08 October 2019
Jersey is a popular place to establish an asset holding company because the Companies Law is modern, flexible and modelled on English companies legislation.
But what happens when things go wrong and a company becomes insolvent?
This guide looks at the key things you need to know about liquidating an insolvent company using a creditors' winding up.
Words in bold text are defined at the end of this guide.
What is a creditors' winding up?
A creditors' winding up is a shareholder initiated insolvency procedure that is used to liquidate an insolvent company. Despite its name, a creditors' winding up may only be started by the company's shareholders – a creditor cannot start it.
The purpose of a creditors' winding up is to facilitate the orderly and fair distribution of the company's assets by treating the claims of all unsecured creditors equally and rateably.
Other insolvency procedures
There are two other procedures that may be used to liquidate an insolvent company: désastre proceedings (which are the only Jersey insolvency procedure for an insolvent company that may be started by a creditor) and a winding up on just and equitable grounds. For more information on:
- désastre proceedings, see our guide Désastre proceedings for a Jersey company (click here) and
- winding up on just and equitable grounds, see our guide Winding up a Jersey company on a just and equitable grounds (click here)
The Jersey insolvency regime does not yet include reconstructive procedures like:
- administration under the UK Insolvency Act 1986; or
- Chapter 11 proceedings under the US Bankruptcy Code.
Although not strictly speaking an insolvency procedure, the Companies Law enables a company to enter into a scheme of arrangement with its creditors or any class of them.
When is a company insolvent?
Under the Companies Law, a company is regarded as being insolvent if it is unable to pay its debts as they fall due.
Unlike other jurisdictions, for a company to be insolvent, it is not necessary that:
- the value of the company's liabilities exceeds its assets; or
- the company has failed to pay a statutory demand.
A company may only be placed into a creditors' winding up if a declaration has not been made under the Bankruptcy Law.
First meeting of shareholders
A creditors' winding up is normally started by the shareholders of the company passing a special resolution to place the company into a creditors' winding up at a meeting of shareholders.
However, a creditors' winding up will also result where a company in summary (or solvent) winding up is unable to pay its debts:
- within six months of the start of its summary winding up; or
- (if its debts fall due after that date) as they fall due.
In these circumstances, the directors or, if a liquidator has been appointed; the liquidator, must call a meeting of creditors and the winding up will become a creditors' winding up from the day of that meeting.
When does a creditors' winding up start?
The creditors' winding up starts:
- at the time the special resolution is passed; or
- where a summary winding up becomes a creditors' winding up, on the date of the creditors' meeting.
Within 14 days of the special resolution to place the company into a creditors' winding up being passed, the company must publish a notice in the Jersey Evening Post stating that it has been placed into a creditors' winding up.
First meeting of creditors
The company must hold a meeting of creditors in Jersey immediately after the meeting of shareholders finishes. The company must give its creditors notice of the meeting of creditors by:
- post, not less than 14 days before the meeting; and
- advertising in the Jersey Evening Post at least 10 days before the meeting.
The notice must nominate a person to be appointed as liquidator.
The company must provide a creditor with any information concerning the company's affairs free of charge, the creditor may reasonably require before the meeting of creditors.
The business of the meeting of creditors includes the following:
Statement of affairs
The directors must present to the meeting a statement of the company's affairs, prepared by them, which must be verified by an affidavit sworn by some or all of them.
Appointment of liquidator
- The person nominated by the creditors or,if no person is nominated by the creditors, the person nominated by the shareholders, is appointed as liquidator with effect from the conclusion of the meeting.
- If the creditors and shareholders nominate different persons, a director, shareholder or creditor may apply to the Court for directions.
- The liquidator must notify the registrar of companies and the creditors of the appointment within 14 days of being appointed.
Appointment of liquidation committee
If they want to do so, the creditors may appoint a liquidation committee.
What are the consequences of a creditors’ winding up?
The main consequences of a company being placed into creditors' winding up are as follows:
Stop carrying on business
The corporate state and capacity of the company continue until it is dissolved, but from the start of the creditors' winding up, it must stop carrying on its business except as may be necessary for its winding up.
Unlike désastre proceedings, the company retains ownership of its assets and they do not vest in the liquidator. The liquidator may, however, apply to the Court for an order requiring any person who has possession or control of any asset to which the company appears to be entitled to deliver, surrender or transfer the asset to the liquidator.
Powers of directors
On the appointment of a liquidator, the powers of the directors cease, except to the extent the liquidation committee or, if no liquidation committee has been appointed, the creditors allow the directors to retain them.
During the period before a liquidator is appointed, the powers of the directors may only be exercised:
- with the approval of the Court;
- to satisfy the company's obligation to call and hold the meeting of creditors; or
- to protect the company’s assets.
From the date the creditors' winding up starts:
- except as noted under How are secured creditors affected? Below, the only remedy of a creditor against the company is to prove its debt;
- except for the right to apply for a declaration, a creditor cannot start any action or legal proceedings against the company to recover its debt or (except with leave of the Court) continue any action or legal proceedings to recover its debt;and
- except as noted under How are secured affected? Below, any transfer of shares in the company made without the approval of the liquidator, or change in the status of the shareholders, made after the start of the creditors' winding up is void.
Invoices, letters etc.
Every invoice, order for goods or services or business letter issued by or on behalf of the company or a liquidator of the company, must state that the company is in liquidation.
If the liquidator believes there are grounds to do so, the liquidator may seek to increase the distribution to creditors by:
- challenging transactions entered into by the company, such as a transaction at an undervalue, a preference or an extortionate credit transaction;
- disclaiming onerous property (like contracts);
- taking action against the company's directors, such aseg for breach of duty or wrongful trading; or
- taking action against the company's shareholders, for example to make a call or reclaim an unlawful distribution.
For more information on the potential recovery actions the liquidator may make, see our guide Potential insolvency challenges under Jersey law] (click here)
How are secured creditors affected?
The effect of a company being placed into a creditors' winding up on secured creditors of the company are as follows:
Jersey real estate
Where a creditor has taken security over Jersey real estate owned by a company, the creditor may only enforce its security by bringing an action against the company in the Court.
As noted in Prohibited actions above, if the company has been placed into a creditors' winding up, the secured creditor may only bring an action against the company to recover its debt with leave of the Court. As a result, ordinarily, the liquidator will sell the secured real estate and pay the sale proceeds (after deducting the sale costs and the liquidator’s fee) to the secured creditor.
If the value of the secured creditor's debt exceeds the sale proceeds, the secured creditor may prove for the balance of its debt as an unsecured claim in the company's creditors' winding up.
Jersey intangible movable assets
In a typical financing transaction, the Jersey intangible movable assets over which security is taken include things like shares, debt securities, bank accounts and contractual rights.
Under the Companies Law, where a creditor has taken security over:
- any Jersey intangible movable assets of the company, the creditor may exercise any power of enforcement conferred by the Security Law without the consent of the liquidator or the leave of the Court; and
- the company's shares, the creditor may transfer the shares pursuant to the exercise of any power of enforcement conferred by the Security Law without the consent of the liquidator.
In addition, where the company has created a security interest over any Jersey intangible movable assets, the Security Law, states that the power of the secured creditor to enforce its security interest it not affected by the company:
- becoming insolvent; or
- or any of its assets becoming subject to insolvency proceedings in Jersey or elsewhere,
as long as the security interest was perfected before the company became insolvent.
If the liquidator sells any Jersey intangible movable assets that are subject to a valid and perfected security interest, the sale proceeds will be applied (after payment of the liquidator's fees and reasonable expenses) in payment of the debt secured by it.
Where the company owns assets that are (or, under Jersey conflicts of law principles, taken to be) located outside Jersey that are secured by a valid security interest, the rights of the secured party will be determined by the law which governs the security interest.
How does a creditor make a claim?
If a creditor of a company wants to recover its debt in a creditors' winding up, it must make a claim, known as proof of a debt, in accordance with the Companies Law.
A creditor that has made proof of a debt may examine the proofs of debt of the other creditors at a time set by the liquidator.
The liquidator will publish a notice in the Jersey Evening Post and in any other publication the liquidator thinks necessary advising the company's creditors to file their claims by a set date.
What debts are admissible?
All present, future or contingent debts and liabilities to which a company:
- is subject at the start of the creditors' winding up; or
- becomes subject before payment of the final distribution by reason of any obligation incurred before the start of the creditors' winding up,
are provable in the creditors' winding up.
Where an unsecured debt accrues interest, any interest accrued to the date of the start of the creditors' winding up is provable as part of the debt.
Where a secured debt accrues interest, any interest accrued to the date of payment of the debt is provable and payable from the sale proceeds of the secured assets to the extent that they are sufficient to pay the interest.
Where a debt is contingent or does not have a certain value, the creditor must make an estimate of its value.
Admitting or rejecting proofs of debt
The liquidator may:
- admit or reject, in whole or part, proof of any debt; or
- reject, in whole or par, any claim for interest if the liquidator considers the rate of interest to be extortionate.
Before the liquidator admits or rejects proof of a debt, the liquidator may require evidence that supports or opposes the debt being admitted.
As mentioned above, if the creditors want to do so, at the first meeting of creditors they may appoint a liquidation committee. The creditors may appoint up to five members to the liquidation committee.
The shareholders may also appoint up to five members of the liquidation committee. The creditors may block the appointment to the liquidation committee of any person nominated by the shareholders, although the shareholders have a right to appeal to the Court.
The power of the liquidation committee is limited to:
- agreeing the liquidator's fees;
- authorising the directors to continue to exercise any of their powers;
- authorising the liquidator to pay out a class of creditors in full or compromise any claim by or against the company; and
- deciding how the records of the company and liquidator are to be destroyed once the creditors' winding up is complete.
Who may be appointed liquidator?
A person is only eligible to be appointed as a liquidator, if the person is:
- the Viscount; or
- a natural person who is:
- not a director, the secretary or an employee of the company or one of its subsidiaries or holding companies; and
- a member of the Institute of Chartered Accountants in England and Wales, the Institute of Chartered Accounts of Scotland, the Association of Chartered Certified Accountants or the Institute of Chartered Accountants in Ireland.
The creditors may remove a liquidator at any time.
- Take possession or control of, protect and sell, the company's assets;
- Distribute the company's assets (or proceeds of their sale) to its creditors in accordance with the Companies Law; and
- If, after paying the liquidator's fees and expenses and all debts proven in the creditors' winding up, there are any surplus assets or sale proceeds, distribute them among the company's shareholders in accordance with the Companies Law.
Duty to report wrongdoing
If, during the course of the creditors' winding up, the liquidator forms the opinion that:
- the company or any other person has committed a criminal offence; or
- as a result of the conduct of any director of the company a disqualification order should be made against that director under the Companies Law,
the liquidator must report the matter to the Attorney General and provide the Attorney General with any information or document the Attorney General requires.
The Companies Law gives a liquidator wide ranging powers to carry out a creditors' winding up. Except as noted below, the liquidator may, without the approval of any person, exercise any power of a company that is required to carry out a creditors' winding up of the company.
However, the liquidator may only:
- pay a class of creditors in full; or
- compromise any claim by or against the company,
with the approval of the Court, the liquidation committee or if no liquidation committee has been appointed, a meeting of the creditors.
The liquidator may require, among others, any current or former director or secretary of the company, employee or person who was an employee in the 12 months before the start of the creditors' winding up to:
- give the liquidator any information about the company and its business, dealings, affairs or assets the liquidator reasonably requires; or:
- meet with the liquidator at any reasonable time on being given reasonable notice.
In addition, the liquidator may apply to the Court for an order requiring any person who has possession or control of any asset or record to which the company appears to be entitled to pay, deliver, surrender or transfer the asset or record to the liquidator.
Power to seek directions
The liquidator may apply to the Court for:
- an order regarding any question arising in the creditors' winding up; or
- the Court to exercise any of its powers relating to the creditors' winding up.
The Court may make an order on any terms it thinks fit if it is satisfied that it just and beneficial to do so.
The liquidator may be paid any fee agreed between the liquidator and the liquidation committee or,if no liquidation committee has been appointed, the creditors.
If the liquidator and the liquidation committee or creditors are unable to agree the liquidator's fee, it may be fixed by the Court.
Distribution of sale proceeds
Pari passu principle
In common with many other jurisdictions, the Companies Law applies the pari passu principle. Under this principle, all unsecured creditors of an insolvent company share equally and rateably in the unsecured assets of a company remaining after the payment of the liquidator's fees and expenses and the claims of preferential creditors.
The liquidator must distribute the sale proceeds of the company's assets in the following order:
- the liquidator's fees and expenses;
- where the company is a bank, amounts payable to the Jersey Bank Depositors Compensation Board;
- amounts due to the company’s employees for up to six months’ wages, holiday pay and bonuses (subject to set maximum amounts);
- amounts due in respect of Jersey taxes, rent and parochial rates;
- all other debts proved in the creditors' winding up;
- paying interest on any provable debts which accrued interest before the creditors winding up in respect for the period during which they have been outstanding since the start of the creditors' winding up at a rate the normal contractual rate; and
- paying any balance to the company's shareholders according to their rights and interests in the company.
Potential liabilities of shareholders
Liability to contribute
Where a company is placed into a creditors' winding up, each present and past shareholder of the company is liable to contribute to its assets an amount sufficient to:
- pay its liabilities;
- pay the expenses of the creditors' winding up; and
- to adjust of the rights of the contributories among themselves.
A past shareholder who held limited shares is not liable to contribute to the assets of the company:
- unless it appears to the Court that the present shareholders are unable to satisfy the contributions required to be made by them;
- if the shareholder ceased to be a shareholder for 12 months or more before a creditors' winding up of the company started; or
- in respect of a liability of the company incurred after the shareholder ceased to be a shareholder.
A past or present shareholder who held or holds limited shares is not liable to contribute an amount in excess of the amount,if any, unpaid on its shares.
Other provisions apply in the case of a past or present shareholder who held or holds unlimited shares and past and present guarantor members.
Liability for share buyback or redemption
- a company, which is not an open ended investment company, is placed into a creditors' winding up;
- the company has made a payment to buy or redeem shares in the 12 month period before the start of its creditors' winding up;
- the payment was not lawfully made; and
- the aggregate realisable value of the:
- company's assets; and
- amount contributed to the company's assets by its shareholders,
is insufficient to pay the company's liabilities and the expenses of the creditors' winding up;
the Court may, on the application of the liquidator, order a person from whom shares were bought or redeemed, to contribute to the assets of the company, an amount not exceeding the amount of the unlawful payment received by the person to enable the shortfall to be met.
The Court will not order the person to contribute to the assets of the company unless the court is satisfied that, when the person received the unlawful payment, the person knew, or ought to have concluded from facts known to the person, that immediately after the unlawful payment was made:
- the company would be unable to discharge its liabilities as they fall due; and
- the realisable value of the company's assets would be less than its aggregate liabilities.
Set off and subordination
Where there are any mutual credits, mutual debts or other mutual dealings between a company and a creditor, the Companies Law requires the debts to be automatically set off on the date on which the creditors' winding up started.
Under the Bankruptcy (Netting, Contractual Subordination and Non-Petition Provisions) (Jersey) Law 2005, a set off provision or a close out netting provision in an agreement will be enforceable in accordance with its terms despite:
- the insolvency of any party to the agreement or any other person; or
- any lack of mutuality of obligations.
At any stage during a creditors’ winding up, a liquidator may apply to the Court for an order terminating the creditors’ winding up on the basis that the company can discharge its liabilities in full as they fall due.
If a creditors' winding up continues for more than 12 months, the liquidator must call meetings of shareholders and creditors to be held within three months of end of:
- that 12 month period; and
- each successive 12 month period.
The liquidator must prepare an account of the liquidator's acts and dealings and how the creditors' winding up was carried out in the relevant 12 month period and present it at meetings of shareholders and creditors.
Once the affairs of the company have been fully wound up, the liquidator must prepare an account of the winding up and how the company’s assets were distributed and present it in a meeting of members and a meeting of creditors.
Within seven days of the final meetings of the members and creditors being held (or, if they are held on separate dates, the date of the later meeting) the liquidator must file with the registrar of companies:
- a return for each meeting; and
- in the case of a public company, a copy of the liquidator's account.
The registrar will register the return and,if applicable, the liquidator's account and the company is taken to be dissolved three months after the registration date.
Disposal of records
Once the creditors' winding up has been completed, the liquidation committee or,if no liquidation committee has been appointed, the company’s creditors may decide how the records of the company and the liquidator are to be destroyed.
However, since the limitation period for a contractual claim under Jersey law is 10 years, it is prudent to keep a company's records for 10 years after it has been dissolved.
Bankruptcy Law means the Bankruptcy (Désastre)(Jersey) Law 1990.
Companies Law means the Companies (Jersey) Law 1991.
Court means the Royal Court of Jersey.
declaration means the declaration by the Court that the assets of a company are en désastre.
insolvent is defined in the paragraph headed When is a company insolvent?
Security Law means the Security Interests (Jersey) Law 2012.
special resolution means a resolution that is required to be passed as a special resolution by a majority of two thirds (or any higher majority specified in the company's articles of association) of shareholders who (being entitled to do so) vote at a meeting of the company of which not less than 14 days' notice has been given.
Viscount means the head of the executive arm of the courts of Jersey.
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About this guide
This guide gives a general overview of this topic. It is not legal advice and you may not rely on it. If you would like legal advice on this topic, please get in touch with one of the authors or your usual Collas Crill contacts.