Guernsey: Getting The Deal Done

Last Updated: 22 November 2017
Article by Stuart Gardner and David Jones

Most Read Contributor in Guernsey, August 2018

Stuart Gardner, a Director at EY in Transaction Advisory Services, and David Jones, Counsel at Carey Olsen, writing on behalf of the Guernsey Investment Fund Association, look at Guernsey's role as a centre for restructuring and insolvency.i

Importance of a robust insolvency regime

The World Bank's Ease of doing Business Index1 quite simply measures the ease of doing business in 190 jurisdictions. It takes the mean of 10 subindices to benchmark those jurisdictions. Three of those indices measure the quality of the insolvency regime including protecting investors, enforcing contracts and resolving insolvency. Given that 30% of the index relates to enforcing stakeholder rights, it is clear that the World Bank attaches significant importance to this.

Just last year in November 2016, the EU proposed a new insolvency directive. Its reasons for so doing were stated in its press release2: "Many investors mention uncertainty over insolvency rules or the risk of lengthy or complex insolvency procedures in another country as a main reason for not investing or not entering into a business relationship outside their own country." That same press release noted that there are 600 corporate bankruptcies every day in the EU.

It is clear from these two brief examples from the World Bank and the EU, that for those involved with structuring transactions and financing investment vehicles, insolvency regimes matter.

From a Guernsey perspective, as at 30 June 2017, there were over 800 Guernsey domiciled closed and open ended investment schemes, with a net asset value in excess of £211 billion3. The geographic location of assets held in these schemes spans the globe, from the UK and the US to Australia, South Africa and China4.

Given this geographical reach and its pre-eminence as an international finance centre, it is axiomatic that Guernsey has a well-developed and sophisticated insolvency regime. It does. This regime allows stakeholders to access the courts to maximise value in an efficient, orderly and controlled manner.

This article outlines market trends and some of the tools available to stakeholders in Guernsey in distressed situations.

Market trends

The sale of non-performing loans (NPLs) has been a significant trend in recent years as Europe has deleveraged following the financial crisis. To 31 March 2017, UK Asset Resolution Limited has reduced its balance sheet by £81 billion since its formation in 2010.5

As at the end of September 2016, banks directly supervised by the European Central Bank (ECB) held €921 billion of NPLs.6 A keynote speech7 from the Vice-President of the ECB in February 2017 noted that 'inefficient and uncertain debt enforcement frameworks' were one of the impediments to Europe resolving these NPLs, and further noted that, 'on the demand side, investors are also deterred by high uncertainty around recoveries and their timing.'8

Many NPLs are structured through Guernsey, via Guernsey companies or funds holding, for example, European real estate assets. Guernsey has proved itself as a robust jurisdiction for enforcing debt and lenders can take comfort that the considerations highlighted by the ECB should not be an impediment to enforcing in the Island.

Guernsey's insolvency regime

The island has a well-established and tested insolvency regime contained in Parts XXI to XXIV of the Companies (Guernsey) Law, 2008 as amended (the Law), which set out Guernsey's laws relating to corporate insolvency.

The Law includes the concept of the statutory 'solvency test' which is key to understanding the insolvency process. A company satisfies this solvency test if:

  • it is able to pay its debts as they become due (known as the 'cash flow test'); and
  • the value of the company's assets is greater than the value of its liabilities (known as the 'balance sheet test').

A company must pass both limbs of this solvency test to be deemed solvent.

Types of corporate insolvency proceedings

Administration

An administration order can be made by the Court for the purpose of achieving either:

  • the survival of the company and the whole or any part of its undertaking as a going concern: or
  • a more advantageous realisation of the company's assets than would occur in a winding up.

The Court also must be satisfied that the company does not satisfy, or is likely to become unable to satisfy, the solvency test as described above.

The main effect of an initial application for an administration order is the implementation of a court sanctioned moratorium against resolutions for the winding up of a company and the commencement (or continuance) of proceedings against it (without leave of the Court), during the period between the presentation of the application and the making of the actual administration order.

The granting of the administration order itself provides the company with the continued benefit of this moratorium. Fundamentally the rights of secured creditors are not affected by the administration moratorium in Guernsey. Moreover, secured creditors often make applications for an administration order.

The making of the administration order facilitates the appointment of an officeholder, proposed by the applicant and approved by the Court, who displaces the directors and manages the company's affairs. The office holder has wide powers to inter alia trade the business to the benefit of the creditors.

If a stakeholder of a company, or the company itself, is looking to continue trading (or in the case of real estate assets continuing leasing arrangements or undertaking capital expenditure / development prior to sale), or to reach accommodations with the company's creditors, an administration order is the most appropriate insolvency process as it affords the office holder flexibility to rescue the business or otherwise maximise value.

Compulsory liquidation

The Court may order a compulsory liquidation of a company and appoint a liquidator on application by, amongst others, a creditor. The liquidator's role is to collect and realise the company's assets and to distribute dividends according to a statutory order of priority. The Court also has the ability to appoint a provisional liquidator.

Liquidation can offer a more direct and efficient route to control of a company or its assets where, for example, the enforcement strategy focusses on realising underlying assets quickly.

Alternative enforcement methods

The Security Interest (Guernsey) Law, 1993 (the 'Security Interests Law') governs the taking and enforcement of security in Guernsey.

It is common for a security agreement to create security interests over shares and rights attaching to those shares by both 'possessory security' and 'title security'. The security rights are normally held by a security agent. The rights will often include remedies for the agent beyond a mere power of sale and will include an attorney right in favour of the security agent. Those rights may, in certain circumstances, be used to displace the boards of asset owning vehicles or otherwise enforce security through taking possession of shares and / or the exercise of voting rights.

Law reform

On 9 February 2017, indicative of Guernsey's commitment to ensuring a modern and fully functioning insolvency framework and following an extensive consultation period, Guernsey's Committee for Economic Development recommended the enactment of amendments to Guernsey's existing insolvency laws.

At the end of March 2017, Guernsey's legislative body directed that legislation necessary to give effect to the reforms should be drafted. The draft is expected in late 2017. The reforms envisaged include:

  • the creation of a basic set of insolvency rules covering those key procedural issues not currently legislated for;
  • the ability to end an administration by dissolution. The current system requires liquidation if a company cannot be rescued;
  • the expansion of office holders' investigatory powers; and
  • the introduction of statutory provisions dealing with transactions at undervalue.

The combined effect of the revised legislation will be to increase the robustness and clarity in the current, well developed system.

Conclusion

Guernsey's insolvency regime has already been utilised in a number of significant enforcements of NPLs and other complex financing arrangements in respect of real estate assets. The laws are effective and the Court system nimble enough to deal with complexity but still reliable for creditors. The proposed reforms will build on Guernsey's existing reputation as a reliable insolvency jurisdiction.

Footnotes

[1] http://www.doingbusiness.org/rankings

[2] http://ec.europa.eu/information_society/newsroom/image/document/2016-48/proposal_40046.pdf

[3] https://www.gfsc.gg/industry-sectors/investment/statistics

[4] ibid

[5] http://www.ukar.co.uk/media-centre/press-releases/2017/04-07-2017?page=1

[6] https://www.ecb.europa.eu/press/key/date/2017/html/sp170203.en.html

[7] ibid

[8] ibid

[i] This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, legal or other professional advice. Please refer to your advisors for specific advice. It is intended to provide only a general outline of the subjects covered. It should not be regarded as comprehensive or sufficient for making decisions, nor should it be used in place of professional advice. Accordingly, Ernst & Young LLP and Carey Olsen accept no responsibility for loss arising from any action taken or not taken by anyone using this material.

For more information about Guernsey's finance industry please visit www.guernseyfinance.com.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions