KEY TAKEAWAYS
- Where a liquidator of a Jersey company identifies loss suffered by the company as a result of transactions entered into by the directors the transaction may be voidable
- There are statutory mechanisms to restore the company to the position it would have been had the voidable transaction not taken place
- This guide considers three types of voidable transactions unfair prejudice, preferences and extortionate credit transactions
When a liquidator is appointed in a Creditors' Winding Up under the Companies (Jersey) Law 1991 (the "Companies Law") a key duty following their appointment is to investigate the affairs of the company.
Where a liquidator of a Jersey company identifies loss suffered by the company as a result of transactions entered into by the directors, the Companies Law provides certain statutory mechanisms to assist in restoring the company to the position it would have been in, had it not entered into the transaction.
Transactions at an Undervalue
The Companies Law provides at Article 176(7) that a company enters into a transaction with a person at an undervalue if:
- it makes a gift to that person; or
- it enters into a transaction with that person (i) where there is no cause for such a transaction, or (ii) for a cause the value of which, in money or money's worth, is significantly less than the value, in money or money's worth, of the cause provided by the company.
According to Article 1 of the Companies Law, cause has the meaning assigned to it by the customary law of Jersey. The Royal Court has held that 'cause' is not the same thing as 'consideration'. Cause can be briefly summarised as the reason for a person to enter into an agreement or transaction. Cause is not necessarily limited to the receipt of money or the deriving of commercial benefit and has more of a flexible scope than is the case for the concept of consideration.
Where a liquidator concludes and can demonstrate that the company was insolvent when it entered into a transaction at an undervalue or became insolvent as a result of the transaction, the liquidator may make an application to the Royal Court to set aside the transaction as being at an undervalue. The time within which the transaction must have taken place is the period is the five years immediately preceding the date of commencement of the winding up. This is known as the 'look back' period.
The test for a company's insolvency in Jersey is the cashflow test, so if a company is unable to pay its debts as they fall due it will be considered to be insolvent.
The Royal Court will however refuse to make an order when an application for a transaction to be set aside as a transaction at undervalue is made, if it is satisfied that:
- the company entered into the transaction in good faith for the purpose of carrying on its business; or
- at the time it entered into the transaction, there were reasonable grounds for believing that the transaction would be of benefit to the company.
In assessing whether a person acted in good faith, the Royal Court may take into consideration whether the person was connected with the company. A person is connected with a company if they are a director or an associate of either the director or the company itself.
The Companies Law provides that where the person the company transacted with was a connected party a presumption arises that the transaction was entered into when the company was insolvent or became insolvent. The presumption can be displaced if it is proved the company was not in fact insolvent at the time of the transaction or did not become insolvent as a result of the transaction. The presumption effectively reverses the burden of proof, placing the onus on the party defending the transaction that is said to be an under value.
If the Royal Court determines, on the liquidator's application, that the company entered into a transaction with a person at an undervalue, the Royal Court may make a wide range of orders to restore the company to the position it would have been in had it not entered into the transaction, including the following examples:
- require property to be transferred as part of the transaction to be vested in the company;
- require property to be transferred to the company where it represents the proceeds of sale of property transferred at an undervalue; or
- require a person to pay the benefit received, back to the company.
This list is by no means exhaustive, but it provides a sense of the remedial framework available to the Royal Court when making orders to set aside a transaction at an undervalue.
The most appropriate remedy to be applied will depend on the factual circumstances before the court. In some cases that remedy will be to reverse the transaction, in others it may not and an alternative order, such as for monetary compensation, may be made.
Preferring Creditors
A company gives a preference to a person if:
- the person is a creditor of the company or a surety or a guarantor for a debt or other liability of the company; and
- the company (i) does anything, or (ii) suffers anything to be done, that has the effect of putting the person into a position which, in the event of a winding up, will be better than the position they would have been if that thing had not been done.
Where a company has given a preference to a person, Article 176A(1) of the Companies Law authorises the liquidator to make an application to the Royal Court for an order restoring the position to what it would have been if the company had not given the preference, which order the Royal Court may make as it thinks fit.
Unlike the five-year look back period afforded to a liquidator as part of an application to set aside a transaction at undervalue, Article 176A(9) of the Companies Law provides that the preference must have been given in the 12-month period immediately preceding the commencement of the winding up.
The 12-month timing of the preference will however not be relevant unless:
- the company was insolvent at the time the preference was given; or
- the company became insolvent as a result of giving the preference.
As with transactions at an undervalue, where the person the company transacted with was a connected party a presumption arises that the transaction was entered into when the company was insolvent or became insolvent. This presumption can also be displaced if it is proved the company was not in fact insolvent at the time of the transaction or did not become insolvent as a result of the transaction.
Extortionate Credit Transactions
The least common of the voidable transactions are Extortionate credit transactions. Article 179 of the Companies Law provides that where a company entered into a transaction involving the provision of credit to the company and is subject to a creditors' winding up, a liquidator may make an application to the Royal Court for an order to, among other things, set aside the obligation created by the transaction or vary the terms of the transaction.
For this relief to be available, the transaction must be extortionate which means it would have had to require the company to make grossly exorbitant payments, or the transaction would have had to grossly contravene ordinary principles of fair dealing.
The transaction would also have had to be entered into within the three-year period ending with the commencement of the creditors winding up for the liquidator to be able to apply for an order.
If the transaction is found to be extortionate the Royal Court may do one or more of the following:
- make an order setting aside whole or part of an obligation created by the transaction;
- make an order otherwise varying the terms of the transaction or varying the terms on which a security for the purposes of the transaction is held;
- make an order requiring a person who is or was a party to the transaction to pay to the liquidator sums paid to that person, by virtue of the transaction, by the company;
- make an order requiring a person to surrender to the liquidator property held by them as security for the purposes of the transaction; or
- make an order directing accounts to be taken between any persons.
Conclusion
Each of the three options available to a liquidator in a creditors' winding up to challenge a transaction entered into by the Jersey company provides a useful tool to help liquidators to improve the return available to be distributed to creditors.
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.
