Guernsey: Guernsey Insolvency Law Reform

Last Updated: 25 September 2019
Article by Andrea Harris

Introduction

As a result of a consultation with industry bodies and professionals that has spanned several years, the States of Guernsey have drafted The Companies (Guernsey) Law, 2008 (Insolvency) Amendment Ordinance, 2019 ("the Ordinance") which introduces a number of proposed additions to the Companies Law.

When these reforms were proposed in 2017, the Committee for Economic Development stated that 'effective, equitable and clear insolvency laws are an essential ingredient of a modern economy. Exit strategies for business are an increasingly important factor when choosing where to establish a venture.....since they enable creditors to understand at the outset how a liquidation or administration will progress. In turn this can lead to willingness on the part of credit providers to lend in a jurisdiction; so allowing businesses improved access to finance to facilitate growth1.'

The Ordinance aims to enhance and streamline the insolvency process for stakeholders in Guernsey. The Ordinance also introduces Company Insolvency Rules for matters of practice and procedure to be followed in, or in connection with, dissolution, winding up, liquidation or administration.

Various areas of the proposed changes are explored further below.

1. Changes to the Administration Regime

The present regime does not provide an administrator to make a distribution to any creditor. The proposed Ordinance allows an administrator to make a distribution to a secured or preferred creditor without reference to the Court. Further, at the end of an Administration, the current procedure requires the administrator to apply for a discharge of the administration order and obtain an order to place the company into compulsory liquidation to enable its affairs to be finalised. The Ordinance will enable the administrator to make an application to the Court for the subject company to be dissolved on a specified date.

These changes will assist in reducing the cost of administration procedures as they remove the requirement and costs of a liquidation application where an element of Court involvement, which also requires Advocates to act on behalf of the administrator in both circumstances.

2. Independent Liquidator for Insolvent Voluntary Liquidations

Unlike many other offshore jurisdictions, Guernsey does not currently distinguish between solvent and insolvent voluntary liquidations. The Ordinance requires that, if a voluntary liquidation will not be solvent, or becomes insolvent, the members may not appoint any of the following as liquidator:-

a. director, former director, shadow director, manager, secretary or member of the company; or

b. the spouse, child or step-child of any of the persons referred to in paragraph a.

This will afford an additional layer of protection to creditors whereby an independent liquidator will be required to be appointed to provide objective oversight of the liquidation procedure, and review of the company's affairs. This will bring Guernsey in line with a number of other offshore jurisdictions which have already implemented such legislation.

3. Liquidator May Require Statement of Affairs ("SoA")

The requirement to submit a SoA currently only applies in the administration regime in Guernsey. The Ordinance replicates the administration provisions in respect of a liquidation, and affords a liquidator the power to require a SoA from any past or present officer of the company, and employees of the company within the past year who the liquidator opines is capable of providing the information requested. There are also provisions requiring those who have taken part in the formation of the company in the year prior to liquidation to furnish a SoA.

4. Additional Powers for Office Holders

Liquidators currently do not have the power to disclaim onerous property. The Ordinance will allow a liquidator to disclaim any unprofitable contract, other property of the company which 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 any real property if it is situated outside the Bailiwick of Guernsey. Introducing these provisions for liquidators will enable a more efficient approach to dealing with onerous assets, such as illiquid investments, or burdensome contracts, and in most instances, should result in a lower cost of the liquidation procedure in circumstances where such issues arise.

Administrators and liquidators will also be able to apply to the Court in respect of transactions at an undervalue (within 6 months of the relevant date, or 2 years if it involved a related party), and extortionate credit transactions (within 3 years of the relevant date). Such powers to apply to the Court on these grounds were not previously available. The Ordinance will enable consideration of further potential causes of action / recovery against office holders in relevant circumstances. It may also be viewed as a deterrent to company officeholders.

5. Insolvency Rules

Guernsey does not currently have any insolvency rules. The Channel Islands INSOL membership body, ARIES, issued the Guernsey Insolvency Practice Statements ("GIPs") which have been available since May 2017, and provide guidance on several key areas but are not mandatory for use by practitioners. The proposed insolvency rules will codify, inter alia, a proof of debt regime, and prescribe the form and content of the notice of disclaimer of onerous assets. The Ordinance envisages the formation of a Company Insolvency Rules Committee with whom the States will consult prior to introducing any specific rules, which specifies the proof of debt and disclaimer regime, but contemplates additional rules recommended by the Committee to the States of Guernsey, in due course. The introduction of Company Insolvency Rules should have a positive impact on the Guernsey insolvency regime by providing procedural rules for all practitioners to provide clarity to stakeholders with regard to proof of debt procedure and other matters that may be considered in due course as the rules evolve.

6. Audit Exemption

Currently, there is no exemption to a liquidator from being obliged to file an annual audit. The proposed change will allow an exemption for an audit from the commencement of the financial year in which the liquidator is appointed, until the Company's final financial year prior to dissolution. This is positive as it means that stakeholders' assets do not need to utilised to meet the cost of an audit which essentially serves no purpose, once a liquidator is appointed.

Conclusion

The changes being introduced by the Ordinance are aimed at improving and modernising the current insolvency law to afford additional protection to stakeholders. It is envisaged that the Ordinance will be passed and enacted by the end of 2019.

Footnote

1 The States of Deliberation of the Island of Guernsey, Committee for Economic Development, Insolvency Review – Amendments to the Companies Law, 9 February 2019

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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