Offshore restructuring and insolvency in the Channel Islands
August 2012 | 10QUESTIONS | BANKRUPTCY & RESTRUCTURING
FW speaks with Alex Adam, senior manager of Restructuring, Forensic and Regulatory Services at Deloitte, about offshore restructuring and insolvency in the Channel Islands.
FW: What impact has the financial crisis had on the Channel Islands economies?
Adam: Guernsey and Jersey have been impacted along with the rest of the global economy as the legacy of the over-indebtedness and subsequent collapse in demand work their way through the system. That said, the islands’ economies have remained relatively robust and indeed have continued to grow in many sectors. While there has been an increase in unemployment impacting on all industries including financial services absolute levels are still low and government is focused on facilitating opportunities for growth. Both islands have a significant number of property investment structures which are heavily geared and in breach of lending covenants.
FW: How has the restructuring and insolvency market responded to that over the last 12-18 months?
Adam: There has been an increase in financial stress within both local trading businesses dealing with reduced consumer demand and within international finance structures. For the financial structures such as investment funds, underlying situations of insolvency can continue to trade through continuing bank support in the expectation that asset values will recover. However, as the markets continue to stagnate in many areas, these expectations are being revealed as hopeful at best. Banks have also come under increased pressure to deal with bad assets, shrink balance sheets and increase capital reserve ratios. In combination, these factors have led banks to seek to take control of structures. Debtor boards are also increasingly seeing the value of advice in relation to protecting their position if continuing to trade whilst insolvent. The insolvency market has responded to this increased demand by expanding the pool of qualified and experienced insolvency specialists able to serve the complex needs of clients. Many of these individuals have relocated from other jurisdictions, especially the UK.
FW: Are there any other drivers of restructuring and insolvency in the islands?
Adam: In addition to the direct results of economic difficulties and over leverage, there are other drivers of restructuring activity in the islands. Regulatory issues have led to the appointment of insolvency professionals to assist in the protection of customers or ensure that regulated entities’ business conduct is supervised in accordance with the Regulatory laws. Another driver of restructuring and insolvency is increased litigation where significant losses can arise and lead to financial distress. Additionally, investors may seek to appoint a practitioner to take control of a structure which has been conducted improperly to realise the remaining assets and pursue the directors or investment manager to augment the estate and recover lost funds.
FW: What restructuring and insolvency options are available in Guernsey and Jersey?
Adam: Within Guernsey, there are two main options: administration and liquidation, with liquidations being either voluntary or compulsory. Administration provides for the continuation of the company’s business for rescue, or to achieve a better result for creditors than would be likely under liquidation. During administration there is a moratorium on actions against the company including any application for liquidation. Voluntary liquidation is initiated by the board and the shareholders. There is no express requirement for the company to be solvent. Compulsory liquidation is a court procedure and application can be made by creditors, the company, directors, members, the regulator or interested parties on a number of grounds. Within Jersey there are also two main options, winding up and désastre (bankruptcy). There are three forms of winding up: summary, creditors, and just and equitable. Summary winding up requires the directors to swear that the company can pay its debts within six months. A creditors winding up applies where the directors cannot make such a statement. Winding up applications on just and equitable grounds can be made by the company, director, shareholders, or regulatory bodies, but creditors cannot make such applications. The court has wide discretion to direct the conduct of the winding up and can allow the liquidator to continue the business where appropriate. A désastre offers the only formal procedure available to creditors in Jersey. A judgement creditor can also pursue a degrevement over individual properties of the debtor where the property is ‘taken’ from the debtor.
FW: How would you describe the development of insolvency legislation in the Channel Islands?
Adam: In Guernsey the 2008 Company law significantly enhanced the insolvency options on the island. The introduction of an administration regime was a major development which has been used extensively and to good effect. A detailed body of insolvency rules has not developed on the island, and practitioners and creditors must instead rely on the small body of insolvency legislation and case law. In Jersey, the désastre and winding up provisions have been in place for a significant period of time and no immediate changes to legislation are expected. Developments are restricted to case judgements. Of particular note is the broadening use of just and equitable applications, and grounds for winding up. We expect that Guernsey will undertake a review of its insolvency regime which may lead to additional codification of matters currently referred to court including, for example, interim distributions and provisions to carry over to liquidation the acts taken in administration. Whilst the position is being considered for review and comparison to other offshore jurisdictions, existing legislation has allowed practical dealing with cases that have emerged to date.
FW: What about recognition of other jurisdictions procedures, is this an option on the islands?
Adam: There is no automatic recognition of overseas procedures in the islands. Neither Jersey nor Guernsey are subject to the European Insolvency Regulations nor have they adopted the UNCITRAL model law. However, both islands’ courts will consider requests for recognition on the merits of the case. There have been a number of instances where Administration procedures have been commenced by English courts in respect of structures established on the islands, either due to a COMI argument or, in the case of Jersey, as a result of a request being made to the English courts by the Jersey Court. This is particularly relevant to Jersey as there is no ‘rescue’ type insolvency procedure available under Jersey law.
FW: Could you outline some of the advantages of restructuring via offshore jurisdictions such as the Channel Islands?
Adam: The islands offer an attractive jurisdiction for conducting a wide variety of sophisticated financial services business. These businesses are supported by high quality corporate service providers, lawyers and accountants. In addition to this, the islands are in close proximity to London and are an important part of the international financial system. For structures established in the islands, these advantages also extend to restructuring. In particular, the presence of experienced practitioners on the islands who understand restructuring and the often complex nature of the businesses being restructured is a key benefit. Furthermore, the islands lack of prescriptive rules has led to a high level of flexibility and pragmatism in the courts. This enables practitioners and creditors to work collaboratively with the courts to reach the most appropriate solutions for the specific circumstances. Restructuring a company offshore with local practitioners should generally maintain the offshore tax residence of the vehicle, which may be important if returns are generated during the procedure. Additionally, distributions out of liquidation are generally treated as capital rather than income in the recipients’ jurisdiction.
FW: Could you explain the role of the regulatory bodies and their impact on proceedings?
Adam: The Guernsey Financial Services Commission (GFSC) and Jersey Financial Services Commission (JFSC) regulate financial services business in the islands. Both have a public interest role to protect the reputation of the islands as financial services centres. In Guernsey, the GFSC must be given notice of applications for administration or compulsory liquidation of financial services businesses and has the right to be heard in court. The GFSC is also able to bring an application to court for an administration order. The GFSC can also apply to court for an administration order to be discharged.
In Jersey, the JFSC has the power to apply to court for a just & equitable winding up order.
In a désastre, the Jersey Viscount is responsible for the conduct of proceedings, taking control of and realising assets before paying dividends to creditors. It is worth noting that insolvency practitioners are not regulated in either island, however it is increasingly the case that the court and creditors consider the formal qualifications of those taking appointments.
FW: In your experience, what challenges may companies face when restructuring in the Channel Islands?
Adam: Due to the relatively small body of insolvency legislation and rules more reference to the court for directions is required. This may afford parties an opportunity to frustrate or delay proceedings. More detailed procedural rules or more frequent publication of written judgments may address this over time. Where creditors or practitioners based in other jurisdictions expect to apply their home procedures to structures being restructured in the islands, the nuances of the court system and the role of the regulators can be overlooked making the process less effective. Early engagement with local practitioners is key to minimising this challenge. Due to the international nature of the structures based in the islands, the assets are frequently located in other jurisdictions. Practitioners need to be able gain control of those assets and utilise asset specialists to effectively realise best value. Those teams with strength in multiple jurisdictions and asset classes have a clear advantage in achieving this.
FW: Finally, are there any recent noteworthy insolvency cases in the Channel Islands? What lessons can we draw from them?
Adam: There are a number of significant insolvency cases in the islands including Landsbanki Guernsey, Carlyle Capital Corporation, Belgravia and Propinvest to name some of the more prominent. Each of these has led to development of the insolvency legislation, however the Landsbanki case in particular provides broader insights. Landsbanki Guernsey entered administration following an application to court by the GFSC to protect the interests of its creditors following the failure of the parent bank. The depositors did not have the benefit of a compensation scheme or government funding. The administrator needed to act to recover funds when the majority of the assets of the entity were represented by amounts owed by the insolvent parent group in a number of other jurisdictions. Due to the scale of the Icelandic banking meltdown and politicisation of the aftermath, there were significant challenges to recovering assets for the depositors. The recovery of very substantial amounts of depositors’ funds represents a good outcome. This was enabled by the effective communication and consultation with depositors through the creditors committee and the pragmatic approach of the court in supporting the office holders’ suggested acts. All of which provides good evidence of the effectiveness of the insolvency regime when it mattered to a large body of retail creditors who were otherwise unprotected.
Alex Adam is senior manager in Restructuring, Forensic and Regulatory Services at Deloitte LLP. He joined Deloitte in 2003 in Guernsey, subsequently transferring to Deloitte’s Corporate Finance practices in London and Shanghai before returning to Guernsey in 2009. Mr Adam’s international experience, combined with his local market expertise, allows him to assist clients across a range of sectors and services. He is a member of the ICAEW and the Association of Business Recovery Professionals (R3) as well as a CFA Charter holder. Mr Adam can be contacted on +44 (0)1481 703214 or by email: firstname.lastname@example.org
© Financier Worldwide