The Companies (Jersey) Law 1991 (the "CJL") derives many of its provisions from the equivalent UK Companies Act. Article 58 of the CJL historically provided for a prohibition on unlawful financial assistance, similar to that set out in section 151 of the UK Companies Act. As in the UK, the consequences of the giving of unlawful financial assistance were severe. If a Jersey company gave financial assistance in contravention of the CJL, such company and any officer who was in default was guilty of a criminal offence. In addition, the transaction constituting the financial assistance would be unlawful and could therefore be void. This provision often proved problematic. However, with effect from 22 January 2008, the CJL has been amended and the giving of financial assistance is no longer unlawful in Jersey. This is a positive step, underlining Jersey's commitment to ensuring that its legal and regulatory framework are continually adapted so that Jersey remains in the forefront of the offshore jurisdictions.
Prior to 22 January 2008, Article 58(1) (a) of the CJL provided that:
- where a person was acquiring or proposing to acquire shares in a Jersey company, it was not lawful for that company or any of its Jersey subsidiaries to give financial assistance directly or indirectly for the purpose of that acquisition before or at the same time as the acquisition took place; and
- where a person has acquired shares in a Jersey company, and any liability has been incurred in respect of such acquisition, it was not lawful for the Jersey company or any of its Jersey subsidiaries to give financial assistance directly or indirectly for the purpose of reducing and discharging the liability so incurred.
- Article 58 of the CJL was similar but not identical to section 151 of the UK Companies Act;
- Article 58 of the CJL did not contain examples of financial assistance equivalent to those set out in section 151 of the UK Companies Act;
- the CJL did not contain any equivalent to the "principle purpose" exemption contained in the UK Companies Act;
- Article 58 of the CJL set out a "whitewash" procedure which was a simpler version of that contained in section 151 of the UK Companies Act.
It is notable that, unlike the UK, there was no express requirement for a statutory declaration or an auditor's report. The comparative ease meant that it was best practice in Jersey to follow the whitewash procedure if there was any doubt as to whether or not a transaction constituted unlawful financial assistance.
Change In The Law
The Companies (Regulations No. 2) (Jersey) Regulations 2008, which came into force on 22 January 2008, removed the prohibition on unlawful financial assistance. Therefore, a Jersey company may give financial assistance in connection with the acquisition of its shares or the discharge of financing related to a prior acquisition of its shares. Importantly, Article 58 as amended makes it clear that the removal of the statutory prohibition on unlawful financial assistance does not result in any prior common law prohibition being revived.
However, the giving of financial assistance, whilst itself lawful, may give rise to other concerns.
Many actions which constitute financial assistance may also give rise to concerns about lack of corporate benefit. Financial assistance often involves a company giving support to its shareholders or potential shareholders with no specific benefit flowing through to the company itself. Given that Article 74 of the CJL sets out a statutory fiduciary duty of directors which expressly refers to the directors having to act in the best interests of the company, it may be necessary, in some circumstances, to follow the sanction procedures set in Article 74 (2) of the CJL. This involves (a) the company satisfying a solvency test that it is able to meet its debts as they fall due immediately following the action which gives rise to the concern and (b) all shareholders providing a sanction or consent to such action. Notably, there is no requirement for the sanction to be put in place before the financial assistance is given, removing one of the major concerns relating to unlawful financial assistance, notably that of timing and the inability to ratify after the event;
Financial assistance may result in value being passed by a Jersey company to its shareholder which could give rise to concerns that there may be a distribution, particularly given the English case of Aveling Barford Limited v Perion Limited (ChD 1989)  BCLC 626, 5 BCC 677). In that case, a company entered into a sale of assets at an undervalue to another company controlled by a common sole beneficial owner. It was held by the English courts that such action could constitute an indirect distribution. Therefore, if a company was not in a financial position to be able to make such a distribution in accordance with the distribution rules under Article 114 and 115 of the CJL, it may be considered unlawful. This could result in (a) the directors being personally liable to reimburse the company for such unlawful distribution, and (b) any recipient on notice of such breach holding the distribution monies on a constructive trust on behalf of the company.
There are current proposals to amend the CJL to allow a Jersey company to make distributions out of any sources (save for the nominal share account and the capital redemption reserve).
This will be subject to the directors who approve the distribution making a prior statement of solvency. However, for the period before this change takes effect, there are transitional provisions which will allow a company to give financial assistance, secure in the knowledge that this will not constitute a distribution. The transitional procedure is also remarkably similar to the old financial assistance whitewash procedure in that it requires (a) a prior special resolution and (b) a statement of solvency to be given by the directors approving the financial assistance, confirming that they have formed the opinion:
- that, immediately following the date of the financial assistance, the company will be able to discharge its liabilities as they fall due; and
- that, having regard to the prospects of the company and their intentions with respect to the management of the company's business and the amount and character of the financial resources that, in their view, will be available to it, the company will be able to carry on business and discharge its liabilities as they fall due for a period of 12 months immediately following the date of the financial assistance or until the financial assistance or until the company is dissolved pursuant to a solvent winding up.
Given the lack of clarity rising from the Aveling Barford case and the potential risk that any action which results in value being provided to a shareholder being categorised as distribution, it is foreseen that companies will generally follow this procedure if in any doubt as to whether financial assistance constitutes a distribution or not.
In respect of the solvency test, it should be noted that:-
- the sanction procedures are available to both private and public companies;
- not all directors are required to approve the financial assistance, just those approving the financial assistance at the relevant board meeting;
- the CJL defines "liabilities" as including "any amount reasonably necessary to be retained for the purpose of providing any liability or loss which is either likely to be incurred or certain to be incurred, but uncertain as to amount or as to date on which it will arise";
- the test provides for a forward looking solvency test based upon the company's cash flow and ability to meet it as they fall due. There is no balance sheet test;
- the sanction procedure does not require a statutory declaration or auditor's report. However, it is best practice for the directors to consider the financial and accounting records of the company before making such statement;
- while there is no technical requirement for the solvency statement to be in writing separate from any board resolutions, it is best practice for a separate statement to be signed by the directors and tabled at the board meeting; and
- the statement of solvency must be made or signed before the board authorises the giving of financial assistance which would otherwise constitute a distribution.
As a consequence of this change, the focus on analysing a transaction will shift from whether or not a transaction constitutes financial assistance and must therefore be whitewashed to whether a transaction constitutes a distribution and must therefore be either made in accordance with Articles 114 and 115 or sanctioned as per the new transitional procedures set out in Article 58.
Financial assistance had previously given rise to technical issues requiring procedural steps to be taken to avoid a transaction potentially being void. Therefore, the removal of the prohibition on unlawful financial assistance can only be seen as a positive step and one which benefits Jersey and the financial institutions that use it.
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.