Jersey: Insolvent Jersey Companies: A Creditor's Options

There was a ripple of concern in both Jersey and the UK after the High Court's decision in HSBC Bank v Tambrook Jersey Limited [2013] EWHC 866 (Ch). The High Court held that section 426 of the Insolvency Act 1986, which allows the English Court to assist a Jersey Court, was not triggered because the Jersey Court was not acting "in its function as an insolvency court" by issuing a letter of request to the English Court.

The High Court held that without the Royal Court determining insolvency proceedings, it was not entitled to seek assistance from the English Court. The decision threatened to dismantle a developed practice by which creditors had been able to prompt Jersey companies to be placed into administration in the UK.

On HSBC's appeal, the Court of Appeal overruled the lower court's decision. Accordingly, it confirmed the established practice that a creditor could petition the Royal Court to issue a letter of request to the English Court, further to which, the English Court would appoint an administrator and the debtor company would be placed into administration. It stated that by hearing HSBC's representation and issuing the letter of request, the Royal Court had exercised its insolvency jurisdiction and therefore did fall within the provisions of section 426. It is therefore confirmed that formal insolvency procedures are not required in both jurisdictions for the purposes of section 426.

The facts in the Tambrook case are very similar to the other cases which have used this route. The company was insolvent on both cashflow and balance sheet tests. The vast majority of the company's assets and creditors were situated in the UK, as was the focus of the company's business.

Letter of Request

The procedure in Jersey for applying for a letter of request to be issued is relatively straightforward. The creditor brings a representation before the Royal Court, on notice to the debtor company, and having first liaised with the Viscount. The creditor sets out in an affidavit the parlous financial state of the company and why he believes that an administration in the UK offers the best outcome in the circumstances. Usually an opinion from leading English counsel is also exhibited setting out the legal advantages of administration.

Advantages of Administration

The Royal Court, upon hearing the representation, will consider all the relevant facts in the matter. In particular, whether the company has a sizeable connection to the UK, where the debtor's assets and creditors are situated, whether any agreements entered into by the company in relation to the assets are governed by English law, or in the case of security agreements, whether they anticipate English administration procedures. The Royal Court has stated in such cases that it is on the interest of both creditor and debtor, for a debtor company to be placed into an English administration rather than for it to be subject to Jersey's bankruptcy procedures.

Placing a company in administration can be an attractive option. It allows a "breathing space" during which, under "new" management it is treated as a going concern and so the business may be saved or re-structured. There is also a moratorium on creditor claims against the company. The "fire sale" of a bankruptcy is avoided, and so the creditors stand a better chance of receiving more value from their debt. Also, as officers of the court, administrators have wide ranging powers to manage the company and are obliged to act in the interests of creditors as a whole.

"The Royal Court has also stated that it is in the public interest of Jersey to have an insolvency procedure in place by which an insolvent company may be dealt with as a going concern."

It may be possible for a creditor of a Jersey company to initiate a creditor's winding up under the English legislation, but to do so must follow the letter of request route as described above. There is cost and delay involved and on a winding up the focus will necessarily be on collecting in and realising assets. A creditors winding up therefore is not usually an attractive option for all creditors, as often they only receive a small dividend, assuming that the necessary link with England has been established.

Creditors Winding Up

In Jersey, the Royal Court has commented that Jersey has an insolvency procedure which allows the debtor company to be treated as a going concern. However, this procedure under Loi (1839) sur les remises des biens may only be used when instigated by a debtor and where the debtor owns Jersey property. It therefore has few of the advantages of administration and is likely to be unavailable in any event. Administration itself is not available.

In Jersey, the most frequently used bankruptcy procedure is set out in the Bankruptcy (Désastre) Law 1991. Further to a debtor being declared en désastre, its assets are vested in the Viscount (the Court's executive officer). Although this protects the debtor's assets from being alienated, the procedure terminates the business activities of the company. Further to a désastre, in order to act in relation to assets situated outside Jersey, the Viscount is required to seek recognition in any other jurisdiction in which he seeks to deal. Inevitably, the Viscount appoints local agents to deal with the foreign assets. This may lead to duplication of costs. Finally, depending on circumstances, contracts entered into by the company may be terminated by a declaration of being en désastre, whereas under an administration, those contracts could be assigned or novated.

While there are benefits to the désastre procedure, it is unlikely to prove to be the most appropriate or efficient procedure for Jersey companies with English assets and creditors. In 1998 the Home Office commissioned a review of the Crown Dependencies' laws and systems of practices. The results, set out in the Edward's Report, praised the "modern" désastre law but also recommended adoption of a procedure by which a business could be rescued. The Royal Court has also stated that it is in the public interest of Jersey to have an insolvency procedure in place by which an insolvent company may be dealt with as a going concern.

A Going Concern

Jersey has not implemented the recommendations in this regard but instead the Royal Court's inherent jurisdiction has been deployed in order to issue letters of request to the English Court to use their administration procedure in respect of Jersey companies.

Mann J in the High Court in Tambrook held that section 426 had not been enacted to "fill in gaps in another jurisdiction's processes." While many may have sympathy with Mann J's viewpoint, in the absence of any change to Jersey's bankruptcy statutes, creditors who can may take comfort from the Court of Appeal confirming that the tried and tested procedure of being able to put a Jersey company into administration is a suitable safety net.

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.