Vol 10 (2013) - Issue 3

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Guernsey Insolvency: Recent Cases and Developments

Guernsey has a well developed system of corporate insolvency law, modelled on English corporate insolvency provisions. The formal corporate insolvency options were significantly enhanced in 2005 with the introduction of an administration regime similar to that found under the UK Insolvency Act. Consolidated under the Companies (Guernsey) Law, 2008 (the 'Companies Law'), administration has become a very popular and effective restructuring option. One substantive difference when compared with many other jurisdictions is the lack of prescriptive rules governing insolvency procedure. This leads to much greater flexibility in the process to meet the needs of stakeholders and is assisted by the pragmatic approach of the Royal Court.
The Royal Court has seen a steady increase in the number of insolvency proceedings. Whilst major contentious insolvencies, such as those involving the liquidation of Carlyle Capital Corporation Limited or the administration of Propinvest Group Limited, grab much of the attention, there have been a number of less prominent but significant cases being decided over the last 12 months. These decisions assist to further develop the body of law supporting corporate insolvency law in Guernsey and demonstrate the constructive approach taken by the Court in applying the legislation.

Rescission of a winding up order
In Re Muben Investments Limited (unreported, 2 March 2012), the Royal Court held that despite the lack of express provision in the Companies Law, the Court had an inherent customary power to review its own decisions and where appropriate, rescind its own winding up order.
This case arose, in part, from the speed with which a winding up order can be made in Guernsey. Muben had received a statutory demand from a creditor, which it disputed, but failed to take steps to set the demand aside or restrain the debtor presenting an application for winding up. Several months later Muben was served with an application for its winding up at its Guernsey registered office. The application was heard and determined by the Court just three business days later.
Unfortunately, Muben’s directors did not become aware of the application until contacted by the newly appointed liquidator. As Muben was solvent and holding significant assets when placed into liquidation, this created a serious problem for the directors – a problem for which Guernsey law provided no clear answer.
Muben’s shareholder made an application to the court to rescind the winding up order, arguing that despite the lack of an express provision, the Royal Court has an inherent power to review its own decisions. This was established by considering the different history and development of the English and Guernsey courts, noting that until the creation of the Court of Appeal in the late 19th century, the English Chancery Courts exercised the power to review their own decisions.
The Court was satisfied that (unlike the English court) this power of review was not lost on the creation of the Guernsey Court of Appeal, and indeed continues to be exercised through requete civile petitions. The Court was also satisfied that the power ought to be exercised in the circumstances, in particular as the debt of the petitioning creditor had been satisfied, there were no other known creditors and the costs of the liquidator (who did not oppose the application) would be met.

Proof of debt and interim distributions
The decision of Re Letterstone Emerging Europe Fund Limited dealt with two important Guernsey insolvency law issues. These were the provision by creditors of proofs of debt and the ability of liquidators to make interim distributions. Guernsey legislation does not specifically deal with these questions and the decisions made by the Court in Letterstone Emerging Europe Fund will go some way to clarifying them.
In this case, the Royal Court, exercising the directions power under section 426 of the Companies Law, established a mechanism for the payment of interim distributions to creditors in a winding up. This was combined with a court-approved proof of debt procedure by which claims could be notified to, and dealt with by, the liquidator. However, it is important to note that the liquidator’s powers did not extend to finally determining claims – this role remained with a Commissioner appointed by the Court. This meant that the liquidator had to ensure sufficient funds were retained to cover any disputed creditor claims. A key benefit of this direction was that it enabled the liquidator to make a series of interim distributions to creditors.