Guernsey: New Companies Law - Distributions And The Solvency Test

Last Updated: 25 September 2008

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions