Guernsey Restructuring Law – A Modern Regime
By Mathew Newman
Posted: 2nd April 2013 09:05
Since 2008, Guernsey has had an up to date and flexible statutory restructuring regime which is capable of dealing with all different types of modern day reorganisation and turnaround strategies. Both regimes are court-led and in our experience the Royal Court of Guernsey is more than capable of understanding the often complex arrangements that are proposed to be put in place and giving sanction to those schemes as long as creditors and members derive maximum benefit from them. Guernsey law also caters for restructurings that do not go according to plan by providing a relatively comprehensive liquidation regime that is supported by the Royal Court’s willingness to exercise its inherent jurisdiction in most circumstances where necessary to assist a liquidator in the performance of his statutory and common law functions.
These regimes can perhaps be contrasted with the position prior to the coming into force of the Companies (Guernsey) Law, 2008 (“Companies Law”) when Guernsey insolvency law was largely limited in statute and relied heavily on the customary law which derives from la coutume de Normandie, the customs of medieval Normandy that still survive today. These customary law procedures have however be supplemented and, to a large extent, superseded, by the new statutory regimes that are much more recognisable to the modern day restructuring and insolvency professional. This shows a willingness and determination on the part of the Guernsey legislature and policy makers to adapt and change our legislation to suit the growing needs and requirements of the financial services industry in Guernsey.
There are two principal restructuring regimes for companies in Guernsey which this article will examine in brief. We will also look summarily at the liquidation procedures available in Guernsey and the position of non-cellular companies
Scheme of Arrangement
Guernsey law does not provide for formal company voluntary arrangements, as can be found in other jurisdictions, and a Scheme, governed by part VIII of the Companies Law, represents an excellent way of a Guernsey company reaching a formal arrangement or compromise with creditors or members in order to achieve a stated turnaround/rescue or reconstruction strategy. The Guernsey legislation is borrowed heavily from the UK Companies Act 2006, with the same concepts and a similar process. As such, English authorities and commentary will be very persuasive and scheme documentation in Guernsey looks very similar to the sort of documentation that one would expect to see in England.
A scheme can either be creditor led or member led but what is crucial is that a proposal is put to the relevant stakeholders through a meeting summoned at the direction of the Royal Court for the purpose of approving that proposal. As in other jurisdictions, 75% of the stakeholders (or class) needs to vote in favour of the proposals and the proposals then require sanction by the Royal Court in order for them to be binding on all of the stakeholders regardless of whether they voted or not. There are specific provisions regarding company mergers and it is also possible to use a scheme to amalgamate, migrate or convert companies. Solvency is not an issue here although specific provisions are made if the company is in liquidation or administration and is proposing a scheme. Although this has not been tested yet, by doing a scheme it may be possible under the legislation for a company in administration to avoid liquidation altogether and go straight into dissolution, making this the one exception to the general rule under Guernsey insolvency law that a company in administration should be placed into liquidation if the purpose of the administration order is not achieved.
This is an insolvency process for companies which are, or are likely to become, insolvent either on a cash flow or balance sheet basis (or both). The Guernsey procedure is based loosely on the English process as it was before 15 September 2003, whereby an application must be made to the Royal Court for an order that the company be placed into administration in order to satisfy the purposes of the survival of the company or any part of its undertaking or a better realisation than would be effected on the winding up of the company.
If the court grants an application, it will appoint a nominated person to act as administrator whose job it is, as the Company’s agent, to manage the business and affairs of the company in accordance with a raft of powers set out at schedule 1 to the Companies Law. The directors’ powers do not cease but they must cooperate with the administrator and must provide a statement of the company’s affairs within 21 days. The key point about administration is that it provides the company with a moratorium from the company’s creditors. There are two important exceptions here. The first is that the moratorium does not prevent secured creditors enforcing their security rights and interests as against the company’s property, and the second is that the moratorium does not prevent creditors with rights of set off from exercising those rights as against the company and thus gaining a priority over other unsecured creditors. Therefore, the moratorium, in reality, only prevent unsecured creditors without set off rights, from taking action against the company without consent of the administration or permission of the Royal Court. In addition the company may not be wound up against without such consent or permission. The administrator’s principal function is to achieve the purposes of the administration order and so, depending on what that is, he will either manage the business and/or attempt to maximise realisations of the company’s assets. Under Guernsey law, he has no power to distribute the company’s assets however (although the Royal Court has permitted distribution in limited circumstances).
The practice has developed in Guernsey recently for the Royal Court to limit the term of the administration order to between 9 months and a year (with extensions permitted with good reason) and for the administrators to be permitted to draw their remuneration on a time costs basis without further reference to the Court. The administrator can secure his release from liability at the end of the administration when he applies to discharge the administration order, and, depending on whether the purpose of the order has been achieved, a distribution to creditors can either be effected by the company itself (acting by the directors or through a scheme of arrangement) or by a duly appointed liquidator.
If the restructuring or rescue process fails, then in normal circumstances the best course would be to place the company into liquidation. Whether the liquidation is voluntary, by way of a special resolution, or compulsory, by way of a court order, depends on whether the failure of the strategy arises out of a member-led scheme (on the one hand) or a creditor-led scheme or administration (on the other). In both circumstances though a liquidator is appointed and the company must cease to trade and conduct business unless expedient for the beneficial winding up of the company. Winding up is a terminal process and as such the liquidator’s primary function is to realise the assets and distribute to creditors pari passu and then to members in accordance with their respective rights. Generally speaking, secured creditors sit outside the liquidation and can deal with their secured assets in accordance with their security rights.
A Guernsey liquidator of an insolvent company has express statutory powers to bring actions for preference (against, inter alia, creditors), wrongful trading, fraudulent trading and breach of fiduciary duty against directors and he also has the power to commence or continue actions that the company might otherwise have brought in its own name. He may seek directions from the court in order to perform his functions and this (potentially) may extend to seeking orders of the court compelling directors and third parties to provide him with documentation and information owned by and even relating to the company in question. The liquidator may also bring an application to disqualify directors from acting as directors of Guernsey companies.
Liquidation is an absolute terminal process. As Guernsey law presently stands, a company which has been in liquidation and which is dissolved cannot be restored to the Register (unlike in other jurisdictions where restoration is possible). This very obvious limitation in Guernsey law is now being remedied by the legislature and reform is expected in the next 12 months.
A Note on Cellular Companies
The Companies Law provides for insolvency regimes for cellular companies as well as non-cellular companies. In most respects the regimes are the same with minor differences to take into account the cellular structure. However, cells of protected cell companies may enter into what is, perhaps misleadingly, called “receivership”, which is, in essence, akin to a liquidation. A receiver has the same powers that a liquidator has to realise assets, bring actions and distribute to creditors of the cell and the receivership is a terminal process with the cell ultimately being dissolved.
This brief note has shown that Guernsey law, and the Guernsey court, is very capable at providing a mechanism and procedure by which companies may be restructured in a formal way that is robust, stands up to scrutiny and ensures that no stakeholders can claim to be prejudiced by the proposal. Equally if things do not work out the way that was planned, Guernsey law provides an excellent winding up regime with all the modern day tools that one would expect a liquidator to have to perform his functions to the highest possible standards.
Mathew Newman is a partner of Ogier Guernsey and can be contacted via email on Mathew.firstname.lastname@example.org and via telephone on +44 1481 721672
(1) Incorporated cell companies and protected cell companies. “Normal” companies are known as non-cellular companies.