Originally appeared in Finance, Offshore – Winter 2012
The main corporate insolvency procedures available in Guernsey and Jersey are summarised below.
Creditors Winding Up
Both a Guernsey "voluntary winding up" and a Jersey "creditors' winding up" are initiated by a shareholders' resolution. In Jersey this is immediately followed by a creditors meeting, and unless the creditors nominate a liquidator, the company appoints a liquidator who is then responsible for realising the company's assets and discharging its liabilities. In Guernsey, the liquidator is appointed by ordinary resolution of the Company. Costs incurred by the liquidator in a creditors' winding up are payable out of the company's assets in priority to all other claims. Detailed rules govern the rights of secured and unsecured creditors, the proving of debts and their order of payment, the setting off of debts and interest payable.
Once the winding up is concluded, the liquidator presents his report to the members and creditors and, subsequently, the company is struck off the register. The court will have nothing to do with a voluntary or creditors' winding up at all unless something happens to cause it to be involved, such as a dispute about the validity of a debt or the liquidator seeking to set aside prior transactions.
Compulsory Winding Up
Compulsory winding up, on the other hand, is very much a court-driven process in Guernsey. (There is no equivalent process in Jersey.) Companies can be compulsorily wound up by the court for a number of reasons including if, amongst other matters, they are unable to pay their debts of over £750 as they fall due. The first step in such an action would be for the creditor to serve a written demand for its debt. If the debt is not paid within 21 days the company will be deemed to be unable to pay its debts without further proof.
The creditor applying for the winding up may nominate his choice of liquidator and may need to agree funding in advance if there are insufficient assets in the company to meet the liquidator's fees. The nominated liquidator is sworn directly into office by the court in Guernsey and must then proceed to conduct the winding up. At the conclusion of the process, the liquidator's accounts are examined by a court-appointed Commissioner, the assets are distributed according to the priority of respective claims, and the company is dissolved.
Misconduct in managing the company's affairs in the period leading up to the liquidation can lead to proceedings for a directors' disqualification order. Also persons who allow a company to continue trading when they know it is insolvent may be made personally liable for wrongful or fraudulent trading.
Liquidators may also apply to the court to set aside transactions which they suspect amount to unlawful preferences. A payment or other arrangement which amounts to a preference is liable to be set aside if it was made in Guernsey within the last 6 months and in Jersey within the last 12 months prior to the commencement of the winding up. In Guernsey, in the case of payments to or arrangements made with persons connected to the company, this period is extended to 2 years.
Liquidators may apply to the court to set aside transactions at an undervalue which were made within the preceding 5 years. (Certain other transactions, such as extortionate credit transactions are also liable to be set aside). Customary law doctrines can sometimes be deployed to unwind fraudulent transactions which may have occurred outside these periods.
In Jersey the main insolvency procedure utilised by creditors is an application to the Court that the company be declared "en désastre". An application for a desastre may be made by a creditor with a claim of not less than £3,000 or by the company itself. The application must state that the company is insolvent and that it has or is believed to have realisable assets. On the making of the declaration, all the company's property vests in an official of the court known as the Viscount.
The Viscount has wide powers in the winding up of the company's affairs including carrying on the company's business as far as is expedient for the beneficial disposal of the business and making any compromise or arrangement with the company's creditors or debtor's which he considers expedient.
Once again costs incurred by the Viscount in a désastre are payable out of the company's assets in priority to all other claims and detailed rules govern the rights of secured and unsecured creditors, the proving of debts and their order of payment, setting off of debts and interest payable. The Viscount is also able to apply to set aside certain transactions in the same way that a liquidator may do so.
When the Viscount has realised all the company's property, the Viscount must supply all creditors and a court official with a report and accounts relating to the désastre and pay the creditors whatever final dividend is due. The Viscount must notify the Registrar of Companies of the date on which the final dividend is paid and subsequently the company will be dissolved. A very similar désastre procedure is also available in Guernsey.
An administration order is an alternative to winding up in Guernsey. It is not available in Jersey although Jersey companies may sometimes be placed into English administration. The procedure can be used whenever there is a possibility the company could survive as a going concern or, if this is not possible, where nevertheless the administration process is likely to lead to a more advantageous realisation of assets than an immediate liquidation. In most cases it will be the company itself or a creditor who applies for the administration order.
The person making the application for an administration order is entitled to nominate their preferred administrator. Once sworn in by the court, the administrator is responsible for managing the business and will either nurse it back to health (in which case the administration will come to an end) or, if this is not possible, the administrator will realise the assets as best they can and then cause the company to be wound up.
It is not generally possible to place a Guernsey or Jersey company into receivership or to appoint a receiver over assets. The only exception to this is in respect of Guernsey protected cell companies, where there is a specific procedure for receivership of individual cells. In appropriate cases, however, the Guernsey and Jersey courts are prepared to recognise receivers appointed overseas and, where necessary, to grant orders to assist them in discharging their functions.
Order of the Court
A company may also be wound up or dissolved by order of the court on a variety of grounds, for example, that it is just and equitable or in the public interests to do so or on grounds of unfair prejudice or as part of a scheme of arrangement.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.