This article first appeared in International Corporate Rescue
On 11 February 2016 the States of Guernsey Commerce and Employment Department (‘Department’) published a consultation response document (‘Response Paper’) setting out proposed changes to Guernsey’s insolvency regime. Following a review of responses received from industry, legal associations, individuals and individual firms (‘Respondents’) the Department has divided the proposed reforms into two phases. The first phase includes those projects that the Department will be taking forward. The second phase is made up of projects that the Department would like to take forward or consider in the future.
The Department examined proposed changes to both personal and commercial insolvency provisions as well as some issues that affect both. For the purposes of this article we will focus on the key proposed changes to the commercial insolvency regime. The proposed changes represent a fairly radical amendment to the current regime and will provide greater certainty regarding procedure and process.
Creation of Insolvency Rules
One of the key proposed reforms is the creation of insolvency rules. The Department has recognised the importance of having a clear set of rules which will ‘sit under’ the Companies (Guernsey) Law, 2008 (‘Companies Law’) and offer day to day guidance on procedural matters. Currently, Guernsey relies reasonably heavily on the ‘spirit’ of the Insolvency Rules 1986 in England and Wales. The creation of Guernsey rules will ensure that a more uniform approach can be taken going forward and may narrow some areas of potential dispute. The Department will commence this process by creating a statutory power to make rules.
It has been proposed that any provisions concerning substantive rights should be dealt with in the relevant commercial legislation whereas procedural requirements should be contained in the rules. Due to the necessity for the rules to remain fluid a standing rules committee, including some industry practitioners, may be formed so that the rules can be reviewed and amended regularly. The Response Paper is not very specific on the exact details of the rules or what they will cover but it states that interested parties will be consulted in the first place so that the rules cover the most relevant areas. It is likely that in substance they will be fairly similar to the Insolvency Rules 1986.
Independence of office holders
There is currently no limitation on who can be appointed as liquidator or administrator of a Guernsey company. Upon an application for an administration order or winding up, the Royal Court scrutinises the suitability of proposed appointees. There is no proposal to change this position dramatically due to the potential cost and administrative burden entailed in creating a register or imposing a licensing requirement.
The Department has, however, addressed concerns regarding the fact that directors and shareholders can currently wind up their own structures. There is an inherent conflict of interest in this position which could lead to creditors in insolvent liquidation being disadvantaged. An amendment to the Companies Law will be recommended so that liquidators in an insolvent winding up must be independent of the insolvent company. This will be a useful compromise as it will address this issue without unnecessarily increasing the administrative burden.
Reporting findings or suspicions of misconduct
The Respondents unanimously agreed that there should be a statutory obligation imposed on all office holders to report to the relevant authorities if they find, or suspect, misconduct on the part of the directors or officers of a company. This is a positive move as it ought to enhance Guernsey’s reputation as a jurisdiction in which to do business and may lead to more action against directors and officers for disqualification.
In the case of licensed companies or formerly licensed companies, office holders will be obliged to report their suspicions to the Guernsey Financial Services Commission (‘GFSC’). Concerns about non-GFSC licensed entities will be raised with the Guernsey Registrar of Companies. This requirement will be in addition to the current requirement for all liquidators in a compulsory liquidation to report to the Royal Court at the conclusion of the liquidation
Meeting of a creditors’ committee
There is currently no obligation in Guernsey to call a meeting of creditors when conducting an administration. This is unusual as it is a standard requirement in most jurisdictions including England and Wales. In practice, most administrators meet with creditors at the outset or make informal contact with key creditors. An amendment will be made to the Companies Law to include provisions requiring administrators to:
(a) provide each creditor with a notice informing them of the administrator’s appointment and outlining the process of the administration; and
(b) call at least one initial meeting of creditors within a given timeframe.
As with the proposals concerning creation of insolvency rules, there will be further work required on the precise details of the legislation and rules on this issue. In particular, it is proposed that there may be some flexibility so that the process can be tailored to the size and complexity of the administration and the number of creditors. It will be interesting to see how these provisions develop over time but the bare proposal is a positive development for the Guernsey insolvency regime.
Powers of administrators
Currently, a Guernsey administrator is unable to make distributions of the company’s assets to creditors. The administrator can pay secured creditors and pay the expenses of the administration but cannot pay other creditors (such as arrears to employees of the company) if the company is still trading during administration. A key reform to the Guernsey insolvency regime will be the creation of a power for administrators to make distributions to creditors where these are in accordance with the objects of the administration. Therefore, if the distribution will assist in rescuing a company as a going concern or will assist in achieving a better result than liquidation, the administrator will have the power to make the distribution.
Exit from administration
Under the current regime, administration can only be brought to an end by the Royal Court. Once administration has been concluded the company is generally placed into liquidation so that distributions can be made and the company wound up. There was a proposal that the move to liquidation should be able to take place out of court in order to save costs. While this idea has been rejected, there will be an amendment to the Companies Law to allow dissolution of the company upon the conclusion of the adminstration. This is a very positive amendment as there will be cases where liquidation is an unnecessary extra step and so this amendment is likely to reduce overall costs in the future.
Strengthening creditor protection in an insolvent voluntary winding up
A suite of reforms aimed at strengthening creditor protection in an insolvent voluntary winding up has been proposed. These include:
(a) introducing a requirement that a liquidator be independent in an insolvent winding up (covered above);
(b) requiring notice of a liquidator’s appointment to be sent to creditors with the aim of explaining the process;
(c) obliging a liquidator to call at least one initial meeting of creditors within a given timeframe; and
(d) creating a statutory obligation to report to shareholders and creditors.
Given that may of the reforms are designed to ensure the maintenance of Guernsey’s good reputation, this is a further positive development for any creditor considering investment in a Guernsey company.
Establishing and ranking claims
Currently, liquidators follow the spirit of the regime in England and Wales when dealing with the establishment and ranking of claims. It was thought that this should be explicitly set out in legislation even if this does not substantially reform the current order of priorities. For that reason the legislative framework will be amended in order to formalise the establishment and ranking of claims.
Statement of affairs and examination powers
Under the new regime liquidators in a compulsory liquidation and administrators should have the power to require:
(a) the production of a statement of affairs;
(b) the production of documents and information from directors, officers, employers, shareholders, accountants, bookkeepers, bankers and any other person involved in the promotion of the company or with knowledge of its affairs; and
(c) that directors and former directors attend (either on the liquidator or, following an application by the liquidator, at court) and be examined.
Further consideration will be required in order to decide how best these new provisions should be enforced. Transactions at an undervalue and set aside of extortionate credit transactions There was unanimous support from Respondents for permitting liquidators and administrators to ‘claw back’ transactions at an undervalue and set aside extortionate credit transactions via an application to court. The Department has decided, therefore, to model provisions on sections 238 and 244 of the Insolvency Act 1986 in England and Wales.
There were proposals for various other amendments to the legislative regime which will be considered during the course of these reforms. In reality, the implementation of the changes set out above will organically lead to further amendments over the next few years. While the amendments will lead to a dramatic change in the legislative regime in Guernsey it may not, ultimately, mean a corresponding sea change in the way that liquidation and administration operates in Guernsey. Even though Guernsey has not enshrined many of these principles in legislation, the reality is that liquidators and administrators have operated as if many of the principles set out above already existed. The spirit of the regime in England and Wales has often been applied historically and the main difference will be that Guernsey will now have its own legislation confirming the position.