There have been a number of recent developments in the area of corporate insolvency law which will impact on Guernsey insolvency procedures. The purpose of this eAlert is to highlight those developments and provide a brief summary of the consequent effects for Guernsey insolvency practitioners and other key stakeholders.
Review of Corporate Insolvency Law in Guernsey
The Commerce and Employment Department has formed a working committee comprised of local insolvency practitioners and lawyers to review Guernsey's insolvency laws, both personal and corporate. At present Guernsey's corporate insolvency law is primarily contained within The Companies (Guernsey) Law 2008 (Companies Law), as amended. The need for a more comprehensive corporate insolvency regime has long been a goal of insolvency practitioners in Guernsey, particularly given the increasing number of insolvency processes and the number of related matters coming before the Royal Court. The goal of the committee is to review all possible options including a stand-alone insolvency law, how prescriptive such a law might be, and whether Guernsey ought to adopt a statutory cross-border insolvency regime. It is envisaged that a "Green Paper" will be released for public consultation and feedback later this year. However, it will pay to be patient as it is likely to be some considerable time before a new regime is actually in place. In the interim liquidators will continue to invoke the court's wide inherent supervisory jurisdiction to ensure companies are effectively wound up and that liquidators "who are officers of the Court are enabled to do what is required of them": see In Re Med Vineyards (in compulsory liquidation)  20 GLJ 7.
Changes to the Companies Law
The States of Deliberation (Guernsey's Parliament) have approved changes to the Companies Law, which will affect the corporate insolvency regime in Guernsey. The key changes are:
- Restoration of a company following dissolution – At present the Companies Law does not make express provision for the restoration to the register of companies that have been dissolved following a voluntary or compulsorily winding up (as opposed to a company which has been struck off the register of companies under Part XX which contains restoration provisions). This lacuna in the Companies Law has caused problems for liquidators who wish to take control of assets discovered after the company has been dissolved. Once a company has been dissolved any assets still held by the company vest in the Crown bona vacantia. The proposed change will remedy this situation and assist liquidators to assert control over the assets of a dissolved company to the benefit of creditors;
- Release of liquidators from liabilities arising from winding up – It is proposed that the court should have the power to grant the release and discharge of a liquidator from liability in respect of his acts or omissions during the course of a winding up (voluntary or compulsory winding up), save for acts of fraud, wilful misconduct or gross negligence. Such an order may be made upon the application of a liquidator and the Court will retain a discretion whether to grant a release, and if so, on what conditions;
- Supervised companies – Notification of applications made "during the course of a winding up" to GFSC - The proposed changes will insert an express provision that a copy of an application made by a supervised company, an entity which is licensed by the GFSC, "during the course of a winding up" must be served on the GFSC. At present the GFSC must only be notified of an application for the winding up of a supervised company. The proposed change will greater scope to the GFSC to "comment" on a proposed interlocutory application; for an example an application by a liquidator for directions concerning the distribution of a company's assets, particularly where regulatory action is being taken or in contemplation against a supervised company.
Rubin v Eurofinance and the Effect on Cambridge Gas
As is now widely known, the majority of the Supreme Court in Rubin v Eurofinance SA  UKSC 46 considered that no special rules should be developed with respect to the recognition and enforcement of judgments made during foreign insolvency proceedings, but that the ordinary conflict of laws rules applied to such judgments. In the course of reaching this determination, the majority disapproved of the actual decision by the Privy Council in Cambridge Gas. Lord Collins, giving the judgment for the majority, stated in paragraph 132:
"It follows that, in my judgment, Cambridge Gas  1 AC 508 was wrongly decided. The Privy Council accepted (in view of the conclusion that there had been no submission to the jurisdiction of the court in New York) that Cambridge Gas was not subject to the personal jurisdiction of the US Bankruptcy Court. The property in question, namely the shares in Navigator, was situate in the Isle of Man, and therefore also not subject to the in rem jurisdiction of the US Bankruptcy Court. There was therefore no basis for the recognition of the order of the US Bankruptcy Court in the Isle of Man."
The order purported to vest Cambridge Gas' shares in Navigator (the insolvent company) in the creditors' committee of Navigator.
Subsequently, there was some question as to whether the principles laid down in Cambridge Gas survived the criticism of Supreme Court, particularly the degree to which it purported to limit the assistance a court could give to a foreign insolvency representative at common law. In its recent decision in In the matter of Saad Investments Company Limited  SC (Bda) 28 Com (15 April 2013), the Bermuda Supreme Court reaffirmed the correctness of its common law jurisdiction to assist foreign liquidators in accordance with the principles laid down in Cambridge Gas. The Bermuda Court held that, at the very least, it has power to assist foreign liquidators by deploying general law remedies generally consistent with those to which a locally appointed liquidator would be entitled under local insolvency legislation. This would be the case even if the legislation itself could not apply to the foreign liquidation and would be defined on a case by case basis.
However, the Bermuda Court went further to say that it regarded the scope of assistance as extending to providing even the remedies available under the local legislation themselves. His Honour Kawaley CJ stated at  that:
"I find that reading Rubin in a straightforward common sense way makes it impossible to conclude that Lord Hoffman's observations in Cambridge Gas about the scope of common law judicial assistance generally are in any way of diminished binding and/or persuasive force. The present application for an examination/production order is made in aid of an application for recognition of winding up proceedings commenced in and liquidators appointed in the place of the foreign debtor's incorporation. I am accordingly still guided by the following observations of Lord Hoffman in Cambridge Gas."
This firm recently appeared for the foreign winding up board of an Icelandic Bank on an application for recognition and assistance in Guernsey. Although it was an ex parte application, the court cited the decision of Saad Investments with approval and considered the decision of Kawaley CJ to be helpful.
It will also be interesting to see how the Guernsey courts deal with the actual decision in Rubin v Eurofinance as regards the correctness of the finding in Cambridge Gas. The Judicial Committee of the Privy Council is the highest court of appeal for Guernsey. Under Guernsey's law of precedent decisions of the Privy Council on appeal from other Commonwealth jurisdictions (such as the Isle of Man) are of persuasive authority where the relevant circumstances do not differ markedly from those in other jurisdictions. Guernsey law largely adopts common law principles of private international law. Decisions of the UK Supreme Court (formerly the House of Lords) are not binding on Guernsey courts, but again insofar as the Guernsey courts follow English decisions on the common law, decisions of the UK Supreme Court carry considerable weight. Therefore, a test case seeking to enforce a foreign judgment in relation to foreign insolvency proceedings is eagerly awaited. In the interim foreign insolvency practitioners will continue to receive assistance from the Guernsey courts in relation to foreign insolvency processes in accordance with the principles of comity and modified universalism.
The UK Supreme Court delivered a significant judgment in BNY Corporate Trustee Services Ltd v Eurosail  UKSC 28. By way of recap, Eurosail was a SPV set up in July 2007 and funded by floating rate loan notes. A class of investor note holders sought an order that Eurosail had committed an event of default on the basis that Eurosail was unable to pay its debts within the meaning of section 123(2) of the Insolvency Act 1986 (UK). Section 123(2) is in legal parlance referred to as the "balance sheet test" and provides that a company is unable to pay its debts if it is proved to the satisfaction of the court that the value of its assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities.
The Supreme Court upheld the Court of Appeal's finding that Eurosail was solvent and dismissed the appeal of the note holders. In the Court of Appeal judgment Lord Neuberger, in seeking to avoid a literal interpretation of the balance sheet test which would result in otherwise solvent companies prone to cyclical trading being wound up, stated that a company would have to have reached a "point of no return" before it could be wound up such that the director would have to "put up the shutters". In the leading judgment of the Supreme Court Lord Walker rejected the "point of no return test" and stated that it "should not pass into common usage as a paraphrase of section 123(2)". Lord Walker stated that it is important to "proceed with the greatest caution in deciding that the company is in a state of balance-sheet insolvency". Whether or not a company satisfies the balance-sheet insolvency test depends on the evidence available as to the circumstances of that particular case.
In Guernsey a company may be wound up by the Royal Court if inter alia it is "unable to pay its debts". A company will be deemed to be unable to pay its debts in the event it is proved, to the satisfaction of the court, that the company fails the "solvency test". The solvency test is defined at section 527 of the Companies Law and is based on section 123 of the Insolvency Act. In short, section 527 provides that a company is insolvent if it is unable to pay its debts as they become due and the value of the company's assets is less than the value of its liabilities. Therefore the decision of the Supreme Court in Eurosail will be of persuasive force as regards the Royal Court's approach in determining whether a Guernsey company passes the insolvency test. On hearing such an application, the Royal Court will be urged to consider each matter on a case by case basis and exercise the greatest caution in determining whether a Guernsey company is balance sheet insolvent, particularly where there are significant long term liabilities (prospective and contingent liabilities).
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.