Setting aside transactions on the insolvency of a Jersey company
05 November 2020
Under Jersey law, it is possible that certain transactions entered into by a Jersey company may be set aside if the company subsequently becomes subject to Jersey insolvency proceedings.
This briefing highlights the various ways in which transactions may be set aside if insolvency proceedings are commenced against a Jersey company.
Jersey insolvency proceedings
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 under 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.
Transactions at an undervalue
What is a transaction at an undervalue?
A transaction may be challenged for being a transaction at an undervalue if:
- it was entered into during the period of 5 years before the start of the creditors' winding up or désastre;
- the company received no consideration under the transaction or the value of the consideration that the company did receive was significantly less than the value of the consideration that the company provided; and
- the company was insolvent when it entered into the transaction or became insolvent as a result of entering into the transaction.
The need to consider transactions at an undervalue may arise in a corporate transaction where a company sells an asset at significantly less than its market value. Transactions at an undervalue may also need to be considered where a company provides a guarantee or third party security interest and the value obtained by the company from granting such a guarantee or third party security interest is questionable or unclear.
If the company entered into the transaction with a connected person or an associated person, then the insolvency of the company is effectively presumed.
To avoid a setting aside order, it is therefore necessary to prove that the company was not insolvent when it entered into the transaction and that it did not become insolvent as a result of the transaction.
Where an arrangement is found to be a transaction at an undervalue, the court may make such an order as it thinks fit to restore the position to what it would have been if the company had not entered into the transaction.
However, there are limits to the scope of any court order. For example, no order may prejudice an interest in property that was acquired from a person in good faith and for value.
The court may not make a setting aside order if the court is satisfied that:
- the company entered into the transaction in good faith for the purpose of carrying on its business; and
- at the time the company entered into the transaction, there were reasonable grounds for believing that the transaction would be of benefit to the company.
What is a preference?
An arrangement with a company may be challenged for being a preference if:
- it was entered into during the period of 12 months before the start of the creditors' winding up or désastre;
- the recipient of the preference is a creditor of the company or a surety or guarantor for a liability of the company;
- the company does something or suffers anything to be done that has the effect of putting the recipient of the preference into a position which is better than the position the recipient would have been in if that thing had not been done;
- the company was insolvent when the preference was given or became insolvent as a result of giving the preference; and
- the company was influenced, in deciding to give the preference, by a desire to put the recipient into a better position.
The need to consider preferences may arise in banking transactions where, for example, a debt is repaid before its scheduled maturity or where additional security is given to secure existing indebtedness.
Where the recipient of a preference is connected with or an associate of the company, the insolvency of the company is effectively presumed.
To avoid a setting aside order, it will therefore be necessary to prove that the company was not insolvent when the preference was given and that it did not become insolvent as a result of the preference being given.
In addition, where the recipient of a preference is connected with or an associate of the company, it is presumed that the company was influenced by a desire to prefer unless it can be proved otherwise.
Where an arrangement is found to be a preference, the court may make such an order as it thinks fit to restore the position to what it would have been if the company had not given the preference.
Again, there are limits to the scope of any setting aside order. For example, no order may prejudice an interest in property that was acquired from a person in good faith and for value.
When is a company insolvent?
It can be seen from the above that the insolvency of the company at the time or as a consequence of the relevant transaction or arrangement is an important factor.
For the purposes of both the Company Law and the Bankruptcy Law, a company is insolvent when it is unable to pay its debts as they fall due.
Extortionate credit transactions
What is an extortionate credit transaction?
An arrangement with a company is susceptible to challenge as an extortionate credit transaction if:
- it is entered into within the three years preceding the creditors' winding up or désastre of the company; and
- if, having regard to the risk accepted by the person providing the credit, the terms of the transaction:
(a) were such as to require grossly exorbitant payments to be made in respect of the provision of the credit; or
(b) otherwise grossly contravened ordinary principles of fair dealing.
If an application is made by the Viscount or liquidator, the onus is on the provider of the credit to prove that the transaction was not an extortionate credit transaction.
Where an arrangement is found to be an extortionate credit transaction, the court may (among other options) make an order to:
- set aside the whole or part of any obligation created by the transaction;
- vary the terms of the transaction; and
- require a person who was a party to the transaction to repay amounts paid to them.
Disclaimer of onerous property
What property may be disclaimed?
The property of a company may be disclaimed by the Viscount or liquidator:
- within six months of the start of the creditors' winding up or désastre;
- where the property is:
(a) movable property;
(b) a contract lease (being a lease of Jersey real property granted for over 9 years); or
(c) immovable property situated outside Jersey,
that 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 and includes an unprofitable contract.
Any person sustaining loss or damage as a consequence of the disclaimer may prove as a creditor for the loss or damage in the applicable insolvency proceedings.
Pauline action – defrauding creditors
What is a Pauline action?
A Pauline action is a legal action that may be brought by a creditor.
Under this customary law action, a creditor can seek to reverse a transfer of property by the company to a recipient provided that:
- the transfer of property was made when the company was insolvent or the company became insolvent as a consequence of the transfer; and
- the transfer of property was made with the intention of prejudicing creditors and prejudice has been caused by the transfer.
If the transfer of assets was made for value, then the creditor must also show that the recipient was aware that the real purpose of the transaction was to prejudice creditors.
Unlike other matters considered in this briefing, the company does not need to be the subject of insolvency proceedings in order for a Pauline action to be brought.
The recipient can be ordered to surrender the original assets or their proceeds of sale.
A change of position defence is available to an innocent recipient who has changed his or her position in good faith. The change of position defence looks at whether it would be inequitable for the recipient to return the property in all the circumstances.
Hardening periods – Jersey security
English law position
Under English law, there are hardening periods relating to floating charges.
In broad terms, under section 245 of Insolvency Act 1986, a floating charge is invalid except to the extent that it secures "new monies" advanced at the same time as or after the creation of the floating charge.
In order to be set aside, the floating charge must have been granted in the period of 12 months ending with the onset of the chargor’s insolvency.
If the floating charge was granted to a connected person, the hardening period is extended to a period of two years.
Jersey law position
There is no equivalent of this hardening period under Jersey law.
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