New insolvency amendments to Guernsey's company law
14 April 2020
On 15 January 2020, following industry-wide consultation, the Companies (Guernsey) Law, 2008 (Insolvency) (Amendment) Ordinance, 2020 (the "Ordinance") was passed.
The Ordinance enacts certain amendments to the Companies (Guernsey) Law, 2008, as amended (the "Companies Law") to reform Guernsey's current corporate insolvency regime and modernise Guernsey's insolvency law, bringing it in line with the UK and other offshore jurisdictions. The changes will officially come into force when enabling regulations are made together with new Insolvency Rules.
The key changes are summarised below.
Voluntary winding up
Currently, one of the unique aspects of Guernsey's insolvency regime is the ability of members to resolve, by way of special resolution, to wind up their company without creditor ratification, even when the company in question is insolvent. The advantage of this provision is that it enables a company to be wound up efficiently without the involvement of creditors or a professional insolvency practitioner. On the other hand, a disadvantage is that creditors lose visibility and control over the process and nothing under the Companies Law prevents a director of a company resolving to wind up such company even though that company may be insolvent as a direct result of the acts and/or omissions of that director.
The amendments will provide that, where a company is to be placed into a members' voluntary winding up, the directors of such a company must make a declaration that such company is able to satisfy a statutory solvency test under the Companies Law, namely that the company is able to pay its debts as they become due and that the value of the company's assets is greater than the value of its liabilities (the "Solvency Test"). Such declaration of solvency must be made within a period of five weeks immediately preceding the date of the resolution for winding up or on the same date. If the directors of the company are unable to make such solvency declaration, then the company must be wound up by an independent third party (not a director, former director, shadow director, employee, manager, secretary or member of the company or an associated company) which will, in most instances, be a professional insolvency practitioner. These added requirements ensure that where a company is insolvent and the creditors of that company are therefore at risk of being prejudiced, an independent insolvency practitioner will need to be appointed to ensure that the creditors are offered some protection and the assets of the company are preserved pending distributions to the creditors.
Powers of administrators/liquidators
Notwithstanding that a comprehensive range of powers are already provided to administrators under the Companies Law, this did not include the power to make distributions to creditors in certain circumstances. This will be remedied by granting administrators the power under the Companies Law to make distributions to certain creditors (including a creditor with a secured interest) without requiring approval of the Royal Court of Guernsey (the "Court"), where such distributions are made in accordance with the objects of the administration.
Previously, there was some uncertainty as to whether an administrator could effect a distribution to a secured creditor, despite the fact that the Companies Law expressly specified that an administration order will have no effect on the rights of secured creditors. Any ambiguity will now be removed, as distributions will be able to be made by administrators to unsecured creditors with the approval of the Court.
The changes will allow a company in administration, where there are no assets to distribute to creditors, to go straight into dissolution without the need for an interim liquidation. This would allow an administrator to distribute all the assets to the secured and preferred creditors and, assuming there are no assets remaining for unsecured creditors, apply immediately for the company to go into dissolution, thereby avoiding a considerable amount of time and expense.
In relation to the powers of a liquidator, a liquidator will, at any time before dissolution of the company, be able to apply to the Court for an order requiring specified persons to produce documents and information in relation to the company. The persons in question include those who are or have been officers or employees of the company within the past 12 months preceding the commencement. Such persons must provide all the documents that the liquidator may reasonably require for the performance of its functions in respect of the winding up of the company.
All of the above powers give administrators and liquidators considerable powers to assist the interests of creditors and shareholders and bring Guernsey's insolvency regime substantially in line with the UK and other major commonwealth jurisdictions.
Notice to creditors
An additional protection afforded to creditors by the changes is the new requirement for administrators to send a notice to all creditors inviting them to a meeting of creditors, at which the administrator must explain the aims and likely process of the administration. This meeting has to be held within 10 weeks of the date of the administration order, unless the Court orders otherwise. This therefore increases transparency and control for creditors during the administration process.
Transactions at an undervalue
Until the amendments are brought into force, the Companies Law does not contain a provision allowing a liquidator to claw back sums from third parties where assets or monies had been sold and/or diverted to them for no or little consideration. The amended law will allow both a liquidator or an administrator to apply to the Court for an order if a company has entered into an undervalued transaction with a person at any time after the commencement of the six month period immediately preceding the relevant date and the company was unable to satisfy the Solvency Test when it entered into such transaction or became unable to satisfy the Solvency Test as a result of entering into such transaction. For the purposes of this provision, the relevant date is the earlier of: i) the date of the making of any application for the compulsory winding up of the company; ii) the date of the passing by the company of any resolution for the voluntary winding up of the company; or (iii) the date of the making of any application for an administration order.
There are three important criteria which must be satisfied before the Court can take action:
- the transaction must have occurred within six months (or two years where the third party is connected to the company) of the company entering insolvency;
- the company must not have been able to pass the Solvency Test at the time of the transaction or as a result of it; and
- if the undervalued transaction was entered into by the company not in good faith and not for the purpose of carrying on its business and, at the time the transaction was entered into, there were no reasonable grounds for believing that the transaction would be of benefit to the company.
The Court can make various orders under the Ordinance, including that property be returned to the company, but cannot take action against a third party who had acted in good faith, paid full value and who had no knowledge of the circumstances giving rise to the action, except where such third parties were party to the transaction themselves.
It is worth noting that "Pauline Actions" (which have historically been actions utilised in Guernsey in respect of transactions made with an intention on the part of the debtor to prejudice his creditors and which usually require an element of fraud) will still be a useful tool for liquidators or administrators where the transactions lie outside the six month or two year period (as applicable) outlined above.
Extortionate credit transactions
Reforms have also been made to the Companies Law in relation to extortionate credit transactions, being those transactions which occur within three years of the insolvency and which involve grossly exorbitant terms in relation to the provision of credit and/or grossly offend the principles of fair dealing. It is worth noting that a transaction will be presumed to be extortionate unless the contrary is shown. The Court will have the power to, amongst other things, set aside the whole or any part of the obligation under the transaction and/or vary or amend the terms of the transaction: this is seen as a positive step in giving flexibility to unwind extortionate credit transactions in the event of a company's insolvency.
The power to disclaim
There will also be a new power for a liquidator to release the company from its "onerous property" which includes unprofitable contracts as well as the responsibility for property (including real property in Guernsey) notwithstanding that such liquidator has taken possession of it, endeavored to sell it or otherwise exercised rights of ownership over it. "Onerous Property" is defined in the amended law as: a) any unprofitable contract; b) any other personal property of the company which is unsaleable or not readily saleable or is such that it may give rise to a liability to pay money or perform any other onerous act; or c) any real property if it is situated outside the Bailiwick of Guernsey.
For the disclaimer to be effective, a notice (containing a description of the property disclaimed) will have to be served by the liquidator within seven days of signing on various bodies including Her Majesty's Receiver General and the Registrar of Companies in Guernsey.
The amendments further provide protections for persons affected by any disclaimer, so that such persons will be able to force the liquidator to make a decision about whether or not to disclaim the property or contract and will be able to apply to the Court for relief, including the vesting of the property in the interested party. The changes also makes it clear that any person who suffers any loss as a result of the disclaimer would then rank as an unsecured creditor of the company. This reform therefore strikes a balance between giving liquidators greater flexibility to unwind unprofitable contracts and ensuring that third parties adversely affected by such provisions still have a right to apply to the Court to preserve their rights as creditors of the company.
Winding up non-Guernsey companies
Under the amended law, there is the power to wind up non-Guernsey companies in instances where:
- such company has been dissolved or has ceased to carry on business or is carrying on business only for the purpose of winding up its affairs;
- such company is unable to pay its debts under section 407 of the Companies Law; or
- the Court is of the opinion that it is just and equitable that such company should be wound up.
The case law in England and Wales (which will be of persuasive authority before the Court in the absence of any specific Guernsey case law) suggests that only foreign companies that have a "sufficient connection" to Guernsey will be wound up in such circumstances. Whilst this additional remedy in the Court's tool box may not be used frequently, it will nonetheless be a useful new remedy for the Court to have.
Audited accounts in a liquidation
The Ordinance amends the current Companies Law so that companies in liquidation will be exempted from the requirement to prepare audited accounts from the time of the appointment of the liquidator. This will ensure liquidators avoid this onerous expense once a company is in liquidation.
Exit from administration
Under the current provisions of the Companies Law, administration can only be brought to an end by the Court. In cases where it is necessary for the company to be wound up after administration, the Court has to bring the administration to an end and make a winding up order. Under the revised law, the Court will have the power to permit dissolution of the company at the same time as discharging the administration order, which will result in procedural simplification, reduced costs and an expedited end of administration process if the circumstances allow.
Duty to report delinquent officers of the company/power to request documents
A duty on administrators will be introduced to make a report to the Registrar of Companies (and the Guernsey Financial Services Commission in relation to companies regulated by it) where such administrators consider there are grounds for making a disqualification order against a present or past officer of the company. Such report will have to be submitted within six months of the administrator vacating office.
The legislative changes have been viewed by the finance industry and insolvency practitioners as positive steps toward improving the insolvency regime in Guernsey, addressing some existing gaps. In part driven by local practitioners including ARIES (the Guernsey branch of INSOL) these reforms will help to ensure that the Companies Law provides insolvency practitioners with the flexibility, tools and powers necessary to perform their functions efficiently and with the interests of creditors in mind. The increase in the powers of insolvency practitioners, for example, particularly in relation to their ability to compel former directors and employees to provide documents or answer questions, have been greatly welcomed at industry level. It is expected that there should be reduced insolvency related costs with administrations, in particular, becoming more cost-effective in certain circumstances. The changes will bring Guernsey in line with jurisdictions such as the UK, the BVI and the Cayman Islands and will serve to greatly reinforce and improve the current insolvency regime under the Companies Law.