Insolvency 2018 Comparisons

Last Updated March 07, 2018

Contributed By Rattray Patterson Rattray

Law and Practice

Authors



Rattray Patterson Rattray founded in 1981, has offices in each of Jamaica’s two cities, Kingston and Montego Bay. It has a team of 10 attorneys-at-law comprising 4 partners, 4 associates and 2 consultants. The Senior Partner and Senior Consultant assisted by associates handle insolvency work. RPR currently represents a significant portfolio of corporate entities in Jamaica and abroad in all the major sectors of commercial activity; which positions the firm to be a leading player in the emerging market under the new insolvency regime in Jamaica. RPR’s clientele consist of major players in the Banking, Bauxite & Alumina, Construction, Gaming, Insurance, Media, Private Security, Real Estate Development, Shipping, Transportation and Tourism & Hospitality sectors.

The legal and regulatory framework in Jamaica has seen major changes over the last two years, aimed at what is expected to result in a new approach to insolvency. The principal focus has been to consolidate laws relating to insolvency. The new insolvency regime is governed by three principal pieces of legislation, namely the Insolvency Act, 2014 (“the Insolvency Act”), The Insolvency Regulations, 2015 (“the Insolvency Regulations”) and the Judicature (Rules of Court) (Amendment) Rules, 2016, which adds Part 77 (“the Insolvency Rules”) to the Civil Procedure Rules that govern the Supreme Court.

The Office of the Supervisor of Insolvency in collaboration with the responsible government Ministry (Ministry of Industry Commerce, Agriculture and Fisheries) and other stakeholders has recently conducted insolvency sensitisation sessions across the island. 

Given its novelty, there would be some difficulty in giving a fact-based assessment in the context of the framework, the impact on the market and other trends. As recently as 9 June 2017, the Supervisor of Insolvency reported that his office has seen only four cases of individuals and companies proposing to rehabilitate their finances under bankruptcy provisions so far, and that there are another eight companies and three individuals in respect of whom notices of receivership have been received. The numbers at first glance seem low, but it is important to note that the last of the three pieces of legislation came into force approximately nine months ago. The now more comprehensive and fully operational regime is likely to result in quite a number of restructures in the course of the coming year.

The principal statutory regime governing insolvencies is found in the Insolvency Act, the Insolvency Regulations and the Insolvency Rules.

While the Insolvency Act and some amended provisions of the Companies Act, 2004 (“the Companies Act”) now provide mechanisms for treating with corporate insolvency, creditors’ voluntary winding-up and derivative actions continue to be addressed under the provisions of the Companies Act.

The object of the Insolvency Act is, as provided in Section 3 of the Act, to “create an environment which aids in - 

  • the rehabilitation of debtors and the preservation of viable companies, having due regard to the protection of the rights of creditors and other stakeholders; and 
  • fair allocation of the costs of insolvencies with the overriding interest of strengthening and protecting Jamaica’s economic and financial system and the availability and flow of credit within the economy.”

The focus, therefore, is on rescue and rehabilitation and not punishment.

There are several routes to bankruptcy:

  • voluntary assignment of all property to a trustee for the general benefit of creditors; 
  • creditor or group of creditors may apply for a receiving order (involuntary); and
  • failed proposal to creditors by debtor – a failed/rejected proposal is deemed an application for assignment by the bankrupt.

There is no obligation under the current regime to enter formal insolvency proceedings in specified circumstances.

Creditors may apply for a receiving order. There are two principal circumstances in which this application may be made:

  • the debt shall amount in the aggregate to no less than USD300,000; and
  • the debtor must have committed an “act of bankruptcy” within the six months preceding the application.

Details of what constitutes an “act of bankruptcy” are set out in Section 57 of the Insolvency Act, which provides ten instances. These include where the debtor:

  • makes an assignment for the benefit of creditors generally;
  • makes any disposition of property or other action in favour of a creditor which falls to be treated as a fraudulent preference;
  • leaves Jamaica or remains outside of Jamaica with the intent to defeat or delay his creditors;
  • assigns, removes, secretes or disposes of any of his or her property with intent to defraud, defeat or delay creditors; or
  • ceases to meet liabilities generally as they become due.

Insolvency is required to commence voluntary proceedings by way of an assignment, and involuntary proceedings by way of an application for receiving order. 

By Section 2 (1) of the Insolvency Act, “insolvent person” – 

  • means a person who resides, carries on business or has property in Jamaica, whose liabilities to creditors provable as claims under this Act amount to no less than three hundred thousand dollars or such other amount as the Minister may by order published in the Gazette prescribe as the threshold and –
    1. who for any reason is unable to meet his obligations as they generally become due;
    2. who has ceased paying his current obligations in the ordinary course of business as they generally become due;
    3. the aggregate of whose property is not at fair valuation sufficient or, if disposed of at a fairly conducted sale under legal process, would not be sufficient to enable payment of all his obligations due and accruing due; 
  • does not include a bankrupt. 

“Bankrupt” means a person who has made an assignment or against whom a receiving order has been made.

An insolvent person is one of several categories of persons that may make a proposal. The other categories are a person facing imminent insolvency, a receiver (but only in relation to an insolvent person), a liquidator of an insolvent person’s property, the trustee of the estate of a bankrupt and a bankrupt. A “person facing imminent insolvency” is a novel concept to this jurisdiction and means a person who – 

  • resides, carries on business or has property in Jamaica, whose liabilities to creditors provable as claims under this Act amount to no less than three hundred thousand dollars or such other amount as the Minister may prescribe as the threshold; and
  • reasonably anticipates that, for any reason within the period of twelve months, will be unable to meet his obligation as they generally become due.

A person facing imminent insolvency, for the purposes of proposal, shall be treated in the same manner as an insolvent person.

Secured creditors may take mortgages over real estate. Some examples of security over other property include:

  • charges over shares/share capital; 
  • charges may be registered over goodwill, patent, licence under a patent, trademark, copyright or licence under a copyright; and
  • charges on the book debt of a company or floating charges on the personal property of a company.

With the advent of the Secured Interests in Personal Property Act, 2013 (SIPP), secured creditors may hold security interests over a range of personal property, and the Insolvency Act recognises secured creditors who hold interest under the SIPP. 

Secured creditors may enforce their liens/security outside the insolvency context by embarking on, for example, foreclosure proceedings in the case of real estate; or enforcing bills of sale over moveable property, most commonly motor vehicles; or obtaining court judgments for recovering money and property.

In the insolvency context, however, it is important to note that, where a debtor gives notice of intention to make a proposal or makes a proposal under the Insolvency Act, the notice or proposal acts as a stay. 

This means that all creditors, including secured creditors, are precluded from commencing or continuing proceedings against the debtor until:

  • (where notice of intention is given) a proposal is lodged or the insolvent person becomes bankrupt. The proposal must be lodged within thirty days after the notice of intention is filed or within any extension. Extensions must not exceed five months after the expiration of the thirty day period; or
  • (where a proposal is lodged) until the trustee has been discharged or the debtor becomes bankrupt.

A creditor may block a proposal by asking the court to declare terminated the thirty day period before it expires if the creditor can satisfy the court that the insolvent person is not acting in good faith or due diligence, is not likely to make a viable proposal before the expiration of the period in question, or is not likely to make a proposal that will be accepted by the creditor.

At this very early stage in the operation of the regime, timelines cannot be given. The first case in the insolvency division was only heard in November 2016. It should be noted, however, that the Supreme Court has created a specialised division for the handling of insolvency matters as it did some years ago with the creation of the Commercial Division. If the success of the commercial division is to be used as a bench-mark the swift handling of insolvency matters is a reasonable expectation. Much too will turn on the Insolvency Practitioner handling the estate; and how expeditiously he/she acts. The mechanisms are, however, in place in the context of the legislation and the test will, in the coming months, be to see how they play out in practical terms.

There are no special procedures or impediments that apply to foreign secured creditors. It is of note, however, that a foreign representative may apply to the court for recognition of foreign proceedings. Foreign proceeding means a judicial or administrative proceeding, including an interim proceeding in a jurisdiction outside Jamaica dealing with creditors' collective interests generally under any law relating to bankruptcy or insolvency, in which a debtor’s property and affairs are subject to control or supervision by a foreign court for the purpose of reorganisation or liquidation.

There are two types of foreign proceedings. “Foreign main proceeding” means a foreign proceeding taking place in the jurisdiction where the debtor has the centre of its main interests. “Foreign non-main proceeding” is a foreign proceeding other than a foreign main proceeding.

Where a foreign main proceeding is recognised, an automatic stay arises that prevents proceedings from being taken against the debtor in Jamaica and suspends the debtor’s ability to transfer or dispose of its property outside the ordinary course of business.

There are no differing rights and priorities among unsecured secured creditors.

Unsecured trade creditors would not generally receive the full amount of their claims.

Unsecured creditors generally share some rights and remedies with secured creditors, such as the right to prove a claim and to attend at and participate in creditors' meetings to consider proposals. Where a debtor has filed a notice of intention to file a proposal and is required by law to do so within 30 days of the notice, unsecured creditors can disrupt the process by applying to the court to declare the 30-day period terminated before it expires. This has the effect of lifting the automatic stay of proceedings imposed on creditors when such a notice is filed.

There are no typical time lines. Each case would turn on its particular facts, and there are other factors such as court schedules that are quite difficult to assess.

The Scheme of Distribution under the Insolvency Act ranks claims in 4 categories. Category 1 includes reasonable funeral and testamentary expenses and costs of administration, as well as prescribed fees to the Supervisor of Insolvency. Category 2 includes statutory contributions such as National Housing Trust, National Insurance and Pensions, claims for wages and salaries 6 months prior to bankruptcy but not exceeding USD500,000, redundancy payments and all taxes (excluding interest and penalties) not exceeding 1 year’s assessment.

Such claims do not have priority over secured creditor claims in all cases. The claims referred to above have priority over secured creditor claims that do not include property of a debtor which, immediately before the commencement of bankruptcy or being placed in a receivership, the debtor was permitted to deal with and dispose of in the ordinary course of their business. 

The Companies Act makes provision for arrangements and reconstructions. The Companies Act was amended to provide that the sections dealing with arrangements and reconstructions may be applied in conjunction or together with Part III of the Insolvency Act, which makes provisions for Proposals.

A creditor, member or trustee may apply to the court for an order to summons creditors to vote on a compromise or arrangement. If a majority in number representing three-fourths in value of the creditors or class of creditors, or members or class of members, as the case may be, present and voting either in person or by proxy at the meeting agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the Court, be binding on all the creditors or the class of creditors, or on the members or class of members, as the case may be, and also on the company or, in the case of a company in the course of being wound up, on the liquidator and contributories of the company.

Given the provisions under Part III of the Insolvency Act, in particular Section 11, a person facing imminent insolvency may make a proposal. A company need not be insolvent to enter into such a procedure where the arrangement or reconstruction is being done in conjunction with the Insolvency Act.

After the initial application to the court, there are several stages in the process in which the court’s sanction is required, or where time lines run from the date of the court’s order.

Where a proposal is being made, the court’s involvement would effectively arise where the court’s approval of the proposal is sought.

Such procedures are commenced by filing a Fixed Date Claim Form and supporting affidavit in the court.

To the extent that it involves the filing of court documents, the procedure is not confidential, as the filing renders all documentation attached to the same public documents.

Where a company puts forward a proposal or notice of intention to file a proposal, there would be a stay of claims asserted by the company (see 4 Unsecured Creditor Rights, Remedies and Priorities, above).

A trustee may be proposed by the debtor (where the debtor gives notice of intention to make a proposal) and later appointed by the Supervisor, or by creditors if they are not satisfied with the trustee appointed by the Supervisor. A trustee may be a corporation, but the majority of its officers must hold a licence as trustee.

The Insolvency Act makes provision for the court to order interim financing in favour of a debtor who has filed notice of intention to make a proposal. The court may order that all or part of the debtor’s property is subject to a security or charge in favour of the lender. The security or charge shall be in an amount the court considers appropriate.

The court shall consider factors such as the period during which the debtor is expected to be subject to proceedings under the Insolvency Act, how the debtor’s business and financial affairs are to be managed during the proceeding, whether the debtor’s management has the confidence of its creditors, whether the loan would enhance the prospects of a viable proposal being made in respect of the debtor, the nature and value of the debtor’s property, whether any creditors would be naturally prejudiced as a result of the security or charge, and the trustee’s report, in particular the debtor’s cash flow statement.

Under the Companies Act, a company may wind up voluntarily in 3 circumstances, including if the company resolves by extraordinary resolution that it cannot by reason of its liabilities continue its business and that it is advisable to wind up.

Derivative actions allow for the court to grant an appropriate remedy, which may include liquidation and winding up of a company.

A voluntary winding up is commenced by resolution.

Winding up proceedings by the court are commenced by way of a fixed date claim form with affidavit evidence in support of the claim.

In the case of a voluntary winding up, the Companies Act requires that the company shall, within 14 days of passing the resolution, give notice of the resolution by advertisement in the Gazette and to the Registrar of Companies.

The Civil Procedure Rules require that the claimant who has filed a fixed date claim form in court must give notice by placing 2 advertisements not less than 1 week apart in a newspaper published daily and circulated throughout Jamaica; the second advertisement must be placed no less than 14 days prior to the date scheduled for the first hearing of the claim.

A foreign representative may apply to the court for recognition of foreign proceedings. The Court must be satisfied that the application for recognition of a foreign proceeding relates to a foreign proceeding and that the applicant is a foreign representative in respect of that proceeding. The court would arrive at this position by reviewing the application, which is to include certified copies of commencement and other documents of that foreign proceeding or a certificate from the foreign court.

Foreign proceeding means a judicial or administrative proceeding, including an interim proceeding in a jurisdiction outside Jamaica, dealing with creditors' collective interests generally under any law relating to bankruptcy or insolvency, in which a debtor’s property and affairs are subject to control or supervision by a foreign court for the purpose of reorganisation or liquidation.

There are two types of foreign proceedings. “Foreign main proceeding” means a foreign proceeding taking place in the jurisdiction where the debtor has the centre of its main interests. “Foreign non-main proceeding” is any foreign proceeding other than a foreign main proceeding.

Where a foreign main proceeding is recognised, an automatic stay arises that prevents proceedings from being taken against the debtor in Jamaica and suspends the debtor’s ability to transfer or dispose of its property outside the ordinary course of business.

This has not, to our knowledge, been tested as yet under the new regime. However, the Insolvency Regulations require the court to co-operate to the maximum extent possible with the foreign representative and foreign court involved in the foreign proceedings.

Voluntary assignment: a trustee would ordinarily be named by the debtor in the application for voluntary assignment. Where the Supervisor approves the application, it would have the effect of confirming the appointment of the named trustee. However, creditors may, by ordinary resolution at any subsequent creditors’ meeting, appoint another trustee to replace that named by the Supervisor.

If the application names no trustee, the Supervisor gives the debtor 14 days to name one. If none is named, the Supervisor appoints a trustee or the Government Trustee to administer the estate.

Receiving order: the application for receiving order must name a proposed trustee. The court will ultimately appoint a trustee when determining the application.

Attorneys and accountants are principally the professional advisers engaged in insolvency proceedings in this jurisdiction.

The appointment of a trustee is by the court on the application for the receiving order.

The Civil Procedure Rules make mediation mandatory in civil proceedings, unless the court dispenses with it. As it relates to insolvency proceedings, which are governed by the CPR, this means of dispute resolution has not been tested under the new regime. The questions in this section cannot therefore be answered with any specificity. 

It should be noted that the court has the power to stay proceedings on an application for a receiving order where the debtor denies the truth of the facts alleged in the application. The stay may be imposed for such time as may be required for trial of the issue relating to the disputed facts.

The existence of a dispute that awaits resolution by trial creates an opening for a mediated result, and it remains to be seen whether the court would refer insolvency matters to mediation if the court considers it appropriate.

The Arbitration Act govern arbitrations. It is not uncommon for parties to agreements to agree that the UNCITRAL rules are to apply. The Civil Procedure Rules, 2002 govern mediation of matters commenced under the civil jurisdiction of the court.

Arbitrators and mediators are appointed by agreement of the parties. The terms of the agreement to arbitrate typically provide for the appointment in the absence of an agreement. In the case of court-directed mediations, the Dispute Resolution Foundation will appoint a mediator in the absence of agreement between the parties.

The duties of officers and directors of a financially distressed or insolvent company in this jurisdiction really do not differ from the duties such persons would generally hold. They are required to act honestly and in good faith in the best interest of the company, and to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

The duties of the officers and directors are owed to the company alone, and not to creditors, owners, shareholders or company affiliates/subsidiaries.

Where a corporation has committed an offence under the Insolvency Act, any officer or director or agent of the corporation who directed, authorised, assented to, acquiesced in or participated in the commission of the offence is party to and guilty of the offence and liable on conviction, whether or not the corporation has been prosecuted or convicted.

The Court may also make an order for damages against the officer director or agent in favour of the person who has suffered loss or damage because of the commission of the offence.

The Insolvency Act treats different types of transactions differently, with settlements and preferences being the most important. A settlement is a covenant, conveyance, transfer or gift for nominal or no consideration. The setting aside of a settlement is time-sensitive and relates very closely to the look-back period.

A preference is a transaction carried out by an insolvent debtor with a view to giving one creditor a preference over others, and includes “a judicial proceeding taken or suffered”. If a transaction has the effect of giving a creditor a preference, it shall be presumed to have been made with a view to giving the creditor that preference, and may be set aside. 

Settlements

If a settlement is made one year before the initial bankruptcy event (IBE), it is void.

If a settlement is made up to five years before the IBE, it is void if the trustee can prove that, at the time of making the settlement:

  • the debtor was unable to pay the debts without the aid of the property transferred; or
  • the legal interest in the property was not transferred.

Preferences

If a preference is made within six months before the IBE, it shall be deemed fraudulent and void as against the trustee.

A preference in favour of a person related to the insolvent person is voidable if made within 12 months before the IBE.

The trustee in the bankruptcy may assert claims to set aside or annul transactions.

There would be some difficulty in giving a fact-based assessment in the context of the framework, as the regime is still quite new. However, it is our considered view that it is not inconceivable that in appropriate circumstances an intercompany claim, whether secured or unsecured, would likely be accorded treatment similar to third party claims and may very well be subject in some cases to subordination to the rights of third party creditors.

This issue has not yet been tested in our jurisdiction, but we anticipate that it is an area that will be in the forefront for consideration by players in the market given its importance to groups of companies and otherwise connected companies and, if unresolved, for consideration by the court.

There are no general limitations in Jamaica on non-banks or foreign institutions holding loans or bonds; nor is there any specific authorisation required should a non-bank or foreign institution provide such financing.

As yet, there are no known cases under the insolvency regime where debt trading has taken place. Given the novelty of the regime, it would not be unexpected if the debt trading would initially be conducted on a transactional basis.

Loan agreements would typically restrict an assignment without consent, but in many cases there would be provision for consent to not be withheld unreasonably.

The key and typical purposes of valuations in the restructuring and insolvency market are identifying insolvency and validating sales by insolvency office-holders.

Valuations are typically initiated by chartered accountants, who would bring in other professional services where necessary. Much would also depend on the type of arrangement being envisaged under the restricting/insolvency regime, since that could very well inform which professional would best initiate the valuation.

The local jurisprudence related to valuations in this jurisdiction is not yet developed, particularly where the regime itself is quite new. It is anticipated, however, that persuasive authority may be gleaned from other jurisdictions with a similar legislative schemes.

Rattray, Patterson, Rattray

13 Dominica Drive
Kingston 5
Jamaica

+1 876 929 6680 – 2 +1 876 618 5500

+1 876 906 0498

info@rattraypatterson.com www.rprja.com
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Law and Practice

Authors



Rattray Patterson Rattray founded in 1981, has offices in each of Jamaica’s two cities, Kingston and Montego Bay. It has a team of 10 attorneys-at-law comprising 4 partners, 4 associates and 2 consultants. The Senior Partner and Senior Consultant assisted by associates handle insolvency work. RPR currently represents a significant portfolio of corporate entities in Jamaica and abroad in all the major sectors of commercial activity; which positions the firm to be a leading player in the emerging market under the new insolvency regime in Jamaica. RPR’s clientele consist of major players in the Banking, Bauxite & Alumina, Construction, Gaming, Insurance, Media, Private Security, Real Estate Development, Shipping, Transportation and Tourism & Hospitality sectors.

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