ARTICLE
25 September 2008

New Companies Law - Distributions And The Solvency Test

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Ogier

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Ogier provides legal advice on BVI, Cayman, Guernsey, Irish, Jersey and Luxembourg law. Our network of locations also includes Beijing, Hong Kong, London, Shanghai, Singapore and Tokyo. Legal services for the corporate and financial sectors form the core of our business, principally in the areas of banking and finance, corporate, investment funds, dispute resolution, private equity and private wealth. We also have strong practices in the areas of employee benefits and incentives, employment law, regulatory, restructuring and corporate recovery and property. Our corporate administration business, Ogier Global, works closely with Ogier's partner-led legal teams to incorporate and administer a wide variety of vehicles, offering clients integrated legal and corporate administration services. We have the knowledge and expertise to handle the most demanding and complex transactions and provide expert, efficient and cost effective services to all our clients.
This memorandum has been prepared for the assistance of our clients in connection with the provisions relevant to distributions and the solvency test under the Companies (Guernsey) Law, 2008 (the “Companies Law”).
Guernsey Wealth Management

This memorandum has been prepared for the assistance of our clients in connection with the provisions relevant to distributions and the solvency test under the Companies (Guernsey) Law, 2008 (the "Companies Law"). It is intended to provide only a summary of the main legal and general principles and it is not intended to be comprehensive in scope. It is strongly recommended that you seek specific legal advice on such matters and we would be pleased to assist in this respect. A series of briefings on other specific aspects of Guernsey companies has been produced by Ogier and is available on our website www.ogier.com. Transitional provisions have also been made (a separate briefing addresses the operation of these).

The memorandum has been prepared on the basis of the law and practice in Guernsey as at 1 July 2008.

Introduction

The Companies Law came into full force on 1 July 2008. One of the most significant changes introduced by the Companies Law is in relation to share capital and distributions.

Historically, companies legislation in many jurisdictions around the world (including Guernsey) placed restrictions on what could be done with share capital. The intention was to ensure that there was a pool of money on which creditors could rely. As modern practice evolved the protection provided by such regimes became more theoretical than real. The Companies Law has updated the Guernsey law in this regard to introduce greater flexibility in relation to maintenance of share capital.

In summary there is no obligation to maintain any specific amount of share capital and, under the Companies Law, a Guernsey company is free to distribute its money or property as it wishes subject to one important caveat.

The caveat is that the directors of the company must be satisfied that immediately after making that distribution the company will satisfy a statutory solvency test.

Evidently this is in addition to any restrictions contained in the relevant company's memorandum and articles and it may be that a number of companies will now wish to update these documents to take advantage of the greater flexibility introduced by the Companies Law.

What is the Solvency Test?

The solvency test is set out at section 527 of the Companies Law and contains two key elements. Firstly, the company must be able to pay its debts as they become due and secondly the value of the company's assets must be greater than the value of its liabilities. Companies which are "supervised companies" for the purposes of the Companies Law (which essentially means entities licensed by the Guernsey Financial Services Commission in respect of banking, fiduciary, insurance or investment business in Guernsey) must also satisfy additional requirements arising under the applicable regulatory legislation.

In determining whether a company's assets are greater than its liabilities the directors must have regard to the most recent accounts of the company and all other circumstances which the directors know or ought to know affect (or may affect) the value of the company's assets and its liabilities. The directors may rely on valuations of assets or estimates of liabilities that are reasonable in the circumstances.

Distributions and Dividends

The incurring of a debt or the direct or indirect transfer of money or property other than the company's own shares to or for the benefit of a member whether by means of a purchase of property, the redemption of or other acquisition of shares, a distribution of indebtedness or by some other means is a distribution for the purposes of the Companies Law.

A dividend is any distribution (whether in the form of money or other property) other than a distribution by way of: " an issue of bonus shares;

  • a redemption or acquisition of any of the company's shares;

  • financial assistance for the acquisition of the company's own shares; or

  • a distribution of assets to members for the purposes of its winding up or pursuant to an administration or receivership order (or in the case of a cell of a protected cell company a distribution of assets to members for the purposes of termination of the cell).

Procedure for Making Distributions

The directors of a company may authorise a distribution if such distribution satisfies any relevant requirement in the company's memorandum and articles and if they are satisfied on reasonable grounds that immediately after the distribution the company will satisfy the solvency test. The directors must certify their opinion in writing and state the grounds for it and the certificate must be signed on their behalf by at least one of them. The one exception to this is that distributions by way of the redemption of shares made by open-ended investment companies do not require director certification (although the solvency test must still be satisfied).

If after the distribution is authorised and before it is paid, the board ceases to be satisfied on reasonable grounds that the company would satisfy the solvency test immediately after the distribution was made, the distribution is deemed not to have been authorised.

In the case of distributions which are dividends they may be of such amount and may be paid to such members at such time as the board thinks fit.

Recovery of Distributions

If it transpires that a distribution was made to a member at a time when the company did not immediately after distribution satisfy the solvency test the distribution may be recovered from such member except to the extent that the member received the distribution in good faith without knowledge of the company's failure to satisfy the solvency test, the member has altered his position in reliance on the validity of the distribution and it would be unfair to require payment in full or at all.

To the extent that any distribution is not recoverable from members, directors may be personally liable to the company if they have voted in favour of a distribution in circumstances where the correct procedures relating to the distribution were not followed or when there were no reasonable grounds for believing that the company would satisfy the solvency test at the relevant time.

Directors of open-ended investment companies are exempt from the provisions relating to such personal liability in respect of redemption of shares.

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.

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