Guernsey: 2020 Heralds New Insolvency Law Changes For Guernsey

On 15 January 2020 the States of Guernsey passed the Companies (Guernsey) Law, 2008 (Insolvency) (Amendment) Ordinance, 2020, making Guernsey an even more desirable forum for insolvency proceedings. The new legislation is set to modernise Guernsey insolvency law, bringing the jurisdiction into line with not only the UK but other offshore jurisdictions such as the British Virgin Islands and the Cayman Islands. These changes will affect all new liquidations and administrations and will come into force when regulations to that effect are made by the Committee for Economic Development.

Having had the opportunity to advise on the new law through ARIES (the pan-Channel Islands industry body) and via the insolvency rules committee I believe that the necessary legislative tools are now in place to ensure that liquidators and administrators can quickly and efficiently gather in the assets of insolvent companies and return them to the creditors.

Some of the more important new tools are set out below:-

A members' voluntary winding up

One of the more unique aspects of Guernsey insolvency law is the ability of members to resolve (by a special resolution) to wind up their company - with creditor ratification - even when this company is insolvent. Neither the UK nor any other major offshore jurisdiction bestows such a power on the members of a company. The advantages of such a power are clear: it enables a company to be quickly and cheaply wound up without needing to involve the creditors or a professional insolvency practitioner. There are also some obvious drawbacks however: the creditors lose visibility over, and control of, the process and there is nothing to prevent a director of a company winding up that company even though that company may be heavily insolvent as a result of the acts and omissions of that director.

This potential lacuna has been remedied by the new amendments of the law which now specify that, where a company is to be placed into a members' voluntary winding up, the directors must declare the company is able to satisfy the statutory solvency test. If they are unable to make that declaration, then the company must be wound up by an independent third party (unconnected to the directors or members of the company) which will normally be a professional insolvency practitioner. This ensures that where a company is insolvent, and the creditors of that company are at risk of being prejudiced, an independent insolvency professional will be appointed to make sure that creditors are adequately protected and that the assets of the company are preserved pending distribution to the creditors. 

Furthermore if a declaration of solvency is not signed by the directors, then the liquidators must call a meeting of all creditors within one month of their appointment unless in their opinion there are no assets for distribution.

The power to demand documents and interview individuals

Until these new amendments there was no statutory power or authority allowing a liquidator to demand documents from directors or employees of the company, or to interview directors or former directors. There was some common law authority outlined in Re Med Vineyards allowing a director to be interviewed but the extent of such powers were uncertain and had recently been doubted by Lieutenant Bailiff Marshall QC in Re X (a Bankrupt), Brittain v JTC (Guernsey) (2015).  All these doubts have been swept aside by clear powers outlined in the amendments.

A liquidator can now demand (by court order if necessary) that all directors, former directors, employees and those who were employed by the company within the past 12 months (preceding the commencement of the liquidation) must provide all the documents that the liquidator may reasonably require to perform their duties.  Furthermore the liquidator can now apply to the Guernsey Court to interview an officer or former officer of the company about matters such as the formation of the company, its business and affairs, and his or her conduct or dealings in relation to the company.

Additionally liquidators have now been granted the same powers as administrators to require a statement of affairs (summarising assets and liabilities and providing the names of creditors) from past and present officers of the company, present employees and those employed in the year preceding the commencement of the liquidation. 

All of the above give liquidators considerable powers  to assist the interests of creditors and shareholders and brings Guernsey substantially in line with the UK and other major commonwealth jurisdictions.

The power to disclaim

Again, this is a new power which has been copied almost word for word from similar UK legislation. The main purpose behind it is to allow a liquidator to release the company from unprofitable contracts as well as responsibility for property (including real property in Guernsey) that cannot easily be sold or is likely to incur liabilities for the liquidator. A good example might be a rusting ship moored in the harbour which is incurring storage fees and which is practically valueless.

For the disclaimer to be effective, a notice must be served by the liquidator on various government entities including Her Majesty's Receiver General, as well as any person interested in the property to be disclaimed and any person who may incur liability in respect of the disclaimed property.

There are protections in place for persons affected by any disclaimer in that they can force the liquidator to make a decision about whether to disclaim the property or contract or not, and they can also apply to the Court for relief including the vesting of the property in the interested party.  The new legislation also makes it clear that any person who suffers loss as a result of the disclaimer would then rank as an unsecured creditor of the company.

Transactions at undervalue and exorbitant credit transactions

One of the more obvious gaps in recent Guernsey insolvency legislation has been the lack of a provision allowing a liquidator to claw back sums from third parties where assets or monies have been sold and/or diverted to them for no or little consideration. In recent years liquidators in Guernsey have had to rely on a customary law device known as a Pauline action (or action paulienne) which has its origins in Roman and Justinian law and which, in the UK, has legislative effect in section 423 of the Insolvency Act 1986 . This customary law principle, which allows a liquidator to reclaim assets which have been fraudulently transferred by a company to a third party in order to place assets beyond the reach of creditors, was confirmed in the Jersey case of Re Esteem JLR 53 (2002) and referred to in the Guernsey case of Flightlease Holdings (Guernsey) Limited (2005) by Lieutenant Bailiff Southwell as well as the Deputy Bailiff in Batty v Bourse GLR 54 [2017].

However, the new law has incorporated a section modelled on section 238 of the UK Insolvency Act 1986,which provides the Guernsey Court with the jurisdiction to make various orders against third parties where property has been transferred to them for no consideration, or for consideration which is considerably less than that provided by the third party.

There are three important criteria that must be met before the Court can take action:-

  • The transaction must have occurred (looking backwards) within six  months (or two  years where the third party is connected to the company) of the company entering insolvency;
  • The company must be insolvent at the time of the transaction or as a result of it; and
  • The Court will not take action if the transaction at undervalue was entered into in good faith for the purposes of carrying on the business of the company and where there were reasonable grounds for believing the transaction would be of benefit to the company.

The Guernsey Court can make various orders including that property be returned to the company but cannot take action against a third party who had acted in good faith, paid full value and who had no knowledge of the circumstances giving rise to the action, except where these third parties were party to the transaction themselves.

It is worth noting that Pauline actions will still be useful to liquidators or administrators where the transactions lie outside the six month or 2 year period outlined above.

In relation to extortionate credit transactions, the provisions will apply to those transactions which occur within 3 years of the insolvency and which involve grossly exorbitant terms in relation to the provision of credit and/or grossly offends the principles of fair dealing. The Guernsey Court has the power to set aside the transactions and/or amend the terms of the provision of credit.  As with transactions at undervalue these provisions are closely based on the UK Insolvency Act 1986 in this case section 244.  There has been very little case law in the UK on the meaning of "grossly exorbitant" and "grossly contravened ordinary principles of fair dealing" although the leading academic texts suggest that the Courts will only impugn a credit transaction where it is grossly unfair and the transaction is one which no reasonable company, in normal circumstances, would agree to.

Further administrator powers- distributions to creditors, early dissolution and creditor meetings

One of the more useful changes to the law in relation to administrations has been the express power to make distributions to secured and preferred creditors without needing court approval. Previously there was some doubt as to whether an administrator could make a distribution to a secured creditor, despite the fact that the Guernsey Companies Law specifies that an administration order will have no effect on the rights of secured creditors. This ambiguity has now been cleared up and distributions can even be made to unsecured creditors with Court approval.

The new law also now allows a company in administration, where there are no assets to distribute to creditors, to go straight into dissolution without the need for an expensive interim liquidation.   An administrator could presumably now distribute all the assets to the secured and preferred creditors and, if there are no assets left over for unsecured creditors, apply immediately to go into dissolution. This could avoid a considerable amount of costs.

A further protection for creditors has been introduced with the requirement for the administrators to send a notice to all creditors inviting them to a meeting and explaining the aims and likely process of the administration. This meeting has to be held within 10 weeks of the date of the administration order, unless the Court orders otherwise.

Winding up non-Guernsey companies

The power now exists (similar to section 221 of the UK Insolvency Act) to wind up non-Guernsey companies. According to the legislation, a foreign company can be wound up where:

  • it has ceased to carry on business or is carrying on business only for the purpose of winding up its affairs;
  • it is unable to pay its debts under section 407 of the Guernsey companies law;
  • or the Court is of the opinion that it is just and equitable that the company should be wound up.

The case law in the UK (which is of persuasive authority in Guernsey) suggests that only foreign companies that have a "sufficient connection" to Guernsey will be wound up here, and due to the nature of the financial business in Guernsey, it is difficult to conceive of many circumstances in which that will not occur. Clearly, what a "sufficient connection" is will need to be defined and tested, and will undoubtedly depend on the facts of each case.

Supplies of gas, water, electricity and IT

This amendment again brings Guernsey into line with the UK in relation to the maintenance of essential services, and allows the Insolvency Committee to make rules preventing the provider of essential services, such as electricity and water, making it a condition of continued supply that the company in liquidation pay all previous invoices up front.  However, these providers can ask that the liquidator or administrator personally guarantees payment of all future invoices post the commencement of the liquidation.

This strikes the balance of protecting these service providers in relation to future payments but stops them from threatening to withhold services unless all previous invoices are paid.

Duty to report delinquent officers of the company

A duty has now been imposed on both liquidators and administrators to make a report to the Registrar of Companies and the Guernsey Financial Services Commission (as regards supervised companies) where they consider that there are grounds for making a disqualification order against a present or past officer of the company. This report must be submitted within six months of the administrator or liquidator vacating office.

Conclusion

The new changes are to be welcomed and have shown that Guernsey is a modern progressive jurisdiction which is prepared to arm insolvency office holders with the necessary tools and powers to tackle, draw in and preserve the assets of an insolvent company for the benefit of creditors. Former directors can no longer refuse to provide documents or answer questions and third parties that hold diverted company assets can now be more be forced to return those assets. Administrations are also likely to be cheaper as administrators can now distribute assets to secured and preferential creditors and then place the company straight into dissolution if there no further assets to distribute and liquidators can now rid themselves of unwanted contracts and property. All of the above will likely save money and preserve assets for creditors, and is a welcome and substantive change which finally brings Guernsey into line with many other Commonwealth jurisdictions. 

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.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please 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