Vol 13 (2016) - Issue 2

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Pooling of Assets and Liabilities of Insolvent Companies in the Channel Islands

Overview
In his seminal work Principles of Corporate Insolvency Law, Professor Roy Goode notes '[i]f it is only infrequently that English courts will be willing to pierce the corporate veil, it is rarer still to consolidate assets and liabilities; indeed, the only case where this is likely to happen is where the assets and liabilities of the different companies within the group are so intermingled that it is impracticable to separate them'. Such a pooling of assets and liabilities of separate companies, thus piercing the corporate veil, contrasts starkly to one of the most fundamental principles of insolvency law, namely that creditors only share in the assets of the company against which they are entitled to lodge a claim.
Professor Goode goes on to consider briefly corporate groups in the context of international insolvency looking at the procedural consolidation of insolvent corporate groups (i.e. appointing the same office holders, recognition of different sets of foreign insolvency proceedings by courts in different jurisdictions etc) and at substantive consolidation, being 'generally confined to situations in which the assets and liabilities of different companies are so intermingled that there is no sensible alternative to consolidation'. The difference between the two is that procedural consolidation involves a consolidated administration of the insolvency of the group, but will not provide for a pooling of assets, whereas substantive consolidation will.
In linked decisions delivered on 7 September and 7 October 2015 the Royal Courts of Guernsey and Jersey respectively held that where the affairs of two insolvent companies (incorporated in Jersey and Guernsey) are so intermingled that the expense of unravelling them would adversely affect distributions to creditors, it can be appropriate to treat the companies as a single entity.
Having concluded that there was no bar in the legislative framework of Guernsey which would prevent such an application and with the interests of creditors firmly to the fore, the Deputy Bailiff of Guernsey granted a proposal by the Joint Liquidators (from Grant Thornton) to consolidate the assets and liabilities of a Guernsey company with the assets and liabilities of a related, but separate company incorporated in Jersey subject to the sanction of the Jersey Court. The Jersey Court subsequently reached a similar conclusion in terms of its jurisdiction to grant a pooling order notwithstanding that the Jersey company was in a just and equitable winding up and that the proposed pooling would involve a transfer of assets and liabilities from a non-Jersey company.
This is the first time the Guernsey Court has considered and granted such an order, which has allowed a procedure which, on its face, would appear to contradict basic principles i.e. separate legal personality and that creditors can only share in the assets of the company against which they are entitled to lodge a claim. Acknowledging the inevitable rise of cross-jurisdictional corporate insolvencies, the Guernsey Court confirmed the basic purpose of a liquidation was the realisation of a company’s assets for the benefit of its creditors and held that where there was a solution whereby creditors would receive more than they otherwise would, then common sense dictated that such a solution should find favour with the Court. Whilst the Jersey Court has granted a similar application previously in the context of two Jersey companies, it was the first time that an application had considered the pooling of assets and liabilities of a Jersey company with those of a foreign company. Furthermore, it is the first time that such an order has been made in the context of a just and equitable winding up.