The existence (or absence) of an efficient creditor-driven winding up regime can have a marked impact on the way in which stakeholders (whether creditors or investors) assess investment opportunities, including on the decisions as to which form of structure to use, the type of investment they elect to effect, and the protections they seek to build into their investment agreements.
A creditor-driven winding up regime, and the associated consequences of a winding up application being filed, and/or a winding up order being made, also materially influences the way in which directors and/or controlling shareholders conduct themselves in periods of financial stress or distress.
Creditor-Driven Winding Up Regime under Jersey Law
The creditor-driven winding up regime introduced by an amendment to the Companies (Jersey) Law 1991 ("the Companies Law") in March 2022 has been a welcome addition to the options available to creditors in Jersey and is regularly being used by creditors of Jersey companies. A creditor with a liquidated claim against a Jersey incorporated company for not less than the prescribed amount of £3,000 can apply to the Jersey Royal Court ("Court") for an order that the company in question be wound up and have licensed insolvency practitioners appointed as liquidators over it. To be successful in the application a creditor must be able to demonstrate to the Court that:
- the company is unable to pay its debts as they fall due;
- the creditor has other evidence of the company's insolvency; or
- the creditor has company consent.
A company will be deemed unable to pay its debts if the creditor has served a statutory demand (in the prescribed form) on the company requiring payment of the sum due, and for 21 days the company has not paid the sum due or disputed the debt to the reasonable satisfaction of the creditor.
Provisional Liquidation
The winding up regime also introduces the concept of a provisional liquidation into Jersey law. An application for provisional liquidators to be appointed over a company can be made in circumstances where a winding up application has been filed against that company, and where there is a concern that the underlying assets of, or value in, the company may be dissipated in the period between the winding up application being filed and the winding up order being made. Whilst the Jersey provisional liquidation regime is not currently as wide reaching as is the case in certain other offshore jurisdictions, the underlying concept and intention behind the regime is consistent.
Provisional liquidation applications which are designed to preserve the underlying assets, and prevent dissipation by the incumbent management, of the company in question are typically heard ex parte. The evidential burden of demonstrating a risk to the underlying assets, and the utility of a provisional liquidation order being made, lies with the creditor making the application. It will be for the Court to determine whether it is appropriate in all the circumstances to make the appointment sought, or whether to make an alternative order. If a provisional liquidator is appointed the appointment would typically be immediate, and the powers of the company would typically vest in the provisional liquidator from the time and date of the order.
As things stand, there is no ability as a matter of Jersey law for a company to make an application itself for the appointment of a provisional liquidator to effect a restructuring following the presentation of a winding up application against it.
This form of 'soft touch' provisional liquidation is a powerful tool in other leading offshore jurisdictions which allows companies to seek to implement a restructuring under a protective moratorium, with the aim of preserving value for stakeholders. Relevantly, the concept of such soft-touch provisional liquidations has typically been introduced in other offshore jurisdictions after the introduction of creditor driven provisional liquidation. It may be that Jersey will follow this familiar path in the future.
Process for Obtaining a Winding Up / Provisional Liquidation Order
Before making any application for a winding up order, a creditor should assess what evidence of insolvency it will use to satisfy the Court that a winding up order should be made. This may lead the creditor to conclude that a statutory demand is the appropriate way to proceed, or it may be that the creditor determines that there are other quicker and equally robust options to take to achieve the desired outcome.
Before filing a winding up application, a creditor should also give some thought to certain other issues which may impact the prospects of the application succeeding, and the contents of the application itself.
This includes (inter alia);
- the existence of security within the structure, where the value breaks, and whether the creditor has any economic interest in the company;
- the likely arguments that the company will make by way of defence to the winding up application;
- the impact of a winding up application on the company and other parts of its business (if known);
- whether the company is in the process of implementing a restructuring and the viability of the same; and
- whether there are any other creditors who are supportive of a winding up order being made.
Once a creditor is satisfied it has standing to file a winding up application and that it has evidence it can present to the Court to demonstrate the company’s insolvency, it may apply to the Court to wind the company up and have licensed insolvency practitioners appointed to the company. It should not however make an application if it has previously agreed not to do so, or if the claim is for repossession of goods only.
Once the Court has considered the winding up application, it may order the commencement of the winding up and appoint a liquidator, it may dismiss the application with costs orders typically being made against the applicant, or it may make such other order as it thinks fit. That may include adjourning the application to allow for further evidence to be provided.
In the recent case of Representation of Vidya AG re Sumner Group Holdings Limited [2022] JRC 259 the Royal Court provided some useful clarification determining that this type of application should be treated as if it were a cause de brievété in order that the application can be heard as promptly as possible. The Royal Court also indicated that in future any applicant for a creditors’ winding up under Article 157A should come on the first presentation of the application, armed with draft directions to bring the matter to a conclusion within a reasonably prompt timescale and the Royal Court will ensure that a reasonable period is provided for a company that may wish to oppose the application.
Winding Up Order & Powers of Liquidator
Assuming the winding up application is successful, the Court will order the winding up of the company and will appoint a liquidator as an officer of the Court to oversee that process. A person will be eligible to act as a liquidator (or provisional liquidator) if they meet certain criteria, including being registered on the Register of Approved Liquidators. At least one liquidator appointed must be from the Jersey resident section of the Register. The liquidator's remuneration will be fixed by the Court and will be payable out of the company's assets in priority to all other claims.
On appointment of the liquidator, the powers of the directors to act as agent of the company cease, and instead such powers are vested in the liquidator in accordance with the terms of the order, and the Companies law. These powers include, inter alia, the power to apply to Court to set aside transactions at an undervalue, preferences and extortionate credit transactions, and to prosecute breaches of directors duties.
