Guernsey is a British Crown dependency, with its own parliament and independent legal system. It is responsible for its own domestic affairs, its economy and tax regime. Given its role as a financial centre, corporate insolvency laws and procedures play an important part in the efficient functioning of business in the jurisdiction. Guernsey's insolvency framework provides an adaptable and commercially focused regime, and has at its core the promotion of a "creditor friendly" approach.
Guernsey is not a member of the EU and does not have legislation giving effect to the UNCITRAL Model Law on Cross-Border Insolvency. It does, however, have modern domestic insolvency laws as well as well recognised procedures for assisting foreign office holders. Many Guernsey insolvency procedures are broadly similar to, and derived from, English law principles and reflect the processes available in the UK and many other Commonwealth jurisdictions.
Guernsey's proximity and close relationship with the United Kingdom, in particular the City of London, as well as Europe more broadly, means that the restructuring and insolvency market in Guernsey is generally impacted by prevailing market conditions in those locations. The use of Guernsey investment funds and other structures to hold UK and European commercial real estate leaves the restructuring market particularly sensitive to impacts from changes in the value of those assets.
Guernsey has been successful in managing the local impact of COVID-19, experiencing a relatively short period of local restrictions, supported by targeted industry assistance packages. However, given its close association with the UK and European markets, the longer-term impact on Guernsey is likely to depend on the broader economic impact from COVID-19. In 2020 Guernsey's legislative body passed amendments to Guernsey's insolvency regime.
The changes, which are expected to come into effect in early 2021, include:
Corporate insolvency and restructuring is governed by the Companies (Guernsey) Law, 2008. This applies to Guernsey companies, including protected cell companies (PCCs) and incorporated cell companies (ICCs) and their incorporated cells.
The Companies Law provides for a number of formal restructuring and insolvency procedures, modelled closely on English law:
There are separate insolvency regimes applying to limited partnerships and limited liability partnerships.
See 2.1 Overview of Laws and Statutory Regimes.
Directors owe fiduciary duties to the company and, where a company is insolvent or on the verge of insolvency, directors must take into account the interests of creditors when fulfilling their duties. In appropriate circumstances, this may include considering whether to commence formal insolvency proceedings. There is no statutory obligation to place an insolvent company into a formal insolvency procedure.
Creditors, as well as members, any director and "any other interested party" have standing to apply for the compulsory winding-up of a company.
Creditors, the directors, the company and any creditor may also apply for or for an administration order.
See 7 Statutory Insolvency and Liquidation Proceedings.
Insolvency is one of the grounds for the making of a compulsory winding up order or an administration order.
Solvency for Guernsey companies is defined in Section 527 of the Companies (Guernsey) Law, 2008, using a dual "cash flow" and "balance sheet" test. In order to be solvent a company must be able to pay its debts as they fall due and the value of its assets must exceed the value of its liabilities. For companies that are supervised by the Guernsey Financial Services Commission, they must also meet any regulatory capital requirements that are imposed.
There is no requirement to show insolvency for members to commence the voluntary liquidation process.
In relation to administration orders, the test is whether the company is, or is likely to become, unable to satisfy the solvency test.
For a compulsory winding up and the appointment of a liquidator by the court it is necessary to show the company is unable to pay its debts which is defined as having failed to meet a statutory demand (see 7.1 Types of Voluntary/Involuntary Proceedings) or is otherwise unable to meet the solvency test.
There are no specific statutory restructuring and insolvency regimes applicable to banks and other financial institutions.
The Guernsey Financial Services Commission does have powers under various laws to appoint administrators, administration managers or liquidators to banks and other financial institutions and licensees.
Given Guernsey's close financial links with the UK market, and the background of most market participants, the approach to out of court restructuring tends to follow the approach and practice adopted in the UK. In order to facilitate consensual restructuring, market participants will in general respect the well-recognised formal consensual restructuring frameworks such as the INSOL principles.
There is no requirement under Guernsey law for consensual restructuring negotiations to take place prior to the commencement of any formal statutory processes.
As noted in 3.1 Consensual and Other Out-of-Court Workouts and Restructurings, the approach and workout processes applied in Guernsey almost invariably follows the process and mechanisms adopted in the UK.
There are no formal stages involved in an out of court restructuring. It is likely that some form of informal moratorium will be agreed with the creditors to enable the provision of information by the company and an opportunity for creditors to evaluate any proposals made.
Major restructurings will inevitably be led by market participants familiar with UK processes.
There is no "typical" approach to the injection of new money. The injection of new money will generally follow the approach adopted in the UK. Where there are assets over which security can be granted, companies will do so. Alternatively, a priority for new money can be crafted through ranking and subordination agreements, but as a matter of contract it will only be binding on those who are a party to it and not other creditors, who will rank pari passu with the new money.
There are no statutory duties applying to creditors during the course of an out of court restructuring. While there is no Guernsey authority on point, the Guernsey courts are likely to follow English case law dealing with the duties and obligations of banks involved in restructuring. In the absence of an express agreement to the contrary, there are only very limited duties owed between banks engaged in a restructuring. Banks are entitled to vote or take other decisions based on their own subjective assessment of their own interests.
Absent contractual provisions in the creditor agreements, there is no out of court cram-down mechanism that will bind dissenting creditors. Where it is intended to bind dissenting creditors, a statutory scheme of arrangement will need to be used.
Guernsey law draws a distinction between the nature of security available over immovable property (ie, real estate) and movable (personal) property.
Security over a Guernsey real property is taken in the form of a hypotheque. This is a form of legal right over the debtor's property that is granted in favour of the creditor, in the form of a bond.
Security may be created over tangible moveable assets in the form of a lien, or a pledge over an asset. In both cases possession of the property must be with the creditor. It is also possible to give effect to a mortgage over a moveable asset such as a ship or an aircraft.
Security can be taken over intangible assets by way of a security interest created under the Security Interests (Guernsey) Law, 1993. A security taken under the Security Interests law must be evidenced by a security agreement which must be:
Security agreements are commonly used to take security over shares in a company or over a bank account.
A secured creditor with security created by a security agreement may enforce that security where the debtor defaults. Enforcement is exercisable by the secured party subject to the statutory criteria being met. The security is enforced by the exercise of a statutory power of sale.
The commencement of an insolvency process, whether voluntary liquidation, compulsory liquidation or administration, does not impact the rights of secured creditors to take enforcement action.
There is no moratorium applicable during the course of a liquidation or compulsory winding-up. While there is a moratorium that applies to claims brought by unsecured creditors during the course of an administration, that moratorium does not apply to creditors having a security interest under the Security Interests Law.
In general terms, the Guernsey Court recognises and applies the principle of pari passu distribution of assets to creditors in an insolvency. This provides that all creditors participate in a common pool of assets proportionate to the amount of their claims against the company. This is subject to the interests of secured creditors in relation to assets over which they hold security and the interests of those creditors afforded a preference under Guernsey law.
Information on secured creditors' rights is discussed in 4 Secured Creditor Rights, Remedies and Priorities.
The Companies (Guernsey Law), 2008 and the Preferred Debts (Guernsey) Law, 1983 set out the order for priority for the payment of preferred debts on insolvencies:
See 5.1 Differing Rights and Priorities.
Unsecured creditors have a variety of rights and remedies. Creditors may bring applications for the compulsory winding-up of a company or for an administration order. While voluntary liquidation procedures are commenced by the company and do not require input from a creditor, a creditor may still apply for administration or a compulsory winding-up order for a company even though it is in voluntary liquidation. Liquidators will have the same general duties whether they are appointed by company members or by the court.
During the period an administration order is in force, a creditor may apply to the court for relief where the company's affairs are being managed in a manner that is unfairly prejudicial to the interests of its creditors. While there is no express power for a creditor to apply to court for relief during the course of a compulsory winding-up, the court has an inherent jurisdiction to supervise and control the function of the liquidators and is likely to respond where appropriate to an application by creditors.
The making of an administration order gives rise to a moratorium that would prevent the claims of unsecured creditors proceeding absent agreement of the administrator or leave of the court. There is no such moratorium applicable in either a voluntary or compulsory liquidation nor does a moratorium apply during a creditors' scheme of arrangement process.
Position of Foreign Creditors
Foreign creditors have the same standing as domestic creditors for the purposes of insolvency proceedings. It is not necessary to have a foreign judgement or obtain registration of a judgment in order to have standing to apply for an administration order or the winding-up of a company.
Where a foreign creditor wishes to enforce a foreign judgment against the assets of a Guernsey company through the Guernsey Court, that judgment will need to be either registered under the Judgments (Reciprocal Enforcement) (Guernsey) Law, 1957, or under common law.
Creditors can secure pre-judgment attachments against both immoveable and moveable property. In relation to immovable property, this is achieved by the application to court or a registration of a claim in the Livres des Hypotheques.
A pre-judgment attachment against other tangible and intangible assets can be made by way of an Arret Conservatoire. This is obtained on an application to court accompanied by a substantive claim seeking recovery of the debt or an undertaking to bring such a claim.
As noted in 5.1 Differing Rights and Priorities, the costs and expenses of an administration or a compulsory winding-up will have priority over other unsecured debts.
Priority is given to certain employee claims. The claims of unsecured creditors, whether having a priority or not, are subject to secured creditors' claims to assets over which they have security.
The principle statutory restructuring tool in Guernsey is the scheme of arrangement under Part VIII of the Companies (Guernsey) Law, 2008. The provisions of Part VIII are substantially similar to schemes of arrangement under English law.
A scheme of arrangement is a statutory form of compromise or arrangement between a company and its creditors (or any class of them) or its shareholders. There is no statutory definition of the terms "compromise" or "arrangement" and the court will define them to incorporate a broad range of arrangements, provided there is some form of "give and take" between the company and creditors to be bound by the scheme.
A scheme of arrangement can be commenced by a company or by any creditor or shareholder, however, a scheme commenced by a creditor or shareholder must have the company's support.
There is no automatic moratorium that applies when scheme proceedings are commenced. It is possible to propose a scheme of arrangement from within an administration, which would give the company a moratorium as regards to claims of unsecured creditors.
The scheme process involves a three-stage mechanism:
Approval and Challenges
A scheme must be approved by creditors of the company (or of the relevant classes concerned) at the meeting convened by the court. The scheme must be approved by a majority of creditors in number, representing 75% in value of the creditors (or class of creditors) present in voting either in person or by proxy.
After the scheme is approved by the requisite majority of creditors, it must be sanctioned by the court. The court will consider whether the statutory requirements have been met, that each relevant class of creditor was fairly represented by those who attended the meeting, that the majority are acting in good faith and not coercing the minority, and the scheme is one that an intelligent and honest man might reasonably approve.
As the scheme requires a court process it is not confidential and key commercial and economic terms may be accessible by the public.
There are potential mechanics for a challenge to a scheme of arrangement. Challenges to questions of class composition are normally raised at the first hearing. A creditor seeking to challenge the class composition will need to demonstrate that they have legal rights (as opposed to interests) that differ from other creditors as to make it impossible for them to consult together.
Challenges at the final hearing will generally focus on whether the scheme has met the statutory requirements.
The scheme of arrangement does not give rise to a moratorium or automatic stay of claims against the company. The company may continue to operate its business while the scheme of arrangement process is pursued and it will normally continue to be managed by its directors.
As noted in 6.1 Statutory Process for a Financial Restructuring/Reorganisation, a company may be placed into administration prior to pursuing a scheme of arrangement, which will afford it a moratorium but require the directors to give way to an administrator to run the business of the company.
The Guernsey Court will consider class composition of creditors at the first scheme hearing. In simple terms, the question is whether the members of each class of creditors have rights which are not so dissimilar as to make it impossible for them to consult together with a view to their common interests.
Creditors do have the right to challenge a scheme of arrangement, including the composition of classes which would ordinarily be done at the first convening hearing.
Provided the requisite majorities are achieved and the scheme comes into effect, the interests of dissenting creditors will be crammed down in accordance with the terms of the scheme.
There is no statutory prohibition on the trading of creditors' claims but under Guernsey law a notice of assignment would need to be given to the company.
The scheme of arrangement procedure may be used to reorganise a corporate group on a combined basis in order to achieve administrative efficiency. A separate scheme would be required for each scheme company, but the procedures can be co-ordinated to maximise efficiencies.
There are no statutory restrictions on the company's use of or sale of its assets during the course of a formal restructuring process. A contractual consent would be enforceable unless the applicable right was itself subject to the terms of the scheme.
Where the scheme is implemented when a company is outside administration, the sale of assets will be executed by the properly authorised representatives of the company. Where a scheme is effected during the course of an administration the sale of assets will be controlled by the administrator. Creditors may bid for any assets being sold and there are no specific rules that apply to such a process. It is possible to give effect to sales or other similar transactions that have been pre-negotiated prior to the restructuring proceedings.
Secured creditors claims could be released by use of a scheme of arrangement procedure.
New money could be given priority by the company granting a form of security to the lender or by subordinating claims of scheme creditors by the terms of the scheme itself.
There is no process set out in statute for determining the value of claims or for determining which creditors have an economic interest in the company. The scheme will adopt a valuation methodology selected by the applicant. That methodology must avoid uncertainty and discrimination against creditors. The approach taken by those promoting the scheme will be subject to supervision and sanction of the court.
The court must approve the scheme of arrangement at the sanction hearing. In order to do so, the court must be satisfied that each relevant class of member was fairly represented by those who attended the meetings, that the majority were acting in good faith and that the scheme is such that an "intelligent and honest man, a member of the class concerned, acting in his interest, might reasonably approve".
The company or any statutory office holder is not able to reject or disclaim contracts formed on the basis of a scheme of arrangement.
It is possible to release non-debtor parties. The Guernsey court is likely to follow the approach of the English courts, which have accepted that schemes can include releases of third parties where such releases can be regarded as ancillary to the arrangement between a company and its creditors. This may include the release of guarantees or indemnities provided by other members of the group.
There is no mandatory right of set-off in a scheme imposed by statute. There may be other types of set-off available to individual debts by way of contractual set-off.
Where a company fails to comply with the procedural requirements for a scheme, that scheme will likely fail at the sanction hearing on the basis of procedural or substantive unfairness. Where the failure to observe the terms occurs, after sanction of the scheme the consequences will amount to a breach of the relevant terms of agreements.
Existing equity holders can receive or retain any ownership or other property on account of their ownership interests.
Subject to the terms of the company's articles, the members of a company may pass a resolution for its winding-up. Generally, a special resolution is required unless provided for in the articles. The winding up resolution may be passed by members even if the company is insolvent.
On passing the winding up resolution, members may also appoint a liquidator to undertake the winding-up of the company. The liquidator is required to realise the company's assets and discharge its liabilities, before distributing any surplus to members. All the powers of the directors cease, except where the company by ordinary resolution or the liquidator has approved their continuation. While the company's corporate capacity continues until dissolution, the company must cease to carry on business unless it is beneficial for the winding-up of the company.
During a voluntary winding-up the company can by special resolution delegate to its creditors the power to appoint a liquidator or to enter into any arrangement regarding the powers to be exercised by the liquidator and the manner in which they are exercised. Members or the liquidator may seek directions from the court on any aspect of the winding-up.
There is no automatic moratorium on the passing of a winding up resolution, such that creditors may commence or continue proceedings against the Company and may apply for it to be compulsorily wound up. There is no procedure to adjudicate creditor claims. The rights of creditors are dealt with in detail in 5.1 Differing Rights and Priorities. There is no ability to disclaim onerous contracts.
There is no provision for the length to time for a voluntary liquidation. A general meeting of the company must be called after one year from the date of winding-up and in each year following. At the general meeting the liquidator should provide an account of the conduct of the winding-up during the year.
Once the affairs of the Company are fully wound up the liquidator will prepare an account of the winding-up and call a general meeting to present and explain the account. Once held, the liquidator will give notice to the register of companies who will issue a public notice that the company will be dissolved. The company is dissolved three months after the notice is given.
An application for the compulsory winding up of a Guernsey company may be made to the Guernsey Court by the company, any director, member or creditor or other "interested party". There is currently no power to wind up a foreign company.
The grounds for making an application for a compulsory winding-up are set out in the Companies (Guernsey) Law, 2018. An application may be made in a number of circumstances, including where the company is "unable to pay its debts" or where it is "just and equitable" that the company be wound up. In addition, the Guernsey Financial Services Commission may apply to wind up any company on the grounds that doing so would be for the protection of the public or the reputation of the Bailiwick of Guernsey.
Statutory demands may be served on a company where that company owes a debt greater than GBP750. Where a company fails to pay the amount demanded or otherwise reach agreement with the creditor within 21 days, it is deemed to be unable to pay its debts. Statutory demands must be served on the registered office of the company by Her Majesty's Sergeant, an official of the court. There is no need to obtain a judgment debt or to register a foreign judgment in Guernsey before serving a statutory demand.
The issue of a statutory demand is not essential. It will be sufficient for a creditor to establish on the evidence that the company fails the solvency test. This means either the company is unable to pay its debts as they fall due (the "cash flow" test) or the value of its liabilities is greater than the value of its assets (the "balance sheet" test).
The company must be given notice of an application for winding-up before it will be heard by the court.
A liquidator is appointed by the court at the hearing of the winding up application. The court also has the power to make interim orders, and these can include an order for the appointment of a provisional liquidator. There is no equivalent to the official receiver in Guernsey, and normally the party making the application for a compulsory winding-up order will nominate the proposed liquidator. On appointment, all the powers of the directors cease, except as provided by the court or as agreed with the liquidator. A liquidator has the power to undertake acts relating to the winding-up and can seek the court's direction on any matter relating to the winding-up.
There is currently no formal "proof of debt" procedure in Guernsey. In practice, liquidators will make contact with known creditors and advertise for claims in relevant newspapers. Creditors will be asked to submit claims in the form of "proofs of debt", but liquidators do not have the role of adjudicating such claims. There is generally no time period within which creditors must lodge their claims. Ultimately, it will be for a Commissioner appointed by the court to approve distributions to creditors. Where there are disputes over creditor claims these are referred to the court for determination.
Any surplus on winding-up will be distributed to shareholders in accordance with their rights and interests under the articles of association of the company.
Once the liquidator has made their final distribution, they must apply to the court for an order declaring the company dissolved.
There is no out-of-court process for appointing administrators to a Guernsey company and the appointment of an administrator will require an application to court.
The court may make an administration order where the company is unable or is likely to become unable to satisfy the solvency test. The solvency test requires that the company is able to pay its debts as they become due and that its assets exceed its liabilities. In addition, the court must form the view that the making of the order would achieve one of the two statutory purposes – either the survival of the company as a going concern or the "more advantageous realisation" of the company's assets than on winding-up.
Administration has the potential to be used as a "rescue" procedure, and is designed to give the company sufficient breathing space to maximise value or enabling better realisations to creditors. Unlike compulsory winding-up, it is not a terminal process. The administrator assumes broad powers to operate the business of the company.
There is no time limit on the length of an administration order. Where the administration is successful in reviving the financial health of the company, the order may be discharged and the company can resume under the management of its directors. In the event that the company remains insolvent, an application is normally made for the company to be wound up.
Within an administration or liquidation, the company's business or assets will be sold by the relevant office holder. The office holder will execute relevant contracts on behalf of the company. There is no need for court sanction of such transactions.
The purchaser will, generally, require good title to the assets, though an administrator or liquidator is unlikely to give various warranties that might normally be sought. The secured and unsecured creditors may bid for company assets and there are no rules against acting as a stalking horse in the sale process. It is possible to effect a sale by way of a pre-negotiated transaction in the administration, although the parties will be expected to comply with the English Statements of Insolvency Practice 16 "pre-pack" requirements. These include requirements for provision of detailed information on the sale, its rationale and the circumstances under which it was undertaken.
Under the current law, there is no express requirement in liquidation or administration for the convening of creditors' committees. A court direction can be sought for the establishment of such committee.
Recent legislative amendments, likely to come into effect in early 2021, will introduce an obligation on administrators to call a meeting of creditors within ten weeks of the making of the administration order or such other period as the court directs. The same amendments will give rise to new insolvency rules that are likely to include provisions dealing with creditors' committees in liquidations.
The court in Guernsey regularly provides recognition and assistance to foreign office holders.
Guernsey has had extended (with necessary amendments) Section 426 of the Insolvency Act 1986 by means of the Insolvency Act 1986 (Guernsey) Order, 1989. Accordingly, Guernsey will extend recognition and assistance to an English office holder on the issue of a letter of request from the English court. The Guernsey Court has a duty to grant the assistance unless the request is oppressive or contrary to public policy.
Importantly, in providing assistance the Guernsey Court can apply the insolvency law of either Guernsey or England. This can be particularly useful where, for example, a foreign office holder wishes to use Insolvency Act statutory powers, such as the power to conduct private examinations of officers of the company that may otherwise not be available.
For requests from countries not covered by the statutes, Guernsey will generally extend assistance under common law principles. While recognition of an appointment is normally uncontroversial, the full extent of powers for courts to assist foreign office holders under common law is subject to many of the same uncertainties as it is in other jurisdictions.
In Singularis Holdings Limited v Pricewaterhouse Coopers  UKPC 36, a majority held that there is a common law power to require persons subject to the court's jurisdiction to provide information to overseas officeholders, as long as similar orders can be made in the officeholders' home forum. This has proved controversial in Guernsey, at least in the context of personal insolvency, with the Guernsey Court declining to follow the majority in Singularis, finding instead that the foreign trustee in bankruptcy of a foreign debtor could not use common law information collecting powers in Guernsey.
Guernsey is not a party to any international treaties relating to bankruptcy or insolvency. There is no express statutory provision for insolvency protocols between the Guernsey Court and foreign courts. The Courts in Guernsey are, however, mindful of the principles of comity and co-operation in insolvency matters.
See 8.1 Recognition or Relief in Connection with Overseas Proceedings.
Foreign creditors as treated the same of domestic creditors.
Guernsey does not have an equivalent of the Official Receiver. Where a company is placed into voluntary winding-up or compulsory winding-up, a liquidator will be appointed. In an administration, the appointed official will be an administrator.
An administrator of a Guernsey company is appointed to manage the affairs, business and property of the company. The powers and duties of the administrator are set out in the Companies (Guernsey) Law, 2008. Those powers are broad and provide the administrator "may do all such things as may be necessary or expedient for the management of the affairs, business and property of the company." The administrator may seek directions from the court in relation to the extent or performance of any function or any other matter arising during the course of their administration.
The administrator has a duty to take into their custody or control or property to which the company appears to be entitled, and must manage that property in accordance with any directions given by the court.
The Companies Law specifically provides for the protection of the interest of creditors, members and such persons as may apply to the court for relief where the administration is being conducted in a manner which is unfairly prejudicial to the interests of its creditors or members.
A liquidator, whether appointed by members in a voluntary process or appointed by the court on an application for compulsory winding-up, has a duty to wind up the company's affairs and realise and distribute its assets.
On the appointment of a liquidator, the powers of the directors cease, except to the extent of the company or the court order their continuance. The liquidator shall realise the company's assets and discharge the company's liabilities and, having done so, distribute any surplus amongst the members in accordance with their respective entitlement. In a compulsory liquidation, the liquidator is obliged to produce accounts which are then examined at a meeting of creditors by a Commissioner appointed by the court
Both voluntary and compulsory liquidators may seek directions in relation to the performance of their function.
There are no formal qualifications required for those taking either voluntary or court ordered appointments.
In a voluntary liquidation, the members will generally select the liquidator. In an uncomplicated voluntary liquidation, the role of liquidator may be undertaken by a director. In more complicated cases, an accountant or qualified insolvency practitioner is appointed. Under recent legislative amendments that likely to come into effect in early 2021, members will be required to appoint an independent person on a voluntary liquidation where the company is insolvent.
Normally, the party making the application for an administration or compulsory winding-up order will nominate the proposed office holder. The appointment is subject to the approval of the court, which will consider the relevant experience and qualifications of the proposed office holder. Such court appointed liquidators or administrators are invariably experienced insolvency practitioners.
As a general principle, a director of a Guernsey company owes their duties to the company rather than individual shareholders or creditors.
Directors of a Guernsey company owe both fiduciary duties and a duty of skill and care. Directors must act in good faith in the interests of the company. They must exercise their powers for a proper purpose and avoid conflicts of interest. Directors also owe a duty of skill and care to the company. They must exercise the conduct of a reasonably diligent person having both the general knowledge, skill and experience of that director, and the general knowledge, skill and experience that may reasonably be expected of a person carrying out such functions in relation to the company.
Duties are always owed to the company itself, however, where the company is insolvent or on the "verge" of insolvency, the directors are obliged to take into account the interests of creditors when reaching decisions.
Liabilities in Relation to Insolvency
Directors can also be exposed to other liabilities in an insolvency context. A director may be guilty of wrongful trading if, in the course of the winding-up of the company which has gone into insolvent liquidation, it appears that at some time before the commencement of the winding-up, the company and/or the director:
If found guilty of wrongful trading, a director may be liable to make such contribution to the company's assets as the court thinks appropriate.
The Companies Law also provides for an action in fraudulent trading where the director carries on the company's business with an intent to defraud creditors. Directors can also be subject to disqualification proceedings. A disqualification order can prohibit the person being in any way concerned, either directly or indirectly, with the management, formation or promotion of a company for a period of up to 15 years.
Directors owe their duties to the company and generally the company is the proper claimant in any breach of duty claim. There are some actions that creditors have standing to commence. A creditor may commence an action for wrongful trading or fraudulent trading. To the extent that any relief is obtained, however, the proceeds go to the company for distribution among creditors in the normal course.
Where a transaction is undertaken that improves a creditor's position in the company's liquidation, a preference claim may be brought. The court can set aside such transactions if the company was "influenced by a desire" to bring about the improvement in the creditor's position and the transaction was entered into when the company was unable to pay its debts, or became unable to do so as a result of the transaction.
As such, a preference can be set aside if made at any time when the company was insolvent in the six months prior to liquidation. Where the preference is given to a "connected person", for example, a director or shareholder, the six month period is extended to two years. In such a case, there is a presumption that the company was insolvent during that two year period and was influenced by a desire to improve the connected person's position in the event of a liquidation.
Recent legislative amendments, likely to come into effect in early 2021, have introduced two new transaction avoidance claims.
The first allows liquidators or administrators to apply to court to set aside a transaction that was made at an undervalue, at a time when the company was unable to satisfy the solvency test or became unable to satisfy the solvency test due to the transaction. The statute provides that a transaction is at an "undervalue" where the company makes a gift or otherwise receives no valuable consideration, or the consideration was "significantly less" than the value of consideration provided by the company.
The second enables a liquidator or administrator to set aside an extortionate credit transaction. An extortionate transaction will be one which, having regard to the risk being accepted, the terms were such as to require "grossly exorbitant payments to be made for the provision of credit" or otherwise "grossly contravened ordinary principles of fair dealing."
There is a six month look-back period for a preference claim, however, that period is extended to two years where the person who receives the preference is a connected party.
The same look-back period will apply to undervalue transaction claims once these come into force. The look-back period for the new extortionate credit transactions will be three years.
A preference can be set aside in an application by a liquidator. Under the recent legislative amendments the power apply to set aside undervalue transactions or extortionate credit transactions is with the liquidator or administrator.
Liquidators or creditors have standing to bring an action against those involved in the promotion, formation or management of a company for misfeasance. Where there has been the misapplication or appropriation of the company's assets, they become personally liable for the company's debts or will otherwise be guilty of breach of fiduciary duty in relation to the company.
Additionally, creditors can bring a customary law action where a transaction has been undertaken that defraud creditors.