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28 November 2014
On October 24 2014 the Commerce and Employment Department published a consultation paper(1) on various options for reforming Guernsey's insolvency regime for both personal and corporate insolvency. Responses to the consultation are due by December 31 2014. The paper proposes some wide-ranging reforms and seeks industry responses on various issues in order to augment, develop and regular the insolvency regime on the island.
A principal assumption in Section 3 of the consultation paper is that Guernsey should remain a creditor-friendly jurisdiction by giving creditors control of the insolvency process and generally placing the insolvent business in the hands of an independent person, rather than allowing the debtor in possession to remain in control of the assets. On balance, this is the correct assumption to make – Guernsey insolvency law is based on UK companies and insolvency legislation and the United Kingdom is a creditor-friendly jurisdiction. Stakeholders in Guernsey companies are often from the United Kingdom, or at least are familiar with how UK insolvency law operates, and it is perhaps going too far to suggest that Guernsey should start with a blank sheet and look at jurisdictions such as the United States for inspiration at this stage.
Section 4 of the paper deals with general policy issues, primarily in relation to personal insolvency law reform and the practical way in which corporate insolvency law might be reformed and developed.
In terms of personal insolvency law, it is proposed to maintain the customary legal procedures of désastre and saisie as a way of collectively enforcing judgment debts – although neither désastre nor saisie are formal insolvency procedures. The criticism is that neither procedure offers rehabilitation and, unlike bankruptcy in the United Kingdom, for example, it allows the door to remain open for creditors to continue to enforce judgments without a time limit. The Loi ayant rapport aux débiteurs et à la renunciation 1929 – a regime whereby individual debtors can be declared insolvent by the Royal Court – is also criticised for being unduly complex and expensive and thus underused. The paper proposes several possible additions to the existing personal insolvency regime (similar to UK procedures) – for example:
After the time period has elapsed, the bankrupt will be discharged, together with restrictions on what the bankrupt individual can do during the subsistence of a bankruptcy order.
Given the lack of user-friendly formal personal insolvency regimes in Guernsey, it would be a welcome move to introduce a simple procedure by which a debtor, regardless of whether creditors have obtained judgments against him or her in Guernsey, can compromise his or her claims with creditors without fear of further recourse, and which could have extra-territorial effect (which the existing regime does not). The IVA process could therefore work in Guernsey as long as it is well regulated and supervisors of those arrangements are resident on the island. However, a more formal bankruptcy process is another matter, as it would require implementing legislation, copying from either the UK regime or a comparable jurisdiction. It would be inadequate to update the 1929 law, which has proved unworkable and outdated, but a codified désastre process could be the answer.
In terms of corporate insolvency, the questions posed in Section 4 relate to the type of legislation that should be introduced. Should insolvency provisions be separated from existing regimes in the Companies (Guernsey) Law 2008, the Limited Partnerships (Guernsey) Law 1995 and others and consolidated in a piece of legislation dealing exclusively with the insolvencies of different types of vehicle, or should things remain as they are? While the UK Insolvency Act 1986 covers both corporate and personal insolvency, the insolvency of limited liability partnerships is, for example, covered by a different piece of legislation. There is also separate legislation in the United Kingdom for the disqualification of directors, while in Guernsey preferred debts are dealt with in separate legislation (while in the United Kingdom they are not). There are many advantages and disadvantages to both types of proposal, and it may be that in order to maintain consistency among the different types of insolvency regime for different vehicles, all insolvency provisions for corporate structures (including companies, partnerships and foundations) are consolidated into a single piece of legislation. This would also have the advantage of developing insolvency law in relation to limited partnerships, which is sparse under the Limited Partnerships (Guernsey) Law, is sparse and could benefit from fuller legislative provisions.
In terms of developing insolvency rules, the consultation paper states that insolvency law is procedural and thus procedural rules are needed to assist insolvency practitioners in their day-to-day administration of an insolvent estate. There are a number of suggestions in the paper for the types of matters that could be dealt with by new rules. It is suggested that these are quite similar to the various rules and regulations enacted in the United Kingdom by the UK government under the powers given to it by the Insolvency Act. Thus, it would be effective to put in place rules governing day-to-day procedures, for example:
This would maintain consistency and a required standard among Guernsey insolvency practitioners in terms of practice, and could obviate some applications to court for directions on estate administration.
The last two elements of Section 4 relate to the establishment of the Office of the Official Receiver and a register of insolvency practitioners. Establishing an official receiver's office has many advatages, the least of which is that creditors which apply for the winding up of a debtor need not fund the liquidation of that debtor if a government-sponsored official takes the role of liquidator. This is common in the United Kingdom and other jurisdictions, but is expensive and is generally paid for by a large percentage of the court fee going straight to the official receiver's office. In Guernsey, the court fee remains relatively low and it would have to be increased significantly in order to pay for an official receiver role. The question of who the official receiver would be or whether Guernsey could have a halfway house with private insolvency practitioners taking the appointment, paid for by the states on an ad hoc basis, remains open. In short, it is probably a good idea and would lead to the formal administration of many more insolvent estates in Guernsey, but the question of funding would have to be addressed as a priority. In terms of a register of insolvency practitioners, there is some control by the Royal Court over appointments as compulsory liquidators or administrators to ensure that people with the right experience and suitability are appointed. The problem that Guernsey has had is that historically many voluntary liquidators have not been insolvency practitioners, but rather the people administering or managing the company (presumably in order to save costs). However, this situation gives rise to a multitude of problems, not least potential conflict of interests. Nevertheless, in a small jurisdiction it may be that a register of insolvency practitioners is unnecessary or impracticable.
The two principal company insolvency regimes in Guernsey are liquidation (voluntary and compulsory) and administration. Both are loosely modelled on UK procedures, but voluntary liquidation covers both solvent and insolvent liquidations, and administrations are based on the UK pre-Enterprise Act 2002 regime. The insolvency provisions in the Companies Law are brief compared to those of other jurisdictions, and the law is silent on a number of important matters which are dealt with by legislation in other comparable jurisdictions. While the Guernsey courts have adopted the pragmatic approach of looking at practice in England and Wales, this approach is uncertain and potentially costly if legal argument on a particular point has to be made.
Section 5 of the consultation paper proposes a number of potentially useful additions to the existing regime.
Company voluntary arrangements
The introduction of company voluntary arrangements (CVAs) (similar to IVAs but for companies) would allow companies to enter into a contractual compromise with all of their creditors while supervised by an insolvency practitioner, which has the potential to restructure the business and ensure the company's survival. While similar to the existing scheme of arrangement provisions in the Companies Law, having specific legislative provision for CVAs may encourage companies to use this procedure rather than the more expensive and time consuming administration route.
Out-of-court filing system
The introduction of an out-of-court filing system for administrations (similar to that seen in the United Kingdom under Schedule B1 of the Insolvency Act 1986) would allow for the speedy and timely appointment of administrators, and, from a commercial viewpoint, would facilitate group-wide restructurings in the form of pre-packaged sales (a 'pre-pack') of insolvent businesses. Is this desirable in a small jurisdiction such as Guernsey? In context, Guernsey has relatively few trading businesses and arguably the need for a regime that supports the pre-pack is not that great when compared to the United Kingdom or other larger jurisdictions. As a result of the 2002/2003 UK reforms, many companies which might have been placed into voluntary liquidation before then are now placed into administration. It could be argued that a court-controlled process for administration, with the moratorium on unsecured creditor enforcement, is a good check and balance to ensure that the system is not abused.
Duty to report directors' misconduct
There is no statutory or regulatory obligation on office holders to introduce a duty on administrators to report misconduct of directors to the registrar of companies or the Guernsey Financial Services Commission. However, in practice, most regulated insolvency practitioners would do so if their investigations uncovered suspicious matters. The introduction of a duty to report directors' misconduct could be used in tandem with the existing directors' disqualification regime in Guernsey.
Representation of creditors's interests
Improvements to the representation of interests of creditors in an administration and the potential for the establishment of a creditors' committee would be a welcome addition to what is happening in practice. Many Guernsey insolvency practitioners already do this in complex matters where they require the buy-in of creditors before taking substantive action in relation to assets.
It is proposed that the administrator be given the specific power to distribute assets to creditors. At present, the administrator does not have this power. However, Re: Montenegro Investments Limited ([2013-14] GLR 423) recently clarified that the Guernsey court is not bound by UK decisions on this point and that if it was in the interests of the creditors, the court would permit an administrator to distribute, notwithstanding the lack of a specific statutory power to do so. Once assets have been distributed from an administration it makes sense to allow the company to be placed into dissolution rather than go through a potentially expensive liquidation first. The principal observation is that liquidators have fairly extensive statutory and common law powers to investigate a company's affairs and take certain actions (eg, clawing back preferences and action against directors for fraudulent and wrongful trading), so that if a company avoids liquidation altogether it is important for administrators to be given standing to bring such claims, or at least give creditors the opportunity to place the company into liquidation to allow a liquidator to investigate the company's affairs.
Changing the winding-up regime to distinguish between solvent and insolvent liquidations is unlikely to be necessary but, as the consultation paper suggests, it may be useful to provide greater protection to creditors in an insolvent voluntary liquidation – for example, by giving them a chance to ratify the members' appointment of the liquidator (as seen in a Section 98 meeting in the United Kingdom) and by allowing them greater control over the conduct and ending the existing process which is purely member driven.
Statutory demand procedure
It may be useful to improve the statutory demand procedure by giving debtors the ability to apply to court to set aside a statutory demand, as at present there is no such ability and the court has arguably no jurisdiction to hear such applications. While it may be desirable to have a set-aside regime in Guernsey, it would be questionable whether the purpose that it would serve when the statutory demand of itself has no legal effect other than providing conclusive evidence of cash-flow insolvency if the debt is not paid and is not substantively disputed. The question of whether the debt is valid (and whether the dispute of it is genuine and real) could be dealt with if a winding-up application is brought rather than as a pre-cursor to it.
Proof of debt procedure
Given the lack of any rules covering debt procedure, it is clear that legislation is required. The introduction of a proof of debt procedure, including prioritisation of secured creditor claims, dealing with unliquidated claims and applying insolvency set-off is advisable.
Liquidator's investigative powers
Providing for a statutory regime in relation to the investigative powers of a liquidator, which would include the requirement for directors to provide a statement of affairs to a liquidation and the introduction of specific provisions (equivalent to Sections 234 to 236 of the Insolvency Act), would require directors and third parties to deliver documents and provide information to liquidators concerning the affairs of the company on request. At present, Guernsey law relies on the inherent supervision of the court over liquidators in order to exercise these types of investigate power, but the introduction of a statutory investigative regime can both save costs and allow liquidators greater scope to conduct their investigations properly and with full legal force.
Exemption from providing audited accounts
Exempting companies in liquidation from providing audited accounts is a long-awaited and sensible reform reflecting existing practice in any event.
The increase of Guernsey's clawback provisions, including the introduction of a provision allowing office holders to attack transactions at undervalue, extortionate credit transactions and charges granted over property in a period leading up to liquidation, reflects the UK position almost entirely. Guernsey already has the customary law action paulienne, which is the equivalent of Section 423 of the Insolvency Act (allowing fraud victims to trace through the insolvent company into the hands of the recipient of the moneys). It seems sensible to bring Guernsey's clawback regime into line with those of other comparable jurisdictions.
To avoid further potentially complex court applications, it would be sensible to give liquidators the ability to disclaim onerous assets to bring Guernsey liquidators in line with UK liquidators and to introduce a system to allow unclaimed dividends to be paid into a government fund.
Fixed and floating charges
The introduction of a system of fixed and floating charges into Guernsey law and a system of registration has been proposed. While the existing Guernsey regime for securing Guernsey-situs personality has recognised shortcomings, it is simple, clear and familiar to lenders dealing with Guernsey. The recent Jersey experience of reforming its security regime indicates clearly the complexity and effort required in such an undertaking. It may well be better for amendments to the Guernsey security interest regime to be addressed separately from the wider insolvency reform process to ensure that it gets the consideration and attention that it deserves.
Jurisdiction of Royal Court
Widening the jurisdiction of the Royal Court to wind up foreign companies with a place of business in Guernsey appears to be desirable if appropriate (at present, the jurisdiction extends to Guernsey registered companies only).
Many of the proposals in the consultation paper are sensible but materially reflect UK insolvency legislation, which brings about certainty and a prescribed way of doing things in an insolvency context. However, they also raise certain questions:
This is a long-awaited opportunity to reform Guernsey's insolvency laws in order to keep Guernsey at the forefront of modern commercial and financial services. The consultation paper gives all stakeholders the chance to have their say on these issues.
For further information on this topic please contact Mathew Newman at Ogier by telephone (+44 1481 721 672), fax (+44 1481 721 575) or email (firstname.lastname@example.org). The Ogier website can be accessed at www.ogier.com.
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