of a member;
in respect of a member's interests, and whether by means of a purchase of property, the redemption or other acquisition of shares, a reduction of indebtedness, or by some other means.
A "dividend", effectively a sub-type of distribution, includes every distribution of a company's assets to its members, except distributions by way of:
- an issue of shares as fully or partly paid bonus shares;
- a redemption or acquisition of any of the company's own shares or financial assistance for an acquisition of the company's own shares;
- a reduction of share capital;
- a distribution of assets to members during and for the purposes of its winding up;
- a distribution of assets to members during and for the purposes of an administration order;
- a distribution of assets to members of a cell of a protected cell company during and for the purposes of a receivership order; or
- a distribution of assets to members of a cell of a protected cell company during and for the purposes of the termination of the cell.
Dividends may be in the form of money or other property.
Procedure for distributions and dividends
While the Companies Law sets out the procedures for approving dividends and distributions in separate sections, the procedure for each is substantially the same: the Board may authorise a distribution or a dividend if:
- it is satisfied on reasonable grounds that the company will, immediately after payment, satisfy the solvency test (see below); and
- the company satisfies any other requirement in its memorandum and articles.
The test requires the Board to make an assessment of the future solvency of the company by considering its ability to satisfy the solvency test immediately after the distribution or dividend is made. The reasonable grounds criteria and the directors' fiduciary duties to the company mean that this assessment must be made on an informed basis, including a consideration of all relevant circumstances.
The Board must also approve a certificate stating:
- that in their opinion the company will, immediately after the distribution, satisfy the solvency test; and
- the grounds for that opinion;
and the certificate must be signed on their behalf by at least one of them.
If, after a distribution (including if it is a dividend) is authorised but before it is made, the Board ceases to be satisfied on reasonable grounds that the company will, immediately after it is made, satisfy the solvency test, the distribution will be deemed not to have been authorised.
The statutory solvency test
For the purposes of the Companies Law, a company satisfies the solvency test if:
- the company is able to pay its debts as they become due;
- the value of the company's assets is greater than the value of its liabilities; and
- in the case of a company supervised by the Guernsey Financial Services Commission, the company satisfies any other requirements as to solvency imposed in relation to it by the relevant legislation under which it is supervised.
Setting aside any requirements imposed on supervised companies under the relevant regulatory laws, the solvency test, therefore, comprises two tests known colloquially as:
- the "cash flow" test; and
- the "net assets" test.
For the purposes of the "cash flow" test, the Board must consider all the company's debts for which a legal obligation exists or which the company is otherwise obligated to fulfil. The definition is, therefore, very broad and would include fixed returns on preference shares, if applicable. The Board's analysis should include some consideration of future debts of the company and contingent liabilities. For the purposes of the "net assets" test, the Board must include any amounts that the company would be required to pay if the company were to be dissolved immediately after making the distribution.
Under the Companies Law, the Board is required to have regard to:
- the most recent accounts of the company; and
- all other circumstances that the directors know or ought to know affect or may affect the value of the company's assets and the value of the company's liabilities; and
may rely on valuations of assets or estimates of liabilities that are reasonable in the circumstances.
The Board needs to consider up-to-date financial data, which should include management accounts covering the period from the date of the last full accounts, if possible. However, a consideration of the financial data alone would not be sufficient if there are other circumstances relating to the company, its business environment or anything else that are relevant to its solvency.
As noted above, directors must ensure that they have sufficient information and have carried out adequate due diligence to make the required assessment on reasonable grounds.
The Board must continue to monitor the solvency of the company until the distribution is made. Otherwise, the solvency test may be deemed not to have been met at the relevant time. Should a payment be made to a shareholder at a time when, immediately after the payment was made, the company did not meet the solvency test, the payment may be recovered by the company, save where, in summary, it would be unfair to do so and the shareholder acted in good faith without knowledge and altered its position in reliance on the validity of receipt.
Directors can be held personally liable to repay any shortfall in the amounts recoverable from shareholders, in the event that they did not ensure that the applicable legal procedures were followed or there were no reasonable grounds for believing the company would pass the solvency test at the relevant time the certificate was signed.