Insolvency and restructuring in the Channel Islands
In this article, we provide a general overview of the insolvency and restructuring sectors in Jersey and Guernsey, followed by a practical update addressing the recent significant insolvency and restructuring developments in each island.
- An introduction to insolvency and restructuring in Jersey
- Recent developments
- An introduction to insolvency and restructuring in Guernsey
- Recent developments
Referenced in this article
- Companies (Jersey) Law 1991 (as amended)
- Bankruptcy (Désastre) (Jersey) Law 1990 (as amended)
- Companies (Amendment No. 8) (Jersey) Regulations 2022
- Equity Trust (Jersey) Ltd v Halabi (in his capacity as Executor of the Estate of the Late Madam Intisar Nouri) JCPC 2019/0119 (the Z Trust litigation)
- Representation of Betindex Limited  JRC 309
- Investin Quay House Limited v BUJ Architects LLP  JCA 299
- Companies (Guernsey) Law 2008 (as amended)
An introduction to insolvency and restructuring in Jersey
A legal system founded upon ancient Norman-French customary law principles and an island often invisible on a world map, Jersey might be mistaken for a sleepy and antiquated jurisdiction. This could not be further from the truth.
With more than 33,600 registered companies, in excess of 20 banks and a net assets value of more than £440 billion under administration by hundreds of regulated funds, Jersey’s legal system demands a pragmatic, robust and sophisticated restructuring and insolvency framework.
Corporate insolvency procedures
The two key pieces of legislation are the Companies (Jersey) Law 1991 (CJL) and the Bankruptcy (Désastre) (Jersey) Law 1990 (BDJL). The former is principally based on the United Kingdom’s Companies Act 1985 and the latter is derived from Jersey’s customary law.
Whether a Jersey company is deemed insolvent depends on whether it can pay its debts as they fall due. This is known as the ‘cash flow’ test. Unlike in other jurisdictions, for a company to be insolvent it is not necessary that the value of the company’s liabilities exceed its assets, which is known as the ‘balance sheet’ test.
Prior to 1 March 2022, désastre proceedings brought under the BDJL were the only Jersey insolvency procedure for an insolvent company that may be started by a creditor. Where a creditor wanted to liquidate a company to try and recover what is owed, it must apply to the Royal Court of Jersey (the Jersey Court) for an order that the company’s assets be declared en désastre (in disaster). In general terms, a successful application vests the assets of the company (wherever situated) in the hands of the Viscount of Jersey (the chief executive officer of the Jersey Court) (the Viscount), who will then facilitate the orderly and fair distribution of its assets.
There are two other Jersey procedures that may be used to liquidate an insolvent company: a creditors’ winding up (CWU) and a winding up on just and equitable grounds. From 1 March 2022, the creditors’ winding-up regime was expanded to include an application being made by a creditor (discussed further below). Prior to this, a CWU, despite its name, could only be initiated by the shareholders of a company. These procedures are governed by the CJL and result in the appointment of an insolvency practitioner to administer the winding up of the company and distribution of its assets to its creditors. The manner of this distribution is prescribed by the BDJL.
Corporate restructuring procedures
The Jersey insolvency regime does not yet include reconstructive procedures, such as an administration under the UK Insolvency Act 1986 or Chapter 11 proceedings under the US Bankruptcy Code.
The only Jersey procedure with a suspensory measure specifically to permit or facilitate reconstruction or rehabilitation is a remise de biens (which is governed by the Loi (1839) sur les remises de biens). This, in essence, places the affairs and assets of the company in the hands of the Royal Court for a period of usually between six and 12 months. To apply for a remise, the company must own immovable property in Jersey and, as long as the secured creditors have been paid in full, with a payment (no matter how small) to unsecured creditors, the company can, in theory, be discharged from all other debts and start afresh. However, it is not geared towards handling complex and cross-border corporate insolvencies.
Instead, the Jersey Court has adopted a broad interpretation of when it is just and equitable to wind up a Jersey company. This procedure enables the Jersey Court to issue a bespoke order, which can draw on the provisions of both the BDJL and the CJL and enable the company to realise a better return for its creditors by, for example, permitting it to trade for a further period or enter into a pre-pack sale of its assets.
A further avenue available to a Jersey company or a creditor is to apply to the Jersey Court for a letter of request for the Jersey company to be placed into a foreign statutory rescue process. Such cases typically involve placing a Jersey company into administration in the United Kingdom. However, the Royal Court’s jurisdiction in this regard is not fettered. This avenue is discussed in more detail in the ‘Recent developments’ section, below.
In addition to informal reorganisation, schemes of arrangement and creditor arrangements are available under the CJL.
In order for the Jersey Court to sanction a scheme of arrangement, it will need to be agreed to by a majority in number of the creditors or shareholders (or a class of either of them) representing:
- 75 per cent in value of the creditors (or class of creditors); or
- 75 per cent of the voting rights of the shareholders (or class of shareholders).
Once sanctioned, it is binding on all the creditors (or class of creditors), the company itself and, where the company is in the course of being wound up, the liquidator.
As an alternative to a scheme of arrangement, an arrangement entered into between a company and its creditors immediately before or during a creditors’ winding up of the company will be binding on:
- the company if it is approved by a special resolution; and
- the creditors if it is approved by three-quarters in number and value of them.
The main benefit of a creditor arrangement is that it does not require the approval of the Jersey Court, and although an objecting creditor cannot prevent an arrangement, it can cause the terms of the arrangement to be varied by the Jersey Court.
The year 2021 was busy for insolvency and restructuring in Jersey. That trend looks set to continue. We have summarised some of the key developments in 2021 below.
A second and likely very welcome option for a creditor of a Jersey company will be in effect from 1 March 2022 with the Companies (Amendment No. 8) (Jersey) Regulations 2022. On 8 February 2022, the government of Jersey approved an amendment to the CJL to enable a creditor to apply to the Jersey Court for an insolvent company to be placed into a CWU and for a liquidator to be appointed to conduct the winding up (the Amendment).
The key aspects of the Amendment are as follows.
- A creditor may apply to the Jersey Court for the commencement of a CWU (the Application) if the creditor has a claim against the company for not less than the prescribed minimum liquidated sum (£3,000); and
- the company is unable to pay its debts;
- the creditor has evidence of the company’s insolvency; or
- the creditor has the consent of the company to make the Application
- the creditor has the consent of the company to make the Application.
- A company is deemed unable to pay its debts if:
- the creditor served a statutory demand on the company; and
- the company has for 21 days since the serve of the statutory demand failed to pay the sum or otherwise dispute the debt due to the reasonable satisfaction of the creditor.
- Except in exceptional circumstances, a creditor must provide the company with at least 48 hours’ notice of the Application.
- A creditor must not make the Application if it has agreed not to do so or if the claim solely relates to the repossession of goods.
- A creditor can apply to the Jersey Court for the appointment of a provisional liquidator at any time after the Application is made, provisional liquidation not having been an option under any of the previous winding-up regimes in Jersey.
- A moratorium on claims against the company upon the appointment of a provisional liquidator unless permission from the Jersey Court has been obtained beforehand.
- A register of approved liquidators has been created, which is to be maintained by the Viscount.
- There is a new requirement for there to be a Jersey-resident liquidator, but one who can act jointly with a non Jersey-resident liquidator.
- Liquidators are to be supervised by the Viscount, including dealing with any complaints made about a liquidator’s acts or omissions.
This Amendment is based upon principles and practices widely recognised in other insolvency regimes across the globe. It further demonstrates Jersey’s position as a leading international finance centre, and enhances and protects the interests of creditors.
The Jersey Court is developing ground-breaking jurisprudence surrounding insolvent trusts as it continues to deal with the multifaceted Z Trust litigation. An insolvent trust is a misnomer, of course, as a trust is not a separate legal entity and cannot, as a matter of law, be insolvent. However, the Jersey Court has described the term as useful shorthand in circumstances where trust funds are insufficient to meet the trust’s liabilities as they fall due (adopting a cash flow test).
The Jersey Court clarified that, in the event of cash flow insolvency, the trustee ceased to owe duties to the beneficiaries of the trust in the administration of the trust assets but owed a duty to act in the best interests of the trust’s creditors as a whole (as would be the case in a corporate context).
The Jersey Court has carefully established a framework for administering the winding up of an insolvent trust. A key question was whether the administration should be left to:
- the incumbent trustees, on the basis that they were already familiar with the trust’s affairs; or
- an independent insolvency practitioner (IP), with greater expertise in winding-up procedures and no risk of conflict.
The Jersey Court resoundingly decided to leave the administration in the hands of the trustee under its supervision. However, the Jersey Court has also approved the appointment of an insolvency practitioner by a trustee to assist with the winding up and it will be interesting to see how commonplace such a step might become in the future.
A further question that the Jersey Court had to grapple with was whether a former trustee had priority over other creditors, including successor trustees, to the trust assets on the basis of a continuing equitable lien or similar. At first instance the decision was no, but on appeal it became yes. That decision, relating to a novel issue and being of significant importance to the trusts industry and the operation of trusts more generally, was appealed to the Judicial Committee of the Privy Council (Jersey’s highest court). The hearing took place between 15 and 17 June 2021 and a decision is eagerly awaited.
UK administration displaced in favour of the Jersey just and equitable regime
As mentioned above, Jersey does not (yet) have a modern statutory rescue procedure. In light of this, there has been a trend of placing insolvent Jersey companies that stand a realistic chance of survival into a foreign statutory rescue process, often administration in the UK.
This is what happened in the case of Betindex, a Jersey company that operated as an online gambling platform extensively in the UK market. Betindex ran into financial difficulty. However, the directors of Betindex believed that the company could be rescued as a going concern if it was placed into a UK administration (as opposed to one of the Jersey insolvency processes that are ultimately terminal for the company).
The Jersey Court issued a letter of request to the High Court of England and Wales (the English Court) seeking that Betindex be placed into UK administration. The request was granted. However, the administration failed. This led to the English Court ordering that administrators of Betindex apply to the Jersey Court for it to be placed into a just and equitable winding up or, alternatively, subject to désastre proceedings.
The administrators duly applied to the Jersey Court for Betindex to be placed into a just and equitable winding up, with the administrators being appointed as liquidators. The administrators’ application was resisted by Betindex’s parent company, Index Labs, principally on the grounds that:
- a creditors’ voluntary liquidation in England or a creditors’ winding up in Jersey under the CJL (which is commenced and progressed ‘out of court’) would be preferable to a just and equitable winding up;
- one of the reasons for this was that either of these processes would allow the creditors of Betindex to appoint a liquidator of their choice and have a voice in supervising the liquidation; and
- the appointment of the administrators as liquidators would be inappropriate on the basis of their previous conduct, which was the subject of criticism by Index Labs.
The Jersey Court noted that it had sought the assistance of the English Court only because Jersey does not have the facility of placing a company into administration; it would not have sought the assistance of the English Court simply to wind up a Jersey incorporated company, for which there are well-established procedures. Furthermore, the Jersey Court noted that it would have been quite inappropriate to decline to deal with a company incorporated in its jurisdiction and for the matter to revert to the English Court.
The Jersey Court ordered that Betindex be placed into a just and equitable winding up and that the former administrators be appointed as liquidators. In summary, its reasoning was as follows.
- The collapse of Betindex is high-profile and it was in the interests of the reputation of Jersey, and the public interest more generally, for the Jersey Court to supervise the winding up.
- Betindex could no longer provide the services of a gambling platform and its substratum had arguably been lost.
- The adjudication of creditor claims is likely to be the subject of complex court applications and, therefore, it made sense for the Jersey Court to be involved from the outset.
- It appeared likely that applications would need to be made under article 51 of the Trusts (Jersey) Law 1984 concerning trust account monies.
- The Jersey Court was already involved, having made the initial request to the English Court that Betindex be placed into UK administration.
- The just and equitable regime provided a flexible procedure, which enables the Jersey Court to make whatever orders were required to suit the needs of each case and there was no such equivalent flexibility provided under a creditors’ winding up.
- Of the two options put forward by the English Court, there was no benefit in proceeding by way of a declaration en désastre, as the complexities of the case meant that the Viscount would have to engage external advisers. Rather than use the resources of the Viscount’s department, it was preferable for the winding up to be conducted by professional insolvency experts.
This case is a helpful demonstration of the Jersey Court’s flexibility and pragmatism. It gave Betindex a fighting chance by utilising a foreign rescue procedure and, when that was unsuccessful, resumed control and placed Betindex into a just and equitable winding up in Jersey to facilitate the best possible return for its creditors.
A hard no to forum shopping
On 27 July 2020, BUJ, a creditor of a Jersey company, Investin Quay, issued a winding-up petition before the English Court. That winding-up petition was to be listed on the general winding-up list on 18 November 2020. Investin Quay challenged the winding-up petition. It was removed from the winding-up list and Investin Quay was given permission to file and serve evidence in opposition to the petition, including evidence challenging the English Court’s jurisdiction to wind it up (bearing in mind that Investin Quay is a Jersey company).
In May 2021, BUJ learnt that Investin Quay had called a meeting of its shareholders and creditors to decide whether to place Investin Quay into a creditors’ winding up under the CJL. BUJ opposed this, but Investin Quay pressed ahead through its sole shareholder and director, Mr Downer, who also claimed to be owed in excess of £2.3 million from Investin Quay.
The day before the matter returned before the English Court, Investin Quay made an ex parte (without notice) to the Jersey Court seeking, among other things, injunctive relief preventing BUJ from pursuing its winding-up petition through the English Courts.
Investin Quay argued that it was a Jersey company and conducted its management and decision-making in Jersey; it firmly asserted that its centre of main interest (COMI) was in Jersey and relied upon the principles of modified universalism, deriving from the idea that there is a public interest in the ability of foreign courts exercising insolvency jurisdiction in the place of the company’s incorporation to conduct an orderly winding up of its affairs on a worldwide basis, notwithstanding the territorial limits of their jurisdiction.
The Jersey Court noted that the alternative to such an approach is, or may be, an unattractive free-for-all in which the distribution of assets depends upon a race to begin insolvency proceedings in other jurisdictions in which particular creditors may perceive particular advantages for themselves.
BUJ argued that the commencement of the creditors’ winding up in Jersey was purely for practical reasons and, in particular, to prevent a claim being made in the English winding up of Investin Quay against Mr Downer personally. BUJ’s position was that Investin Quay’s COMI has always been in England and, in the alternative, even if that was not right, the English Court has the power to wind up Investin Quay as an unregistered company.
Indeed, the English Court had held as much. Its view was that Investin Quay’s COMI was in England and Wales and, even if it was not, Investin Quay had a sufficient connection with England and Wales for it to be wound up as an unregistered company.
BUJ advanced a position that Mr Downer was looking to avoid a potential reference claim against him. It was unchallenged that Investin Quay had paid in excess of £20 million to him between 30 July and 17 September 2018, giving rise to a potential preference claim by insolvency office holders. However, a preference claim in Jersey is subject to a 12-month period immediately preceding the commencement of the winding up, whereas it is subject to a two-year period ending with the date of the onset of insolvency in England.
Consequently, BUJ held that purely for reasons of self-interest, the sole shareholder and director commenced a creditors’ winding up in Jersey at the eleventh hour in order to defeat a preference claim in England for his personal benefit.
The Jersey Court declined to prevent BUJ from pursuing its petition through the English Courts. In doing so, it noted that its decision may well have been different had the Jersey insolvency process begun earlier. But it did not and, on the facts of the case, there was some evidence (although no findings were made) that Mr Downer was attempting to prefer himself to other creditors. The Jersey Court decided that it should not grant the relief sought by Investin Quay for the purpose of enabling Mr Downer to rely upon certain features of Jersey insolvency legislation in order to defeat the claims of third parties to the prejudice of Investin Quay’s creditors as a whole.
Investin Quay sought leave to appeal the Jersey Court’s decision but this was refused, twice.
An introduction to insolvency and restructuring in Guernsey
The Guernsey insolvency regime also has its roots in Norman law and the customary law principles of désastre and saisie are still used today. However, in 2008 the States of Guernsey enacted the Companies (Guernsey) Law 2008 (CGL) in recognition that the island needed a modern, dynamic and flexible insolvency regime in light of its position as an offshore financial centre.
Insolvency procedures under the CGL vary depending on the legal structure and are summarised in brief below.
A key provision of the CGL is the solvency test. This test ascertains the solvency of a Guernsey company by assessing whether it:
- is able to pay its debts as and when they fall due (cash flow test);
- has more assets than liabilities (balance sheet test); and
- where regulated by the Guernsey Financial Services Commission (GFSC), complies with all its regulatory financial adequacy requirements (the solvency test).
A company may be wound up voluntarily or, as is more usual within the insolvency context, compulsorily by the Royal Court of Guernsey (the Guernsey Court) and a liquidator appointed. The liquidator’s role is to collect and realise the company’s assets and to distribute dividends in line with a statutory order of priority.
The Guernsey Court may make a winding-up order, among other reasons, where the company is ‘unable to pay its debts’, the test for which is that:
- a creditor has served a written demand for payment on the company for a sum exceeding £750 and the company fails to pay within 21 days; or
- it is proved to the satisfaction of the Guernsey Court that the company fails to satisfy the ‘solvency test’.
Once appointed, the liquidator takes control of the company’s affairs and has all the necessary powers to wind it up in an orderly manner. Accordingly:
- any payments to creditors within a certain period of the start of the winding up can be clawed back as unlawful preference payments, in certain circumstances;
- the liquidator can take action against the directors as a result of breach of duty or other misfeasance to recover funds or property of the company;
- the liquidator is required to present a report to the Guernsey Court once the assets of the company have been realised. A commissioner will be appointed to examine his or her accounts and make any appropriate distributions to creditors, subject to certain priority claims being recognised. As part of his or her account the liquidator must include a statement of whether he or she considers there has been any wrongful or fraudulent trading and misfeasance by directors; and
- when the assets of the company are distributed, the company is then dissolved.
In addition to being liable to an action to return property of the company, liquidation has other serious consequences for directors of the company. Directors of an insolvent company may be liable for wrongful trading where the company traded at a time when the director was aware that the company was likely to be insolvent. They also risk having a disqualification order made against them barring them from future involvement in the management or affairs of other companies.
Pursuant to the CGL, the Guernsey Court can make an administration order for the purpose of creating a temporary safe haven for a company in financial difficulties.
An application for administration must be made to the Guernsey Court and can be submitted by:
- the company;
- the directors of the company;
- any member;
- any creditor; or
- the GFSC in the case of a regulated company.
The grounds for making an administration order are that:
- the company does not satisfy the solvency test; and
- an administration serves a purpose – that is, it may increase the prospects of survival of the company or any part of it as a going concern or it may achieve a better result for the company and its creditors than a liquidation of the company.
The Guernsey Court will only grant an administration order for a specified period of time, and any extension will be subject to being satisfied that its purpose may still be achievable.
The administrator has wide powers to operate the company’s businesses. During the administration, Guernsey Court proceedings cannot be commenced or continued against the company without the leave of the Guernsey Court (or the consent of the administrator), except for claims of secured creditors.
From the date that an application is filed with the Guernsey Court, the company benefits from a moratorium from its creditors. This means that a claim may not be brought or continued against the company without the permission of the Guernsey Court or the administrator.
On 15 January 2020, the States of Guernsey approved the final version of the Companies (Guernsey) Law 2008 (Insolvency) (Amendment) Ordinance 2020 (the Ordinance), which incorporates improvements to Guernsey’s statutory regime. Some of the key changes are as follows.
- Administrators are able to distribute property to secured and preferred creditors without the approval of the Guernsey Court.
- Administrators must call an initial meeting of creditors within 10 weeks of an administration order being made. Notice of the meeting will have to explain to the creditors the aim of the administration and the likely process to be followed.
- Companies can be dissolved while in administration, where previously a compulsory winding-up order had to be sought.
- There is a distinction between solvent and insolvent winding ups. Prior to the introduction of this, Guernsey has been unusual among offshore jurisdictions by not making this differentiation. To avoid the more onerous procedure of an insolvent winding up, directors may now make a declaration of solvency within the five weeks preceding the resolution to voluntarily wind up the company.
- A procedure has been introduced by which liquidators may disclaim onerous assets – this includes unprofitable contracts, property that would be difficult or impossible to sell or any real property outside the bailiwick.
- There is a mandatory requirement for liquidators and administrators to report delinquent conduct by officers and former officers. Disqualification orders are to be made against individuals who are judged by the Guernsey Court to be unfit to be concerned in the management of the company.
- A statutory offence has been created in relation to transactions at an undervalue that are undertaken by a company in the lead up to insolvency.
- Companies in winding-up proceedings are exempt from the requirement to have their accounts audited. Liquidators will also not be obliged to conduct the audits for financial years prior to their appointment.
- Insolvency rules have been codified in the form of a published set of binding rules for practitioners, governing matters of practice and procedures in relation to Guernsey’s insolvency regime.
- The Guernsey Court can compulsorily wind up non-Guernsey companies. The Ordinance sets out the circumstances in which the Guernsey Court may wind up such a company.
- Additional powers have been given to liquidators to seek information by recovering documents and interrogating officers. The Ordinance gives liquidators the power to apply to the Guernsey Court to require officers, employees or others to produce documents and information relating to the company. They will also have the power to apply to the Guernsey Court to order the examination of officers, extending to former officers. The examinations will be conducted by Court-appointed officers and taken place in private under oath or affirmation. Any statements made in these examinations can then be used in civil proceedings against the officer. Creditors will also be able to force liquidators to apply for an examination if one half (in value) of them request it.
- Administrators and liquidators can ask or require any person to submit a statement of affairs, with the Guernsey Court’s permission. This amends the previous position whereby only a closed list of individuals could be required to provide a statement of affairs. A statement of affairs contains: particulars of assets and liabilities; the identities and details of any creditors; details of any security held by creditors; and such further information as required by the requesting practitioner.
The Ordinance will deliver some of the significant extra powers that insolvency practitioners have been expecting for some time. Hopefully this will lead to greater powers for liquidators when pursuing information and significant savings in the insolvency process, which will ultimately benefit creditors. However, parties to transactions will have to examine their counterparties carefully to avoid falling foul of the new powers to disclaim property and reverse transactions.
The changes were anticipated to come into force in the second quarter of 2020; however, due to Brexit and the covid-19 pandemic, they are still eagerly awaited.