Knowledge

Due to their proximity and relationships with the UK, the Channel Islands have experienced the same roller-coaster of inflationary pressures caused by an increase in demand post-pandemic and the war in Ukraine, and (because the Channel Islands are in the sterling zone) interest rates hikes imposed by the Bank of England. The problems are however exacerbated because of the need to import goods and fuel to the islands, and whilst Brexit has not affected trade with the UK, it has certainly not helped trade with Europe. All these factors have been placing pressure on businesses.

In Jersey, the most high profile collapses have been in the building trade with large Jersey builders Camerons and JP Mauger going into liquidation. Anecdotally the difficulties have been caused by the increase in costs, which have rendered uneconomic fixed price building contracts entered into pre-pandemic. Despite this, the demand for construction continues and St Helier is awash with cranes and hi-viz jackets.

Regulatory pressures

Businesses of all types are also having to contend with a deluge of regulatory changes on many different fronts, many prompted by the upcoming Moneyval visit in September 2023.

For example, in April 2022, Jersey's civil financial penalty regime (imposed for contravention of the regulatory Codes of Practice or the new Anti-Money Laundering / Combatting Terrorist Financing / Countering Proliferation Financing Handbook) was toughened up and the possible penalties increased. In June 2022, a new offence of "failure to prevent money laundering" was introduced; a defence exists if the supervised business can show it adequately maintained and applied "prevention procedures" in relation to the activities of the "associated party" engaged in money laundering, whether or not that person has been convicted of an offence related to that conduct. With effect from 30 January 2023, who is supervised for AML has been completely overhauled by re-casting Schedule 2 of the Proceeds of Crime (Jersey) Law 1999 and all previous scope and registration exemptions have been removed. 

Businesses are also having to wrestle with a sanctions regime which has been expanding rapidly since Russia's invasion of Ukraine in February 2022. Jersey implements locally both UN Security Council and autonomous UK sanctions. Since 29 September 2022, all UK sanctions on Russia (and since 10 June 2023, UK sanctions on Belarus) have been automatically implemented in Jersey.

Director disqualification

On 20 September 2022, a director of a Jersey company in bankruptcy (désastre) was disqualified for 10 years under Article 78 of the Companies (Jersey) Law 1991 ("Companies Law") (In the matter of SPARC Group Limited (en désastre) 2022 (2) JLR 65). It was the first time a director has ever been disqualified following a referral by the Viscount under Article 24(7) of the Bankruptcy (Désastre) (Jersey) Law 1990 ("Désastre Law"), and it was the first reported disqualification case in 20 years, since the maximum period for disqualification was increased from 5 years to 15 years in September 2002. The director had flagrantly breached his obligations under the Désastre Law and refused to engage properly with the bankruptcy process. He had misled the Viscount on numerous occasions, which had affected her ability to discharge her functions.

The Viscount is not the only potential applicant for a disqualification. The Chief Minister, the Jersey Financial Services Commission, or the Attorney General, can all apply for a disqualification order if it is expedient in the public interest. The Court will make the order if satisfied that "the person’s conduct in relation to a body corporate makes the person unfit to be concerned in the management of a body corporate."

On 3 March 2023, the Attorney-General issued Guidance on the circumstances in which he will apply under Article 78 for a disqualification order. The Guidance sets out a long (but non-exhaustive) list of factors which may trigger such an application, which include relevant criminal convictions, court orders in respect of their wrongful trading or fraudulent trading, corporate governance breaches, failure to co-operate with any liquidator or the Viscount in a winding up or bankruptcy, and involvement in transactions at an undervalue or preferences.

Bedding in of March 2022 creditor-friendly reforms

It is now over a year since a package of creditor-friendly reforms to Jersey's insolvency regime came into force on 1 March 2022:

• For the first time, creditors were able to apply to the Jersey court under the new Article 157A of the Companies Law for a Jersey company to be placed into a creditors winding up and have private sector liquidators appointed. Previously creditors had only one domestic option: a désastre (bankruptcy) administered by the Viscount. Article 157A mirrored the long-standing provisions that apply to an application for a désastre by a creditor with a claim of at least £3,000. We have seen several applications made by creditors, including opposed applications, coming before the courts - and one has recently reached the Court of Appeal (described in greater detail below). The use of statutory demands in the prescribed form (as a precursor to such an application), which was also introduced in Jersey in March 2022, has also become widespread, and may even have prompted debtor companies to take the initiative and for their members to resolve to enter into a creditors' winding up, i.e. to jump before they were pushed.
• A provisional liquidator (not previously available in Jersey) could be appointed to preserve the position where there is a real concern that the affairs of the company will be conducted improperly, its books and records will be destroyed or its assets dissipated between the creditor's application to court and the making of a winding up order. There are no reported judgments on this having been used yet.
• A new register of Approved Liquidators was introduced. Only those registered can be appointed as liquidators in a creditors winding up (whether initiated by a creditor application or under the existing regime via a resolution of shareholders) or as liquidators of a Jersey public company (however appointed). As at 28 June 2023, there are currently nine Jersey resident approved liquidators, along with 22 non-Jersey approved liquidators.

Disputed debts under Article 157A

In Vidya AG v Sumner Group Holdings Limited 2022 (2) JLR 283, a creditor had served a statutory demand in the sum of $120,000. The debtor company disputed that the debt was due. The Royal Court considered English and Jersey caselaw before concluding that a claim is not "disputed" for the purposes of Article 157A(2)(b) "unless it is the subject of a substantial dispute (as that expression has been interpreted in the English cases and which is essentially to the same effect as the expression 'genuine dispute and arguable defence and counterclaim')." In deciding that issue, the Court will consider much the same matters as it would do on an application for summary judgment. On the facts, the Royal Court found that although there was a dispute about $20,000, the sum of $100,000 was not the subject of a substantial dispute, and accordingly found that the debtor company was unable to pay its debts and ordered the winding up of the company. The Royal Court also confirmed that the creditor's reasonable costs of the application would be costs of the winding up (as it was brought, and has effect, for the benefit of all creditors) and would rank in priority to general creditor claims in the winding up; this resolves an issue which is not entirely clear in the legislation. It also suggested that any applicant under Article 157A should come, on first appearance of the Representation, armed with draft directions to ensure such applications are dealt with in a reasonably prompt timescale. 

Do you need a liquidated claim?

Interestingly, the Royal Court in Vidya said "the reference in Article 157A(1) to the need for a creditor to have a claim for a liquidated sum and the reference in Article 157A(2)(b) to the company not disputing the debt are two sides of the same coin and addressing essentially the same issue."

That a creditor needs to have a liquidated claim was based on the statutory language of Article 157A, the accompanying Practice Direction RC 22/01 (which requires the creditor to have "a claim for a liquidated sum"), and Jersey caselaw in relation to the equivalent requirement under the Désastre Law. This also reflects the customary law position in Jersey for over 125 years, the Désastre Rules which have applied since 1968, at least three Court of Appeal decisions, a series of Royal Court decisions and the leading Jersey textbook on this subject.

Undeterred by this weight of precedent, the Court of Appeal held in HWA 555 LLC v Redox PLC SA (formerly Regus PLC) [2023] JCA 085 that a creditor does not need a liquidated claim at all. Regus PLC ("Regus") was an unusual "dual hatted" company, incorporated in Jersey but also registered in Luxembourg where it was tax resident.  Its role was to guarantee the rent payments of over 600 tenant SPVs to their landlords around the world. It had a potentially huge exposure but very few claims had actually been made on the guarantees. The pandemic disrupted Regus' business model, and it anticipated that the guarantees would be called upon and it would become insolvent. In September 2020, it applied to the Royal Court for a letter of request to be sent to the Luxembourg Court to put Regus into a Luxembourg bankruptcy process. The Royal Court noted that a huge distribution had been made to its parent company (now thought to have exceeded £3.3 billion) in January 2019, which could potentially be clawed back in a Jersey winding up as a transaction at an undervalue (the lookback period for which is 5 years) but not in Luxembourg (where the equivalent period was 6 months and 10 days). It nevertheless issued the letter of request. Regus was shortly afterwards placed into Luxembourg bankruptcy.

HWA 555 LLC had a large, unliquidated damages claim (for more than $90m) for breach of contract against Regus under a guarantee and once the new regime came into force in March 2022, it applied for Regus to be wound up in Jersey (by this point, it was common ground Regus was insolvent). The Royal Court declined to wind up Regus in Jersey, so HWA appealed.

1. Standing to apply. The Court of Appeal was split on the issue of whether or not a creditor with an unliquidated claim could apply under Article 157A. The first judgment was given by Matthews JA. In very short precis, he held that the statutory requirement that a creditor "has a claim against the company for not less than the prescribed minimum liquidated sum" does not require the creditor to have a "liquidated claim" - the word "liquidated" is in the wrong place and merely refers to the prescribed minimum sum (currently £3,000). He bolstered his argument by reference to the fact that a creditor with an unliquidated claim can prove in a liquidation, just as it can in a désastre, which provision was clarified in 2006: he concluded the legislature must have intended in 2006 to give the Royal Court a wider discretion than had hitherto been the case. Wolffe JA disagreed with that interpretation of the wording, noting the weight of precedent to the contrary referred to above, the fact that no mention was made of this significant change in any of the legislative papers from 2006 - and there was even a contrary Court of Appeal decision on this topic in 2011. He also noted that in Jersey customary law (as in England and Wales and under Scots law) there is no necessary identity between those with standing to initiate an insolvency process and those with a right to prove their debts. The casting vote fell to Sir William Bailhache KC sitting as President of the Court of Appeal. He decided that the Court could develop the customary law and "it would be convenient on policy grounds to adopt the construction of the legislation as adumbrated by Matthews JA." He went on to say that when considering an application by a creditor with an unliquidated claim "[t]he Royal Court can be trusted to reach a sound conclusion."
2. Discretion. All the Court of Appeal judges agreed that if a creditor could jump through the statutory hoops, a winding up order should be made "unless there is a sufficiently good reason not to do so".
3. A fresh exercise. Finally, the Court of Appeal found that the Royal Court had erred in its exercise of discretion, not least in failing to consider the advantages of a Jersey liquidation (one being the longer "lookback" period in Jersey). The Court of Appeal exercised the discretion afresh and reached the conclusion that Regus PLC should be wound up in Jersey.

An oddity about the decision on standing is that HWA had a separate liquidated claim for c.$100,000 arising from a costs order in earlier US proceedings – so the lengthy debate about unliquidated claims, whilst not technically obiter, was perhaps unnecessary (Wolffe JA would have wound up Regus on this narrower basis). An irony also arises because, for a decision on the law so clearly driven by justice and policy reasons, in fact no winding up order was ultimately made: after the hearing but before the Court of Appeal's judgment was handed down, the parties agreed to settle. 

Assignment of claims in a désastre

Spot the difference:

1. Mr Alan Booth was declared bankrupt in October 2015. Prior to his bankruptcy he had commenced three sets of legal proceedings. During his bankruptcy, he sought an assignment of the claims to him; the Viscount refused. He applied to the Royal Court to challenge those decisions; the Royal Court dismissed that challenge in April 2016. The Court of Appeal overturned the Royal Court’s decision in November 2016, and the Viscount thereafter assigned the claims to him (apparently unconditionally). Two claims settled and one was unsuccessful following trial. On 3 January 2020 he was discharged from bankruptcy.
2. On 20 November 2020 Mr Booth sent a letter before action to a surveyor – its lawyers responded that the claim pre-dated the bankruptcy and had vested in the Viscount. Mr Booth asked the Viscount to assign the claim to him; she refused. Mr Booth challenged the Viscount's decision; the Royal Court dismissed his challenge, distinguishing the earlier Court of Appeal decision. Mr Booth appealed. This time the Court of Appeal dismissed his appeal (Booth v Viscount and Reynolds Chartered Surveyors [2022] JCA 200): it held that it was "inherent in the logic of the November 2016 Judgment that the merits of any claim would be a relevant consideration in the context of a proposed assignment" and that "the Viscount is not only entitled but positively required to consider the merits of a claim when deciding whether to assign it." As such, the Viscount was entitled to decide not to assign a claim which she thought was frivolous and to some extent vexatious.
3. A month after the Court of Appeal's decision, Mr Booth asked the Viscount to release to him a further claim against the surveyor. The Viscount refused. Mr Booth issued proceedings against the Viscount in respect of that refusal on the basis it breached his human rights. On 12 April 2023, the Master of the Royal Court declined to strike out that claim. Perhaps this will make it to the Court of Appeal for a third time?

Cross-border recognition still requires a letter of request

English joint trustees in bankruptcy had their appointment recognised in Jersey under Article 49 of the Désastre Law in Representation of Wright and Knowles re: Yeowart and Hopkinson [2022] JRC 242. The Royal Court had received two letters of request from the English High Court, one in respect of each bankrupt, asking for the appointment of the trustees to be recognised and given effect in Jersey and that they be authorised to examine various persons within this jurisdiction with a view to getting in the assets of each of the bankrupts in Jersey.

In contrast, in Waterfront LC Limited v Cine-UK Limited [2022] JRC 260, an attempt by the defendant to resist payment of a judgment following Jersey proceedings by relying on an automatic stay arising following its entry into US Chapter 11 proceedings was refused: the Royal Court held that "Notwithstanding the purported extra-territorial effect of the order made in the US Court on 8 September 2022, the fact remains that such an order has no direct effect in Jersey.  Advocate Harvey-Hills accepted that it would have been appropriate for the US Court to have either issued a letter of request to the Jersey Court seeking recognition of the Chapter 11 Proceedings or for some equivalent application to have been made, or for an application to be made to stay these proceedings. No such approach or application has been made..."

Winding up on just and equitable grounds is still alive and well

In Gibbons v Monarch Investments Limited and Gibbons [2023] JRC 024, two brothers (Robert and Kenneth) were shareholders in a solvent company, but only Robert was a director. Their relationship had broken down and the Royal Court found that Kenneth had justifiably lost confidence in the probity and impartiality of Robert, and the circumstances were sufficient to prompt a just and equitable winding up of the company. Unusually, the order was made without a named liquidator having been proposed or terms agreed - the liquidator's engagement had to be negotiated and agreed with the Court after the event.

In Representation of Daisy Logistics [2023] JRC 051, no liquidator was needed at all. Three companies applied to be wound up on just and equitable grounds. They were special purpose companies created for an unsuccessful bid. Unfortunately, their parent entities had been dissolved, and so were unable to pass a resolution for their summary winding up. The companies could have been left to be struck off but "the companies take the view that they should not be allowed merely to fall away but should be wound up appropriately." The Royal Court agreed that they be wound up on just and equitable grounds. Whilst it would be usual to appoint a liquidator to conduct the winding-up, by reason of the complete inactivity of the companies at any stage, their effective dormancy from creation, the absence of any creditors or otherwise, the Court agreed that the companies be dissolved immediately on the registration of the Court's winding up order with the Registrar of Companies.

This article was first published in the South Square Digest in July 2023