The Isle of Man is a British Crown dependency. It has its own legislature and legal system, with responsibility for its own domestic affairs.
The current Isle of Man insolvency regime shares many similarities with that which prevailed in England prior to the introduction of the Insolvency Act 1986, at which point the regimes diverged: England moved towards a more debtor-friendly regime, whilst the Isle of Man remained more secured creditor-friendly.
The Isle of Man’s corporate insolvency regime can be found in Part V of the Companies Act 1931 and the accompanying Companies (Winding-Up) Rules 1934. Reformation of the regime has been considered on a number of occasions, without being progressed, and it is fair to say that, increasingly, judges of the Manx High Court (known as Deemsters) have weighed in to criticise the state of affairs.
One particular issue is the absence of an Official Receiver (despite there being provision for one in the legislation). This means that a creditor needs to be prepared to fund a winding-up, even in circumstances where a return is uncertain. As a result, there are very few court winding-ups. Despite there being approximately 25,000 Manx companies, on average fewer than 20 are wound up by the court in any one year. Voluntary liquidation is more common, although the funding issue remains. There are no official statistics as to the number of winding-ups undertaken. The numbers involved make identification of trends impossible.
Another issue is the perceived lack of a turnaround regime. Whilst provisional liquidation can be (and has been successfully) used to facilitate corporate restructuring, with or without the use of a scheme of arrangement, there is no equivalent to the English administration or CVA (creditors’ voluntary arrangement) regime.
The Isle of Man has two main company law regimes, which operate in parallel. Companies can be incorporated under either the Companies Acts 1931–2004 (the “1931 Act”) or the Companies Act 2006 (the “2006 Act”).
The Isle of Man’s corporate insolvency procedure is primarily governed by Part V of the 1931 Act and the Companies (Winding-Up) Rules 1934. Companies may be wound up by the court, voluntarily or subject to the supervision of the court.
In addition to the 1931 Act, insolvency law in the Isle of Man is also governed by the following legislation:
The winding-up legislation in the Isle of Man is similar to that in the UK.
Companies may be wound up by three methods.
Voluntary winding-up (by creditors or by members)
The process is normally commenced by the directors convening a general meeting to put a resolution to the shareholders that the company be wound up and a liquidator appointed (winding-up resolution). However, shareholders could themselves requisition a general meeting without the instigation of the directors.
To be a members’ voluntary winding-up, the directors must (prior to the winding-up resolution) swear a declaration that the company is solvent and able to pay its debts within a period of one year. In an insolvency situation, where the directors cannot swear such a declaration, the winding-up will be a creditors’ winding-up.
Winding up by the court (compulsory winding-up)
A company may be wound up by the court if:
A petition to wind up the company may be brought by: the company itself; a creditor; a shareholder; the Isle of Man Treasury; or the Financial Services Authority. The Financial Services Authority would only bring a claim to wind up a company if it is clearly in the public interest to do so.
Under the supervision of the court
This is a method which is rarely used and which can take place only after a company has started to be wound up voluntarily.
Receivership in the Isle of Man
In the Isle of Man, receivership is not a collective procedure and can be initiated at any time a fixed or floating charge granted by the borrowing company allows. A receiver owes a duty of care to their appointer, but only limited legal obligations to others. Receivers are not given statutory powers so an Isle of Man law governed security agreement must express in full all the powers the secured creditor would wish a receiver to be able to exercise. The primary duty of the receiver is to try to bring about a situation in which interest on the secured debt may be paid and the debt itself repaid.
Concepts designed to promote a “rescue culture” such as administration, examination or company voluntary arrangements do not exist in Isle of Man law. However, in recent years the Isle of Man court has been prepared to extend the scope of Manx common law to assist overseas insolvency officers/administrators in the absence of statutory power within the jurisdiction to provide this assistance (see Capita Asset Services (London) Ltd v Gulldale Ltd (CHP) 2014 MLR N-2). The jurisdiction of the Isle of Man court in this regard has not yet been challenged.
Under Isle of Man law, there are no express duties requiring directors to commence insolvency proceedings. The only duty to commence such proceedings arises when doing so is necessary for the directors to comply with their duties and in particular where a company is insolvent or on the verge of insolvency. There are no specified time limits.
Creditors wishing to commence involuntary proceedings would be required to apply to court to wind up the company and to appoint a provisional liquidator (please refer to 2.2Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership (Winding up by the court)). The main grounds which creditors can use are:
The list of “other parties” who may commence involuntary proceedings are contained in 2.2Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership.
Insolvency is not always required to commence voluntary and involuntary proceedings. Other methods for winding up a company are available.
A company is considered to be insolvent when it is unable to pay its debts. The definition of “inability to pay debts” as contained in the 1931 Act is as follows:
There are additional provisions relating to the insolvency of banks and insurance companies. The Bank (Recovery and Resolution) Act 2020 broadly reflects similar legislation that has been adopted in the UK and Europe and gives the Financial Services Authority as the Resolution Authority a range of tools to deal with a bank which is failing or likely to fail. Provisions in the Insurance Act 2008 modify the application of the 1931 Act winding-up regime in relation to insurers.
There are no mandatory consensual restructuring negotiations that are required in the Isle of Man prior to the commencement of the winding-up process.
The Isle of Man has close links to the UK market and, as such, out-of-court restructurings usually follow the approach taken in the UK.
Save where a formal court-approved scheme of arrangement is used, there are no formal stages involved in an out-of-court restructuring. Whilst governed by applicable Manx legislation, a Manx scheme of arrangement broadly mirrors that seen in England, and English authorities are highly persuasive and regularly followed by Manx courts.
There is no specifically Manx approach to the injection of new money. The approach in the Isle of Man is usually to follow the approach being taken in England.
There are no laws or legal doctrines that impose duties on creditors during an informal restructuring in the Isle of Man.
The Isle of Man courts are likely to follow English case law dealing with the duties and obligations of banks etc involved in a restructuring.
There are no out-of-court cram-down mechanisms. The only cram-down mechanisms are those seen in formal schemes of arrangement (see above).
The main types of security that can be taken against immovable (real) property in the Isle of Man are namely:
In relation to movable property, the main types of security are as follows:
Subject to any intercreditor agreements between creditors, if a lender has a mortgage or charge over a particular asset or group of assets (for example, the company’s real estate or its shares), it will often enforce its security by appointing a receiver over the asset (provided the legal instrument has been properly executed and drafted).
There are no statutory powers of sale available to lenders under Isle of Man law, but foreign law security is generally recognised that may incorporate statutory powers in accordance with the governing law.
There are no moratoria available in Isle of Man insolvency law which would affect a secured creditor and the untrammelled exercise by a lender of its enforcement rights, in accordance with the mortgage or charge, is permitted.
If the mortgage or charge does not permit the appointment of a receiver, or if the lender chooses not to exercise this power, the lender can sue for the covenanted debt and a coroner (an officer of the court) will be authorised by the court to sell the charged assets at public auction without reserve in accordance with statutory procedure (Administration of Justice Act 1981).
The onset of insolvency procedures does not affect the rights of a secured creditor to enforce its security in accordance with its terms. However, there is a stay on starting or continuing legal proceedings against a company in liquidation without the leave of the court.
Secured and unsecured creditors have different rights in a winding-up. Ordinarily, secured creditors do not participate in the insolvency process, unless they opt to give up their security. Secured creditors will be paid first by the liquidator of a company and any liquidator will require the secured creditors’ approval before selling any secured asset.
The order in which creditors are paid on a distribution depends on whether any of them has security over its claim and, if so, what type of security it is and whether there has been any contractual subordination.
Provided that each security document is correctly executed and registered (and there is no contractual subordination to the contrary), creditors will be paid in the following order:
See 5.1 Differing Rights and Priorities.
Unsecured creditors may bring an application for the compulsory winding up of a company.
In both a creditors’ voluntary winding-up and in a court winding-up, unsecured creditors may also:
Unsecured creditors will be prevented from starting or continuing legal proceedings against a company in liquidation without the leave of the court.
Freezing orders can be used in the Isle of Man as a form of pre-judgment attachment. A freezing order (formerly called a Mareva injunction) is an interim injunction that restrains a party from disposing of or dealing with their assets. Freezing injunctions can apply to all types of assets, including bank accounts, shares, motor vehicles and land, provided that the respondent has a legal or beneficial interest in those assets. An applicant would ordinarily apply for such interim measures before proceedings are commenced and without notice to the respondents (although they can be sought at any stage of the proceedings). A freezing order affects not only the defendant, but also third parties, who must not breach the terms of the order, or help to permit the defendant to do so. Ancillary orders can also be sought in support of freezing orders to include the appointment of a receiver, the delivery up of assets or payment into court.
A freezing order does not, however, create a proprietary interest that would cause the asset to fall outside the insolvency estate.
See 5.1 Differing Rights and Priorities. In a liquidation, a liquidator has the power to raise money on the security of the assets of the company if required. This would be deemed an expense of the liquidator and would therefore have priority over unsecured creditors.
As further noted at 5.1, priority is also given to certain preferential creditors, including employees.
As indicated above, corporate insolvency law in the Isle of Man is broadly similar to that which existed in England and Wales around 1985. The Isle of Man views itself as a secured creditor-friendly jurisdiction and as such has not developed the same rescue culture that has been adopted in England and Wales (with the introduction of the Insolvency Act 1986 and the subsequent Enterprise Act 2002). Accordingly, Manx law does not provide for company voluntary arrangements or administrations.
There are, however, provisions in both the 1931 Act and the 2006 Act for schemes of arrangement, mergers and/or consolidations.
A scheme of arrangement involves a company entering into a compromise or arrangement with its creditors or members and can be used by both solvent and insolvent companies. The meaning of “compromise” or “arrangement” is construed widely and the agreement may be about anything that the company, its creditors or members may properly agree. Under any scheme, creditors or members must obtain some advantage which compensates them for the alteration of their rights.
Once effective, the scheme is binding on all the members and creditors of each class that approved the scheme, whether or not a creditor votes upon the scheme. It is worth noting that Manx law follows English authority on schemes.
In summary, schemes comprise the following steps:
A scheme of arrangement does not give rise to a moratorium or automatic stay of claims against the company. Usually, the company’s directors continue to operate the company’s business.
See 6.1Statutory Process for a Financial Restructuring/Reorganisation.
See 6.1Statutory Process for a Financial Restructuring/Reorganisation. There are “cram-downs”; provided 75% in value of those present and voting, vote in favour of the scheme and the court sanctions the scheme, all other creditors will be bound by the terms of the scheme.
It is possible for claims to be traded, subject to certain exceptions and formalities.
See 6.1Statutory Process for a Financial Restructuring/Reorganisation.
See 6.2 Position of the Company. As the Directors usually continue to manage the company’s business, assets may be used and disposed of in accordance with their duties.
That being said, the Isle of Man court needs to sanction the scheme and a court would take into account any significant changes to the company and its assets.
The directors generally remain in control of the management of the company during proceedings for a scheme. A creditor could bid for assets being sold and a company could implement a sale on pre-negotiated terms provided it is considered in the interest of the company and its creditors.
Secured creditors’ claims may be released consensually or pursuant to a scheme.
The company, by granting security, could grant priority to new money.
Any valuation methodology should be set out in the scheme document – there is no statutory method of valuation.
The approval of the scheme is subject to the discretion of the court. The Isle of Man court has confirmed that its role is not simply to rubber stamp a scheme. The court will consider whether: the statutory majority acted bona fide; the scheme is fair; the different classes were fairly represented; and an intelligent and honest person, acting in respect of their interest, might reasonably approve the scheme. However, the court does recognise that the creditors and members of a company are likely to be best placed to consider their own interests.
Non-debtor parties may be released from liabilities if they agree to be bound by the scheme.
Creditors cannot exercise rights of set-off or netting in a scheme with creditors. The court will, however, consider existing rights of creditors when it determines whether to sanction the scheme.
The court could refuse to sanction the scheme if the failure occurs prior to court sanction. Legal action could be brought against the company and creditors for breach.
Generally, shareholders’ interests would not be affected by the scheme.
See 2.1 Overview of Laws and Statutory Regimes, 2.2Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership, 2.3Obligation to Commence Formal Insolvency Proceedings and 2.4Commencing Involuntary Proceedings for types of insolvency proceedings.
Stay of Proceedings
Prior to winding-up order
The 1931 Act confirms that at any time after a presentation of a winding-up petition, and before a winding up order has been made, the company, creditor or contributory may, where an action is pending, apply for a stay of such proceedings and apply to the court to restrain further proceedings in the action or proceeding. The court may stay or restrain such proceedings as it sees fit. A liquidator, creditor or contributory in a creditors’ voluntary winding-up can also apply to have any action stayed or restrained.
In both methods of winding up, any disposition of property of the company including things in action, and any transfer of shares, or alteration in the status of members, made after commencement of the winding up, shall be void unless the court orders otherwise.
The 1931 Act also provides that in a voluntary winding-up, the company, from the date of commencement of the winding-up, must cease to carry on its business except so far as is necessary for its beneficial winding up.
Any transfer of shares made after the commencement of a voluntary winding-up without sanction of the liquidator, and any alteration in the status of members, is void.
The 1931 Act also provides that where any company is being wound up by the court, any attachment, sequestration, distress or execution put in force against the estate or effects of the company after the commencement of the winding-up shall be void to all intents.
Post winding-up order
The 1931 Act confirms that when a winding-up order has been made, or a provisional liquidator has been appointed, no action or proceeding may be continued or commenced against the company except by leave of the court, and subject to such terms as the court may impose.
The 1931 Act provides that where a creditor has issued execution against the property of a company or has attached any debt due to the company, and the company is subsequently wound up, the benefit of the execution or attachment against the liquidator in the winding-up of the company cannot be retained unless the execution or attachment has been completed before the commencement of the winding-up. There are protections for good faith purchasers and the section defines what is meant by a completed execution or attachment for different categories of assets.
Proof of Debts
The 1931 Act describes what debts are provable in a liquidation (in both modes of winding up). These include all debts payable on a contingency and all claims present and future, certain or contingent, ascertained or sounding only in damages, and, where necessary, a just estimate is to be made of their value.
Proof of unliquidated demands are limited to those arising by reason of contract, promise or breach of trust. It is not possible to prove for unliquidated damages in tort, hence these are incapable of set-off until liquidated and proved. The definition of provable debts is set out in the Winding-Up Rules and provides that, for the purposes of the rules, in any reference to a debt or liability, it is immaterial whether the amount is fixed or liquidated, or capable of being ascertained by fixed rules or is a matter of opinion.
Insolvency legislation requires that where there have been mutual credits, mutual debts, or other mutual dealings between a company in respect of which a winding-up order or a creditors’ resolution to wind it up has been made or passed, and any other person proving or claiming to prove a debt under such winding up, an account must be taken of what is due from the one party to the other in respect of the mutual dealings and the cross-claims are then set off. The balance of the account is claimed or paid by either side. A person is not entitled under the section to claim the benefit of any set-off against the property of a company in any case where they had, at the time of giving credit to the company, notice of an act analogous to an act of bankruptcy committed by an individual. There has never been any doubt that contingent debts owed by an insolvent company are provable and hence eligible for set-off. However, until Secretary of State for Trade and Industry v Fridd, the position regarding a liquidator’s ability to set off contingent debts owed to an insolvent company was uncertain. The rule against double proof applies in Manx law.
Within a liquidation, the company’s business or assets will be sold by the liquidator. The liquidator also has the power to execute contracts for the company. The liquidator’s powers are set out in the Act (Section 184 of the 1931 Act in relation to a court winding-up and Section 236 of the 1931 Act for a voluntary winding-up) and granted by the court or the Committee of Inspection. Court approval for a sale of assets is not required.
Pursuant to the 1931 Act, once a winding-up order has been made by the court, it shall be the business of separate meetings of creditors and contributories to determine whether an application is to be made for the appointment of a committee of inspection.
A committee of inspection consists of up to five persons. The committee of inspection has various purposes, including: supervising the liquidator; fixing the remuneration to be paid to the liquidator; and modifying the powers and duties of the liquidator (which can also be modified by the court). The liquidator should report to the committee regularly.
Except by the express sanction of the court, no remuneration shall, under any circumstances, be paid to a member of a committee for services rendered by them in the discharge of the duties attaching to their office as a member of this committee.
The Isle of Man court has a history of proactively assisting foreign courts in respect of insolvency proceedings and has been prepared to extend the scope of Manx common law to assist foreign liquidators when there has been no statutory power to provide such assistance. Such recognition and assistance is subject to the restrictions set out in Rubin v Eurofinance SA  UKSC 46,  1 AC 236 and Singularis Holdings Ltd v PricewaterhouseCoopers (Bermuda)  UKPC 36. In that context, the Isle of Man court cannot provide assistance that would not be available to the insolvency officeholder in their own jurisdiction.
In addition, whilst not affecting the rights of secured creditors, the Isle of Man court has been willing to be creative in using the tools available to facilitate attempts to rescue Manx companies. For example, the Isle of Man court, in the case of Capita v Gulldale (CHP 2013/145), agreed to issue a letter of request to the High Court in London seeking the appointment by the High Court of administrators over an Isle of Man company, the centre of main interests being deemed to be nonetheless in the Isle of Man. The Isle of Man court was satisfied that the issuing of a letter of request in the circumstances of that case would facilitate the most efficient and effective administration of the debtor company’s assets in the best interests of all concerned.
By way of a further example, in the unreported matter of 2e2 (IOM) Limited (CHP 13/0014), the Isle of Man court was persuaded to follow lines of authority from the Cayman Islands and Hong Kong to use the appointment of provisional liquidators to provide a “breathing space” for an Isle of Man company, which was the subsidiary of a UK company and in administration, to enter negotiations with its own direct creditors and, in due course, emerge from provisional liquidation without winding up. It is possible for a liquidator to be provisionally appointed at any time after the presentation of a winding-up petition. The appointment of a provisional liquidator should only be made if there is a prima facie case for making a winding-up order and it is accepted that the appointment must be shown to serve some purpose which will justify the expense of a provisional liquidator being appointed.
In cross-border cases, the courts may enter into protocols or other arrangements with foreign courts to co-ordinate proceedings.
See 8.1Recognition or Relief in Connection with Overseas Proceedings.
Foreign creditors are dealt with in the same manner as local creditors; all must have provable debts.
Foreign judgments are enforced in the Isle of Man using either:
The Reciprocal Enforcement Act
The Reciprocal Enforcement Act applies in respect of money judgments from the superior courts of the United Kingdom, Jersey, Guernsey, Italy, Israel, Suriname and the Netherlands.
Where the Reciprocal Enforcement Act applies to a judgment, no proceedings for the recovery of a sum payable under that judgment can be dealt with by the Isle of Man courts until the judgment has been registered.
Once registered, the judgment has the same force and effect as if it were a judgment of the Isle of Man High Court.
The Common Law (for Courts not Covered by the 1968 Act)
In the majority of cases where the Reciprocal Enforcement Act does not apply, the question of whether a judgment obtained in a foreign state can be enforced or recognised in the Isle of Man is determined by common law principles.
For judgments in personam to be enforceable under the common law, the judgment debtor has to have been present in the foreign country when the proceedings were commenced, or to have submitted to the court’s jurisdiction by voluntarily appearing in the proceedings or having agreed to submit to the courts of that country.
A fresh action may be commenced suing on the judgment as a debt. The defences to such an action are very limited – for example, that the judgment was obtained by fraud or that its enforcement would be contrary to public policy.
If the judgment of a foreign court does not satisfy the common law for the enforcement of foreign judgments (and is not registrable under the 1968 Act), it cannot be enforced in the Isle of Man.
The Isle of Man is not a party to the Brussels or Lugano Conventions.
In a Court winding up, a liquidator is nominated by the petitioning creditor and then appointed by the Court. This appointment is provisional and subject to approval by the creditors and members and then confirmation by the Court.
In a members’ voluntary liquidation, the members appoint the liquidator by resolution.
In a creditors’ voluntary liquidation, the liquidator is appointed following meetings of the members and creditors, with the creditors’ choice being determinative, subject to any application to the court.
The Isle of Man does not have an equivalent of the Official Receiver – instead a liquidator is appointed as deemed official receiver.
See 2.2Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership for the role of receivers.
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. See also 9.3 Selection of Officers.
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.
Both voluntary and compulsory liquidators may seek directions in relation to the performance of their function.
There is a court list of “approved” liquidators in the Isle of Man by which liquidators can be selected.
See 2.2Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership for the role of receiver.
In court winding-ups, a provisional liquidator is appointed, with such powers and duties as the court orders. That person is usually styled provisional liquidator and deemed official receiver since, as yet, there has never been an officer appointed to the position of official receiver in the Isle of Man. The provisional liquidator’s powers are usually restricted to preserving and protecting the assets, pending the appointment of a liquidator.
The provisional liquidator (as official receiver) has the duty of summoning and acting as chairperson at separate meetings of creditors and shareholders which decide whether application is to be made to the court for the appointment of some person whom they nominate to be liquidator in the provisional liquidator’s place and for the appointment of a Committee of Inspection.
If for any reason no other person is nominated as liquidator, the provisional liquidator as official receiver acts by virtue of their office. The Committee of Inspection consists of representatives of creditors and shareholders. However, if the company is insolvent, it usually comprises representatives of creditors only. The Committee of Inspection acts with the liquidator. Their sanction, or that of the court, is required by a liquidator to do certain acts in the liquidation. If at the meetings more than one candidate is nominated to be liquidator, it will be for the court to decide which candidate should be appointed, or whether the provisional liquidator as official receiver should remain liquidator.
The winding-up order has the effect of terminating the employment of employees and other agents of the company. The offices of directors are similarly terminated and their powers to act on behalf of the company cease for most purposes.
The liquidator is an officer of the court and subject to the control of the court. They should have regard to the wishes of creditors and contributories and of the Committee of Inspection, although they are expected to use their own discretion. The liquidator can apply to the court for directions on any matters arising in the liquidation and any person aggrieved by their actions has the right to apply to the court. The liquidator’s duties are to get in and realise the property of the company, to pay its debts according to the priorities laid down by law, and to distribute any balance among the shareholders. Their powers are those necessary to enable them to carry out these duties and to carry on the business of the company in so far as it is necessary for beneficial winding up.
When a liquidator has completed the winding-up process or has resigned or has been removed from office, they can apply to the court for release from the office of liquidator. Until granted their release, the liquidator remains liable to creditors for the conduct of the liquidation. In the absence of fraud or concealment of material facts, the release discharges the liquidator from all liability in respect of any act or default by them or on their behalf in the conduct of the liquidation.
Voluntary Winding-Up (Creditors’ Liquidation)
The creditors and the company in general meeting may each nominate a liquidator, but, in the event of the meetings nominating different liquidators, the nomination of the creditors will prevail, subject to an application to the court. The creditors may also appoint a Committee of Inspection to act with the liquidator. On the appointment of the liquidator, all powers of the directors cease except in so far as the Committee of Inspection or, if there is no Committee, the creditors sanction their continuance.
The duties of the liquidator are broadly the same as in a court winding-up, that is, to get in and realise the property of the company, to pay its debts according to the priorities laid down by law and to distribute any balance among the shareholders. The liquidator may exercise, without sanction, any of the powers given to a liquidator appointed by the court except that in regard to paying any class of creditors in full, making any compromise or arrangement with creditors, or any compromise of calls or debts, they need the sanction of the court or Committee of Inspection in the case of a creditors’ voluntary winding-up.
As soon as the company’s affairs are fully wound up, the liquidator must summon a final meeting of the company and a meeting of the creditors of the company to which they submit an account showing how the winding-up has been conducted, and the liquidator’s release is secured. The company is deemed to be dissolved at the end of three months from the registration by the Financial Supervision Commission of notice that the final meetings have been held.
Generally, directors of Isle of Man companies owe their duties to the company rather than individual shareholders or creditors.
However, if a company is facing financial difficulties, its directors will become subject to additional duties. The key additional considerations that the directors need to be aware of are (a) the duty, in certain circumstances, to consider, or to act in, the interests of the company’s creditors, and (b) the possibility of transactions which the company has entered into being set aside, in the worst-case scenario of the company going into insolvent liquidation.
Most of the ongoing duties that directors have to comply with under Isle of Man law will continue to apply, whatever the company’s financial position.
Ongoing duties that apply to directors irrespective of whether the company is facing financial difficulties include:
Other Statutory Duties
Duties to creditors
Most general duties remain in place in all circumstances. However, as noted above, when a company faces financial difficulties or becomes insolvent, some may be modified. In particular, as the company’s financial position deteriorates, the general duty to act in the best interest of the company is modified by an obligation to have regard to the interests of creditors. The duty will be displaced entirely should the company become insolvent, on the basis that, if the company is insolvent, the members’ equity no longer has any value, and the directors’ main priority should be maximising recoveries for the company’s creditors.
Consequences of a Breach of Duty
The consequences are as follows.
The provisions of the Company Officers (Disqualification) Act 2009 provide consequences for officers’ failure to exercise care and skill at common law. The Financial Services Authority, deemed official receiver, liquidator or any past or present member or creditor of a company has the power to apply to the court for the disqualification of directors and other officers in various circumstances in which they have shown themselves to be unfit to be involved in the future management of limited liability companies. If the company does go into an insolvency process, the officeholder who is appointed will submit a report to the Financial Services Authority on whether they consider that it should consider pursuing a disqualification action in respect of a particular director or directors. No further action would be expected where the directors (or other officers) have acted reasonably, but, if action is taken, a director’s (or other officer’s) part in the failure of the company could lead to their disqualification from acting as a director or being involved in the management of any company for 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, as set out above.
The 1931 Act provides that any conveyance, mortgage, delivery of goods, payment, execution or other act relating to property which would, if made or done by or against an individual, be deemed in a bankruptcy a fraudulent preference, shall, if made or done by or against a company, be deemed, in the event of its being wound up, a fraudulent preference of its creditors, and be invalid accordingly.
A payment will be a fraudulent preference if it is made with the dominant intention of giving the creditor a preference over other creditors and if it is a voluntary act. This reflects the position in England before the Insolvency Act 1986.
Under the 1931 Act, where a company is being wound up, a floating charge on the undertaking or property of the company created within six months of the commencement of the winding-up will be invalid, unless it is proved that the company immediately after the creation of the charge was solvent, except to the amount of any cash paid to the company at the time of or subsequently to the creation of, and in consideration for, the charge, together with interest on that amount.
The Fraudulent Assignments Act 1736 provides that all fraudulent assignments or transfers of the debtor’s goods or effects shall be void and of no effect against his just creditors, any custom or practice to the contrary notwithstanding. This is the Manx law equivalent to Section 423 of the Insolvency Act 1986. However, in a departure from the English law position in Re Heginbotham’s Petition on the interpretation of the Manx provision, it was held at first instance that a transfer of assets cannot be set aside at the instance of creditors whose debts were not known and ascertained at the time of the transfer.
At common law, where a third party is on notice that directors are acting in breach of their fiduciary duty, any benefits conferred on that third party will be held by it for the company as constructive trustee.
The 1931 Act enables a liquidator to disclaim onerous property. Insolvency of itself does not terminate a contract unless the parties have provided for it as an act of termination. A solvent party will usually wish to cancel where the debtor has breached the contract or where insolvency represents anticipatory repudiation.
See 11.1 Historical Transactions.
See 11.1 Historical Transactions. Creditors may fund the liquidator to bring certain claims or, in some circumstances, may bring the claim themselves.