Channel Islands: Jersey
The turmoil in the financial markets has the effect, among many other consequences, that borrowers may find it difficult or impossible to maintain or renew their existing financial arrangements. The result is that many are having to consider restructuring their obligations or, if that cannot be achieved, face insolvency.
If it is not insolvent, a company may reach an agreement with its creditors to restructure or reschedule its obligations. If the company is not able to meet its debts as they fall due, so that it is insolvent, the directors will need to consider winding up the affairs of the company or they may face a winding-up procedure initiated by a creditor.
Solvent restructuring
Outside the context of insolvency, companies may restructure their affairs with their creditors by way of agreement with their creditors or using a scheme of arrangement under the Companies (Jersey) Law 1991 (Companies Law).
Private compromises and arrangements between a solvent company and its creditors can be arrived at without the need for strict procedural requirements and outside the terms of a specific statutory framework.
If it is not possible to reach agreement with all of the creditors or all of the relevant class of the creditors, the statutory scheme of arrangement procedure under the Companies Law provides a mechanism for a Jersey company that needs to achieve the protection of an agreement that is binding on all its creditors or all of the members of a particular class of creditors.
The statutory provisions under Jersey law and under English law in relation to schemes of arrangement are similar and the process followed under Jersey law is similar to what happens in England, including as to documentation required and the court processes involved. The court in Jersey has declared that it would have the fullest regard, in relation to schemes of arrangement, to the interpretation given by the English courts to the relevant provisions of the English legislation.
A scheme of arrangement relating to creditors has the following principal procedural stages:
- an application to the court by the company, or any creditor, for the court to order and give directions for a meeting of the relevant class(es) of creditors, to be summoned in such manner as the court directs;
- a notice to creditors summoning a meeting and including an explanatory statement on the effect of the scheme;
- the meeting, as ordered by the court, to approve the scheme of arrangement by the requisite majorities of the relevant class(es) of creditors; and
- delivery of the order of the court to the registrar of companies in order for the scheme of arrangement to become effective.
Before sanctioning a scheme, the court needs to be satisfied:
- that the provisions of the law have been complied with;
- that the creditors, or relevant class of the creditors, were fairly represented by those who attended the meeting and that the statutory majority are acting bona fide and are not coercing the minority in order to promote interests adverse to those of the class whom they purport to represent; and
- that the arrangement is such as an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve.
If the scheme is for reconstruction of a company or the amalgamation of more than one company and involves the transfer of some or all of the property or undertaking of one company to another company, the court has powers to make specific orders in relation to the scheme for the purpose of facilitating the reconstruction or amalgamation.
Once a scheme of arrangement has been sanctioned and become effective, it is binding upon all of the creditors (or creditors of the relevant class) or, in the case of a company in the course of being wound up, on the liquidator and contributories of the company.
As a pre-insolvency option, a scheme of arrangement may be useful for a company that is attempting to avoid being made the subject of a creditors' winding-up or having its property declared en désastre.
A debtor that has immovable property in Jersey and whose property exceeds the value of the claims of its secured creditors may also apply to the court for a remise de biens. The procedure affords an indulgence to a debtor who may not be insolvent but is having difficulty satisfying his creditors. Under it the debtor's property is realised in an orderly way by two court-appointed officials, the autorisés, charged with selling enough of the debtor's property to pay the debts.
If a company is solvent and there is no intention to continue its business, it may be wound up using the summary winding-up procedure under the Companies Law. This option may be useful in the context of a restructuring for the purposes of removing solvent companies that are no longer required for the purposes of a structure. The process is initiated by a special resolution of the company and the winding-up may be conducted by the directors. It is not necessary to appoint a liquidator. If the affairs of the company are straightforward so that its assets can be realised, its liabilities (if any) can be quickly discharged and any remaining assets distributed to shareholders, the process can be completed so that the company is dissolved within a single day.
Insolvency
An insolvent Jersey company may be wound up using the creditors' winding-up procedure under the Companies Law or may have its property declared en désastre under the Bankruptcy (Désastre) (Jersey) Law 1990 (Bankruptcy Law). As such there are two largely similar insolvency regimes applicable to a Jersey company as a matter of Jersey law. Insolvency is defined by both the Companies Law and the Bankruptcy Law 1990 as meaning where a company is unable to pay its debts as they fall due.
A creditors' winding-up under the Companies Law is commenced by a resolution of the shareholders. It may not, despite the name of the procedure, be initiated by creditors. On the commencement of a creditors winding-up all of the powers of the directors cease and their powers are vested in the liquidator. The liquidator requires the sanction of the Jersey court or of the liquidation committee (or of the creditors generally in the absence of a liquidation committee) to pay any class of creditor in full or to compromise any claim by or against the company in liquidation. Any other power may be exercised by the liquidator without sanction if required for the beneficial winding-up of the company in liquidation. The property of the company in liquidation remains vested in it (pending dissolution), the liquidator acts as the agent of the company in liquidation and the corporate status of the company in liquidation continues until its dissolution on the conclusion of the creditors' winding-up.
The commencement of a creditors' winding-up places an automatic stay on all proceedings against the company in liquidation without the sanction of the Jersey court, save that any eligible creditor may still apply for a declaration of désastre in respect of the property of the company in liquidation under the Bankruptcy Law.
Désastre proceedings under the Bankruptcy Law are commenced by application to the Royal Court, which may be made by a creditor of the debtor having a liquidated claim exceeding £3,000 ($4,000) or by the debtor itself or, in certain circumstances, by the Jersey Financial Services Commission. If the application is granted, possession of the debtor's property vests in Her Majesty's Viscount, the chief executive officer of the Royal Court. The Viscount's duty is to get in and liquidate the property vested in him for the benefit of the creditors of the debtor who prove their claims. Once a declaration of désastre has been made creditors with provable debts have no other remedy against the debtor and may not commence or, without consent, continue any action to recover the debt.
The Companies Law (in the case of a creditors' winding-up) and the Bankruptcy Law (in the case of a declaration en désastre) each provide that the Jersey court may order that a director or former director be made personally liable without limitation for the debts or other liabilities of the company incurred before the instigation of a creditors' winding-up or désastre application (as the case may be):
- where a director knew that there was no reasonable prospect that the company would avoid a creditors' winding-up or the making of a declaration under the Bankruptcy Law; or
- on the facts known to him or her was reckless as to whether the company would avoid such a winding-up or the making of such a declaration.
It is a defence to the making of such an order to show that the directors took reasonable steps to minimise the potential loss to the company's creditors after either of the conditions set out above were satisfied.
The Companies Law and the Bankruptcy Law also prohibit fraudulent trading by the directors of a Jersey company so as to prohibit the business of a company being carried on with intent to defraud creditors. Both the provisions in relation to wrongful and fraudulent trading apply in addition to any criminal sanctions that may be brought in light of such conduct.
There is no express duty of a director of a Jersey company to put a company into liquidation when it is clear that the company is insolvent, but until such time as either a creditors' winding-up is instigated or a declaration that its property is en désastre is sought, the director's risk being held liable for wrongful or fraudulent trading.
In relation to cross-border insolvencies, the Bankruptcy Law provides that the court may assist courts of a relevant country or territory in matters relating to insolvency and may have regard to the provisions of any model law on cross-border insolvency prepared by the United Nations Commission on International Trade Law (Uncitral). The court may also assist in insolvency proceedings in jurisdictions that are not designated as relevant countries in accordance with general principles of comity.
Cayman Islands
The Cayman Islands' insolvency regime is based on local enactments (Laws) and the English common law system. A number of changes are in the process of being made to both the underlying legislation and to the court system.
The current provisions dealing with insolvency are contained in Part V of the Companies Law (2007 Revision) (Companies Law). The English Insolvency Rules 1986 apply, save insofar as they are inconsistent with the provisions of the Companies Law. The Companies (Amendment) Law 2007 (CAL) will introduce a number of important changes but the only sections now in force are sections 154 and 155, which provide for the establishment of an Insolvency Rules Committee to draft a set of Insolvency Rules specifically suited to the needs of the Cayman Islands. It is not possible at present to say when the remainder of the CAL and the new Insolvency Rules will come into force.
In addition, there are proposals to restructure the Grand Court from a generalist court into a number of specialist divisions, including a commercial division, which is likely to deal with complex insolvency matters (more straightforward insolvencies and personal bankruptcies may be dealt with by a civil division). This should help to streamline the insolvency process.
Restructuring
A company may engage in an informal restructuring outside the process of the court by entering into negotiations with creditors with a view to agreeing a compromise, which can then be incorporated into a contract binding on all interested parties. However, in practice such a restructuring may be difficult to achieve.
Sections 86-88 of the Companies Law provide a formal restructuring process in the form of a scheme of arrangement. The requirements for a binding scheme are:
- the agreement of a majority in number representing 75% in value of each class of creditors present and voting in person or by proxy at the creditors meeting;
- the sanction of the court; and
- the delivery of the court's order approving the scheme to the Registrar of Companies.
A scheme of arrangement therefore allows for the cram-down of dissenting creditors, provided sufficient support can be obtained in favour of the scheme. If the terms of the scheme are breached, the scheme may fail and, in these circumstances, a compulsory winding-up is likely to follow. The CAL does not change the restructuring regime.
The courts have adopted a flexible approach in relation to international groups of companies to facilitate restructurings carried out under the laws of other jurisdictions (principally Chapter 11 of the US Bankruptcy Code). This has involved the presentation of a winding-up petition, the implementation of a moratorium staying proceedings against the Cayman company and the appointment of a provisional liquidator to deal with the restructuring. Upon completion of the restructuring, the petition is withdrawn or dismissed.
Winding-up
There are two procedures to wind up a company: compulsory winding-up (for insolvent companies) and voluntary winding-up (for solvent companies).
If a liquidator conducting a voluntary winding-up suspects that the company may be insolvent or that there may be contentious issues arising in the liquidation, an application can be made for the winding-up to be subject to the court's supervision. A winding-up subject to the court's supervision is treated as though it was a compulsory winding-up.
Under Section 94 of the Companies Law, a company may be wound up by the court if:
- the company has passed a special resolution (a resolution approved by at least a two-thirds majority of the shareholders or such greater majority as may be specified in the constitutional documents) requiring the company to be wound up by the court;
- the company does not commence its business within a year from its incorporation or suspends its business for a whole year;
- the company is unable to pay its debts; or
- the court is of the opinion that it is just and equitable that the company should be wound up.
Under Section 96 of the Companies Law any application to the court for the winding-up of a company shall be by petition presented by the company itself, a creditor or a contributory. Contingent creditors cannot petition, although will be able to do so once the CAL comes into force. Likewise, the directors of a company cannot present a winding-up petition unless authorised to do so by the articles of association or ordinary resolution, although this limitation will be removed by the CAL.
The court will deem a company unable to pay its debts if payment has not been made within three weeks of a written demand for payment of at least CI$100 ($120), execution against the company is returned unsatisfied or it is proved to the satisfaction of the court that the company is unable to pay its debts. The legal test for solvency is on a cash flow and not a balance-sheet basis, with contingent assets and liabilities playing no part. Despite allowing contingent creditors to petition, the CAL does not change the test for solvency, and this discrepancy is likely to have to be resolved by the court.
The court can wind up a company if it is just and equitable that the company should be wound up. This jurisdiction is similar to that which exists under English law, but is more frequently invoked in Cayman because there is no statutory remedy for unfairly prejudicial conduct. It is possible that it may also be invoked by contingent creditors: for example, insurance policy holders who are unable to establish cash-flow insolvency.
The making of a winding-up order brings into effect a moratorium staying all actions against the company, unless otherwise permitted by the court. There is also a power to grant an injunction staying actions after presentation of a winding-up petition but before a winding-up order has been made.
Upon the making of a winding-up order, an official liquidator is usually appointed, with all of the powers of the directors being revoked and all powers of management vesting in the official liquidator. The official liquidator is an officer of the court and has extensive powers under the provisions of Part V of the Companies Law, including the power to carry on the business of the company as far as may be necessary for its beneficial winding-up.
A company may be wound up voluntarily where any period fixed in the articles of association for the duration of the company expires and the shareholders of the company have passed a resolution to voluntarily wind up; or if the company's shareholders have passed a special resolution requiring the company to be wound up voluntarily. A voluntary liquidator has the same powers as an official liquidator but is not an officer of the court.
The order of priority for the distribution of assets on winding-up is similar to that in England, with the expenses of the winding-up being paid first, then preferential creditors (including employees and taxes), floating charge holders, ordinary creditors, subordinated creditors and finally shareholders. Secured creditors are entitled to enforce their security and apply the proceeds to discharge the company's liabilities to them. They can claim as ordinary creditors for any shortfall and any excess recovery must be returned to the liquidator.
There are provisions allowing a liquidator to seek to claim back fraudulent preferences and challenge transactions at an under value. However, these provisions have been regarded by many as inadequate for quite some time, and the CAL will improve the position by introducing new offences, including fraudulent trading, and for the first time the concept of shadow directorship. However, there will still be no equivalent to the English offence of wrongful trading or any procedure for the disqualification of directors.
International cooperation
The majority of insolvency proceedings in Cayman involve a foreign-owned company that is incorporated in Cayman but has substantial operations and assets located elsewhere. Cross-border insolvencies are therefore something with which practitioners and judges in Cayman are very familiar.
Cayman has not adopted the Uncitral Model Law on Cross-Border Insolvency but, as noted above, the courts have adopted a flexible approach to facilitate the restructuring of international groups of companies. The courts have also approved and adopted the common law position that there should generally be one bankruptcy (whether personal or corporate) in the most appropriate jurisdiction that receives worldwide recognition. They have sought to cooperate with the courts in other jurisdictions to this end and have been willing to provide assistance where appropriate. The CAL will formalise the position by introducing specific provisions, similar although not identical to section 426 of the UK Insolvency Act 1986, dealing with the recognition of foreign insolvency proceedings and the provision of assistance in respect of those proceedings.
| Author biographies |
Jonathan Walker
Mourant du Feu & Jeune
Jonathan specialises in special purpose vehicles and financial structures for capital markets and corporate finance transactions. Admitted as an English solicitor with Bischoff & Co in 1987, he joined Mourant du Feu & Jeune in 1991 and has been a partner since 1999.
Jonathan is listed in the Legal 500 UK and the Who's Who in the Law directory.
Email: jonathan.walker@mourant.com
Peter Hayden
Mourant du Feu & Jeune
Peter graduated from Manchester University in 1993 and was admitted as an English solicitor in 1996. He obtained the Higher Rights of Audience (Civil) qualification in 2002.
Peter joined Mourant du Feu & Jeune and was admitted as an attorney in Cayman in March 2008. Before joining the firm, he was a partner at Matthew Arnold & Baldwin and before that worked at Allen & Overy for eight years, where he was a leading member of the team that won the Legal Business Litigation Team of the Year award for successfully defending a $ 200 million derivatives claim in AIG v First National Bank.
He also acted for the banks in the administration of TXU. Peter has extensive experience of financial services litigation and insolvency matters. He has also worked in-house at UBS and Barclays.
Email: peter.hayden@mourant.com |