Source: https://practiceguides.chambers.com/practice-guides/insolvency-2019-second-edition/jersey
Timestamp: 2019-12-10 04:26:44
Document Index: 426942562

Matched Legal Cases: ['art 4', 'art 7', 'art 7', 'art 7', 'art 7', 'art 7', 'art 7', 'art 18', 'arts 18', 'EWCA ']

Insolvency 2019 Second Edition - Jersey | Global Practice Guides | Chambers and Partners
Jersey, like Guernsey, is a British Crown dependency with its own legislature and independent legal system. It is responsible for own domestic affairs, its economy and tax regime. Given its role as a financial centre, corporate insolvency laws and procedures play an important role. Much of the insolvency regime is based on modern and adaptable insolvent and solvent winding up processes which will be familiar to English and other common law practitioners. However, there are some important local distinctions. One such example is the insolvency process known as désastre, a form of court ordered compulsory winding up, which is unique to the Channel Islands. Whilst originating in Jersey case law over two hundred years ago, it is now substantially set out and updated in a statute designed to meet modern day needs.
Jersey is not a member of the EU and does not have legislation giving effect to UNCITRAL Model Law on Cross-Border Insolvency (although the court is empowered to take it into account in rendering assistance to foreign courts). However, there is much in Jersey insolvency procedure and legislation regarding schemes of arrangement that is based on English principles, and which thus reflects processes available in the UK and many other Commonwealth jurisdictions.
Like Guernsey, the close relationship of Jersey with the UK and in particular the City of London as well as Europe more broadly means that the restructuring and insolvency market is generally impacted by prevailing market conditions in those locations.
Notable developments in the last few years have included the increasing use of a court-ordered just and equitable winding up of companies in preference to the more traditional routes of a désastre or a creditors' winding up. The court requires good reason to allow departure from the more usual insolvency processes but will order the winding up on just and equitable grounds of an insolvent company if there are good grounds to do so. This can be the case where, for example, swifter action is required to be taken by a liquidator to secure the debtor's assets than is possible under the other procedures or where there are policy considerations in favour of the appointment of a liquidator answerable to the court. The scope of this jurisdiction has been extended to permitting the business of the debtor to be continued in the interests of stakeholders and/or other related ancillary orders, designed to improve the ultimate returns for stakeholders.
In recent years, the court has also allowed assets and liabilities of group companies to be pooled so as to enable a more costs effective liquidation to proceed for the benefit of creditors.
There is a continuing absence of an administration procedure in Jersey suitable for international business and designed to encourage the rescue of an insolvent company as a going concern. Nevertheless, Jersey companies have been placed in UK administration under the UK Insolvency Act 1986 either where the UK courts have direct jurisdiction to do so and, where they do not have direct jurisdiction, the same result may be achieved through the Jersey court requesting assistance under Section 426 of the UK Act, the Jersey court being satisfied that the company's connections with the UK are such that administration is likely to be in the interests of creditors and the company and that the request is likely to be acceded to by the UK court.
Because of Jersey's prominence as a financial centre, the court sanction of schemes of arrangement are commonplace in Jersey. The regime in Jersey set out under in the Companies Law, in large part, replicates similar provisions under the English Companies Act. Schemes are most commonly used in the context of takeovers, but they can also be used to effect insolvent restructurings such as by a debt for equity swap or by a wide variety of other debt-reduction strategies. The Court has wide discretion under the Companies Law to make appropriate directions to ensure that the scheme is effectively implemented, which includes the grant of a stay or moratorium against legal proceedings.
The Security Interests (Jersey) Law 2012 replaced the original 1983 legislation regarding security interests in intangible movable property. It is based on the PPSA model. There are current plans to extend the scope of the 2012 Law to include security in tangible movable property.
The principal legislation governing company restructuring, schemes of arrangement and insolvent winding-up of Jersey companies is the Companies (Jersey) Law 1991 ("Companies Law").
In addition, a company may the subject of a court-ordered declaration of désastre under the Bankruptcy (Désastre) (Jersey) Law 1990 ("Désastre Law") which is another form of insolvent winding up. The Désastre Law also contains provision for the Jersey courts to assist certain prescribed foreign courts in matters of insolvency, and similar assistance can be given to other foreign courts under the court's inherent jurisdiction.
Certain other entities are wound up in insolvent circumstances under legislation specific to them (such as an incorporated limited partnership under the Incorporated Limited Partnerships (Jersey) Regulations 2011).
Older forms of insolvency proceeding - remise de biens and dégrèvement – are unlikely to be encountered in an international context, as they are dependent on the debtor owning Jersey immovable property. These procedures are not, therefore, covered in this chapter.
The Companies Law contains provisions similar to those under UK company legislation regarding schemes of arrangement between companies and their creditors (and/or shareholders).
There are two main forms of insolvent winding-up of a Jersey company.
A désastre under the Désastre Law is a court-ordered from of winding up carried out by an officer of the court known as the Viscount. It is both a voluntary and involuntary form of winding up in that it may be applied for either by the company itself or by a creditor.
A creditors' winding-up under the Companies Law, on the other hand, is a voluntary insolvent winding-up commenced by special resolution of company's shareholders. The winding-up is carried out by a liquidator.
In addition, there are circumstances where the court has ordered the winding up of an insolvent company on just and equitable grounds under Article 155 of the Companies Law. Whilst a just and equitable winding-up is more commonly used in respect of solvent companies, it has also been used on several occasions by the Royal Court in order to wind up insolvent companies where action is required to be carried out more swiftly, conveniently or flexibly than is possible under a désastre or creditors' winding-up or where it is important that the liquidator is appointed by and answerable to the court. There must, however, be good reason to prefer the just and equitable route to the more normal process of désastre or a creditors' winding-up.
Whether the company is wound up in a désastre or creditors' winding-up, the same rules apply with regard to the respective rights of secured and unsecured creditors, to debts provable, to the time and manner of proving debts, to the admission and rejection of proofs of debts, to the order of payment of debts and to setting off debts. The same principles are likely to be ordered to apply by the court in the case of a just and equitable winding up, subject to the court adopting a different approach to procedural matters if the circumstances of the case so require.
There is no direct equivalent in Jersey to administration under the UK Insolvency Act 1986, which has the primary objective of rescuing a company as a going concern rather than proceeding straight to a liquidation. However, the existing insolvency regime provides a significant level of adaptability through the just and equitable winding up jurisdiction, which allows the Royal Court to exercise its discretion (and it is not uncommon for it to do so) to permit the business of the debtor to be continued in the interests of stakeholders and/or other related ancillary orders, designed to improve the ultimate returns for stakeholders. This extends to the sanctioning of a "pre-packaged sale" of a debtor company's assets.
However, if a formal administration of a Jersey debtor is desirable and it is in the interests of the creditors to do so, then it may be possible to seek such administration orders in the UK. The Jersey court has jurisdiction to send a letter of request to the UK court asking it to exercise its powers of assistance under Section 426 of the 1986 Act by placing the company in administration. This has been done on many occasions in cases where there the UK court has no direct jurisdiction to make an administration order, but there are assets or creditors in the UK and a UK administration will have advantages for creditors as opposed to the winding up options available in Jersey. The efficacy of this way of proceeding was confirmed as a matter of English law by the English Court of Appeal in HSBC v Tambrook Jersey Ltd 2014 1 Ch 252.
Brief mention may also be made of other Jersey entities.
There are several types of Jersey partnership. An ordinary Jersey partnership is not itself a legal entity. Partners, if individuals, are subject to the désastre regime, and if Jersey companies, to the désastre and other insolvency regimes mentioned above. In the case of limited partnerships, the limited partners have limited liability and therefore any insolvency would normally be expected to fall only upon the general partner (who is subject to the ordinary désastre and corporate insolvency regimes). A Jersey limited partnership (other than the two types mentioned below) is not itself a legal entity. A Jersey separate limited partnership (SLP) is a separate legal person but not a body corporate. An SLP is not subject to any special insolvency regime.
A Jersey incorporated limited partnership (ILP), on the other hand, is both a separate legal person and a corporate body. The voluntary winding up of an insolvent ILP is also known as a creditors' winding-up and is governed by Part 4 of the Incorporated Limited Partnerships (Jersey) Regulations 2011. The procedure is similar to a creditors' winding up of a company. An ILP may also be the subject of a désastre, which as mentioned above provides a mechanism for both voluntary and creditor-originated involuntary insolvent winding up. A Jersey limited liability partnership (LLP) is a separate legal person but not a body corporate. Voluntary insolvent winding up of an LLP is governed by the Limited Liability Partnerships (Winding Up and Dissolution) (Jersey) Regulations 2018. An LLP may also be the subject of a voluntary or involuntary désastre.
A Jersey foundation is a separate legal person and also a distinct form of corporate body. A foundation is wound up in accordance with its own internal charter and regulations and the requirements of the Foundations (Winding Up) (Jersey) Regulations 2009. In the case of an insolvent foundation, a voluntary insolvent winding up is known as a creditors' winding up; this is similar to a creditors' winding up of a company. A foundation may also be the subject of a désastre, which, as mentioned above, provides both a voluntary and involuntary insolvency procedure.
A Jersey trust is not a separate legal person. There is developing case law in the Royal Court for the orderly winding up of trusts where the assets of the trust exceed the amount to which the trustee is entitled by way of indemnity for liabilities reasonably incurred by it in connection with the trust.
There are no provisions directly compelling an insolvent company to enter into a formal insolvency procedure. However, under Article 177 of the Companies (Jersey) Law 1991 and Article 44 of the Bankruptcy (Désastre) Jersey Law 1990, a director is potentially liable without limit for the debts of the company incurred after a time when the director either knew that there was no reasonable prospect that the company could avoid a creditors’ winding up or a désastre or, on the facts known to the director, was reckless as to whether the company would avoid such a winding-up or désastre. A director will not be liable, however, if they can satisfy the Court that they took reasonable steps with a view to minimising the potential loss to the company’s creditors.
In addition, as under the UK Insolvency Act, there are provisions imposing personal liability in the event of fraudulent trading and provisions for the disqualification of directors.
As with Section 214 of the UK Insolvency Act 1986, on which these provisions are based, there is no obligation necessarily to seek the formal insolvent winding up of the company. It may sometimes be more appropriate, in the interests of creditors, to continue trading and seek an accommodation with them. Depending on the facts, however, a liquidation process, may be the best way to avoid loss to creditors and mitigate the directors' risks of liability.
Directors also have general duties owed to the company which will include the interests of creditors where the company is insolvent or near-insolvent. This is considered further in 12.1 Duties of Directors.
In terms of options available to a Jersey company for its own voluntary insolvent winding up, there are three options.
The first is to make an application to court for a désastre (strictly, for a declaration that the assets of the company are en désastre). Subject to any internal restrictions on the directors' powers, the decision to make such an application falls within the competence of the board of directors, rather than the shareholders. Under the Désastre Law and the Bankruptcy (Désastre) (Jersey) Rules 2006, not less than 48 hours' notice of the application must be given to the Viscount. In practice, the notice is accompanied by a draft of the application and supporting documents. Longer notice may be needed in more complex cases as, in practice, it is important that the application is not objected to by the Viscount. The application is made ex parte to the Court, supported by a statutory statement, which sets out the estimated value of the company's assets and liabilities, and a verifying affidavit. The affidavit must:
verify the contents of the statement;
where the application is a voluntary one made by the company itself, state that the company is insolvent but has realisable assets; and
provide details of the notice given to the Viscount.
The test of insolvency is a cash flow test - inability to pay debts as they fall due.
The second option for the insolvent company is a creditors' winding-up. This requires no application to court but rather the passing of a shareholders' special resolution and it is therefore more squarely a decision for the shareholders. A special resolution must be passed by a majority of at least two thirds of the votes cast by shareholders present, in person or by proxy, being entitled to attend and vote. If, however, the articles of the company specify a greater majority than two thirds (or unanimity), the special resolution must be passed by that greater majority (or unanimity). At least 14 days' notice to shareholders must be given of the meeting, specifying the intention to propose the resolution as a special resolution. The company must also give at least 14 days' notice to creditors, by post and in the Jersey Gazette, of a creditors' meeting to held on the same day as, and immediately following, the shareholders' meeting.
The notice to creditors the company nominates the person who it proposes to be the liquidator. The liquidator must be an individual from one of a number of prescribed professional bodies. At the creditors' meeting, the directors must present a statement as to the affairs of the company, verified by affidavit by some or all of the directors; they must also appoint a director to preside over the creditors' meeting. Creditors may, at the meeting, nominate their own person as liquidator and in the case of disagreement with the company, the identity of the liquidator or liquidators will be determined by the court on the application of a director, shareholder or creditor of the company. During the winding-up, creditors may at any time remove a liquidator and fill the vacancy with another qualified person, unless the removed liquidator was appointed by the court in which the new appointment should be made by the court.
The third option is an application to the court for the company's own just and equitable winding up. Article 155 of the Companies Law enables such application to be made by the company itself, by a director or a shareholder (as well as various official bodies). If it is made by the company, this would again (subject to any internal restrictions) be under the authority of a decision of the board of directors rather than the shareholders. The notice period for the convening of the necessary creditors' meeting in a creditors' winding-up is statutory and where swifter action is required this can be a reason for the court acceding to an application or a just and equitable winding up instead (In the matter of Poundworld (Jersey) Ltd [2009] JRC 042).
The main option for creditors is to make an application to court for a declaration en désastre against the company. This option is available to a creditor with a claim for liquidated sum (ie, a debt to which there is no reasonably arguable defence), being not less than a prescribed amount, which is currently GBP3,000.
However, a désastre application may not be made by a creditor to the extent that the creditor has agreed not to do so, or a creditor whose only claim is one for the repossession of goods.
As in the case of a debtor application (see 2.3 Obligation to Commence Formal Insolvency Proceedings), at least 48 hours' notice must be given to the Viscount. The application to court is usually made ex parte and must be supported by a statutory statement and affidavit. The statement, in the case of a creditor's application, must, amongst other things, include the name and address of the debtor company, the amount of the claim and the nature and location (so far as known) of the company's assets. The affidavit must: verify the contents of the statement; where the application is made by a creditor, state that the creditor has a claim against the debtor, that to the best of the creditor’s knowledge and belief the debtor is insolvent but has realisable assets, and specify the grounds on which the creditor believes the debtor to be insolvent; and provide details of any notice of the application given to the Viscount. The test of insolvency is again a cash-flow test – inability to pay debts as they fall due.
A creditor making an application should also note that it is customary for the Viscount to seek an indemnity in respect of the Viscount's costs and the court has power to order that such indemnity be given.
The application is usually made ex parte and dealt with swiftly by the court; it is incumbent, however, on the applicant to act reasonably and in good faith. The company may later seek to challenge the declaration, by way of an inter partes application to recall the désastre. If that application is successful, and it turns out that it was not insolvent at the time of the application, the company has a right of action against the applicant to recover damages in respect of any loss sustained by it as a consequence of the declaration, unless the applicant was acting reasonably and in good faith.
At present, a creditors' winding-up under the Companies Law is a purely voluntary form of insolvent winding-up, being commenced by special resolution of the company's shareholders, but extending this option to creditors is the subject of future expected reform.
Cash flow Insolvency is required, whether désastre proceedings are voluntary or involuntary. This is reflected by the evidential and procedural requirements referred to in 2.4 Procedural Options.
A debtor aggrieved by a declaration en désastre may apply to the court for a recall of the declaration. In a recall application the court will consider more broadly a balance sheet test of insolvency. However, even if the company is solvent on a balance sheet basis, the désastre may still be maintained by the court if, balancing the interests of the debtor and its creditors, maintenance of the désastre appears just, having regard to the likelihood of continuing cash flow problems (In the Matter of the Désastre of La Sergenté Farm Limited 2002 JLR Note 2). Balance sheet solvency is therefore relevant at this stage but not decisive.
It is not necessary to establish that the company is insolvent in order for the court to make an order for the just and equitable winding up of a company under Article 155 of the Companies Law. The procedure is not, however, available to creditors. A just and equitable winding-up may be applied for by the company, or a director or shareholder of the company and certain official bodies.
There are no specific insolvency regimes for banks, insurance companies or other regulated entitles in Jersey. However, in the case of a regulated entity providing financial services, one of the reasons why the court might be amenable to ordering a just and equitable winding up, in preference to expecting the company to enter into a creditors' winding-up, is that the liquidator in the case of a just and equitable winding up is appointed by and answerable only to the court. This will be particularly relevant if there are also to be investigations by the Jersey Financial Services Commission (In the matter of Belgravia Financial Services Group Ltd 2008 JLR Note 36).
There are also special provisions in the Banking Business (Jersey) Law 1991 and the Insurance Business (Jersey) Law 1996, allowing the court to approve the transfer of deposit-taking business and a long-term insurance business respectively. These provisions are often used in solvent group restructurings.
Out-of-court restructurings and consensual workouts involving Jersey companies will typically occur in cases where the lenders and other creditors are based in other jurisdictions, typically the UK. The relevant loan and security documentation will also generally be governed by non-Jersey law, albeit that Jersey law security will be used to create security over Jersey-situate collateral. In addition, the financial problems faced by a Jersey company may be reflective of wider group distress involving entities based in other jurisdictions. In these scenarios, attitudes to informal out-of-court restructurings, and to corporate financial difficulty generally, will depend on prevailing market practice in the relevant territory of the primary lenders, including recognition of established frameworks such as the INSOL principles.
There is no requirement for consensual restructuring negotiations to take place before commencement of statutory process for the approval of a scheme of arrangement under Article 125 of the Companies Law or before the invoking of any voluntary insolvency procedure by the company.
Especially where there are protracted negotiations for restructuring company debt, directors of distressed Jersey companies need to keep under review whether they are continuing to meet their duties to creditors and continuing to avoid any potential liability for wrongful trading referred to in 2.3 Obligation to Commence Formal Insolvency Proceedings. A point may be reached where a formal insolvent winding-up of one form or another is going to be in the best interests of creditors.
As noted in 3.1 Restructuring Market Participants, the negotiation and implementation of consensual restructuring and workout processes will, in practice, follow market processes and mechanisms in the relevant jurisdiction outside Jersey and this will typically be a UK jurisdiction.
There is no typical approach to the injection of new money. The positon is likely to be governed in the first instance by the existing financing and security documents which may not be governed by Jersey law.
Article 34 of the Security Interests (Jersey) Law 2012 ("Security Interests Law") gives a purchase money security interest priority over other security interests in the intangible movable collateral provided that the security interest is perfected not later than 30 days after the day on which it attached. A "purchase money security interest" is defined as a security interest taken in collateral by a seller to the extent that it secures the obligation to pay all or part of the collateral’s purchase price and a security interest taken in collateral to the extent that it secures an obligation to repay part or all of so much of any value (being value given to the grantor for the purpose of enabling the grantor to acquire rights in the collateral) as is in fact applied to acquire those rights. However, separate rules apply to collateral which is an investment security represented by a certificate, a securities account, and a deposit account.
The Jersey courts have not yet had an opportunity to consider the duties of creditors in negotiations for a restructuring. In the context of the restructuring of debt of a Jersey company which conducts business with lenders and creditors outside the Island, those duties would be likely to arise under the foreign (ie, non-Jersey) law which typically governs the loan and security documents and/or the place of negotiations, rather than under Jersey law.
To the extent that, in a particular case, Jersey law applies to workout negotiations, informal restructuring or the exercise of voting powers under syndicated loan arrangements, it is likely that the Jersey courts would follow English case law on the extent of creditor duties. In the absence of express agreement, it is anticipated that creditors engaged in a restructuring would owe only limited duties to each other.
The tort of negligent misstatement is recognised in Jersey following principles of English common law, as is the tort of fraud or deceit.
Subject to Article 167 of the Companies Law, in the absence of contractual provision, there is no out-of-court process that will bind or cram down dissenting creditors. A scheme of arrangement is required in order to achieve that.
Article 167 of the Companies Law which provides for a more informal type of scheme of arrangement, which in principle could bind dissenting creditors out-of-court. It provides that an arrangement is entered into between a company immediately preceding the commencement of, or in the course of, a creditors’ winding up and its creditors is (subject to a right of appeal) binding on the company, if sanctioned by a special resolution of the company, and on the creditors, if acceded to by three quarters in number and value of them. An objecting creditor or contributory of the company may, within three weeks from the completion of the arrangement, appeal to the court against it. The court then has power to amend, vary or confirm the arrangement in such way as it considers just. There is no case law in Jersey on this provision. Whilst such an arrangement would bind a dissenting creditor who omits to appeal in time, the effect of a timely appeal will be to put the terms of arrangement in the discretion of the court.
Where security is required to be taken under Jersey law, in most cases the collateral will comprise intangible movable property situated in or closely connected with Jersey, such as shares in a Jersey company, debt owed by Jersey company or money in a Jersey bank account. Such security is taken under the Security Interests Law. The Security Interests Law adopts a "PPSA" approach. It is drawn, with significant adaptations, from Canadian and New Zealand legislation and indirectly from Article 9 of the US Uniform Commercial Code.
Security over Jersey immovable property is taken by way of a judicial or conventional hypothec, which is registered in court records or the Jersey land registry respectively.
There are plans to extend the Security Interests Law so as to cover the creation of security in tangible moveable property, but at present the Security Interests Law is restricted to intangible property. For the time being security over a tangible movable may only be created by way of a possessory pledge under the customary law.
Position Before an Insolvency Process
Subject to any contractual restrictions between creditors, a secured party may enforce a security interest created under the Security Interests Law, provided that there has been an event of default (being an event of a type specified as such by the security agreement) and written notice is given to the grantor specifying the event of default.
As well as the original collateral, the security interest will extend to the identifiable or traceable proceeds of the collateral, that is to say, intangible movable property in which the grantor acquires an interest derived directly or indirectly from a dealing with the collateral or from a dealing with the proceeds of such collateral. Interest, dividends or other income derived from the collateral are not themselves "proceeds" but may be included within the ambit of the original security interest under the express terms of the security agreement.
Part 7 of the Security Interests Law gives a secured party wide powers of enforcement. The power of enforcement may be exercised in any of the following ways:
exercising any rights of the grantor in relation to the collateral or proceeds; and
instructing any person who has an obligation in relation to the collateral or proceeds to carry out the obligation for the benefit of the secured party; and
applying any remedy that the security agreement provides for as a remedy to the extent that the remedy is not in conflict with the 2012 Law.
The Law also provides that an additional notice has to be given to the grantor and other interested parties not less than 14 days before any actual appropriation or sale. The grantor can waive its own right to receive notice in the security agreement.
The secured party may effect a sale of the collateral by auction, public tender, private sale or another method. The sale would usually be to a third party but does not have to be; the secured party may purchase the collateral itself.
If the collateral is sold, the secured party must take all commercially reasonable steps to obtain fair market value for the collateral as at the time of the sale, act in other respects in a commercially reasonable manner in relation to the sale and enter any agreement for or in relation to the sale only on commercially reasonable terms.
If the collateral is appropriated, the secured party must take all commercially reasonable steps to determine the fair market value of the collateral as at the time of the appropriation; and act in other respects in a commercially reasonable manner in relation to the appropriation.
Position After the Commencement of an Insolvency Process
The effect of a declaration of désastre is, in accordance with Article 8 of the Désastre Law, to vest all the debtor's property in the Viscount. Such vesting is, however, subject to the rights of secured creditors.
Whilst Article 10(1) of the Désastre Law has the general effect of prohibiting other creditor remedies after a declaration of désastre, Article 10(5) specifically confirms that a secured party under the Security Interests Law may continue to exercise its usual powers of enforcement under Part 7 of that Law, without needing to obtain the consent of either the Viscount or the court. Article 56 of the Security Interests Law is to the same effect: it provides that if the grantor of a security interest becomes "bankrupt" (which expression includes a corporate désastre or creditors' winding up in Jersey) or the grantor or the grantor’s property is subjected, whether in Jersey or elsewhere, to any other judicial arrangement or proceeding consequent upon insolvency, this will not affect the powers of a secured party under Part 7 of the Security Interests Law to enforce the security.
Almost invariably a security agreement will contain a security power of attorney which can be used to facilitate enforcement. Article 5(2) of the Powers of Attorney (Jersey) Law 1995 provides that where a power of attorney is expressed to be irrevocable and is given either for the purpose of facilitating the exercise of powers of a secured party holding a security interests under the Security Interests Law or in connection with security governed by foreign law, the power continues to have effect notwithstanding the insolvency of the grantor. Article 5(4) of the Powers of Attorney Law further provides that such power of attorney may be continue to be exercised notwithstanding any rule of law in Jersey or elsewhere which vests property in any person (such as the Viscount) on bankruptcy and, further, that the attorney may act under it as if the power of attorney had also been given by the person in whom the property has vested.
Article 32 of the Désastre Law sets out mandatory waterfall provisions for the distribution of the insolvent estate amongst creditors who have proved in the désastre. These provisions apply in respect "the money the Viscount receives by the realisation of the property of a debtor". They do not, therefore, apply to enforcement action taken by a secured party itself: in the normal course the secured party will have enforced the security and it will not be the Viscount who realises the collateral. In the event that the Viscount does realise the collateral, Article 32(7) of the Désastre Law provides that the proceeds of realisation must be dealt with by the Viscount in accordance with Part 7 of the Security Interests Law. Thus the secured party's rights of priority in the proceeds of sale continue to be recognised but in this event after deduction of the Viscount's costs.
If the grantor company is being wound up in a creditors' winding-up under the Companies (Jersey) Law 1991, rather than a désastre, the position is similar, albeit that in this case the assets of the company do not vest in the liquidator but rather remain vested in the company under the control of the liquidator. The effect of Article 56 of the Security Interests is that the holder of a security interest under the Security Interests Law may continue to exercise its powers of enforcement under Part 7 of the Law, notwithstanding the commencement of a creditors' winding-up.
There is no impediment in principle to the enforcement of a security interest obtained under the Security Interests Law in the event of the company or another person instigating proceedings for the approval of a scheme of arrangement.
Secured creditors do not have the right, simply by being secured creditors, to disrupt or block formal voluntary or involuntary insolvency processes.
The ability to enforce a security interest, and the ranking of, and any dealing with, proceeds of sale, may, as a matter of contract, still be affected by inter-creditor covenants to which the secured party has agreed. Article 32 of the Security Interests Law confirms that a secured party may, in a security agreement or otherwise, subordinate the secured party’s security interest to any other interest and that such subordination is effective in accordance with its terms as between the parties to the agreement. The Bankruptcy (Netting, Contractual Subordination and Non-Petition Provisions) (Jersey) Law 2005 also makes certain netting, contractual subordination and non-petition provisions enforceable notwithstanding bankruptcy.
As mentioned in 4.2 Rights and Remedies, in order to enforce a security interest under the Security Interests Law notice of an event of default must be given to the grantor. There is no particular period of notice required for this purpose.
However, if the secured party intends to exercise rights of appropriation or sale, an additional written notice has to be given to the grantor and certain other interested persons not less than 14 days before any actual appropriation or sale.
The additional notice must be given to the following persons:
any person other than the grantor who has an interest in the collateral and has, not less than 21 days before the appropriation or sale, given the secured party notice of that interest.
The grantor can waive its own right to receive notice in the security agreement or agree to a different period of notice. This will not affect the need to give notice to other persons to whom notice is required to be given unless such agreement is also obtained from them.
The requirement to give notice of sale does not apply if the collateral is a quoted investment security (or anything else prescribed for this purpose), the secured party believes on reasonable grounds that the collateral will decline substantially in value if it is not disposed of within 14 days after the relevant event of default, or for any other reason, the Royal Court orders, on an ex parte application, that notice need not be given. Thus in a rapidly falling market it should be possible for the secured party to proceed on a more urgent basis.
As mentioned in 4.2 Rights and Remedies, the right of a secured creditor to enforce its security continues notwithstanding a declaration of désastre or the commencement of a creditors' winding-up.
There are no special procedural protections or rights applying to secured creditors in a scheme of arrangement. Secured creditors may, however, be treated as a separate class or classes for the purposes of voting on the scheme.
Priority between unsecured creditors in the event of insolvency in Jersey is governed by the waterfall provisions in Article 32 of the Désastre Law, which are set in 5.8 Statutory Waterfall of Claims. Subject to certain exceptions mentioned in Article 32, a pari passu principle applies.
Subject to certain exceptions mentioned in Article 32, a pari passu principle applies.
Unsecured creditors may not, simply by being creditors, disrupt a formal voluntary or involuntary process. Indeed, upon commencement of a court ordered liquidation, a moratorium prohibiting any suit, action or other proceeding from being commenced or continued with or against the company without the leave of the Royal Court begins.
Prior to this, unsecured creditors may sue the debtor for recovery of the debt due to them. The jurisdiction of the Petty Debts Court extends to claims for up to GBP30,000 and otherwise action would be commenced in the Royal Court. In addition, they may also have a lien on goods in possession or the benefit of a retention of title clause in a contract for the supply of goods.
A judgment debt may be enforced against the assets of the company in Jersey. Enforcement in other jurisdictions will depend on whether that jurisdiction has reciprocal enforcement legislation with Jersey (as has the UK and several other jurisdictions) or, if not, its rules of private international law.
Unsecured creditors may also apply for a declaration of désastre in respect of the company, the effect of which, if granted, is to force the company into an insolvent winding-up by the Viscount. The procedure and requirements for this are summarised in 2.4 Procedural Options. The current threshold for making such an application is a liquidated claim for not less than GBP3,000. For the reasons stated in 2.4 Procedural Options, the applicant creditor would need to have reasonable grounds that the company is insolvent (unable to pay its debts as they fall due) but has realisable assets.
In practice, the most likely form of interlocutory injunction is a freezing order (formerly known, as in England and Wales, as a Mareva injunction) in order to prevent the dissipation of assets prior to any judgment being awarded in the applicant's favour. To obtain a freezing order, the plaintiff must show a good, arguable case in respect of the substantive claim and that there is a real risk of dissipation of assets which would defeat a judgment. The usefulness of a Jersey freezing order is not restricted to Jersey proceedings. It was established by the Jersey Court of Appeal that the order may be obtained on a free-standing basis in support of foreign proceedings (Solvalub Ltd v Match Investments 1996 JLR 361). It may also be brought in support of arbitral proceedings (Goldtron Ltd v Most Investments Ltd 2002 JLR 424).
A freezing order is not designed to secure priority for the plaintiff’s claim over the defendant’s other creditors, punish the defendant in advance of judgment or exert pressure to settle. If it has been sought for any of these purposes, it is liable to be construed as an abuse of process and discharged.
The application for a freezing order is made ex parte. Amongst other requirements, the applicant has strict duty to make full and frank disclosure of all facts and matters which it is material for the judge to know.
The freezing order must follow a standard form of wording issued by the court (Practice Direction RC 15/04), unless the court can be persuaded that there is good reason to depart from it. Under the standard terms, the applicant is required to undertake to pay damages in the event that the court later finds that the defendant should be compensated for loss caused by the injunction. Where a third party, such a bank holding an account of the defendant, is to be joined, the applicant must also agree to pay the reasonable costs of that party incurred as a result of the order, including the costs of ascertaining whether it holds any of the defendant's assets, as well as an undertaking in damages if the court decides that the party cited should be compensated for loss by the plaintiff. The standard form also requires the defendant to disclose the value, location and details of its assets.
The typical timeline for enforcing an unsecured claim will depend on whether the claim is contested and how easily realisable the debtor's assets are.
At customary law, a landlord has a preferential claim against the goods of their tenant but this is limited to a claim for one year's rent and is also limited to the goods of the tenant which are actually situated on the demised premises or which have been removed within the previous forty days. The claim also extends to the proceeds of sale of such goods. A landlord may also have certain other rights in relation to property in the hands of or belonging to third parties, but this has not been the subject of any recent decision of the courts.
There are no special procedures or requirements applicable to foreign creditors.
However, if a defendant seeks an order for security for costs against a plaintiff, the court will be more inclined to accede to that application if it would be difficult for the defendant to enforce a Jersey costs order in the plaintiff's jurisdiction. Each case is assessed on its individual circumstances. Many overseas plaintiffs will be resident in the United Kingdom, where the enforcement of Jersey judgments (including costs orders) is straightforward. However, where the plaintiff is resident in other jurisdiction and the defendant can show that enforcement would be difficult, an application by the defendant for an order for security for costs is more likely to succeed (Leeds United Association Football Club Ltd v The Phone-In Trading Post Ltd t/a Admatch Ltd [2009] JCA 97).
In a désastre, moneys recovered by the Viscount from the realisation of the debtor's property are paid in the following order:
in payment of the Viscount’s fees and emoluments and all costs, charges, allowances and expenses properly incurred by or payable by the Viscount in the “désastre” (and any expenses of a liquidator as defined by Article 15(7) of the Dormant Bank Accounts (Jersey) Law 2017);
where under the Banking Business (Depositors Compensation) (Jersey) Regulations 2009, the debtor is a bank in default, and a right of an eligible depositor in respect of an eligible deposit held by the debtor is vested in the Jersey Bank Depositors Compensation Board, in payment to that Board of the total amount due to the Board by virtue of all such vested rights in relation to that debtor, but not exceeding the total amount payable by the Board in respect of that debtor as compensation to depositors under those Regulations;
in payment to any employee of the debtor of any amount due to the employee at the date of the declaration in respect of arrears of:
wages or salary for services rendered to the debtor during the 6 months immediately preceding the declaration; and
holiday pay and bonuses, but not exceeding in either case such amount as may be prescribed;
in payment of:
all sums payable to the Health Insurance Fund under Article 25 of the Health Insurance (Jersey) Law 1967 and to the Social Security Fund under Article 41 of the Social Security (Jersey) Law 1974;
outstanding Jersey tax (being all amounts due as described in Article 45(3) of the Income Tax (Jersey) Law 1961 and all amounts due as described in Article 47(8) of the Goods and Services Tax (Jersey) Law 2007;
an amount due by the debtor to his or her landlord for the payment of rent due to the extent, if any, that their claim qualifies for preference by virtue of customary law; and
parochial rates due to any parish in Jersey for a period not exceeding two years;
in payment of all other debts proved in the “désastre” on a pari passu basis.
The debts referred to in bullet points 3 and 4 rank equally between themselves. If the property of the debtor is insufficient to meet them, they abate in equal proportions between themselves.
As noted in 4.2 Rights and Remedies, the vesting of the debtor's property in the Viscount is subject to the rights of secured creditors. If the collateral is sold by the Viscount Article 32(7) of the Désastre Law, the proceeds are dealt with in accordance with the priority rules set out in Part 7 of the Security Interests Law 2012. Similarly, where a hypothec has been obtained over Jersey immovable property and this is sold by the Viscount, Article 32 provides that hypothecary creditors are (subject to payment of the Viscount's costs of sale) entitled to preference in the order of the date of creation of their respective hypothecs out of the proceeds of sale.
In the case of a creditors' winding-up, all costs, charges and expenses properly incurred by the liquidator, including the remuneration of the liquidator (and any expenses of a liquidator under Article 15(6)(a) of the Dormant Bank Accounts (Jersey) Law 2017), are payable out of the company’s assets in priority to all other claims. Apart from that, and the corresponding absence of any role for or costs incurred by the Viscount, Article 166 of the Companies Law provides that creditors are paid in the same order as in the case of a désastre.
There are no special priority rules for a scheme of arrangement with creditors. However, negotiations for such a scheme, and the court's ultimate approval of it, would need to take place against the background of the order in which claims would be paid in the event of a désastre or a creditors' winding-up, as well as the rights of secured creditors.
The priority rules in Jersey insolvency proceedings taking the form of a désastre or a creditors' winding-up are referred to in 5.8 Statutory Waterfall of Claims.
There is no equivalent in Jersey to the English Creditors' Voluntary Arrangement.
There are, however, provisions in Part 18A of the Companies Law for court-sanctioned schemes of compromise or arrangement between a company and its creditors and/or its shareholders. These provisions are largely based on those contained in the Companies Act 1985 (which are similar to those now in the UK Companies Act 2006) and accordingly the court regards English judgments in this area as highly persuasive, if not strictly binding.
Most of the published Jersey judgments on such applications have concerned schemes of arrangement with shareholders; a minority of judgments have concerned schemes with creditors. However, a number of principles set out in the shareholder cases are also applicable to creditor schemes.
In common with the UK and other jurisdictions which have adopted similar provisions, there are three stages in a scheme of arrangement application:
The company, a creditor or a shareholder may apply to the court for an order directing the holding of a meeting of creditors or of the relevant class of creditors. If the company is being wound up, Article 125(1) provides that the application may be made by its liquidator. Accordingly, it is clear that a scheme of arrangement may be proposed and considered in the course of a creditors' winding-up. Although the application to court for the convening of the necessary creditors' meeting may be made by a creditor, the company must always be a party to the scheme and the court will not sanction a scheme which does not have the company's approval.
The court then orders the convening of creditors' meeting or class meetings to be held in such manner as the court directs. The court must consider in particular whether creditors should be divided into separate classes and meet separately. In order for the court to have power to sanction a scheme with creditors, the scheme must be approved at the meeting (and any class meeting ordered) by a majority in number of the creditors present and voting at the meeting who also represent three quarters in value of the creditors present and voting at the meeting. Thus, in line with the UK legislation upon which it is based, there is a dual majority test. A creditor may be present either in person or by proxy.
If the scheme is approved by the requisite majority at the court-ordered meeting(s), the next stage is to seek the court's sanction. The application should be supported by an affidavit from the chairman of the meeting confirming the due holding of and voting at the meeting and appending copies of the relevant documentation.
A scheme that has been approved by the requisite majority should not be frustrated or delayed solely because those who voted against it disagree with the views of those who voted in favour. Following UK jurisprudence, in order to sanction the scheme, the court must conclude:
that the provisions of the Companies Law have been complied with;
that creditors were fairly represented by those who attended the meeting, that the statutory majority was acting bona fide and was not coercing the minority in order to promote interests adverse to those of the class which they purported to represent;
that the arrangement is such as an intelligent and honest person, a member of the class concerned and acting in respect of their interests, might reasonably approve; and
as it has been said in some cases, that there is no other "blot" on the scheme.
Mention has been made in 3.5 Out-of-court Financial Restructuring or Workout of the more informal process for achieving a cram down under Article 167 of the Companies Law and in particular its drawback in potentially putting the scheme at large in the discretion of the court.
The commencement of an application for the court's sanction of a scheme of arrangement does not result in any moratorium or automatic stay on the claims of creditors. The company will continue to operate its business during the procedure under the management of its directors.
Whether or not the scheme is itself an arrangement with a class of creditors, the court considers whether separate class meetings of the affected creditors should be held. The court has drawn on English case law for this purpose, mostly in connection with schemes with shareholders. Meetings of separate classes are required where the affected creditors or shareholders have such dissimilar rights against the company that it is impossible for them to consult together with a view to a common interest.
Article 126 sets out certain information which must be circulated with the notice convening the meeting. This includes a statement explaining the effect of the scheme and any material interests of the directors (whether as directors, shareholders, creditors or otherwise) and the effect of the scheme on those interests, in so far as different from its effect on the like interests of other persons. Where the scheme affects the rights of debenture holders, the same information regarding any conflict of interest of any trustee for the debenture holders is required. Directors and debenture trustees are required to provide the company with the necessary information. If the meeting is convened by advertisement, this must also indicate how a copy of the statement may be obtained free of charge.
Creditors have the right to challenge the scheme including the composition of classes.
Provided that the scheme is approved at the creditors' meeting or class meetings by the requisite statutory majorities and is sanctioned by the court, it will be binding on dissenting scheme creditors.
There is no restriction, in principle, on the trading of claims against the company during the process of a scheme of arrangement, subject to formalities required for assignment.
Article 127 of the Companies Law gives the court additional powers where the compromise or arrangement has been proposed for the purposes of, or in connection with, a scheme for the reconstruction of a company or companies, or the amalgamation of two or more companies, and under the scheme the whole or part of the undertaking or the property of a company concerned in the scheme is to be transferred to another company. Under these additional powers the court may order:
the transfer to the transferee company of the whole or part of the undertaking and of the property or liabilities of a transferor company;
the allotting or appropriation by the transferee company of shares, debentures, policies or other similar interests in that company which under the compromise or arrangement are to be allotted or appropriated by the company to or for any person;
the continuation by or against the transferee company of legal proceedings pending by or against a transferor company;
the dissolution, without the winding-up, of a transferor company;
the provision to be made for persons who, within a time and in a manner which the court directs, dissent from the compromise or arrangement;
If the court's order provides for the transfer of property or liabilities, Article 127 further provides that the property transfers to, and vests in, the transferee company and the liabilities are transferred to and become liabilities of the transferee. If the order so directs, property also vests freed from any hypothec, security interest or other charge which is by virtue of the compromise or arrangement to cease to have effect. Orders made under Article 127 must be delivered to the registrar of companies for registration.
Merger of companies and continuance in and out of Jersey is also possible under Parts 18A and 18C of the Companies Law.
The company continues to be managed by its directors during a scheme process. Assets may be used and disposed of by the company, subject to any existing contractual commitments. However, the court retains discretion whether or not to sanction the scheme and any substantial change in the company's position after the scheme has been put to creditors would be likely to be taken into account by the court.
The directors remain in control of the management of the company during proceedings for a scheme.
Where the court's additional powers are engaged under Article 127 of the Companies Law, the court may order that property to be transferred under the scheme vests in the transferee freed from any hypothec, security interest or other charge which, by virtue of the scheme, is to cease to have effect.
Security may be released consensually or pursuant to the scheme for a reconstruction or amalgamation.
New money could be given priority by the company granting security to the lender or subordinating scheme creditors by the terms of the scheme.
There are no statutory provisions regarding how the claims of creditors are to be valued for this purpose. The valuation methodology should be set out in the explanatory statement. If the company is proposing contentious or discriminatory valuations, the scheme will be open to objection and the court may decline to sanction it.
The approval of the scheme is subject to the overall discretion of the court. The manner in which the court exercises its discretion to sanction a scheme of arrangement is referred to in 6.1 Statutory Process for a Financial Restructuring/Reorganisation. Creditors should vote bona fide and not be seen as coercing the minority in order to promote interests adverse to those of the class which they purport to represent. The court must also be satisfied that the scheme is such that an intelligent and honest person, being a member of the class concerned and acting in respect of their interests, might reasonably approve.
In principle, non-debtor parties may be released from liabilities if they are bound by the scheme.
There are no statutory rights of set off or netting applicable to claims in a scheme with creditors. However, the court would be likely to take any such existing rights, and those which would be expected to apply in an insolvency process, into account when assessing the overall effect of the scheme.
Failure by the company to observe the terms of a scheme would expose the company to legal action in the normal way. If the failure relates to procedural requirements and occurs prior to court's sanction, the court might not sanction the scheme. Failure by a creditor to observe the terms of scheme would similarly render it liable for its breach and potential injunctive relief.
In a scheme of arrangement with creditors, the proprietary interests of shareholders in the company would not be affected.
Where the courts additional powers are engaged under Article 127 of the Companies Law in connection with a scheme for the reconstruction or amalgamation, a transferee company may receive assets of the company. The transferee company could be its parent.
The three forms of insolvent winding up of Jersey companies and their procedural requirements are referred to in 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership, 2.3 Obligation to Commence Formal Insolvency Proceedings, 2.4 Procedural Options and 2.5 Commencing Involuntary Proceedings: désastre, creditors' winding-up and a just and equitable winding-up.
The rules with regard to the respective rights of secured and unsecured creditors, to debts provable, to the time and manner of proving debts, to the admission and rejection of proofs of debts, to the order of payment of debts and to setting off debts are substantially the same whether the company is in a désastre or creditors' winding-up. The same rules are in practice substantially adopted by the court in the case of a just and equitable winding up.
The effect of declaration of désastre, is that creditors with provable claims no longer have any other remedy against the property or person of the debtor in respect of the debt, may not commence any action or legal proceedings to recover the debt, or except with the consent of the Viscount or by order of the court, continue any action or legal proceedings to recover the debt. If the debtor is a company a transfer of shares in the debtor not being a transfer made to or with the sanction of the Viscount or an alteration in the status of the company’s members, made after the declaration is void. However, as noted in 4.2 Rights and Remedies, although in a désastre the debtor's property vests in the Viscount this is subject to the rights of secured creditors.
In a creditors' winding-up, the company's property does not vest in the liquidator (it remains vested in the company). Article 159 of the Companies Law provides that the corporate state and capacity of the company continue until the company is dissolved. After the commencement of the winding-up no action may be taken or proceeded with against the company except by leave of the court and subject to such terms as the court may impose. A transfer of shares in the company, not being a transfer made to or with the sanction of the liquidator, and an alteration in the status of the company’s members made after the commencement of the winding up, is also void. As noted in 4.2 Rights and Remedies, express provision allows the holder of a security interest under the Security Interests Law to enforce its security notwithstanding the commencement of a creditors' winding up or a désastre.
Creditors' claims are filed and open to inspection by the debtor and other creditors subject to statutory time periods. In the event that a creditor is aggrieved by a decision of the Viscount with regard to the admission of another claim (having filed objection to it) or the rejection of its own claim, in whole or in part, the creditor can require the Viscount to bring the matter to court for review pursuant to Article 31(7) of the Désastre Law. The court reaches its own decision on the merits and exercises its own discretion, the burden of proof falling on the person objecting to the decision (In the matter of Rockingham Investments Ltd [2019] JRC 082). In cases falling outside the terms of Article 31(7), the creditor may still challenge a decision of the Viscount, but this will be by way of judicial review and the court will interfere on the merits only in cases where the decision falls outside the range of reasonable decisions that the Viscount might make. In the case of a creditors' winding-up, the liquidator or a contributory or creditor of the company, may apply to the court under Article 186A of the Companies Law for the determination of a question arising in the winding-up, or for the court to exercise any of its powers in relation to the winding-up.
In both a désastre and a creditors' winding-up, the powers of the directors are effectively superseded by those of the Viscount or liquidator respectively. The goal of both proceedings is not the rescue of the company but its orderly winding up and dissolution. Although the Viscount and a liquidator have limited powers to carry on the company's business this is only in so far as beneficial for the purpose of its winding up.
Amongst their other powers, the Viscount or liquidator may disclaim onerous property that is unsaleable or not readily saleable or is such that it may give rise to a liability to pay money or perform any other onerous act, including an unprofitable contract. A person who claims an interest in the disclaimed property and a person who is under any liability in respect of the disclaimed property, not being a liability discharged by the disclaimer, may appeal to the court.
The court may make an order on such terms as it thinks fit for the vesting of the disclaimed property in, or for its delivery to a person entitled to it or a trustee for such a person or a person subject to a liability or a trustee for such a person. The court may not make the latter order except where it appears to the court that it would be just to do so for the purpose of compensating the person subject to the liability in respect of the disclaimer. A person sustaining loss or damage in consequence of the operation of a disclaimer is deemed to be a creditor of the company to the extent of the loss or damage and accordingly may prove for the loss or damage.
Mandatory insolvency set off applies in a désastre and in a creditors' winding-up in respect of mutual credits, mutual debts or other mutual dealings between the debtor and a creditor. In addition, the Bankruptcy (Netting, Contractual Subordination and Non-Petition Provisions) (Jersey) Law 2005 also makes certain netting, contractual subordination and non-petition provisions enforceable notwithstanding formal insolvency processes.
In a désastre, after the Viscount has realised all the debtor's property, or as much as can be realised without needlessly protracting the désastre, the Viscount supplies creditors with a report and accounts and pays the final dividend. If the debtor is a Jersey company (or a foundation or incorporated limited partnership) the Viscount, then notifies the registrar of companies in writing of the date of final payment. Jersey companies en désastre (and those other entities) are dissolved with effect from the date on which registrar receives the notice (save where the registrar has received notice from the Attorney General that criminal proceedings have been instituted or are pending).
As part of the requirements for commencing a creditors' winding-up, the company is obliged to convene a meeting of creditors to be held in Jersey on the same day as, and immediately following, the shareholders' meeting at which the special resolution for the winding up is proposed. During the period before the creditors' meeting, the company must furnish creditors free of charge with such information concerning the company's affairs as they reasonably require. At the creditors' meeting, the directors lay a statement of affairs of the company, verified by affidavit, before the meeting and a director must be present at and preside over the creditors' meeting. As mentioned in 2.4 Procedural Options, the company and the creditors may each nominate their own liquidator (subject to that liquidator having the appropriate qualifications) and the creditors' choice will prevail unless the Royal Court determines otherwise.
If the creditors' winding-up lasts for longer than twelve months, the liquidator must convene further meetings of the company's shareholders and of the creditors and lay before those meetings an account of the liquidator's acts and dealings and of the conduct of the winding up.
Article 185A of the Companies Law provides that the liquidator in a creditors’ winding-up may apply to the court for an order terminating the winding up, and the members may, by special resolution, authorise the company to make such an application. The court must refuse the application unless satisfied that the company is then able to discharge its liabilities in full as they fall due.
As soon as the affairs of the company have been fully wound up, the liquidator must make up an account of the winding-up, showing how it has been conducted and the company’s property has been disposed of, and then call a meetings of the company's shareholders and of the creditors for the purpose of laying the account before the meetings and giving an explanation of it. The liquidator makes a return of the registrar of companies of the meetings and their dates (and, in the case of a public company, a copy of the account). This is registered by registrar and at the end of three months after the after registration the company is deemed to be dissolved (subject to the power of the court to defer dissolution on the application of the liquidator or any other interested person).
In terms of the relative advantages of a désastre and a creditors' winding-up, this will depend on the particular circumstances. For creditors, a désastre is the only form of insolvent winding-up which they can initiate. (Note that the process is also available in respect of non-Jersey companies and other persons and legal entities subject to jurisdictional requirements set out in Article 4 of the Désastre Law. Thus, a non-Jersey company may be the subject of a désastre application if it carries on or has within the preceding three years carried on business in Jersey or has immovable property in Jersey which is capable of realisation).
For the indebted company itself, there is a choice whether to proceed by way of a désastre, creditors' winding up or a just and equitable winding up. Where a désastre is proposed, the Viscount can sometimes use their jurisdiction to promote a voluntary scheme with creditors in order to avoid insolvency. The court may also seek to assist in order to avoid a désastre and has power to adjourn an application on terms. Generally, however, the company may prefer the degree of control it has in nominating a preferred liquidator through a creditors' winding-up. As noted in 2.2 Types of Voluntary and Involuntary Restructuring, Reorganisations, Insolvencies and Receivership, an application for a just and equitable winding-up can be the preferable course where action is required to be taken more swiftly than the timescales required for commencing a creditors' winding-up or it is important that the business of the debtor be permitted to continue in the interests of stakeholders.
In cases where there are assets and creditors in the UK, the interests of the creditors and the company may be better served by a UK administration. As noted in 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership, where the UK court does not have direct jurisdiction to do this, an administration of a Jersey company may indirectly be achieved through a letter of request for assistance under Section 426 of the UK Insolvency Act 1986.
The Viscount in a désastre or liquidator in a creditors' winding up will be responsible for negotiating and executing contracts of sale of the company's assets. The purchaser will acquire title which is free of secured claims against the company. There is no statutory restriction on creditors bidding for the company's assets or acting as a stalking horse in a sale process.
Sales may take place on a pre-negotiated or pre-pack basis. In the case of In the matter of Collections Group Ltd [2013] JRC 096 the Jersey court approved a pre-pack sale by liquidators appointed in a just and equitable winding up of an insolvent Jersey company. The court noted that, whilst such a sale may in some circumstances be in the best interests of creditors, there was potential for abuse, and for this reason the Joint Insolvency Committee in England and Wales had issued a Statement of Insolvency Practice (SIP16) setting out guidance for insolvency practitioners in connection with pre-packaged sales in administrations. The Statement is not directly applicable in Jersey, but the court took account of it, emphasising that "there are risks involved in any form of pre-packaged agreement, particularly where the directors or shareholders of the company being placed in liquidation have an interest in the purchasing company and liquidators must therefore pay careful attention to the guidance given in SIP16".
There is no statutory plan in a désastre or creditors' winding-up. To the extent that parties have failed to comply with contractual obligations or have otherwise not complied with their statutory obligations, then the normal consequences, including the risk of litigation, apply.
In principle, the Viscount or liquidator has power to borrow further money and give security over unencumbered or free assets during the course of a désastre or creditors winding-up. However, since the purpose of those proceedings is the orderly winding-up and dissolution of the company, this is only likely to arise in an exceptional case.
The Royal Court has jurisdiction to order the pooling of assets and liabilities of group companies in the liquidation of those entities. In the case of in the matter of Corebits Ltd and Zoombits Ltd 2011 JLR Note 38 the joint liquidators of two companies, which were in a creditors’ winding-up, applied to pool the companies’ assets and liabilities on the grounds that the affairs of the companies were seriously intermingled and the cost of disentangling them would be considerable. The court approved the application to pool the assets and liabilities so that the creditors of both companies would be treated in the same manner. The court had jurisdiction to make the order because Article 186A of the Companies (Jersey) Law 1991 provided that, on an application by, inter alia, the liquidator of a company in a creditors’ winding-up, the court could make any order that it could make in relation to a désastre, and there was ample precedent for the court making a pooling order in a désastre (In the matter of Royco Investment Company Ltd. 1994 JLR 236).
In the case of In the Matter of The Representation of Roberts, Toynton and Rhodes (as Joint Liquidators of Huelin-Renouf Shipping Limited) 2015 (2) JLR 148, the Jersey court approved the consolidation of the assets and liabilities of a Jersey company in a just and equitable winding-up and a Guernsey company of the same group which was in compulsory liquidation under Guernsey law. The businesses of the companies had been conducted in manner such that they said to be "inextricably intertwined". The amount of work that was needed in order to unravel the affairs of the group so that they could be treated separately would have increased costs to the detriment of the Jersey creditors.
Article 162 of the Companies Law allows a creditors' meeting in a creditors' winding-up to appoint a liquidation committee consisting of not more than five persons. The company may also appoint up to five persons, subject to objection by creditors and ultimate decision by the court. The liquidation committee undertakes the functions of a creditors' meeting in relatively limited respects, such as the approval of the remuneration of the liquidator and approving the liquidator in paying a class of creditor in full or in compromising a claim by or against the company. The expenses of a liquidation committee are likely to be an expense of the winding up.
The use and sale of the company's assets during a désastre or creditors' winding-up is in principle a matter for the Viscount or liquidator for the orderly and beneficial winding up of the company.
The Viscount and a liquidator have extensive powers but the company's business may only be continued to the extent that it is necessary to do for the purpose of its beneficial winding-up.
Article 49 of the Désastre Law provides that the court may give assistance to other courts of certain prescribed jurisdictions in all matters relating to insolvency. In doing so it may have regard, to the extent it considers appropriate, to the provisions for the time being of any model law on cross border insolvency prepared by the United Nations Commission on International Trade Law. The prescribed jurisdictions are currently Australia, Finland, Guernsey, the Isle of Man, the United Kingdom, and the Republic of Ireland. A letter of request must be made by the foreign court to the Jersey court.
In respect of other territories, the Jersey court has also readily given similar assistance under its inherent jurisdiction to insolvency officials who have been appointed in other jurisdictions. Such assistance will be forthcoming, especially if reciprocity is shown, and the assistance is not contrary to the relevant foreign law or contrary to Jersey public policy.
In exercising its discretion, whether under Article 49 or under inherent jurisdiction, the court has regard to principles of private international law. The court will not directly or indirectly enforce the penal or revenue laws of another state, but it has been held that this restriction does not apply merely because a foreign tax authority is one (and even vastly the most substantial) of a number of major creditors (In re Bomford, 2002 JLR N34; In re Williams (Royal Ct), 2009 JLR N16).
In relation to applications under Article 49, the court is expressly empowered to exercise any jurisdiction which it or the requesting court could exercise in relation. Therefore, although in a domestic case the Jersey court could not authorise a creditor to sell a debtor’s immovable property, the court may do so in an appropriate case where the requesting court would have power to take such action (In re Estates & General Developments Ltd 2013 (1) JLR 145).
There is are no express statutory provisions for insolvency protocols between the Jersey courts and foreign courts. The courts are, however, mindful of the principles of comity and co-operation between courts.
See 8.2 Co-ordination in Cross-border Cases.
Foreign creditors in a Jersey insolvency process are treated the same as local creditors.
In a désastre the insolvent winding-up of the company is carried out by an official of the Jersey court known as the Viscount. The Viscount is the Executive Officer of the Royal Court.
In a creditors' winding-up of a Jersey company, the winding-up is carried out by a liquidator from one of a number of prescribed professional bodies.
In a just and equitable winding-up ordered by the court, it is likely to appoint a liquidator or liquidators having the qualifications required of a liquidator in a creditors' winding-up.
The Viscount's role has been described by the Court as to "get in and liquidate [the debtor's property] for the benefit of the creditors who prove their claims" (Re Overseas Ins Brokers Ltd 1966 JJ 547). As an officer of the court, the Viscount is accountable to the court as well as to creditors.
A liquidator has similar responsibilities to the Viscount in a désastre, although, unlike the position in relation to a désastre, the property of the company does not vest in the liquidator. A liquidator is accountable to creditors and to the court in a just and equitable winding-up.
The Viscount is a standing official of the Jersey court appointed by the Bailiff (chief judge).
A liquidator in a creditors' winding-up a person must a member of:
The Viscount is also qualified by virtue of office.
In a creditors' winding-up the company and the creditors may each nominate a person to be the liquidator. If different persons are nominated, a director, shareholder or creditor of the company may, within seven days after the date on which the nomination was made by the creditors, apply to the court for an order either directing that the person nominated as liquidator by the company shall be liquidator instead of or jointly with the person nominated by the creditors or appointing some other person to be liquidator instead of the person nominated by the creditors.
In both a désastre and a creditors' winding-up, the powers of the directors of the company are effectively superseded by those of the Viscount or liquidator.
Jersey lawyers work closely with external advisers in structuring and implementing a Jersey scheme of arrangement. The external professional advisers involved in the restructuring of a Jersey company will typically be located in the place of the company's principal business.
Advisers in the case of the case of Jersey insolvency proceedings will vary depending on the nature and location of the company's business. This may include valuers, property management and marketing, investment management and other professionals.
The costs of professionals engaged by the Viscount or a liquidator in an insolvent winding-up would generally be an expense of the winding up and have the priority referred to in 5.8 Statutory Waterfall of Claims.
In general terms, no specific approval is required for the appointment of professional advisers.
There is no Jersey case law determining to whom professional advisers owe their duties. In the case of engagement by a liquidator in a creditors' winding-up, the duties are likely to be owed to the company. In the case of appointment in a désastre the duties are likely to be owed to the Viscount, who would hold the benefit of any claim as an asset to be administered and distributed under the désastre. Proceedings against advisers may, however, need to be funded by creditors.
Article 4(1) of the Arbitration (Jersey) Law 1998 provides that where a party to an arbitration clause in a contract becomes bankrupt (which expression includes a corporate désastre and a creditors' winding-up) and the Viscount seeks to enforce the contract, the arbitration provision is enforceable by or against that party.
If a matter to which the arbitration provision applies requires to be determined in connection with the bankruptcy proceedings, then, if Article 4(1) does not apply directly, Article 4(2) empowers the Viscount, a liquidator or any other party to the agreement to apply to the court for an order directing that the matter in question be referred to arbitration in accordance with the agreement. The court may make that order if in its opinion, having regard to all the circumstances of the case, the matter ought to be determined by arbitration.
In pursuing a contested claim prior to the advent of a formal insolvency process, a creditor and its debtor are also expected to explore the possibility that negotiation or some form of alternative dispute resolution might enable them to settle their dispute without commencing proceedings. In a party unreasonably refuses to engage in such processes it may be penalised by the Jersey court in costs even if ultimately successful in the litigation.
The extensive powers of the Viscount in a désastre include power to refer any dispute to arbitration or compromise debts, claims and liabilities.
The principal statute governing arbitration is the Arbitration (Jersey) Law 1998. Other forms of alternative dispute resolution are referred to in the Royal Court Rules 2004 and Practice Directions.
Arbitration cannot be imposed and the identity of arbitrators and the mechanism by which they are appointed will depend on the terms of the arbitration agreement.
The general duties of directors of Jersey companies are set out in Article 74 of the Companies Law. Directors must act act honestly and in good faith with a view to the best interests of the company and exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
A director will not be in breach of these duties if all of the shareholders of the company authorise or ratify the act or omission concerned and after the act or omission the company will be able to discharge its liabilities as they fall due. There is also provision for authorisation or ratification by less than all the shareholders disregarding the director and any shareholder connected with the director. Where the company is in a financially troubled state, such authorisation or ratification will not be possible due to the inability to say that it will be able to discharge its liabilities as they fall due.
Where the company is insolvent or near-insolvent, the interests of the company can no longer be equated with those of its membership. Rather, they are now those of its creditors, since creditors have claims ahead of shareholders in a winding-up. Directors therefore have a duty to take into account the interests of creditors. At which point this obligation arises has not yet been considered by the Jersey courts, but it is likely that the decisions of the English court will be followed. In BTI 2014 LLC v Sequana SA & Ors ([2019] EWCA Civ 112 the English Court of Appeal on balance favoured the view that the duty arises when insolvency has become probable.
Creditors' claims against directors would typically be asserted by the liquidator on behalf of the company in a creditors' winding-up or by the Viscount in a désastre.
Given the small number and size of insolvent restructurings in Jersey, there is no developed local practice in this regard. If required in relation to a Jersey company whose main business is carried on in outside of the Island, there is no reason of principle why the practice in that jurisdiction would not be followed, although, in a given case there may be tax reasons for external advisers outside the Island not be appointed to the board.
However, as in the United Kingdom, there is the broader concept of a de facto director. A director is defined in the Companies Law, as in Section 250 of the UK Act, as "a person occupying the position of director, by whatever name called". Thus, a person may be concerned in the top-level managerial decision-making of a company to such an extent as to be regarded by the law as a director, although they have not been formally appointed as such. If they are a de facto director, the duties and responsibilities of an ordinary director will apply to them.
Shareholders with limited shares are in principle only liable in respect of the debts of the company to the extent that their shares are not fully paid. However, they may incur liability in other capacities, such as directors or de facto directors.
A transaction at an undervalue may be set aside by the court in either a désastre or a creditors' winding-up on the application of the Viscount or liquidator respectively.
Under identical definitions in the Désastre Law and the Companies Law, a company enters into a transaction with a person at an undervalue if
it makes a gift to that person;
it enters into a transaction with that person either:
for a cause the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the cause provided by the company.
This is similar to the definition of a "transaction at an undervalue" in Section 238 of the UK Insolvency Act 1986 save that for "consideration" the concept of "cause" has been substituted. "Cause" is, as a matter of contract law, a somewhat wider concept than consideration. It equates more to the reason for entering into a contract, which may be gratuitous. Although there is this technical distinction, it appears to make no difference, given that a significant mismatch of value can clearly amount to a transaction at an undervalue under (b) above.
The court will make an order if it is satisfied that the company entered into the transaction in good faith for the purpose of carrying on its business and that, at the time it entered into the transaction, there were reasonable grounds for believing that the transaction would be of benefit to the company.
Similarly, there is in both statues provision for the setting aside of preferences. A company gives a preference to a person if:
the person is a creditor of the company or a surety or guarantor for a debt or other liability of the company; and
the company does anything, or suffers anything to be done, that has the effect of putting the person into a position which, in the event of the winding-up of the company, will be better than the position they would have been in if that thing had not been done.
The court will not make an order unless the company, when giving the preference, was influenced in deciding to give the preference by a desire to put the person into a position which, in the event of the winding-up of the company, would be better than the position in which the person would be if the preference had not been given.
There is no statutory equivalent to the action to set aside a transaction to defraud creditors under Section 423 of the UK Insolvency Act 1986. However, at customary law the Pauline action has a similar purpose. A transfer undertaken in fraud of creditors may be set aside if the creditor proves that the intention of the debtor was to defeat his creditors and their actual defeat, because the debtor was either insolvent as a result of the transfer or already insolvent.
If the transfer is gratuitous or for substantially less value received by the company than the market value of the property transferred, it is only required that the transferor is guilty of an intention to defeat its creditor. In other cases, the transferee must also be privy to the real nature of the transaction (In the matter of the Esteem Settlement 2002 JLR 53).
The Viscount or liquidator may also apply to the court for an order setting aside certain extortionate credit transactions. In a désastre the Viscount may also disallow a claim for interest to the extent that the rate of interest is considered extortionate.
The hardening periods in Jersey are different to those which apply under the UK Insolvency Act 1986.
Under the Jersey legislation, a transaction at an undervalue may be set aside by the court if entered into within five years immediately preceding a désastre being declared or a creditors' winding up being commenced. The company must also have been either insolvent at the time of the transaction or rendered insolvent as a result of it. Where the transaction was entered into with a connected person or associate of the company, a person seeking to uphold the transaction has the burden of proof in so far as they must show that the company was neither insolvent at the time of the transaction nor rendered insolvent as a result of it.
A preference may be set aside by the court if given within twelve months immediately preceding a declaration of désastre or the commencement of a creditors' winding up. Similarly, the company must also have been either insolvent at the time of the preference or rendered insolvent as a result of it. Where the preference was given to a connected person or associate of the company, a person seeking to uphold the preference has the burden of proof in showing that the company was neither insolvent at the time of the transaction nor rendered insolvent as a result of it.
The time limit for bringing a Pauline action (which is a customary law action for the purposes of setting aside a transaction undertaken to defraud creditors where the debtor was insolvent at the time or as a result of the transaction), under and subject to the general law regarding prescription (limitation) of actions, is ten years (In the matter of the Esteem Settlement 2002 JLR 53).
A claim to set aside a transaction at an undervalue or preference is made by the Viscount in a désastre and the liquidator in a creditors' winding-up.
In the case of a Pauline action, the proceedings may be brought by the prejudiced creditor.
Valuations are important at various points in insolvency and restructuring processes.
In order bring an application for a declaration of désastre the creditor must have reasonable grounds to believe that the company is cash-flow insolvent. As noted in 2.5 Commencing Involuntary Proceedings, if the declaration is granted by the court, and the company then applies to have it lifted in an inter partes application, the court will also then consider a balance sheet test of solvency. Asset valuation for this purpose will be a matter of evidence for the court; what evidence is required will depend on the nature of the assets concerned.
In the case of a scheme of arrangement, this will typically have been negotiated outside Jersey and, in so far as asset valuation is material, it will relate to assets situated outside Jersey which are likely to be valued in accordance with market practice and conditions in the place of business or location of asset. The Jersey scheme would implemented by application by Jersey lawyers to the court and this is sometimes carried out in parallel with a similar scheme being approved in respect of another group member in another jurisdiction.
Depending on the proposed use of the valuation, it might be sought by the directors, a shareholder or creditor or in the case of a formal insolvent winding-up the viscount or the liquidator.
There is little Jersey authority on valuation principles in an insolvency. The Jersey courts are likely to find English authorities on this point persuasive.