03 January 2020
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 Jersey company using désastre proceedings.
Words in bold text are defined at the end of this guide.
What are désastre proceedings?
Désastre proceedings are a court initiated insolvency procedure that is used to liquidate an insolvent company. The purpose of désastre proceedings is to facilitate the orderly and fair distribution of the company's assets by treating the claims of all unsecured creditors equally and rateably.
Désastre proceedings are the only Jersey insolvency procedure for an insolvent company that may be started by a creditor. So, where a creditor wants to liquidate a company to recover a debt owed to it, its only option is to apply to the Court for an order that the company's assets be declared en désastre (in disaster).
Other insolvency procedures
There are two other procedures that may be used to liquidate an insolvent company: a creditors' winding up and a winding up on just and equitable grounds, however, a creditor is unable to initiate either of them. For more information on:
- a creditors' winding up, see our guide A creditors' winding up of 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 Bankruptcy 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 a company's liabilities exceeds its assets; or
- the company has failed to pay a statutory demand.
Who may make an application?
An application for a declaration may be made by:
- a creditor owed a liquidated sum by a company in excess of the prescribed amount (currently £3,000);
- the company; or
- the JFSC.
A creditor may not apply for a declaration if the creditor:
- has agreed with the company not to apply for a declaration; or
- only has a claim against the company for the repossession of goods.
How is an application made?
An application must set out the facts that give rise to the application and (unless the applicant is the JFSC), be accompanied by a statement in the statutory form and an affidavit.
Where the applicant is the company:
- the statement must specify, among other things, the estimated value of the company's assets and liabilities; and
- the affidavit must, among other things, verify the contents of the statement and state that the company is insolvent but has realisable assets.
Where the applicant is a creditor:
- the statement must specify, among other things, details of the company, location and nature of its assets, to the extent known, and the debt owed by it to the creditor; and
- affidavit must, among other things, verify the contents of the statement and state:
- the creditor has a claim against the company;
- to the best of the creditor’s knowledge and belief, the company is insolvent but has realisable assets; and
- the grounds on which the creditor believes the company is insolvent.
Hearing an application
The Viscount must be given at least 48 hours' notice of an application unless the Court allows less notice to be given. An application is typically made on an ex parte basis (without notice to other parties), however, the Court has the discretion to require the application to be heard on an inter partes basis (with notice to other parties).
The making of a declaration is a discretionary remedy. This means that, even if an applicant satisfies the conditions necessary for a declaration to be made, the Court may not necessarily make a declaration.
The Court will, however, normally make a declaration unless there are significant facts or circumstances which weigh against it doing so.
What are the consequences of a declaration?
The main consequences of a declaration are as follows.
Company's assets vest in Viscount
Subject to limited exceptions, immediately on a declaration being made, all of the company's assets of any kind (irrespective of where its assets are located and whether its assets are present, future, vested or contingent) and powers vest in the Viscount.
The Viscount may also claim any asset which the company acquires or passes to it by operation of law after the declaration has been made. Any claim must be made within 40 days of the Viscount becoming aware of its existence.
From the date of the declaration:
- (except as noted under How are secured creditors affected? below), the only remedy of a creditor against the company is to prove its debt;
- a creditor cannot commence any action or legal proceedings against the company to recover its debt or, except with the consent of the Viscount or leave of the Court, continue any action or legal proceedings to recover its debt; and
- (except as noted under How are secured creditors affected? below) any transfer of shares in the company made without the approval of the Viscount, or change in the status of the shareholders, made after the declaration is void.
Termination of creditors' winding up
If the company had started a creditors' winding up before the declaration was made, the creditors' winding up is automatically terminated.
If the Viscount believes there are grounds to do so, the Viscount 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 as for breach of duty or wrongful trading; or
- taking action against the company's shareholders, such as to make a call or reclaim an unlawful distribution.
For more information on the potential recovery actions the Viscount may make, see our guide Potential insolvency challenges under Jersey law (click here)
How are secured creditors affected?
The effect of a declaration on secured creditors of a company are as follows.
Jersey real estate
Any Jersey real estate owned by the company will vest in the Viscount subject to any debt secured against it. Where the Viscount sells the real estate:
- any charge (called a hypothec) secured against it will be extinguished; and
- the sale proceeds, after deducting the sale costs, will be paid to the secured creditors with priority being determined according to the date on which each charge was created.
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 désastre proceedings.
If the company is a joint owner of real estate, title to the real estate is converted into ownership in common in equal shares on the date of the declaration. Any charges over the real estate are apportioned equally between those shares.
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 Bankruptcy Law, where a creditor has taken security over:
- any Jersey intangible movable assets of a company, the creditor may exercise any power of enforcement conferred by the Security Law without the consent of the Viscount 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 Viscount.
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
- 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 Viscount 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 Viscount's fees and reasonable expenses) in payment of the debt secured by it.
Where a 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 the désastre proceedings, it must make a claim (known as proof of a debt) in accordance with the Bankruptcy 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 Viscount.
The Viscount will publish a notice in the Jersey Evening Post and in any other publication the Viscount thinks necessary, advising the company's creditors to file their claims by a set date, normally forty days from the date of the declaration.
What debts are admissible?
All present, future or contingent debts and liabilities to which a company:
- is subject at the time the of the declaration; or
- becomes subject before payment of the final distribution by reason of any obligation incurred before the time of the declaration,
are provable in the désastre proceedings.
Where an unsecured debt accrues interest, any interest accrued to the date of the declaration 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 Viscount may:
- admit or reject, in whole or part, proof of any debt; or
- reject, in whole or part, any claim for interest if the Viscount considers the rate of interest to be extortionate.
Before the Viscount admits or rejects proof of a debt, the Viscount may require evidence that supports or opposes the debt being admitted.
A company is required by the Bankruptcy Law to assist the Viscount to realise its assets and distribute the proceeds to its creditors. The company must, among other things:
- give a complete and accurate list of its assets, creditors and debtors and any other information the Viscount requires;
- disclose to the Viscount as soon as practicable any assets that may be acquired by the Viscount during the désastre proceedings;
- supply any information regarding its expenditure and sources of income the Viscount requires; and
- transfer or deliver its assets to the Viscount on demand.
It is an offence, punishable by up to six months imprisonment and/or a fine, for a company (or any director, manager, secretary or other officer) to fail to comply with its obligations mentioned above without a reasonable excuse.
Unlike a liquidator, the Viscount is an officer of the Court and not an agent of the company.
The general duties of the Viscount are to:
- take possession or control of, protect and sell, the company's assets;
- distribute the sale proceeds of the company's assets to its creditors in accordance with the Bankruptcy Law; and
- (if, after paying the Viscount's fees and expenses and all debts proven in the désastre, there is a surplus) distribute the surplus among the company's shareholders in accordance with the Bankruptcy Law.
Duty to report wrongdoing
If, during the course of the désastre proceedings, the Viscount 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 Viscount must report the matter to the Attorney General and provide the Attorney General with any information or document the Attorney General requires.
The Bankruptcy Law gives the Viscount wide ranging powers to carry out the désastre, including the power to:
- summon any person who has (or is suspected to have) any property, document or information relating to the company's activities and to require that person to produce any document;
- hold assets of any kind;
- start or defend any action or other legal proceedings relating to the company's assets;
- make any compromise or other arrangement:
- with creditors relating to any provable debt; or
- relating to any claim with respect to the company's assets;
- carry on the company's business as far as necessary to dispose of it;
- borrow money and create security over the company's assets;
- appoint employees or agents;
- exercise any voting rights attached to shares owned by the company; and
- sell any of the company's assets.
The Viscount is not required to hold any creditor meetings or, except for the final report mentioned below, provide them with any reports, but will often hold creditor meetings to discuss the progress of the désastre proceedings, next steps and the potential funding of identified claims.
The Viscount's fees and expenses are paid in priority to any other claim in the désastre proceedings.
Currently, the Viscount is entitled to charge fees of up to 10 per cent of the value of the assets sold plus 2.50 per cent of the value of all assets distributed. The Court has, however, previously approved the Viscount charging fees calculated on a time cost basis.
Sale of assets
The Viscount may sell a company's assets by:
- public auction or public tender on any terms the Viscount thinks fit; or
- private contract where the:
- assets are perishable;
- assets were offered for sale by public auction or public tender but were not sold; or
- Viscount considers it unnecessary or inadvisable to sell the assets by public auction or public tender.
If any assets cannot be sold readily or on favourable terms, the Viscount may instead distribute those assets in kind among the company's creditors according to their estimated value.
Distribution of sale proceeds
Pari passu principle
In common with many other jurisdictions, the Bankruptcy 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 Viscount's fees and expenses and the claims of preferential creditors.
The Viscount must distribute the sale proceeds of a company's assets in the following order:
- the Viscount'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 désastre proceedings;
- paying interest on any provable debts which do not accrue interest at a rate the Viscount considers reasonable; and
- paying any balance to the company's shareholders according to their rights and interests in the company.
Potential liabilities of a creditor
If a company was not insolvent at the time the declaration was made, it may make a claim against the creditor which applied for the declaration for any loss suffered by it as a result of the declaration unless the creditor acted reasonably and in good faith. The company must make a claim within 12 months of the date of the application.
The Court may require that a creditor making an application to indemnify the Viscount against the costs and expenses of conducting the désastre proceedings to the extent it thinks fit.
Potential liabilities of shareholders
Liability to contribute
Where a declaration is made, each present and past shareholder of a company is liable to contribute to its assets an amount sufficient to:
- pay its liabilities;
- pay the expenses of the désastre proceedings; and
- adjust the rights of the contributories among themselves.
A past shareholder who held limited shares is not liable to contribute to the assets of a 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 the declaration is made; 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 declaration has been made in respect of a company that is not an open ended investment company;
- the company has made a payment to buy or redeem shares in the 12 month period before the declaration was made;
- 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 désastre proceedings,
the Court may, on the application of the Viscount, 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 a person to contribute to the assets of a 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 Bankruptcy Law requires the debts to be automatically set off on the date of the declaration.
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.
Recall of declaration
At any time during désastre proceedings, the company may apply to the Court for an order recalling the declaration on the ground that its assets are sufficient to discharge in full the claims in the désastre proceedings.
The recall of a declaration will not prejudice the validity of any act of the Viscount relating to the assets of the company between the date of the declaration and the date of the order.
Final report and dissolution
Once a company's assets have been realised and all claims concluded, the Viscount will supply all of the creditors with a report and accounts and pay a final distribution.
The Viscount must then give the Jersey registrar of companies a notice stating that the final distribution has been paid. The company will be dissolved once the notice has been registered.
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?
JFSC means the Jersey Financial Services Commission.
liquidated sum means a debt that is not subject to any reasonably arguable defence, set-off or counterclaim.
Security Law means the Security Interests (Jersey) Law 2012.
Viscount means the head of the executive arm of the courts of Jersey.
About Collas Crill
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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.