Increased Protection For Isle Of Man Depositors

Most jurisdictions have by now felt the effects of the credit crunch to a certain degree and are having to make adjustments to protect themselves and their businesses from its effects. To counter these effects as far as possible the Isle of Man has taken steps to ensure that its reputation is maintained and that its financial services industry remains strong.

In part this has been achieved by the overhaul of the Isle of Man depositors compensation scheme. The compensation of depositors is an issue prevalent in the minds of many savers in the current climate and the ability of a jurisdiction to protect those using the services of its licensed deposit takers has become of paramount importance. In the Isle of Man a depositors compensation scheme has been in existence since 1991. However, in view of the current economic climate it was decided to update the scheme in order to provide better protection for depositors, both local and international. The consultation process had been progressing throughout 2008 but in light of the direct effect on the Isle of Man of the collapse of the Icelandic banking system, the whole process was brought forward in order to aid accountholders with the Isle of Man banking subsidiary of Kaupthing Hf, Kaupthing Singer & Friedlander (Isle of Man) Limited.

The new Depositors Compensation Scheme (the "DCS") was established under the Isle of Man Compensation of Depositors Regulations 2008 (as amended) (the "2008 Regulations"). The DCS came into operation on 23rd October 2008 and applies to individuals and to most other categories of depositor. Subject to a limited number of exceptions, any person (whether local or international) who has deposited money with an Isle of Man office of a participant (as defined under the 2008 Regulations) is entitled to some level of compensation in the event that such participant is in default. A participant is defined as being every deposit taker licensed under section 7 of the Isle of Man Financial Services Act 2008 to carry on deposit taking activity and which is not exempt from participating in the DCS. Those deposit takers which are exempt from participating do not take deposits on the Island from the general public. In addition, building societies in the Isle of Man are not participants in the DCS. The Isle of Man Financial Supervision Commission is the scheme manager of the DCS and is charged with its administration.

The level of compensation which depositors can recover in the Isle of Man has been significantly increased under the 2008 Regulations to 100% of the eligible protected deposit, subject to a maximum of £50,000 where the depositor is an individual beneficially entitled to the deposit and a maximum of £20,000 in every other case. This increase brings the Isle of Man in excess of the levels currently required under the European Union Directive and in line with the amounts recoverable in the UK in respect of deposits. However, it should be noted that under the 2008 Regulations, from 23 October 2009 the maximum level of compensation available under the DCS will reduce to £20,000 for all depositors.

Funding for the DCS will be met on a case by case basis by levying other participants in the DCS. A participant may be required to pay up to a maximum of £350,000 per annum. Up until 23 October 2009, the aggregate of all the amounts which may be levied on participants by the scheme manager throughout the currency of the DCS in respect of all defaults will not exceed £200,000,000.

The Isle of Man Government appreciates that the imposition of such levies will have an impact on deposit taking licenceholders. To counter balance this and to show its confidence in the Isle of Man banking system, the Isle of Man Government will, until 23 October 2009, use some of its capital reserves to inject up to a maximum of £150 million in to the DCS if there is a default. Any such contribution will be made to top up payments where a claim by a depositor under the DCS exceeds £20,000.

By contrast in Jersey there is currently no equivalent depositors compensation scheme in place. In Guernsey, a depositors compensation scheme was put in place at the end of November 2008 which covers individual retail depositors only.

It should be noted that the 2008 Regulations are not intended as a permanent solution. They have been put in place to solve a very real current problem. It is intended that over the course of this year further industry wide consultation will be undertaken to formulate a long term solution that all parties are completely happy with. Such revisions could include the set up of an independent body to administer future schemes if needed, the imposition of annual levies to build up a battle fund and the use of insurances. Whilst all this is at the moment purely speculative, it does underline the Isle of Man's commitment to maintaining its international reputation.

Set Off On Insolvency Under Isle Of Man Law

In December 2008 Standard and Poors and Moody's confirmed that the Isle of Man had retained its 'AAA' rating. Despite this and Ministerial confidence that the Manx economy, one of the fastest growing economies in Europe, is strong enough to avoid recession, it would be naive to think that the Isle of Man will altogether escape the impact of the worldwide recession and the surge in corporate insolvencies predicted for 2009. Legal issues such as set off on insolvency have, as a result, come to the fore in recent months and this article looks at the position under Isle of Man law applicable to insolvent companies incorporated in the Isle of Man.

The statutory rule of set off on insolvency arises when either an insolvent debtor or creditor is wound up. Whilst it does not create a security interest, insolvency set off has a similar commercial effect to security. In a situation where a creditor claims a debt from an insolvent debtor and the insolvent debtor has a cross-claim against the creditor, set off saves the creditor from having to prove with the other creditors for the whole of his debt in the liquidation of the insolvent debtor, in which case he would almost certainly not receive payment in full. Instead, it enables the creditor to set off what he owes to the insolvent debtor and only prove for or pay the balance in the winding up.

The statutory rule of set off on insolvency under Isle of Man law is contained in section 22 of the Bankruptcy Code 1892 (the "Code"). The Code deals with set off in respect of individuals, but is applied to companies incorporated in the Isle of Man by the Island's companies legislation. Section 22 of the Code was based upon section 38 of the old English Bankruptcy Act 1883. Despite its modernisation in the form of the English Insolvency Act 1986 and the underlying Insolvency Rules 1986, the position remains largely the same. This means that English case law is highly persuasive authority on the interpretation of the equivalent Isle of Man statutory provisions.

Statutory set off arises automatically on the winding up of an insolvent debtor. In order to be eligible for set off, the creditor's debt must be provable in the insolvent debtor's winding up. Generally speaking all debts and liabilities, present or future, liquidated or unliquidated (save for unliquidated damages arising in tort), actual or contingent are deemed to be debts provable in a winding up. In addition, in order that debts may be set off there must be mutuality between the debtor and the creditor—in other words the creditor and debtor must each be the clear beneficial owner of the debt owed to him by the other and personally liable for the debt owed by him to the other. An account will be taken on the date of the winding up order or the date of the passing of the members resolution to wind the company up voluntarily of what is due from each party to the other in respect of such mutual dealings and the sum due from one party is set off against the sum due from the other. However, sums due from an insolvent debtor company to a creditor will not be taken into account if the creditor had notice that a petition for the winding up of the company had been presented or that a resolution for the winding up of the company had been proposed at the time that the debt was incurred.

The rules of set off on insolvency are mandatory and it is not possible for debtors and creditors to exclude, amend or expand them by agreement. In this way, such rules certainly favour payment to creditors by the insolvent debtor. This stems from the view that it is inequitable that a creditor should pay what he owes in full, when his own chances of full recovery from the estate of an insolvent debtor are small. This is a clear invasion of the pari passu principle, which could be the reason why in many jurisdictions such as France, Belgium, Luxembourg and Spain, set off on insolvency is generally not possible.

In a time when the number of corporate insolvencies is on the increase, it gives some comfort to know that the Isle of Man remains a pro-creditor jurisdiction by virtue of its foundations in nineteenth century insolvency law and that its statutory rules of set off on insolvency are tried and tested and largely akin to those in England and Wales.

Companies (Amendment) Bill 2008

The Companies (Amendment) Bill 2008 (the "Bill") is currently making its way through the legislative process. The Bill proposes a number of amendments—mainly to the Isle of Man Companies Acts 1931-2004 and the Isle of Man Companies Act 2006.

The amendments will be covered in more detail in a future edition of the Commercial Update. However, the main amendments to note are as follows:

  • the prescriptive prospectus requirements for a company incorporated under the Companies Act 1931-2004 ("1931 Act Company") will be simplified;
  • the repeal of the prohibition on private 1931 Act Companies giving financial assistance;
  • an enabling power to be inserted to allow the Financial Supervision Commission ("FSC") to make regulations to permit both 1931 Act Companies and companies incorporated under the Companies Act 2006 to have treasury shares;
  • an enabling power to be inserted to allow the FSC to make regulations for or in connection with the regulation of take over bids and merger transactions; and
  • changes to accounting and auditor requirements.

Who Is Qualified To Audit An Isle Of Man Company?

The purpose of the Companies (Amendment) Bill 2008 (the "Bill"), currently progressing through Tynwald, is to make amendments to the Companies Acts 1931 -2004, Companies Act 2006 and Limited Liability Companies Act 1996. These amendments have been suggested by industry practitioners, or are intended to update the legislation to reflect evolving international standards (relating in particular to IOSCO and the IMF)

Here we describe the proposed changes that particularly affect auditors of Isle of Man companies; we will discuss other amendments in future Commercial Updates. The existing qualifications of an independent auditor of an Isle of Man company incorporated under the Companies Acts 1931-2004 ("1931 Act Company") are established in section 14 of the Companies Act 1982 (the "1982 Act"). This states that to be qualified for appointment as auditor of a 1931 Act Company , a person must be a member of one of the following bodies of accountants: the Institute of Chartered Accountants in England & Wales ("ICAEW"), the Institute of Chartered Accountants of Scotland, the Institute of Chartered Accountants in Ireland, the Chartered Association of Certified Accountants, the Chartered Institute of Public Finance and Accountancy, or the Association of Authorised Public Accountants. The Isle of Man Financial Supervision Commission ("FSC") may by order amend the list by adding or deleting any body.

Unfortunately the drafting of this section led to some unforeseen ambiguity for incorporated practices. Although "person" can include a body corporate, the fact that such a person must be "a member" of one of the regulatory bodies caused a difficulty. As readers in the accountancy profession will no doubt be aware, under the byelaws of some accountancy professional bodies, including the ICAEW, incorporated firms of accountants are "member firms" and only individuals can be members. There resulted some doubt as to whether incorporated practices could audit Isle of Man companies. Indeed, the ICAEW stated in Audit News in November 2004: "Please remember: Auditors who are corporate entities themselves (limited companies or limited liability partnerships) cannot audit companies incorporated within the Republic of Ireland and the Isle of Man. The respective company registration departments are likely to reject accounts that have the "wrong" type of auditor." Although the FSC assured enquirers that there was never any intention to exclude incorporated auditors, such as English LLPs, a clarifying amendment to the primary legislation is welcomed.

The Bill has been subject to a wide consultation process and comments were received from accountancy professionals and their regulatory bodies, and others (this firm included). The proposed amendment provisions are somewhat more complex but set out the specific requirements which must be met for individuals , bodies corporate, LLCs and partnerships to be qualified for appointment as auditors of 1931 Act Companies.

Bodies corporate (including English LLPs) in particular will qualify if they conform with the conditions set out in the proposed new section 14B of the 1982 Act, namely that each of the persons who are responsible to it for examining or reporting on the accounts of a 1931 Act Company, or for supervising the examination of or report on such accounts, is an individual who is a member of a recognised accountancy body, and the body corporate is controlled by either: individuals who are members of recognised accountancy bodies; or partnerships which are qualified for appointment as auditors of companies; or bodies corporate or limited liability companies which are themselves qualified for appointment as auditors of companies. "Controlled by" is defined in the same way as in the ICAEW byelaws, i.e. the persons or partnerships control the body corporate by over 50% voting rights at either owner or board level.

The recognised accountancy bodies under the Bill will remain as the ICAEW, the Institute of Chartered Accountants of Scotland, the Institute of Chartered Accountants in Ireland, the Association of Chartered Certified Accountants, the Chartered Institute of Public Finance and Accountancy, and the Association of Authorised Public Accountants. However, a proposed new section 14E will enable the FSC to authorise an applicant, whether a partnership, individual or body corporate, to perform a statutory audit on a case-by-case basis, in circumstances where such a person or partnership does not meet the specific statutory requirements to qualify as an auditor of a 1931 Act Company.

Interestingly this authorisation power in section 14E extends to the auditors of companies incorporated under the Companies Act 2006 ("2006 Act Companies"). Although there are currently no audit requirements imposed upon 2006 Act Companies, the Bill will add new sections to the Companies Act 2006 which will require any auditor that is appointed, whether by choice or as a legal requirement, to be qualified under the amended provisions of the 1982 Act described above.

Further, the Bill will introduce a new requirement to appoint a qualified auditor where a 2006 Act Company's securities are listed or admitted to trade on a securities market or exchange. Also proposed is a general power granted to the FSC to make regulations regarding accounts and audit of 2006 Act Companies, and to keep a register of qualified auditors. This is to address any perceived risk from the possibility of 2006 Act Companies being audited by unqualified auditors not regulated by any professional code of practice, especially in view of the now significant number of 2006 Act Companies admitted to AIM.

Although the Isle of Man is not a member state of the European Union, the Revised Eighth Directive on Statutory Audits affects Isle of Man companies whose securities are admitted to trade on a regulated market in an EU member state. The Isle of Man is a "third country" for the purposes of the directive and as such is required to have oversight over auditors of such Isle of Man companies, equivalent to the oversight in the member state where the securities are admitted to trade. New sections are proposed for both the 1982 Act and the Companies Act 2006 granting power to the FSC to make regulations subjecting auditors of companies to prescribed systems of public oversight; quality assurance; and investigations and penalties. It has been suggested that the audit oversight function could be delegated to the UK's Professional Oversight Board. To allay concerns regarding proper scrutiny of such oversight regulations, the FSC will consult the profession further before any implementation and the regulations would also require the specific approval of Tynwald.

In conclusion it appears that these amendments will facilitate the auditing of Isle of Man companies by auditors from all jurisdictions, and should provide investors and regulators with additional comfort regarding the quality of audits. The application of internationally recognised audit standards should enhance access to regulated markets within and outside the EU for Isle of Man companies. The Bill is due shortly to have its second reading in the Legislative Council; the Government has expressed its wish to enact it as soon as possible.

Tax Information Exchange Agreements

As part of the OECD's initiative on harmful tax practices, the OECD has set standards on transparency and exchange of information on tax matters. The OECD considers it harmful if countries do not exchange tax information on request in order to assist each other with tax investigations.

One way in which these standards may be met is by countries entering into tax information exchange agreements ("TIEAs"). TIEAs are agreements entered into between countries which allow governments to enforce their domestic tax laws by exchanging, on request, information relevant to tax matters covered by the arrangements.

In 2000 the Isle of Man ("IOM") made a commitment to the OECD to implement the OECD's principles on the effective exchange of information on tax matters. As a result, over the last six years the IOM has negotiated and signed TIEAs with the US, the Netherlands, the Nordic Countries, Ireland, the UK and Australia. Negotiations are also taking place with other countries, including Canada, France, Germany and New Zealand.

The Isle of Man is not unique in entering into TIEAs with other countries — a number of other international financial services centres have also built up a network of TIEAs. Implementation of the OECD's principles on transparency and exchange of information demonstrates that the IOM is a mature and responsible financial centre in which to do business.

The IOM recently entered into a TIEA with the UK. The TIEA was signed on 29th September 2008, ratified by the Isle of Man on 18th November 2008, and is currently awaiting ratification in the UK.

The TIEA will enable the IOM and the UK to exchange information but only in so far as it is foreseeably relevant to the administration or enforcement of the domestic laws of the IOM or the UK concerning taxes. This will include information that is foreseeably relevant to the determination, assessment, enforcement or collection of tax or to the investigation or prosecution of tax matters.

The TIEA includes a number of safeguards which are intended to protect the legitimate confidentiality of taxpayers and the holders of information. For example, a request for information must specify:

  • the identity of the person under examination or investigation;
  • the period for which the information is requested;
  • the nature of the information;
  • the tax purposes for which the information is sought;
  • the reasons for believing that the information is foreseeably relevant;
  • the grounds for believing that the information is present in the requested country;
  • a statement that the request is in conformity with the laws and administrative practices of the requesting country, that if the information was within the jurisdiction of the requesting country then the competent authority of that country would be able to obtain the information and that it is in conformity with the TIEA;
  • a statement that the requesting country has pursued all means available in its own territory to obtain the information.

Accordingly, information can only be requested in respect of individual cases and a request for large amounts of general information in the hope of finding something useful is not permitted. A country can decline to assist if a request is not made in conformity with the TIEA. A country is not obliged to provide information subject to legal privilege or information which would disclose any trade secret or trade process.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.