What procedures are used to liquidate an insolvent Jersey Company?
There are two avenues that can be utilised to liquidate insolvent companies; obtaining a declaration that the company is désastre pursuant to the Bankruptcy (Jersey) Law 1990 (the Bankruptcy Law); and a creditors’ winding up pursuant to the Companies (Jersey) Law 1991 (the Companies Law, together with the Bankruptcy Law, the Laws).Each of these are briefly considered below.
When is a company considered insolvent?
The Laws deem a company to be insolvent when it is unable to pay its debts as it falls due.
Procedure under the Bankruptcy Law
This avenue is typically pursued by a creditor of a company who seeks to recover a liquidated debt (presently this must exceed £3,000) from the company.
An application must be made to the Court to seek the declaration.This consists of a demande, attaching a statement and affidavit setting out certain prescribed information.The statement must provide details of the debt owed and confirm that to the best of the creditor’s knowledge and belief the company is insolvent.The Viscount must be given at least 8 hours prior notice before submitting the application.
It must be stressed that getting a declaration of désastre is a discretionary remedy.This means that even when the necessary conditions contained in the Bankruptcy Law are satisfied, the Court is not obliged to grant the declaration. Currently it is not known how the Royal Court would view such applications in light of the Covid-19 pandemic. The Court is, however, still open for urgent applications.
Should a declaration be granted, it will result in:
The company’s property (wherever located) and its powers vesting immediately with the Viscount who will, gather in, preserve and realise the assets for the benefit of, and distribute the proceeds of the same among the creditors who have proved their debts.
A moratorium is imposed preventing any creditor of the company from commencing or continuing any action or legal proceedings against the company to recover debts without the consent of the Viscount.The only remedy that will be available thereafter will be to prove the creditor’s debt in the désastre proceedings.It is important to note that this moratorium does not prevent a secured creditor from taking any action to enforce any security it may have that does not require commencing legal proceedings (except under the Security Interests (Jersey) Law 2012) (the Security Law)
Any transfers of shares in the company after the declaration are void unless made with the consent of the Viscount (except a transfer made by a secured creditor under the Security Law).
Termination of any creditors’ winding up that may have commenced prior to the declaration.
The désastre is complete once the company’s assets have been realised and a final distribution paid to all of the creditors who have proved their debts.The Viscount will provide a notice to the Registrar of Companies confirming that this has been done and once such notice is registered by the registrar, the company will be dissolved.
What about Secured Creditors?
If a company owns immovable property in Jersey that is secured by a hypothec (a charge) such property will be vested in the Viscount subject to that hypothec.
If security has been taken pursuant to the Security Law over movable property, the secured creditor may still enforce its security despite the declaration, irrespective of the fact that the secured assets have vested with the Viscount.
If there is any security over movables governed by the Security Interest (Jersey) Law 1983 (the 1983 Law) this is governed by some separate rules but in essence centre around how the security interest was created.
If there is any security over property outside of Jersey the rights of that secured creditor will be determined in accordance with the law governing that security interest.
What if the company was not insolvent at the time the declaration was made?
If this is the case, the company may seek damages from the creditor who made the application unless the creditor is able to demonstrate that it made the application whilst acting reasonably and in good faith.In any event, it is often ordered by the Court that the creditor making the application, agrees to indemnify the Viscount for its costs in carrying out the désastre proceedings.
Considerations for a creditor of seeking a désastre application
There are a number of practical and commercial considerations for a creditor considering a désastre application, including:
Do they know how many other unsecured creditors the company has? This will be very relevant as if there are substantial other creditors, then the creditor making the application (if unsecured) may recover only a small percentage of its debt (and have to pay the Viscount’s fees too);
Does the company owe money to the Comptroller of Taxes, social security or to employees in unpaid wages? If so, the creditor needs to be aware that there (along with the Viscount’s fees) take priority over all other creditor debts.
Does the company have any assets to realise in order to pay the debts owed? If not, again, the creditor may re-think a désastre application.
How many secured creditors are there? This can be checked by your lawyer on the Public Registry. These also take priority.
Would it be better to allow the company to continue trading to enable it to repay the debt?
Procedure under the Companies Law
It must be stressed that for a creditors’ winding up to take place, the members of the company must pass a special resolution.It is not, therefore, a course of action open to a creditor which is not also a shareholder of the company.
Once such an action takes place:
The company continues to exist until it is dissolved but it must only carry out such activities as required for its winding up, i.e. it must cease to carry on its general trading business.
The powers of directors cease and become vested with the appointed liquidator.
A moratorium is imposed meaning no action may be taken or proceeded against the company except with leave of the court.As with a désastre, a secured creditor may take any action to enforce its security that does not involve commencing legal proceedings, except under the Security Law.However the imposition of a moratorium does not prevent an eligible creditor from seeking a declaration of désastre (as to which see above).Should such an application be granted, the creditors’ winding up will automatically terminate.
No transfer of shares can take place without the consent of the liquidator and any transfer of shares after the commencement will be void.However a transfer of shares made by a secured creditor under the Security Law will not be declared void.
All company stationary issued by or on behalf of the company must contain a statement that the company is in liquidation.
Within 14 days from the passing of that special resolution, a notice must be published in the Jersey Gazette advising that such a resolution has been passed and convening all creditors of the company to attend a meeting.Such a meeting must take place at least 14 days after notice has been issued.At this meeting:
The directors must present a statement of affairs which is verified by an affidavit.
A liquidator can be appointed and if there is an appointment it is effective from the conclusion of the meeting.This person should either be the person nominated by the creditors, or if one is not nominated, by such person nominated by the shareholders.They must either be the Viscount or a Chartered Account and not be a director, secretary or employee of the company, its subsidiaries or holding companies (if any).If the shareholders and creditors nominate different people, an application may be made to the court for directions.The liquidator must notify the registrar of companies and the company’s creditors within 14 days of their appointment.
If no liquidator is appointed, the Royal Court may appoint one, however until such appointment the powers of the directors can only be exercised:
with the sanction of the Royal Court;
to call a meeting of the creditors and to prepare the statement of affairs of the company; or
to protect the company’s assets
A liquidation committee may be formed by the creditors consisting of up to five people.If such a committee is formed, the company is also permitted to add up to five members to the committee.The Companies Law imposes some powers on the committee, principally in relation to the conduct of the winding up, such as the fees to be paid to the liquidator, and to approve certain actions of the liquidator. a liquidation committee may be formed by the creditors consisting of up to five people.If such a committee is formed, the company is also permitted to add up to five members to the committee.The Companies Law imposes some powers on the committee, principally in relation to the conduct of the winding up, such as the fees to be paid to the liquidator, and to approve certain actions of the liquidator.
Once the company’s affairs have been dealt with by the liquidator, it must prepare an account of its actions. This must be presented to further meetings of the shareholders and creditors.The liquidator is required to give at least 21 days’ notice of each meeting.Such notice must be done by post and must include a copy of the liquidator’s account.
Within seven days of the date of these meetings of members and creditors the liquidator must file a return in respect of each meeting and a copy of the liquidators account (if the company is a public company).The company will be deemed dissolved three months after these documents are registered by the registrar.
How are assets distributed under both of these processes?
Under both processes the proceeds following the realisation of the company’s assets will be applied in the following order:
Fees and expenses of the Viscount / Liquidator
secured creditors pursuant to hypothecs, interests under the Security Law and the 1983 Security Law (each in order of priority)
Amounts payable to the Jersey Bank Depositors Compensation Board (only where the company is a bank)
Employees (representing the equivalent on up to six months of their usual salary and holiday pay and bonuses, subject to prescribed maximum amounts)
Any amounts due regarding, health insurance, social security, income tax, goods and services tax, rent and parish rates
All proved unsecured debts on a pari passu basis
If there is any surplus, between the members according to their rights and interests in the company.
Can members be asked to contribute if the company has insufficient assets to satisfy the debts?
Each present and past member is liable to contribute to the company’s assets an amount sufficient to pay its liabilities along with the expenses of the relevant procedure but only to the value of any amount unpaid (if any) on their respective shareholding.
A director can also be liable for the debts of a company if they are found to have been wrongfully or fraudulently trading.For more information on this, please see our separate briefing which can be found here.
Directors may also be required to return certain assets (or provide a monetary equivalent) obtained from the company if the Royal Court concludes that have either:
Been transferred that asset at an undervalue; or
The receipt of that asset has placed them in a better position than the other creditors.
Unless they can demonstrate that they acted in good faith and had provided far value for the asset received.
Are there any other potential avenues available?
The Companies Law permits that a company may be wound up by an order of the court where, in the opinion of the court, it is just and equitable and or expedient in the public interest.This type of application can only be brought by the company, a director, the Jersey Financial Services Commission (the JFSC) or the Chief Minister.An application for an expedient winding up in the public interest can only be brought by the JFSC and or the Chief Minister.
This avenue could be of assistance to directors of a company with no realisable assets as in such circumstances it is not possible to commence either of the procedures discussed above.
In addition, there is always the option for a company in financial distress to seek a compromise or arrangement between its creditors.The Companies Law permits that where a compromise or arrangement is approved at a meeting of creditors by a majority in number representing at lease 75% in value of the creditors and has been sanctioned by the court, it will be binding on all of the creditors of the company.