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19 June 2020
Standing and process
Purposes of administration
Effects of administration order
Administrator's duties and functions
Remuneration and swearing in of administrator
Maintenance of essential services and utilities
Office holders' duty to report delinquent company officers
Information and documents to be submitted by and to administrator
Protection of creditors' and members' interests
The Companies (Guernsey) Law 2008 (Companies Law) provides for companies, protected cell companies (PCCs), incorporated cell companies (ICCs) and cells of PCCs and ICCs to be placed into administration and for an administrator to be appointed to manage their affairs while the administration order remains in force.
On 15 January 2020 the Companies (Guernsey) Law 2008 (Insolvency) (Amendment) Ordinance was passed, introducing various changes to insolvency law in relation to both administrations and liquidations. The changes which affect new administrations are set out below. The new ordinance is expected to come into force in 2020.
The concept of administration in Guernsey was first introduced for PCCs in 1997; however, its scope has since been expanded to cover all other types of company that can be registered in Guernsey. Administration, similar to the equivalent procedure in other jurisdictions, provides insolvent companies with breathing room in order to maximise their realisations and asset values without increasing their liabilities which, in turn, favours creditors. However, there are substantive differences from a creditor's perspective between the process in Guernsey and, for example, England.
Pursuant to Section 374 of the Companies Law, the Royal Court may place a company, PCC, ICC or cell into administration upon the application of certain parties. During the term of the administration order, the affairs, business and property of the company, PCC, ICC or cell are managed by an administrator who is appointed by the court for that purpose. The Royal Court will make an administration order only if various requirements are fulfilled – namely:
Throughout this article, the term 'company' also refers to PCCs, ICCs and their cells, unless otherwise stated.
The solvency test, which underpins many substantive provisions in the Companies Law, requires a company to:
An administration application may be made in respect of a company by the company itself (or in the case of an ICC or PCC, by the respective ICC or PCC), its directors or members or a creditor as set out in Section 375 of the Companies Law. In addition, if the company is supervised, the Guernsey Financial Services Commission may make the application. The court will sit with jurats to determine the application. Most applications are heard at the Ordinary Court, which takes place approximately twice a month on a Tuesday morning, although urgent applications will be accommodated by the Royal Court (sometimes at short notice, depending on judge and jurat availability) upon a written request from an advocate setting out the reasons for seeking to have an application heard on an urgent basis.
The two purposes for which an administration order is made are either or both:
In order to demonstrate that either or both of these purposes can be achieved, the Royal Court will often require evidence, in support of the application, that at least one of the purposes is achievable.
Once an application for an administration order is made, a moratorium prevents any proceedings from being commenced or continued against the company by unsecured creditors and any existing application for the company's winding up will be dismissed. Further, the company cannot be placed into liquidation (either by its shareholders or by the court), except with the leave of the Royal Court (albeit that a fresh winding-up application may be presented to the court in respect of the company).
The key difference between the Guernsey regime and the regime in other jurisdictions (eg, England) is that secured creditors, including but not limited to creditors with security granted under Guernsey law, remain entitled to enforce their security regardless of the moratorium. In addition, any creditors with set-off rights may also enforce those rights.
The moratorium continues during the administration, absent leave of the Royal Court or consent from the administrator.
Where a company has been placed into administration, all of its correspondence (including emails and websites) must contain the administrator's name and a statement that the company's affairs, business and property are being managed by the administrator, unless this is obvious from the context of the correspondence or common knowledge between the parties thereto.
While there is no legal requirement in Guernsey for an administrator to be a qualified insolvency practitioner, the current practice is that the court must be satisfied that the nominated person is appropriately experienced and suitably qualified to take on this important role. The court also prefers at least one nominee to be resident in Guernsey. Joint appointments are permitted and encouraged for risk management purposes.
Administrators' functions are to collect and realise assets for the benefit of creditors. Administrators have broad management powers, akin to the powers afforded to the directors of a company in its constitutional documents. A list of administrators' management powers is set out in Schedule 1 to the Companies Law. Directors remain in office but must not do anything (or omit to do anything) that interferes with an administrator's functions.
Administrators take into their custody and control all of the property to which the company is entitled upon their appointment and manages its affairs and business in accordance with any directions from the Royal Court. Administrators can commence or continue proceedings brought in the name of the company but cannot, under Guernsey law, bring actions in their own name (in contrast to liquidators' power to bring statutory-based actions for preference, wrongful trading and misfeasance).
However, under the new ordinance, administrators can now challenge any transaction entered into at an undervalue within six months of the onset of insolvency or two years where the transaction was with a connected party. A challenge will be unsuccessful where the company can show that:
Under the new ordinance, administrators can also challenge transactions (within three years of the onset of insolvency) which involve grossly exorbitant terms regarding the provision of credit or grossly offend the principles of fair dealing. The Royal Court can set aside these transactions and amend the terms of the provision of credit.
Administrators may do anything necessary to manage the company's affairs, business and property. They are deemed to be an agent of the company when exercising this power but incur no personal liability, except where they act in a fraudulent, reckless or grossly negligent manner or in bad faith.
An important power that administrators may exercise is the removal and appointment of company directors and the calling of meetings of members and creditors of the company. Administrators can also approach the Royal Court for the discharge or variation of an administration order where circumstances permit such actions.
Further, the administrator of an ICC cannot carry on the administration in such a manner as to prejudice the underlying businesses of its incorporated cells during the administration. On that basis, that administrator must carry on the business of the ICC if necessary to ensure that its cells' businesses also continue. There are no such statutory protections for the cells of PCCs, but there are provisions governing the inter-relationship of the insolvency processes of a PCC with its cells.
Once an administrator has realised the company's assets under the new ordinance, they can make distributions to secured creditors and preferential creditors. They may also make distributions which, in their view, are likely to assist the achievement of any purpose for which the administration order was made. An administrator can also make distributions to unsecured creditors with the court's permission. It is now possible for a company to proceed immediately from administration to dissolution. In cases where there are no assets to distribute to creditors, Guernsey companies can avoid the need of an interim liquidation which may prove costly. This may prove practical and economical, for example, where the company's estate is exhausted in making distributions to secured and preferential creditors and where it is clear that no distributions could be made to unsecured creditors.
Under the new ordinance, administrations will also involve greater creditor participation. Within 10 weeks of the date of the administration order (unless the court orders otherwise) Guernsey administrators must now send a notice to all creditors inviting them to a meeting and explaining the aims and likely process of the administration.
Once an administrator is appointed, the Royal Court will swear them into office to act not only as an administrator in relation to the company, but also as an officer of the Royal Court. As stated above, joint appointments are permitted and the court may order that the office holders may act jointly or alone.
Administrators' remuneration and related expenses incurred in an administration are payable from the company's assets in priority to all other claims, and the Royal Court will fix their remuneration (or at least determine the basis of such remuneration) when the application is made. As such, any proposed administrator should provide evidence of, for example, their hourly rate when making their application.
The new ordinance also brings Guernsey into line with the United Kingdom by allowing the Insolvency Committee to make rules preventing providers of essential services, such as electricity and water, from making it a condition of continued supply that the company in administration pay all previous invoices up front. However, providers can ask that the administrator personally guarantee the payment of future invoices following commencement of the administration. This gives some protection to payments due to services providers while disallowing threats to withhold essential services.
Under the new ordinance, administrators must now 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. The report must be submitted within six months of the administrator vacating office. Office holders must also provide any information which the registrar and the commission require.
Once the Royal Court has made an administration order, the administrator must give immediate written notice of the order to the company and give, within 28 days from the date of the order, written notice to all of the company's creditors, the registrar and, in the case of a supervised company, the commission.
The administrator may also require the following persons to submit a statement of affairs to them within 21 days:
The statement of affairs must be verified by affidavit of the person submitting it and show, among other things:
Unlike in England, administrators have no specific power to require directors, employees or third parties to provide information or documentation in relation to a company's business and affairs. However, administrators have a general power to apply to the Royal Court for directions regarding the performance of their functions or any matter arising during the administration. Further, the Royal Court will likely attempt to assist an administrator, as a court-appointed officer, in resolving any third-party enquiries if those enquiries will assist the administrator in performing their functions in the same way that the court has assisted liquidators seeking similar relief in the past. Directors have a statutory duty to comply with an administrator in relation to the management of the company's affairs.
Once a company has been placed in administration and its creditors have been notified, the creditor may send notification of its claim to the administrator.
When an administration order is in force, a creditor or member of the company, and in the case of a supervised company, the Guernsey Financial Services Commission, can apply to the Royal Court if they feel that they are being unfairly prejudiced by the manner in which the administrator is managing the company's property, affairs and business. If such an application is successful, the Royal Court may regulate the future management of the company by the administrator, restrict the actions of the administrator or, in the harshest circumstances, discharge the administration order.
Two recent noteworthy judgments by the Royal Court are:
Re Montenegro Investments Limited (In Administration)
This was the first scheme of arrangement to be approved by the Royal Court in relation to the restructuring of an insolvent business operated by Guernsey company Montenegro Investments Limited (In Administration) (MIL).
MIL was insolvent on a balance sheet and cash flow basis and could not continue to operate as the holding company of overseas vehicles which held numerous real estate sites in Montenegro. The purpose of the administration order was for the survival of the company or all or part of its undertaking as a going concern. In order to achieve the statutory purpose, the joint administrators sought to restructure the company's business with support of its existing, and some new, investors and its investment manager. The most effective way in which to achieve the restructuring was through a scheme of arrangement pursuant to Part VIII of the Companies Law.
Shortly after their appointment, the scheme proposed by the joint administrators was that:
New investors would also be invited to join. The principal condition of the scheme was that the creditors of MIL would be paid in full. This was to be achieved by the new company raising sufficient cash to acquire MIL's assets and provide a fund for the future trading of the new company. Two further aspects of the scheme were that the administrators sought approval from the court to distribute funds to creditors and proposed that, under Section 111 of the Companies Law, MIL would be dissolved after the scheme's conclusion rather than proceed, as would normally be the case, into liquidation and then be wound up.
As in other jurisdictions, a scheme of arrangement in Guernsey has three stages:
At the scheme approval hearing, the Royal Court concluded that in the circumstances where MIL's creditors had been paid in full (with no more creditors expected after ads calling for all creditors to make themselves known had been placed several times), where MIL no longer had a business and where there would be considerable costs saving if MIL was dissolved following the end of the administration, the joint administrators should be allowed to distribute funds to creditors and MIL should be dissolved once the relevant distributions had occurred.
As a consequence of the hearing and ancillary orders being granted, MIL's business was duly transferred to the new company in consideration for payment of a sum equal to the amount due to MIL's creditors (including accrued interests) and the amount payable in respect of the costs of the administration and the scheme of arrangement. Creditors were paid in full and MIL was dissolved shortly thereafter. The new company in the British Virgin Islands is now operating MIL's former business, with significant cost savings, and substantially more investor support to see it through today's turbulent economic climate.
Re Esquire Realty Holdings Limited
In this case, the Royal Court recognised, for the first time, that a pre-packaged sale of a company's assets immediately following that company being placed in administration would satisfy the statutory purpose of a more advantageous realisation of the company's assets than would be effected in a winding-up.
The application was made by Lloyds Bank PLC as security agent on behalf of certain principal creditors of Esquire Realty Holdings Limited and was supported by Esquire. The application was part of a much larger arrangement designed to preserve the operations of a large group of companies engaged in providing specialist adult and children's care homes throughout the United Kingdom.
The Royal Court reiterated the special concerns and issues which may arise with a pre-pack administration order, which were considered by the Joint Insolvency Committee in England and Wales in a statement of insolvency practice (SIP 16) – namely:
In deciding to grant an administration order in this case and approve the appointment of joint administrators, the Royal Court found that they had carefully considered the position of all creditors, including those who would not benefit from the proposed arrangements, and that the special concerns and issues referred to above had thus been adequately addressed.
The Royal Court concluded that although it did not expressly approve the detailed arrangements making up the pre-pack sale that would follow the making of an order, by implication, it may appear to have done so. It also helpfully noted that while there was no statutory requirement for a SIP 16 report to be produced in pre-packaged administration applications in Guernsey, the report was of great assistance in this matter and such a report should be produced in similar applications unless there are overwhelming reasons not to do so.
The Royal Court also mentioned that when exercising its discretion under the Companies Law, it may consider the interests of Esquire's other stakeholders (ie, its employees, individuals for whom care is provided and the families of those individuals).
In two more recent administration applications, it was possible to obtain administration orders where the applications were held in camera. Although unusual, the particular circumstances of those applications justified the in camera orders.
Administration, unlike liquidation under the Companies Law, is not a terminal process. Rather, it provides a company with breathing room and stability in trying financial times. However, as noted above, secured creditors may continue to enforce their rights regardless of an administration order, as may creditors which can set off their claims against those brought by the company. That said, an administration order empowers a company to initiate mechanisms to realise assets, ultimately to be distributed to creditors, without facing debt recovery proceedings and other enforcement measures from those same creditors. Administration will also often facilitate the sale of the company's business as a going concern as goodwill is preserved. It is also often more advantageous to effect a sale of assets through an administration because events of default in funding arrangements (leading to potential enforcement of security) may not be triggered. As a result, a company may survive the procedure, or at least ultimately provide a better return to creditors than might have resulted if the company had simply been wound up.
The flexibility of administration allows Guernsey-specific entities, such as PCCs, ICCs and their cells, to enter the procedure and benefit from its many advantages. Since the introduction of the Companies Law, many Guernsey-registered non-PCC and ICC companies and their creditors have taken advantage of the regime. Further, the new ordinance will afford greater powers to administrators to both collect in assets and more easily distribute them to creditors.
Finally, the abovementioned Royal Court judgments demonstrate the flexibility of Guernsey legislation and the court in dealing with complex restructuring and insolvency matters. The court is not afraid to reach its own conclusions, without the restraints that prescriptive legislation can bring to bear on it, in order to grant just, pragmatic and effective solutions to restructuring problems.
For further information on this topic please contact Simon Davies, Marcus Leese, Mathew Newman or Alex Horsbrugh-Porter at Ogier by telephone (+44 1534 514 000) or email (firstname.lastname@example.org, email@example.com, firstname.lastname@example.org or email@example.com). The Ogier website can be accessed at www.ogier.com.
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