Désastre proceedings and an applicant creditor's funding commitment – what you need to know

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. 

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.

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). 

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.

One of the considerations for a creditor before applying for a declaration is that the Court may require the creditor to indemnify the Viscount against the costs and expenses of conducting the désastre proceedings to the extent it thinks fit.

The Court recently had to consider the extent of this indemnity in Re DP9 Limited [2020] JRC 047.

Background

DP9 Limited applied to the Court to seek a declaration in respect of the assets of a Jersey company, SPARC Group Limited, which owed £148,617.22 to DP9 Limited at that time. The Court was satisfied that a declaration should be made. However, the extent of the Viscount’s indemnity was a contentious matter that would need to be resolved first.  

Article 5(2) of the Bankruptcy Law states as follows:

'In the case of an application by a creditor the court may require the creditor to indemnify the Viscount against the costs of the désastre to the extent that it thinks fit'.

In summary, DP9 Limited was prepared to indemnify the Viscount up to the sum of £5,000; whereas the Viscount submitted that this was a case where an unlimited indemnity was appropriate and that DP9 Limited should make a payment on account of her likely costs of £25,000.  

DP9 Limited argued, amongst other things, that the Court has no jurisdiction under the Bankruptcy Law to compel a creditor put the Viscount in funds to carry out the work that had not yet taken place. The Viscount disagreed with this and invited the Court to give a wider interpretation to article 5(2) of the Bankruptcy Law, namely that a payment on account of her future costs and expenses could be ordered.  

Decision

In light of the relatively small value of DP9 Limited’s claim, the Court did not consider an unlimited indemnity in favour of the Viscount to be appropriate. However, the Court confirmed that it can order an unlimited indemnity in the right circumstances.

The Court disagreed with DP9 Limited’s narrower interpretation of article 5(2) of the Bankruptcy Law. The Court held that it can order a creditor to pay such sums as the Court thinks appropriate in order to indemnify the Viscount in advance of her incurring such costs. Consequently, DP9 Limited was ordered to provide the Viscount with £10,000 within 28 days and to provide a further sum of £5,000 should she require it. Thereafter, the Viscount and DP9 Limited would need to agree any further expenditure, in default of which they could apply to the Court.

In delivering its judgment the Court reminded DP9 Limited that the funding it provided to the Viscount would be repaid if and when the Viscount realises the assets of SPARC Group Limited prior to any distributions being made to its creditors. Furthermore, any funding not utilised by the Viscount would be returned to DP9 Limited.

Finally, the Court refused a request by DP9 Limited to make a conditional declaration, pending payment of the £10,000 (presumably on the basis that DP9 Limited was to revisit whether it wished to pursue the matter further). The Court held that a declaration is either made or it is not.

Conclusion

Upon making a declaration, all of the company’s assets automatically vest in the Viscount. This is to be distinguished from the appointment of a liquidator with pre-agreed funding when winding up a company under the Companies Law. As the Viscount noted in this case, a liquidator cannot be compelled to take office.

The Court has confirmed its power to order a creditor applying for a declaration to provide the Viscount with an unlimited indemnity and to provide funding to the Viscount in advance of costs being incurred.

To the extent that sufficient assets are realised, this funding will be repaid in priority to creditors. However, the extent of the indemnity that the Viscount might require can often be a material consideration for creditors. The Viscount must be given at least 48 hours' notice of an application for a declaration unless the Court allows less notice to be given. The creditor’s potential funding commitment should form part of the discussion with the Viscount at the earliest opportunity.  

For further information on désastre proceedings and how to bring them, see our guide Désastre proceedings for a Jersey company.

 

Terms used

Bankruptcy Law means the Bankruptcy (Désastre) (Jersey) Law 1990 (as amended).

Court means the Royal Court of Jersey. 

declaration means the declaration by the Court that the assets of a company are en désastre.

Companies Law means the Companies (Jersey) Law 1991 (as amended).

insolvent means being unable to pay debts as they fall due.

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.

Viscount means the head of the executive arm of the courts of Jersey. 

 

About Collas Crill

We are a leading offshore law firm. We are easy to do business with and give practical advice to overcome tough challenges. Through our network of offices, we practise British Virgin Islands, Cayman Islands, Guernsey and Jersey law. 

About this case note

This case note 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. 

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