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Changes to Gsy insolvency regime

Approved changes to Guernsey insolvency regime

Approved changes to Guernsey insolvency regime

The Companies (Guernsey) Law, 2008 (Insolvency) (Amendment) Ordinance, 2020 (the “Ordinance”) was approved by the States of Guernsey on 15 January 2020.

The Ordinance will take effect following approval by the Committee for Economic Development and has been prepared following an extensive period of consultation with industry stakeholders and local professionals, with a view to modernising Guernsey’s insolvency regime.

We have prepared the below summary of some of the key amendments.

Administration

Initial meeting of creditors’

The administrator must convene an initial meeting of creditors within 10 weeks of the date of the administration order being made.

The notice of the meeting must include an explanation to creditors of the aims of, and likely process of, the administration.

Distributions during administration

The administrator may make a distribution to a secured creditor (within the meaning of the Security Interests (Guernsey) Law, 1993),  or preferred creditor (within the meaning of the Preferred Debts (Guernsey) Law, 1983) of the company if they deem it likely to assist the achievement of any purpose for which the administration order was made, thus reducing the time and cost of the process.

Dissolution following administration

Previously, it was necessary for companies to move from administration into compulsory liquidation prior to being dissolved.

Under the Ordinance, this requirement is removed in the event that the company has no remaining assets to be distributed.  Again, it is anticipated that this will reduce both the time and cost of the administration process.

Liquidation

Differentiating between solvent and insolvent liquidation

Previously, there was no distinguishing between solvent and insolvent liquidations.  The Ordinance will require that directors shall make up a declaration of solvency of the company within the five weeks prior to the passing of a resolution to voluntarily wind up the company.

In the event that a declaration of solvency is not made, then there will be a requirement to appoint an independent liquidator. The independent liquidator will also be required to report to creditors and hold an initial meeting, the notice of which shall contain an explanation to creditors of the likely process of the winding up.

It is hoped that these amendments will lead to improved transparency in the reporting of investigation findings to creditors and other stakeholders.

Power to disclaim onerous property

A key amendment is the power for liquidators to disclaim property which is deemed onerous. Under the Ordinance this is defined as:

— any unprofitable contract;
— any other personal property of the company which 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; or
— any real property if it is situated outside the Bailiwick of Guernsey.

This is a power already available to liquidators in a number of other jurisdictions and will allow Guernsey liquidators to deal with onerous assets in a cost effective manner, whilst also allowing liquidations to be concluded in a timely manner.

Statement of Affairs

Under the Ordinance, a liquidator now has powers to request completion of a statement of affairs of the company, in a prescribed format, to be submitted.

This will assist the liquidator in their investigations with regards to company affairs and director conduct.

Production of documents and examination

The Ordinance provides that a liquidator may now apply to the Royal Court of Guernsey (“Court”) for an order requiring directors, officers, employees or others to produce documents or information relating to the company.

The liquidator may also apply to Court to order an examination(s) of any person who is or has been an officer of the company. Upon an order being granted, an “Inspector” will be appointed to conduct the examination in private.

A statement made by a person in the course of an examination before an Inspector may subsequently be used in civil proceedings.

Exemption to prepare audited accounts

The amendments also provide an exemption for the liquidators to prepare audited financial statements in the financial year in which the liquidator is appointed, which should reduce both the time and the cost of the winding up process.

Other amendments

Reporting of delinquent directors

A fundamental amendment under the Ordinance is administrators and liquidators having a duty to report to the Guernsey Registry (and the Guernsey Financial Services Commission ("GFSC") in the case of regulated companies) if they consider that there are grounds for the Court to make a disqualification order for unfit conduct.

There has previously been no requirement for insolvency practitioners to undertake such reporting and it is therefore hoped that this will lead to practitioners developing a rigid framework for the investigation of director conduct.

Extortionate credit transactions

A liquidator or an administrator of a company may apply to the Court for an order in respect of extortionate credit transaction in relation to the provision of credit to the company in the three years prior to the relevant insolvency date (being the date of passing of a resolution to wind up the company or the date of a Court order).

Under the Ordinance, a transaction is deemed “extortionate” if the terms of it are or were such as to require grossly exorbitant payments to be made in respect of the provision of the credit, or it otherwise grossly contravened ordinary principles of fair dealing.

The Court may make an order that it sees fit in respect of such transactions, and may:-

— set aside the whole or part of any obligation created by the transaction;
— vary the terms of the transaction;
— require any person who is or was a party to the  transaction to pay to the liquidator or  administrator any sums  paid to that person, by virtue of the transaction, by the company; or
— require that security be surrendered to a liquidator or administrator.

Transactions at undervalue

In the event that a company entered into a transaction at an undervalue within a period of six months preceding the relevant date of insolvency and the company was insolvent at the time of the transaction or rendered insolvent due to it, then a liquidator or administrator may apply to Court under the Ordinance for an order to be made in respect of the transaction.

In respect of a transaction at undervalue, the Court may make an order:

— requiring any property transferred as part of the transaction to be vested in the company;
— require any property to be vested in the company if purchased with proceeds of the transaction at undervalue;
— require the release of security given by the company;
— require any person to pay the benefit of the transaction received by them back to the company; or
— reinstate released security under new or revived obligations, as the Court thinks fit.

Winding up of non-registered Guernsey companies

The Ordinance provides that the Court may compulsorily wind up non-Guernsey companies if they satisfy the following conditions:-

— the company is dissolved, or has ceased to carry on business, or is carrying on business only for the purpose of winding up its affairs;
— if the company is unable to pay its debts; or
— if the Court is of the opinion that it is just and equitable that the company should be wound up. 

The duly appointed liquidator may exercise any powers or do any act  in the case of a non-Guernsey company which might be exercised or done in the course of winding up a company registered in the Register of Companies (in Guernsey).

Supply of Utilities

The amendments include regulations for the continuance of utility services.  Suppliers who are owed arrears as at the appointment of an insolvency practitioner will not be able to withdraw service, although the practitioner may have to provide a personal guarantee for the continuance of the same.

Utility services also include communication services i.e. IT service providers, which may be vital in contemplation of the trading of the company or immediate access to electronic records.

Conclusion

The Ordinance modernises certain elements of the Guernsey insolvency regime and aligns it with other jurisdictions, particularly the UK.  The amendments further allow insolvency practitioners the flexibility to adopt a pragmatic approach when dealing with certain matters and, at the same time, bestow additional powers to carry out investigative functions for the benefit of creditors and other stakeholders.

KPMG Channel Islands Limited welcomes the amendments and these will further enhance Guernsey’s reputation as a secure and robust jurisdiction to undertake business.

KPMG Channel Islands Limited has a dedicated team of experienced restructuring and insolvency professionals in Guernsey.  Should you wish to discuss the Ordinance in further detail, please do not hesitate to contact us.