Jersey corporate insolvency - the two regimes
20 September 2019
There are two principal regimes for corporate insolvency in Jersey: désastre and winding-up. This Briefing seeks to highlight the major features of each and some of the differences between the two.
The law of désastre arose out of the common law of Jersey, although since 1991 the common law has only applied to the extent that express provision is not made in the Bankruptcy (Désastre) (Jersey) Law 1990 (the "Désastre Law").
Who may commence the process?
A declaration en désastre may be sought from the Royal Court by a creditor, the debtor company itself or the Jersey Financial Services Commission (the "JFSC").
Creditor: a single creditor with a liquidated monetary claim in excess of a minimum figure (currently £3,000), to which there is no reasonably arguable defence, may seek to place a company en désastre. The company must be insolvent on the cash flow test, although it must have realisable assets. If the company does not pay an undisputed debt, this is evidence (although not conclusive proof) of insolvency. It is unusual to seek a désastre unless there is already a judgment that has remained unsatisfied in relation to the debt.
Debtor: a company may seek a declaration en désastre in relation to itself. The company must be insolvent on the cash flow test and must have realisable assets.
The JFSC: since 1991, the JFSC has been able to seek a declaration en désastre or, indeed, seek a winding-up on "just and equitable grounds", for certain regulated activities such as insurance, investment, trusts and company formation/ administration and banking businesses.
Against what companies?
The Royal Court has jurisdiction to declare the property of a company en désastre where the company (i) carries on business in Jersey, or did so at any time during the previous three years, or (ii) has realisable immovable property in Jersey, or (iii) is registered (or, has been dissolved) under the Companies (Jersey) Law 1991 (the "Companies Law").
The procedure is commenced by a representation, which sets out the relevant facts and, unless the representor is the JFSC, is accompanied by an affidavit. The affidavit will set out (i) details of the deponent's belief that the company is insolvent (on the cash flow test) but has realisable assets, (ii) that, as required by the Désastre Law, 48 hours notice has been given to the Viscount of the intention to apply (or, if no notice has been given, why not), and (iii) where the Representor is a creditor, details of the debt.
The application is generally made ex parte, although as with any ex parte application, caution must be exercised to ensure full and frank disclosure has been made to the court. The debtor may seek to have the application reargued inter partes, and, can seek to have any order set aside for failure to make candid disclosure, and/or seek damages against the applicant. If concerned, the court may adjourn the matter to be heard inter partes, and, if it appears to the court that there are arguable grounds on which the making of the declaration may be resisted then, unless there is some reason for supposing that the creditor would be unjustly prejudiced by having to give notice, it is likely, in normal circumstances, to adjourn the application to enable notice to be given to the company, and for the company to appear, if it wishes. The directors or shareholders of the debtor company may also apply, at any time during the course of a désastre, for an order recalling it. The Royal Court may not grant such an order unless satisfied that the debtor company’s property is sufficient to discharge the claims filed in the désastre in full (i.e. the debtor is solvent on the balance sheet test). The debtor company may also seek to appeal against a declaration en désastre, for example, where an error has vitiated the legitimacy of the declaration.
There is no automatic right to an order declaring a company en désastre even if the prerequisites appear to have been met. The relief is in the discretion of the Royal Court. The application is generally heard in open court unless exceptional circumstances merit a hearing in private.
Upon the making of a declaration en désastre, the property of the company (other than property held by the company as a trustee), and the powers of the directors, vest in the Viscount (although the directors have a residual power to challenge the désastre). All property vests, whether movable or immovable, present, future, vested or contingent, and whether located in or outside of Jersey. Immovable property vests subject to any hypothec and any valid security. Where security exists, the Viscount will account, on a preferential basis, to secured creditors for the sale proceeds. If the debtor is entitled to movable or immovable property as a joint owner, that is converted into ownership in common from the date of the declaration.
The aim of the procedure is to ensure, subject to any charges, a pari passu distribution amongst creditors and avoid the inequity of some creditors of an insolvent debtor getting paid and others not. There is a general moratorium of actions against the company. The process comes to an end upon payment of the final dividend, which leads to automatic dissolution of the company.
The court may require a creditor who applies for a declaration to indemnify the Viscount against costs and expenses. In practice, the Viscount generally requires an indemnity, particularly if there are no readily realisable assets.
Powers and duties of the Viscount
The Viscount's primary duty is to protect and realise all assets of the debtor (by public auction/tender or private contract, depending on the circumstances). Property devolving on a company after the date of the declaration will vest in the Viscount, providing that the Viscount, within 40 days of the date on which it first came to his knowledge, serves written notice on the company claiming such property.
The Viscount has a number of specific statutory powers, which include bringing or defending proceedings in relation to the property of the debtor, compromising debts and claims, voting any shares owned by the debtor, and (importantly) carrying on the business of the debtor. The Viscount has powers to summon any person in, or suspected to be in, possession of information relating to the debtor's activities and to require production of documents. He may seek an order to question such persons on oath and the debtor itself has a number of statutory duties to co-operate. A further function of the Viscount is to adjudicate on claims filed by creditors, and generally to investigate the circumstances of the désastre.
Co-extensive with the Viscount’s duty to protect and realise the debtor’s property is a duty requiring him to investigate the debtor's affairs. This is co-extensive to the duty of a liquidator in a creditors’ winding-up.
The Viscount’s fees, costs and expenses properly incurred, are paid as a first charge on the liquidated value of the company’s assets. The Viscount is entitled to levy a commission against the value of assets realised and also against the value of assets distributed.
There is no obligation on the Viscount to convene creditors’ meetings, but often they are called, commonly to consider the funding of a désastre or the desirability of the Viscount pursuing different alternatives in the conduct of a désastre. Further, the Viscount may from time to time report to creditors on progress. In any event, he may apply to the Royal Court at any time for directions on any issue, or to endorse any course of action proposed by him in a désastre.
The Viscount also has an obligation to report possible criminal offences relating to the company.
There are three types of winding-up under Part 21 of the Companies Law: summary, creditors and court winding-up.
This procedure can only be obtained by members of the company and is used where a company has no liabilities, or has liabilities which it is able to satisfy within six months of the commencement of the winding-up or, where liabilities will arise thereafter, they will be discharged as they fall due. Members pass a special resolution (requiring a two thirds majority of those voting) to commence a members' summary winding-up. All the directors are required to sign a solvency statement. Both the special resolution and the solvency statement must be delivered to the registrar of companies (the "Registrar"). Where the company has no assets and no liabilities, the dissolution of the company is triggered by the registration of the first solvency statement.
Upon the commencement of summary winding-up, the company's ability to operate is restricted to winding-up its affairs. The directors continue in office if or until a liquidator is appointed, at which point their powers cease. Unlike in a creditors' winding-up, in a summary winding-up, there is no particular requirement for a qualified professional liquidator. If no liquidator is appointed by the special resolution, then the directors will be responsible for carrying out the winding-up. Once the winding-up is completed, the directors (or, the liquidator, if applicable) will sign a statement confirming that they have enquired into the company's affairs and are satisfied that the company has no further assets. When the statement is filed with the Registrar, the company is dissolved.
This description is something of a misnomer, as it cannot be commenced by creditors (whose only method under Jersey law of forcing a company into a bankruptcy process is désastre). The winding-up can only be commenced by the members passing a special resolution. A minimum of 14 days' notice is required for the general meeting (although the members can consent to shorter notice) and the notice should contain details of the proposed liquidator. At the general meeting, a resolution is proposed to wind-up the company and to nominate a liquidator. The winding-up commences upon the passing of the special resolution, following which, the company's ability to operate is restricted to winding-up its affairs. In order to appoint a liquidator, a creditors' meeting will be convened to take place immediately after the general meeting. The creditors' meeting requires 14 days' notice. It must also be advertised in the Jersey Gazette with 10 days' notice.
If the creditors nominate a liquidator, then the liquidator's appointment becomes effective immediately. If the creditors do not nominate a liquidator, the liquidator chosen by the members at the general meetings will be nominated. If different nominations are made as between the two meetings, a director, member or creditor, may apply to the court for directions. To the extent that there is a time gap between the shareholders' resolution placing the company into liquidation and the appointment of the liquidator by the creditors, the powers of the directors must not be exercised, except with the sanction of the Royal Court. Once the liquidator has been appointed, the powers of the directors cease except in so far as the liquidation committee (or if there is none, the creditors) sanction their continuance.
The liquidator must be a member of a number of prescribed professional accountancy bodies, although the liquidator does not need to be resident in Jersey or to be a qualified insolvency practitioner.
Alternatively, a creditors' winding-up may result from the conversion of a summary winding-up if it becomes apparent that the company cannot pay its debts within six months of the summary winding-up, or as they fall due thereafter.
An application can be made to the Royal Court for the winding-up of a company on just and equitable grounds by the company, a director, or member. Additionally, the Minister for Economic Development or the JFSC may apply where it is just and equitable and/or expedient in the public interest for the company to be wound up.
Creditors do not have standing to make such an application.
There are a number of English authorities on the grounds on which just and equitable winding-up can take place. These include where the substratum of a company has gone, or, in circumstances of deadlock. A particular example is where there is a total breakdown of trust and confidence between the shareholders of a company that has the characteristics of a partnership.
There is no particular requirement for insolvency either on just and equitable, or, public interest grounds, although the circumstances in which the director(s) might make the application are usually where the shareholders do not pass the appropriate resolution and the company is insolvent, or is heading towards insolvency.
The Royal Court has broad discretion to order a winding-up on just and equitable grounds.
It should be borne in mind that the detailed provisions of the Companies Law relating to creditors' winding-up, including for instance: the importation of certain provisions from the Désastre Law as to adjudication and priorities of claims, provisions relating to setting aside of antecedent transactions, and the moratorium of claims against the company (all of which apply in a creditors' winding up), are not applicable to court winding-up. However, the Royal Court has power to direct the manner in which the winding-up is to be conducted, and can make such orders as it sees fit. These will usually include all or most of the provisions, powers and procedures specifically relating to creditors' winding-up. Further, the Royal Court might grant powers to allow the liquidator to trade the company. (These powers might also be applied for by a liquidator in a creditors' winding-up, where the court can determine questions arising, and is specifically empowered to grant the same powers as the Viscount has in a désastre which, as set out above, include the power to trade the company).
Court winding-up on just and equitable grounds is sometimes used where there is benefit in trading the business of the company (in the absence of administration in Jersey). It has been used as a procedure through which a "pre-packaged" sale can be implemented.
What companies can be wound up?
The provisions relating to winding-up only apply to companies registered under the Companies Law (unlike a désastre, which can be declared in relation to a non-Jersey company which has done business in Jersey, or, has immovable property in Jersey).
Unlike in a désastre, in a winding-up, the property of the company remains vested in the company. The liquidator stands in the shoes of the directors and acts as agent of the company. The liquidator (in a creditors' winding-up) and the Viscount (in a désastre) have more extensive powers than a liquidator or the directors in a summary winding-up. As with a désastre, the aim of the procedure is to ensure a pari passu distribution amongst creditors according to their status. There is also a general moratorium of actions against the company. The process comes to an end with the liquidator drawing up an account of the winding-up, calling general and creditors' meetings to lay the account before them, and filing the account with the Registrar, three months after which the company is deemed to be automatically dissolved.
Duties of the liquidator
A number of general duties are set out in the Companies Law. These include: the obligation to report possible criminal offences relating to the company, those involved with it or its directors, to Her Majesty's Attorney General; and realising the company's property, and thereafter distributing it in satisfaction of the company's debts pari passu, following payment to any priority creditors. In a creditors' winding-up there is a duty to investigate the assets. If the company is solvent, then members will only receive a distribution once the creditors have been paid in full. Many of the procedural rules applying to désastre, including proving and adjudicating on debts, and the priority of payments to creditors, also apply to winding-up, although certain actions of the liquidator, such as paying creditors in full, or compromising claims by or against the company, require sanction of the Royal Court or the creditors' committee.
Both the Désastre Law and the Companies Law contain anti-avoidance provisions. The Viscount (in a désastre) and a liquidator (in a creditors' winding-up) may apply to set aside transactions at an undervalue and preferences. In either case, the Royal Court may restore the position to what it would have been had the company not entered into the transaction.
Transactions at an undervalue
In relation to transactions with unconnected parties, transactions are susceptible to cancellation if: (i) entered into within the five years preceding the winding-up or désastre, and (ii) the company was insolvent at the time or became insolvent (on the cash flow test) as a result of the transaction. In the case of parties connected to the debtor, the burden of proof for insolvency shifts, and the transaction is susceptible, unless it is proved that the company was solvent, or did not become insolvent (in each case on the cash flow test), as a result of the transaction.
In the case of both connected and unconnected transactions, the provisions do not apply if the company entered the transaction in good faith for the purposes of its business, and there were reasonable grounds for believing the transaction would benefit the debtor.
If a debtor enters into a transaction with a creditor, surety or guarantor, and the transaction: (i) puts the other party in a better position, in the event of a declaration or winding-up, than it would have been in but for the transaction, and (ii) there was a desire on the part of the debtor to prefer, and (iii) the transaction occurred within 12 months of the declaration or winding-up, and (iv) the company was insolvent or became insolvent as a result of the transaction, then the transaction is susceptible to cancellation.
In relation to connected parties, there is a presumption that there was a desire to prefer. The transaction will only remain intact, if it can be proved, in the circumstances, that the debtor was solvent at the time or, did not become insolvent as a result of it, or, that there was no intention to prefer the creditor.
Wrongful and fraudulent trading
The Viscount (in a désastre) and a liquidator (in a creditors' winding-up), may apply to the Royal Court for orders in relation to: (i) wrongful trading, or (ii) fraudulent trading.
If a director allowed a company to trade when he knew that there was no reasonable prospect that it would avoid a creditors' winding-up, or a désastre (or was reckless about that), he may be liable to meet some or all of the company's debts, from the time of such knowledge, unless he took reasonable steps to minimise the potential loss.
Any parties knowingly involved in running a business with the intention to defraud creditors may be liable to contribute to the company's assets, as well as possibly being subject to criminal sanctions.
Some general considerations regarding désastre and winding-up
- A creditor's only remedy is désastre. A company, through its board, has the option of désastre or winding-up on just and equitable grounds. Shareholders, as such, can commence summary or creditors' winding-up, or, apply to court for winding-up on just and equitable grounds, but cannot apply for désastre in their capacity as shareholders.
- A désastre can be commenced quickly if necessary: 48 hours notice must be given to the Viscount. This compares to the more lengthy procedure to convene a creditors' meeting (and, subject to short notice, a shareholders' meeting) in a creditors' winding-up. However, if time is short, a court winding-up might be initiated by a company as an alternative to a désastre.
- The Viscount has some powers in a désastre to trade a business in order to sell it. These powers can be incorporated into a just and equitable winding up and extended as the court thinks fit. In either case, this provides a form of rescue procedure in the absence of administration or its equivalent.
- The Viscount's appointment in a désastre (or court appointed liquidator's appointment in a court winding-up), may assist in obtaining foreign recognition. In some circumstances, the Viscount may be provided with government funding to carry out investigations.
- The Viscount may be able to use his powers to promote a settlement between debtor and creditors and avoid insolvency. Alternatively, a désastre may sometimes be avoided through requests for assistance from foreign courts: for example, by placing a Jersey company doing business in the UK into UK administration.
- Liquidators, with their extensive resources and commercially oriented approach, may be a more attractive option in complex cross-border collapses.
- In proceedings which become solvent, the Viscount may be better able to pay interest to creditors than a liquidator.
For further analysis of these issues, see Dessain and Wilkins 'Jersey Insolvency and Asset Tracking', the latest edition of which can be ordered here.