Guernsey insolvency law – administration orders
03 August 2011
The concept of administration under Guernsey insolvency law is a relatively recent one. Since the changes to Guernsey company law in 2008 it is now possible to obtain an administration order from the Royal Court in Guernsey. The purpose of such an order is to provide a moratorium over the affairs of the subject company providing a "breathing space" in order for it to trade out of its difficulties or to provide a better result for creditors than could be achieved under a normal liquidation. Such an order may also prove useful in assisting with other difficulties which threaten the survival of the company including hostile litigation or regulatory pressure where, in each case, the problems caused by money shortages may be managed positively to try to keep things afloat.
Grounds for an administration order
In Guernsey, an application for an administration order may be made by any member of the company or any creditor, including any contingent or prospective creditor. The court may grant an order if it is satisfied that the company does not satisfy or is likely to become unable to satisfy the solvency test and if it considers that making an order will achieve:
- the survival of the company and the whole or any part of its undertaking as a going concern; and/or
- a more advantageous realisation of the company's assets than would be effected on a winding up.
The solvency test is defined in the Companies (Guernsey) Law 2008 as amended ("the Law"). A company fails this test if it is unable to pay its debts as they become due or if the value of the company's assets is not greater than the value of its liabilities.
Most applications relating to company or insolvency issues are heard by the Court on Tuesday mornings and the application can be made on very short notice. If necessary, though, a special sitting of the Court can be arranged.
Notice of the application has to be served upon the company unless the court directs otherwise. In terms of other formal requirements, notice of the application also needs to be given to the Registrar of Companies at least 2 clear days before the making of the application unless that is "not reasonably practicable" in which case it has to be given as soon as reasonably practicable thereafter.
The application notice needs to be accompanied by a supporting affidavit (a witness statement is not sufficient) setting out the grounds for the application - very much in the format previously used in England before the changes there under the Enterprise Act 2002 and the affidavit must include any matters relied upon to bring the application on an urgent basis.
Finally, whilst not specifically set out under the Law, as a matter of practice the Royal Court would expect to see a Guernsey based administrator appointed. That individual will need to appear before the court and be sworn into office as a court appointed official. Further, every invoice, letter and other document issued by the company must also state that the company is in administration and give the name of the administrator.
Following the making of an administration order, the Registrar of Companies must be notified and he will also publicise the fact that a company has been placed into administration.
Effect of order
During the period for which an administration order is in force and the period between the presentation of an application for such an order and the making of such an order or the dismissal of the application, no proceedings may be commenced or continued against the company except with the consent or leave of the court. "Proceedings" in this context means court proceedings and therefore does not include the enforcement of security.
It is worth noting that the grant of an administration order or an order for liquidation in Guernsey does not impose a complete moratorium and security can still be enforced and rights of set-off exercised after the order has been made.
During the administration the administrator has very wide powers to operate the business of the company and make investigations or enquiries of relevant individuals concerning the affairs of the company. The process is extremely flexible as there are no formal reporting requirements and the administrator is free to make any arrangement or compromise concerning the company so as to try to achieve the aims of the administration – this may include a scheme devised in tandem with the creditors to form the basis of a "work out" from insolvency.
Interaction with other jurisdictions
It would be possible for an English administration order to be made in relation to a company incorporated in Guernsey in the following circumstances:
- where the centre of main interests (as such term is used in Council Regulation (EC) No 1346/2000 of 29 May 2000 on Insolvency Proceedings) ("CoMI") of the relevant company is located in the UK; or
- pursuant to a request for assistance by the Guernsey courts to the UK courts made under section 426 of the Insolvency Act 1986.
It may be possible (although this route has not yet been used in Guernsey) for an application to be made to the Royal Court (under its inherent jurisdiction) for the Royal Court to issue a letter of request to the English court, asking the English court to make an administration order in relation to the target company as a Guernsey company. This has been successful in Jersey but, unlike Guernsey, Jersey does not have its own legislation providing for administration of companies. It may be more difficult, therefore, to persuade the Royal Court that this route is appropriate where such a process is available under Guernsey law, even where the majority of a company's assets may be situated in England.
Further, there is no reciprocal enforcement legislation that applies in Guernsey to require a court to recognise a foreign administration order. However, Sections 426 (4), (5), (10) and (11) of the English Insolvency Act 1986 have been extended to Guernsey by statutory instrument (UK SI 1989/2409) ("Guernsey Order"), such that the Royal Court shall (subject to its residual discretion) assist the courts having jurisdiction in relation to insolvency law of (inter alia) the UK on receipt of an appropriate letter of request.
However, there is no precedent for the Royal Court recognising a foreign administrator appointed over a Guernsey company either under the Guernsey Order or at common law. As Guernsey has its own administration procedure, it is uncertain whether the Royal Court would receive such an application favourably.
CoMI and jurisdiction
As Guernsey has not signed up to The UNCITRAL Model Law on Cross-Border Insolvency, it does not apply to Guernsey. Guernsey is also not a part of the EU and so is not subject to EU insolvency law.
The CoMI is therefore assessed in Guernsey under the general common law of private international law or conflict of laws. Guernsey will automatically assume jurisdiction in any case involving:
- a Guernsey company;
- assets which are situate in Guernsey;
- persons who are situate in Guernsey; or
- when on the fact of the case, Guernsey appears to be the most appropriate forum in which the case should be decided.
End of administration
The court will only grant an administration order for a specified period of time although that time may be extended provided that one of the purposes of the order can continue to be met. Should that not be possible, then the administrator must bring the matter back before the court to bring the administration to an end.
If the process is successful then the company will simply become free of the order once it is discharged. Whilst it is always to be hoped that the breathing space given by an administration will succeed, should it fail then the end result is, of course, likely to be the commencement of the formal liquidation process.