The Companies (Jersey) Law 1991, as amended, (the "Law") gives Jersey companies a considerable degree of flexibility to make distributions from a wide range of sources.
What is a distribution?
The Law defines a distribution as any distribution of a company's assets to its shareholders (in their capacity as shareholders), whether in cash or otherwise, other than:
- an issue of shares as fully or partly paid bonus shares;
- the redemption or purchase of the company's own shares;
- a reduction of share capital; or
- a distribution of assets to shareholders on a winding up.
What about guarantees to support a parent?
The Law only restricts or seeks to control distributions which reduce the net assets of a company and which would need to be accounted for in the accounts of the company.
Guarantees to support parent entities therefore do not fall within the Law's distribution provisions unless the directors believe that the guarantee will be called upon and have made provision for it in the accounts of the company.
How can distributions be funded?
Distributions can be made from any source other than the company's nominal capital account or any capital redemption reserve.
In particular, the Law does not require distributions to be paid from profits or distributable reserves, and companies are therefore free to make distributions from a share premium account (for a par value company) or a stated capital account (for a no par value company).
Must distributions be paid in cash?
A company's ability to make distributions by way of transferring specific assets rather than cash (referred to as a distribution in kind or a distribution in specie) will be determined by its articles of association (the "Articles"). If a company's Articles permit the payment of distributions in kind, it would be typical for the Articles to stipulate that shareholder approval of some form is required. The directors should therefore consider the provisions of the Articles when proposing a distribution in kind. June
What is the process for making a distribution?
Jersey companies can make a distribution at any time, but the directors who authorise the distribution must make a statement (a "Solvency Statement") that they have formed the opinion that:
- immediately following the date on which the distribution is proposed to be made, the company will be able to discharge its liabilities as they fall due; and
- having regard to (i) the prospects of the company and to the intentions of the directors with respect to the management of the company's business and (ii) the amount and character of the financial resources that will in their view be available to the company, the company will be able to:
a. continue to carry on business; and
b. discharge its liabilities as they fall due,
until the first to occur of the expiry of the period of 12 months immediately following the date on which the distribution is proposed to be made, or the company is wound up on a solvent basis.
A director who makes a Solvency Statement without having reasonable grounds for the opinion expressed in it is guilty of an offence and, upon conviction, is liable to a fine, imprisonment for up to two years or both.
Ratifying a distribution
If a company makes a distribution without obtaining a Solvency Statement from the directors who authorised the distribution, the distribution is unlawful.
In such circumstances, the company would need to apply to the Court for an order to treat the distribution as lawful. The Court would need to be satisfied that (i) the solvency tests set out in the Solvency Test could have been passed both immediately after the distribution and on the determination of the application and (ii) it would not be contrary to the interests of justice to do so.
It is also worth noting that, if a shareholder receives a distribution in breach of the requirements under the Law and knows or has reasonable grounds to believe that the distribution is unlawful, the shareholder is liable to repay all or part of it to the company (or, if the distribution was made otherwise than in cash, to pay a sum of equivalent value).
It addition to the statutory requirements under the Law, a company's Articles may also contain bespoke provisions regarding the payment of distributions. The directors should be aware of these as they may include restrictions, preferences and/or more comprehensive procedural requirements than those set out in the Law.
Originally published by Walkers, on June 2020
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.