Reform of the Guernsey Insolvency Regime

In Autumn 2018 the States of Guernsey proposed changes to Guernsey’s corporate insolvency regime to come into effect in 2019.  On 15 January 2020 the States of Guernsey enacted these changes with the passing of the Companies (Guernsey) Law 2008 (Insolvency) (Amendment) Ordinance 2020 (the Ordinance).

The Ordinance brings into effect the proposed changes to create a structured, flexible and transparent regime for company insolvency procedures in Guernsey, as is required in a modern jurisdiction.  A summary of the main changes is set out below.

Administration

• An administrator will now be obliged to call a creditors’ meeting within 10 weeks of the administration order (unless ordered otherwise by the Court) to advise on the administration process;
• Administrators will have the power to make distributions to certain creditors without the need to make an application to Court for approval; and
• The Ordinance permits companies in administration to go straight to dissolution in circumstances where there are no assets for distribution.

Liquidation

• The Ordinance establishes a requirement for companies to meet the statutory solvency test in members’ voluntary winding-ups;
• The Ordinance requires the appointment of an independent liquidator, ordinarily a regulated insolvency practitioner, to conduct winding-ups of insolvent companies;
• If no solvency declaration is signed, the liquidator must call a creditors’ meeting within a month of their appointment (unless it is considered that there are no assets for distribution); and
• A new regime has been introduced which allows the compulsory liquidation of companies which are registered outside of in Guernsey.

Directors’ conduct

• The Ordinance imposes an obligation to report director misconduct that gives rise to grounds for a disqualification order to the Registrar of Companies, and if that company is regulated, to the Guernsey Financial Services Commission;
• The Ordinance introduces powers for a liquidator to compel production of documents from directors and officers when investigating a company;
• The Ordinance provides liquidators with the power to appoint an inspector of the Court to examine directors and officers of a company; and
• The Ordinance gives liquidators the power to request a statement of affairs (Administrators already have this power).

Insolvency rules

The changes also recommended the introduction of a set of insolvency rules to govern the insolvency process.  No draft rules have yet been published but it is anticipated that these will create more formal guidance based on the Guernsey Insolvency Practice Statements (GIPS) introduced in 2017 as best practice guidelines. The issues likely to be covered are:

• The introduction of a proof of debt procedure for creditors;
• Provision for creditor’s meetings;
• Investigation of director misconduct; and
• Disclaimer of assets.

Other changes

• Under the Ordinance, liquidators and administrators will be able to take action in relation to exorbitant credit transactions and transactions at an undervalue, and to disclaim onerous property.
• There will be an exemption from auditing will be introduced for the financial year of the liquidator’s appointment.

These changes provide welcome resolutions of some of the issues within the previous insolvency regime. The introduction of a more structured process and the additional powers available to administrators and liquidators will enhance Guernsey’s reputation as a place to do business with a clear framework and protection to creditors in place. The requirement of independent practitioners with a duty to hold officers to account improves the transparency of insolvency processes and is an attractive and necessary reform.  We look forward to seeing how these reforms will play out.