1 Issues Arising When a Company is in Financial Difficulties
1.1 How does a creditor take security over assets in Jersey?
Jersey law distinguishes between two types of property – immovable (i.e. real property) and movable property (which can be both tangible and intangible).
Immovable property cannot be hypothecated (charged) unless it is hypothecated under one of two statutes, namely the Loi (1880) sur la Propriété Foncière or the Loi (1996) sur l'hypothèque des Biensfonds Incorporels and by no other means, whatever the parties may have agreed.
It has historically been the position in Jersey that tangible movables cannot be hypothecated unless the movable is a ship, in which case it must be hypothecated in accordance with the Shipping (Jersey) Law 2002. It is possible to create security over tangible movable property by means of a pledge or lien and a landlord has a customary law right to seize all goods on premises for rent and reservation of title.
In early 2014 a new law, the Security Interests (Jersey) Law 2012, came fully into force and brought into effect new legislation governing security interests over intangible movable property. The previous legislation, the Security Interest (Jersey) Law 1983 was replaced.
The 2012 Law's transitional provisions provide that security interests created under the 1983 Law will continue to be valid and governed by the 1983 Law and will have priority over security interests created in the same collateral under the 2012 Law. If a security interest created under the 1983 Law is amended after the 2012 Law is in force by, for example, adding new collateral, the new Law will apply to the new collateral. There is, therefore, currently a "dual" security regime in Jersey – one governed under the 1983 Law and the other governed under the 2012 Law. The 2012 Law is a significant reform of the security laws of Jersey. It addresses many of the technical problems that existed under the 1983 Law and will greatly enhance the ability of a secured party to take security which will meet international standards and expectations.
The concept of a 'floating charge' over intangible immovables, where security is taken over a changing pool of assets, has only recently been introduced to Jersey by means of the 2012 Law. It is now possible to describe the collateral subject to a security interest as all the grantor's present and future intangible movable property in the style of a debenture. However, it is still not possible in Jersey to grant security over land (save as above) or over a pool of changing, tangible, movable property in the manner of an Englishstyle floating charge.
The key features of the new Law are as follows:
- A simplified concept of what constitutes a security interest. It will be possible to create a "security interest" in the relevant collateral without having to specify any specific method of creation, for example, by possession of certificates of title, by control or by assignment.
- A clear set of priority rules. A secured party will enjoy more certainty as to how security will rank against competing interests.
- An online security interest registration system.
- The Law significantly extends the enforcement powers of security holders.
1.2 In what circumstances might transactions entered into whilst the company is in financial difficulties be vulnerable to attack and what remedies are available from the court?
A liquidator (or the Viscount in the case of a désastre – see below) has a wide range of powers, including undertaking investigations into the affairs of a company. If, after such investigation (which ordinarily has to be funded either from the company's assets or by creditor(s) directly), it appears to the liquidator that an offence has been committed, whether a transaction at undervalue, a preference payment, wrongful or fraudulent trading – all offences under the Companies (Jersey) Law 1991 ("Companies Law"), Articles 176 to 178 – the liquidator may apply to the court for various remedies against the relevant parties. These may involve the court ordering that the position be restored to the position had the preference not been given or transaction at undervalue not been made.
1.3 What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in Jersey?
A liquidator is obliged to make a report to the Attorney General (Jersey's state prosecutor) if it appears to him that the company or a director has committed a criminal offence or that a disqualification order should be sought as a result of his conduct.
The wrongful acts which a director is likely to commit when a company is in financial difficulties are those of wrongful trading (where a director knew there was no reasonable prospect or, on the facts, was reckless as to whether the company would avoid a winding up or declaration of désastre) and fraudulent trading (where a director intends to defraud creditors). In relation to wrongful trading a director may be made liable for any or all of the company's debts arising from the time of such knowledge unless he took reasonable steps to minimise the potential loss to creditors. Concerning fraudulent trading the court can order that parties who were knowingly involved be liable to contribute to the company's assets to the extent it sees fit.
2 Formal Procedures
2.1 What are the main types of formal procedures available for companies in financial difficulties in Jersey and can any of these procedures be used in a restructuring?
Jersey has two principal forms of insolvency procedure – creditors' windings up under the Companies Law and désastre under the Bankruptcy (Désastre) (Jersey) Law 1990. Jersey's legislation is designed to provide the same outcome whichever procedure is followed. In recent years, there has also been a growing trend for the use of court windings up, also under the Companies Law, principally where the court is satisfied that it is just and equitable to do so (a different test of public interest may also be available). The 'just and equitable' route has, in recent times, been used in the context of so-called 'pre-packaged' arrangements where, immediately following their appointment, the liquidators enter into an agreement for the sale of much of the business and assets of the companies to a Newco, in which former management has an interest. Broadly speaking, as long as this is in the interests of creditors, this route can be used as a form of restructuring.
Other forms of insolvency do exist (based on Norman customary law, given Jersey's constitutional, legal and cultural background) but these procedures are invoked comparatively rarely.
2.2 What are the tests for insolvency in Jersey?
The test for insolvency is a cashflow test, i.e. the company is unable to pay its debts as they fall due.
2.3 On what grounds can the company be placed into each procedure?
Concerning creditors' windings up and désastres, the ground is simply that the company is insolvent based on the cashflow test. Rather confusingly, a creditor is not entitled to initiate a creditors' winding up; it is for the directors of a company to do so on the basis of insolvency. An application for a désastre may be made to the court by a creditor of the company having a liquidated claim exceeding £3,000. This limit does not apply to creditors' windings up. A company can apply to the court to be declared, through its directors, en désastre.
In relation to just and equitable windings up, the court has adopted a flexible approach. Recent cases have included, but are not limited to, the following grounds: where the substratum of the company has gone; where an investigation is required; where there might be competing interests between creditors and clients (particularly where financial services businesses are concerned); or where speed and choice of liquidator are important. A just and equitable winding up can be initiated by the company, a director, a shareholder, or the local financial services regulator.
2.4 Please describe briefly how the company is placed into each procedure.
In a désastre it is normally necessary to give the Viscount (the principal executive officer of the Jersey courts) at least 48 hours' notice of an intention to make an application. The application is accompanied by a supporting affidavit which confirms, insofar as the applicant is aware, that the company is insolvent, has assets, and that the applicant has a liquidated claim (if presented by a creditor).
In respect of a creditors' winding up, the directors resolve to call a shareholders' meeting to pass a special resolution to place it into liquidation. A creditors' meeting usually takes place immediately after this meeting, but 14 days' written notice must be given to creditors directly in advance of this meeting. A notice in the local newspaper advertising the meeting must also be placed at least 10 days in advance of the meeting. Creditors are entitled to receive information concerning the company's affairs and a statement of affairs verified on affidavit by some, or all, of the directors. At the creditors' meeting a liquidator is appointed as well as a liquidation committee.
An application for a just and equitable winding up is also commenced by a representation and affidavit, but given the complexities that are usually associated with such applications, more court time is required for such hearings. The Viscount's views on the appropriateness of such applications are always sought by the court.
2.5 What notifications, meetings and publications are required after the company has been placed into each procedure?
Under a désastre, the Viscount is required to publish a notice in the gazette section of the local newspaper to the effect that a company has been declared en désastre and invite claims to be filed in a 40- to 60-day window after the declaration. Thereafter, the Viscount must allow claims to be inspected by interested parties, notification of which is made again via the local paper (although, in practice, known creditors outside Jersey are contacted directly). A formal process follows whereby objections are considered and further information can be requested. Finally, formal adjudication of filed claims then takes place and creditors and any objectors are notified of the Viscount's decision. An appeal mechanism is also available. When the Viscount has realised all of the debtor's property the Viscount must supply all the creditors of the debtor with a report and accounts and pay a final dividend. The company is then struck from the register of companies following notification by the Viscount to the Registrar of Companies.
There are no formal requirements to hold meetings under a désastre. The Viscount may contact creditors on issues relating to funding or conduct of the proceedings on an ad hoc basis and seek directions from the court.
The creditors' winding up provisions in terms of claims handling are broadly similar. However, if a creditors' winding up continues for more than 12 months, a general meeting of members and creditors must be held. In the case of the first meeting, this must be held within three months after the end of the first 12 months, at which the liquidator must lay an account of his or her acts. Once the liquidator has notified the Registrar of Companies confirming that the final members' and creditors' meetings have been held, the company is dissolved at the end of three months after the registration of the return from the liquidator.
In just and equitable proceedings, the court can direct the manner in which the winding up is to be conducted and make such orders as it sees fit to ensure that the winding up is conducted in an orderly manner. Such orders are usually similar to the provisions of creditors' windings up, but modified to accommodate any factspecific requirements.
2.6 Are "pre-packaged" sales possible?
Jersey does not have any statutory regime which formally acknowledges "pre-packaged" sales. However, interpretation by the Jersey courts of the just and equitable provisions as referred to earlier has allowed the concept of both administration and pre-packaged sales as recognised in England and Wales to safeguard the interests of both clients of financial services businesses and creditors respectively.
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