Jersey

Jersey is a popular place to establish an asset holding company. It is well regulated and creditor friendly, and the Companies Law is modern, flexible and modelled on English companies legislation.

But what happens when things go wrong and a company becomes insolvent?

Changes to the Companies Law have significantly bolstered the armoury of creditors of insolvent Jersey companies. These changes now enable the creditor to apply to the Court to wind up the company.

But what can a shareholder do? This guide looks at the key things that you need to know about using a shareholder-initiated creditors' winding up to liquidate an insolvent Jersey company.

Words in bold text are defined at the end of this guide.

What is a creditors' winding up?

A creditors' winding up is an insolvency procedure that is used to liquidate an insolvent company. It can be commenced by way of a Court order or by shareholders.

The purpose of a creditors' winding up is to facilitate the orderly and fair distribution of the company's assets by treating the claims of all unsecured creditors equally and rateably.

Other insolvency procedures

There are three other procedures that may be used to liquidate an insolvent company: a Court-ordered creditors' winding up (referred to above); désastre proceedings under the Bankruptcy Law; or a winding up on just and equitable grounds under the Companies Law.

Please see our related guides on these topics:

When is a company insolvent?

Under the Companies Law, a company is regarded as being insolvent if it is unable to pay its debts as they fall due. This is generally described as "cash flow" insolvency.

Unlike other jurisdictions, Jersey does not apply an insolvency test based on the company's balance sheet. What this means, is that, for a Jersey company to be insolvent, it is not necessary to establish that the value of the company's liabilities exceeds its assets.

Eligibility

A company may only be placed into a creditors' winding up if its assets have not been the subject of a declaration under the Bankruptcy Law.

Initiating a creditors' winding up

A shareholder-initiated creditors' winding up is authorised by the shareholders of the company passing a special resolution to place the company into a creditors' winding up at a meeting of shareholders.

However, a creditors' winding up will also result where a company in summary (or solvent) winding up is unable to pay its debts:

within six months of the start of its summary winding up; or
(if its debts fall due after that date) as they fall due.

In these circumstances, the directors or the liquidator (if one has been appointed) must call a meeting of creditors and the winding up will become a creditors' winding up from the day of that meeting.

When does a creditors' winding up start?

The creditors' winding up starts:

at the time the special resolution is passed; or
(where a summary winding up becomes a creditors' winding up) on the date of the creditors' meeting referred to above.

What is the process?

There are prescribed steps under the Companies Law that the company must take, both prior to and following the special resolution. Failure to take any of these steps is not only likely to invalidate the winding up, but it may also constitute an offence by any or all of the officers of the company, and the company itself. These steps are set out below.

Advance notice to creditors
Not less than 14 days before the day of the company meeting at which the special resolution for a creditors' winding up is to be proposed, the company must give notice, by post, to its creditors which calls a meeting of creditors. The creditors' meeting:

must be held in Jersey; and
must be on the same day as, and immediately following the meeting of the company; at which the special resolution is passed.

The company and the creditors at their respective meetings may nominate a person to be the liquidator of the company.

Not less than 10 days before the creditors' meeting, the company must advertise the meeting in the Jersey Gazette.

In the lead up to the creditors' meeting, the company must give creditors any information about the company's affairs they reasonably require, free of charge.

Shareholder meeting

At the shareholder meeting, the company resolves by special resolution, to wind up the company.

Notice

Within 14 days of the passing of the special resolution, the company must publish a notice in the Jersey Gazette stating that it has been placed into a creditors' winding up.

First meeting of creditors

The company must hold a meeting of creditors in Jersey immediately after the meeting of shareholders finishes (notice having been given as above).

At the creditors' meeting, there must be presented a statement of affairs, and a director appointed to preside at the meeting.

Statement of affairs

The directors must present to the creditors' meeting a statement of the company's affairs prepared by them which must be verified by an affidavit sworn by some or all of them.

Appointment of liquidator

Both the company (through its shareholders) and its creditors may nominate a person to be liquidator at their respective meetings.

The creditors' nominated liquidator will be appointed at the conclusion of their meeting, unless they do not nominate anyone, in which case the company's chosen liquidator will be appointed.

If the creditors and the company nominate different people for the role of liquidator, then the directors, shareholders or creditors can apply to the Court, within seven days of the nomination made by the creditors, asking for the company's' nominated person (or some other person) be appointed instead of or jointly with the creditors' nominated liquidator.

The appointed liquidator must notify the registrar of companies and the creditors of their appointment within 14 days.

The Court may appoint a liquidator if, for any reason, there is no liquidator acting in a creditors' winding up.

Appointment of liquidation committee

The creditors may appoint a liquidation committee to represent their interests in certain statutory decisions if they wish. The shareholders may also appoint members to the committee if the creditors have formed one, subject to the creditors' refusal. See Liquidation Committee below.

What are the consequences of a creditors' winding up?

The main consequences of a company being placed into creditors' winding up are as follows:

Stop carrying on business
The corporate state and capacity of the company continue until it is dissolved, but from the start of the creditors' winding up, it must stop carrying on its business except as may be necessary for its beneficial winding up.

Unlike désastre proceedings, the company retains ownership of its assets and they do not vest in the liquidator. The liquidator may, however, apply to the Court for an order requiring any person who has possession or control of any asset to which the company appears to be entitled, to deliver, surrender or transfer the asset to the liquidator.

On the appointment of a liquidator, the powers of the directors cease except to the extent the liquidation committee, or (if no liquidation committee has been appointed) the creditors, allow the directors to retain them.

During any period after the winding up has begun, but before a liquidator is appointed, the powers of the directors may only be exercised:

with the approval of the Court;
to satisfy the company's obligation to call and hold the meeting of creditors; or
to protect the company's assets.

Prohibited actions

From the date the creditors' winding up starts:

except as noted under How are secured creditors affected? below, the only remedy of a creditor against the company is to prove its debt in the winding up;
except for the right to apply for a declaration, a creditor cannot start any action or legal proceedings against the company or continue any action or legal proceedings to recover its debt unless permission is obtained from the Court; and
except as noted under How are secured creditors affected? below:
- any transfer of shares in the company made without the approval of the liquidator; and
- any change in the status of the shareholders made after the start of the creditors' winding up,

is void.

Invoices, letters, etc.
Every invoice, order for goods or services or business letter issued by or on behalf of the company or a liquidator of the company must state that the company is in liquidation.

Recovery actions
If the liquidator believes there are grounds to do so, the liquidator may seek to try and increase the distribution to creditors by:

challenging transactions entered into by the company (e.g. as a transaction at an undervalue, a preference or an extortionate credit transaction);
disclaiming onerous property (e.g. unprofitable contracts or unsaleable property);
taking action against the company's directors (e.g. for breach of duty or wrongful trading); or
taking action against the company's shareholders (e.g. to make a call or reclaim an unlawful distribution).

For more information on the potential recovery actions the liquidator may make, see our guide Potential insolvency challenges under Jersey law.

How are secured creditors affected?

The effect on secured creditors of a company being placed into a creditors' winding up is as follows:

Jersey real estate

As noted in Prohibited actions above, if the company has been placed into a creditors' winding up, a creditor who has security over Jersey real estate owned by a Jersey company may only enforce its security by bringing an action against the company with the permission of the Court. Ordinarily, the liquidator will sell the secured real estate and pay the sale proceeds (after deducting the sale costs and the liquidator's fee) to the secured creditor.

If the value of the secured creditor's debt exceeds the sale proceeds, the secured creditor may prove for the balance of its debt as an unsecured claim in the company's creditors' winding up.

Jersey intangible movable assets

In a typical financing transaction, the Jersey intangible movable assets over which security is taken include things like shares, debt securities, bank accounts and contractual rights.

Under the Companies Law, where a creditor has taken security over:

any Jersey intangible movable assets of the company, the creditor may exercise any power of enforcement conferred by the Security Law without the consent of the liquidator or the leave of the Court;
the company's shares, the creditor may transfer the shares pursuant to the exercise of any power of enforcement conferred by the Security Law without the consent of the liquidator.

In addition, where the company has created a security interest over any Jersey intangible movable assets, the Security Law, states that the power of the secured creditor to enforce its security interest is not affected by the company:

becoming insolvent; or
any of its assets becoming subject to insolvency proceedings in Jersey or elsewhere,

as long as the security interest was perfected before the company became insolvent.

If the liquidator sells any Jersey intangible movable assets that are subject to a valid and perfected security interest, the sale proceeds will be applied (after payment of the liquidator's fees and reasonable expenses) in payment of the secured debt.

Foreign assets

A Jersey company may own assets that are (or, under Jersey conflicts of law principles, taken to be) located outside Jersey.

Any security interest granted over a foreign asset may be subject to the requirements of the law of the jurisdiction where the asset is situated. It should be borne in mind that, where an asset is not in Jersey, the rights of a secured party may not be governed by the laws of Jersey.

How does a creditor make a claim?

If an unsecured creditor of a company wants to recover its debt in a creditors' winding up, it must make a claim (known as proof of a debt) in accordance with the Companies Law.

A creditor that has made proof of a debt may examine the proofs of debt of the other creditors at a time set by the liquidator.

The liquidator will publish a notice in the Jersey Gazette, and in any other publication the liquidator thinks necessary, advising the company's creditors to file their claims by a set date.

What debts are admissible?
All present, future or contingent debts and liabilities to which a company:

is subject at the start of the creditors' winding up; or
becomes subject before payment of the final distribution, by reason of any obligation incurred before the start of the creditors' winding up,

are provable in the creditors' winding up.

Interest

Where an unsecured debt accrues interest, any interest accrued to the date of the start of the creditors' winding up is provable as part of the debt.

Where a secured debt accrues interest, any interest accrued to the date of payment of the debt is provable and payable from the sale proceeds of the secured assets to the extent that they are sufficient to pay the interest.

Contingent debts
Where a debt is contingent or does not have a certain value, the creditor must make an estimate of its value.

Admitting or rejecting proofs of debt

The liquidator may:

admit or reject (in whole or part) proof of any debt; or
reject (in whole or part) any claim for interest, if the liquidator considers the rate of interest to be extortionate.

Before the liquidator admits or rejects proof of a debt, the liquidator may require evidence that supports or opposes the debt being admitted.

Liquidation committee

Appointment

As mentioned above, if the creditors want to do so, at the first meeting of creditors they may appoint a liquidation committee, with up to five members.

The shareholders may also appoint up to five members of the liquidation committee. The creditors may block the appointment to the liquidation committee of any person nominated by the shareholders, although the shareholders have a right to appeal to the Court.

Powers

The power of the liquidation committee is limited to:

agreeing the liquidator's fees;
authorising the directors to continue to exercise any of their powers;
authorising the liquidator to pay out to a class of creditors in full, or compromise any claim by or against the company; and
deciding how the records of the company and liquidator are to be destroyed once the creditors' winding up is complete.

Who may be appointed liquidator?

A person is only eligible to be appointed as a liquidator if the person is the Viscount or is registered as an approved liquidator and entered on the Register of Approved Liquidators. A person is not qualified to be registered as an approved liquidator and entered on the Register of Approved Liquidators unless the person:

is ordinarily resident in Jersey (subject to the below);
is an individual who has the level of experience determined by the Viscount in writing and:
- is licensed in the United Kingdom to act as an insolvency practitioner by one of the recognised professional bodies ; or
- is a member of the Institute of Chartered Accountants in England and Wales, the Institute of Chartered Accounts in Scotland, the Chartered Accountants of Ireland or the Association of Chartered Certified Accountants; and
has in place a general bond of £250,000 plus a specific bond of between £5,000 and £5,000,000 for each appointment.

An individual who is not ordinarily resident in Jersey, but otherwise meets the criteria set out above, may be appointed as a liquidator of a Jersey company if appointed together with an individual who is registered as an approved liquidator in Jersey and entered in the Register of Approved Liquidators. In this situation, the Viscount may register the individual as a non-Jersey liquidator in the Register of Approved Liquidators.

A person is disqualified for appointment as a liquidator if:

they are not a natural person;
they are a secretary, officer or servant of the company, or a partner or employee of such a person; or
they are subject to a disqualification order under the Companies Law.

The creditors may remove a liquidator at any time. The Court may also remove a liquidator and may appoint another.

Liquidator's duties

General duties

The general duties of the liquidator are to:

take possession or control of, protect and sell, the company's assets;
distribute the company's assets (or proceeds of their sale) to its creditors in accordance with the Companies Law; and
if, after paying the liquidator's fees and expenses and all debts proven in the creditors' winding up, there are any surplus assets or sale proceeds, distribute them among the company's shareholders in accordance with the Companies Law.

Duty to report wrongdoing

If, during the course of the creditors' winding up, the liquidator forms the opinion that:

the company or any other person has committed a criminal offence; or
as a result of the conduct of any director of the company, a disqualification order should be made against that director under the Companies Law,

the liquidator must report the matter to the Attorney General and provide the Attorney General with any information or document the Attorney General requires.

Liquidator's powers

General powers

The Companies Law gives a liquidator wide-ranging powers to carry out a creditors' winding up. Except as noted below, the liquidator may (without the approval of any person) exercise any power of a company that is required to carry out a creditors' winding up of the company.

However, the liquidator may only:

pay a class of creditors in full; or
compromise any claim by or against the company,

with the approval of the Court or the liquidation committee (or, if there is no liquidation committee, a meeting of the creditors).

Investigative powers

The liquidator may require (among others) any current or former director or secretary of the company, employee or person who was an employee in the 12 months before the start of the creditors' winding up to:

give the liquidator any information about the company and its business, dealings, affairs or assets that the liquidator reasonably requires; or
meet with the liquidator at any reasonable time on being given reasonable notice.

In addition, the liquidator may apply to the Court for an order requiring any person who has possession or control of any asset or record to which the company appears to be entitled, to pay, deliver, surrender or transfer the asset or record to the liquidator.

Power to seek directions

The liquidator may apply to the Court for:

an order regarding any question arising in the creditors' winding up; or
the Court to exercise any of its powers relating to the creditors' winding up.

The Court may make an order on any terms it thinks fit if it is satisfied that it just and beneficial to do so.

Costs of a creditors' winding up

All costs, charges and expenses properly incurred in a creditors' winding up, including the remuneration and expenses of the liquidator, are payable out of the company's assets in priority to all other claims.

The liquidator may be paid any fee agreed between the liquidator and the liquidation committee or (if no liquidation committee has been appointed) the creditors.

If the liquidator and the liquidation committee or creditors are unable to agree the liquidator's fee, it may be fixed by the Court.

Distribution of sale proceeds

Pari passu principle

In common with many other jurisdictions, the Companies Law applies the pari passu principle. Under this principle, all unsecured creditors of an insolvent company share equally and rateably in the unsecured assets of a company remaining after the payment of the liquidator's fees and expenses and the claims of any preferential creditors.

Payment waterfall

The liquidator must distribute the sale proceeds of the company's assets in the following order:

the liquidator's fees and expenses;
where the company is a bank, amounts payable to the Jersey Bank Depositors Compensation Board;
amounts due to the company's employees for up to six months' wages, holiday pay and bonuses (subject to set maximum amounts);
amounts due in respect of Jersey taxes, rent and parochial rates;
all other debts proved in the creditors' winding up;
interest on any provable debts which accrued interest before the creditors winding up in respect of the period during which they have been outstanding since the start of the creditors' winding up, at the normal contractual rate; and
any balance is paid to the company's shareholders according to their rights and interests in the company.

Potential liabilities of shareholders

Liability to contribute

Where a company is placed into a creditors' winding up, holders of limited shares will only be liable to contribute amounts unpaid on their shares, or amounts they undertook to contribute in the event of a winding up.

Those contributions may be required to pay the company's liabilities, the expenses of the winding up, or to adjust the rights of the contributories amongst themselves.

Past holders of limited shares are not liable to contribute unless it appears to the Court that the present shareholders are unable to satisfy the contributions required from them. Any liability would be restricted to the amount paid on their shares. However, they will not be required to contribute:

if they ceased to be a shareholder 12 months or more before the winding up began; or
in respect of liabilities incurred after the shareholder ceased to be a shareholder.

Other provisions apply to past or present holders of unlimited shares or guarantor members.

Liability for share buyback or redemption

If the company unlawfully made a payment to buy or redeem shares in the 12 months leading up to the creditors' winding up, then the liquidator may apply to the Court to claw back the payment from the exiting shareholder to pay liabilities or expenses that cannot be covered by the company's assets or contributions of shareholders.

This does not apply to open-ended investment companies.

The Court will not order the person to contribute to the assets of the company unless the court is satisfied that, when the person received the unlawful payment, the person knew, or ought to have concluded from facts known to the person, that, immediately after the unlawful payment was made:

the company would be unable to discharge its liabilities as they fall due (the company is insolvent); and
the realisable value of the company's assets would be less than its aggregate liabilities.

Set off and subordination

Where there are any mutual credits, mutual debts or other mutual dealings between a company and a creditor, the Companies Law requires the debts to be automatically set off on the date on which the creditors' winding up started.

The terms of any agreement relating to set-off, close-out netting or contractual subordination of debts are enforceable despite:

the insolvency of any party to the agreement or any other person; or
any lack of mutuality of obligations.

The liquidator must therefore give effect to any such agreement terms applicable to the company.

Termination

At any stage during a creditors' winding up, a liquidator may apply to the Court for an order terminating the creditors' winding up on the basis that the company can discharge its liabilities in full as they fall due.

Additional meetings

If a creditors' winding up continues for more than 12 months, the liquidator must call meetings of shareholders and creditors to be held within three months of the end of:

that 12 month period; and
each successive 12 month period.

The liquidator must prepare an account of their acts and dealings, and how the creditors' winding up was carried out in the relevant 12 month period, and present it at meetings of shareholders and creditors.

Final meetings

Once the affairs of the company have been fully wound up, the liquidator must prepare an account of the winding up and how the company's assets were distributed, and present it in a meeting of members and a meeting of creditors.

Dissolution

Within seven days of the final meetings of the members and creditors being held (or, if they are held on separate dates, the date of the later meeting) the liquidator must file with the registrar of companies:

a return for each meeting; and
(in the case of a public company) a copy of the liquidator's account.

The registrar will register the return and (if applicable) the liquidator's account and the company is taken to be dissolved three months after the registration date.

Disposal of records

Once the creditors' winding up has been completed, the liquidation committee or (if no liquidation committee was appointed) the company's creditors may decide how the records of the company and the liquidator are to be destroyed.

However, since the limitation period for a contractual claim under Jersey law is 10 years, it is prudent to keep a company's records for 10 years after it has been dissolved.

Terms used

Bankruptcy Law means the Bankruptcy (Désastre)(Jersey) Law 1990.

Companies Law means the Companies (Jersey) Law 1991.

Court means the Royal Court of Jersey.

Declaration means the declaration by the Court that the assets of a company are en désastre.

Insolvent is defined in the paragraph headed When is a company insolvent?

Security Law means the Security Interests (Jersey) Law 2012.

Special resolution means a resolution that is required to be passed as a special resolution by a majority of two thirds (or any higher majority specified in the company's articles of association) of shareholders who (being entitled to do so) vote at a meeting of the company of which not less than 14 days' notice has been given.

Viscount means the head of the executive arm of the courts of Jersey.

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.

The Collas Crill Guide To... A Shareholder-Initiated Creditors' Winding Up Of A Jersey Company

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