The Novelty of Pre-Packs in Jersey: The Just and Equitable Winding Up Dynamic

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1 The Novelty of Pre-Packs in Jersey: The Just and Equitable Winding Up Dynamic Re Collections Group [2013] JRC 039 (20 May 2013) 1 - Royal Court of Jersey (Samedi Division)/Article 155, Companies (Jersey) Law 1991 (Jersey) A recent case emanating from Jersey has continued what appears to be a trend of using the just and equitable winding up provision contained in companies legislation in preference to other winding up and/or bankruptcy procedures available, especially where there is a particular need to consider what may be in the best interests of creditors. In this most recent case, the Jersey court has extended the scope of the just and equitable winding up procedure by sanctioning the initiation of proceedings in order to conduct a pre-pack sale. This is the first time, apparently, that the court has done so in Jersey. Preliminary Note: In Jersey, many modern statutes, particularly in the commercial law arena, are modelled on their equivalents in the United Kingdom. This is certainly the case for corporate law, where Jersey s local statute, the Companies (Jersey) Law 1991, 2 is based on the Companies Act 1985 (United Kingdom). The law contains a Part 21 dealing with the winding up of companies. Access, however, to the procedures of summary (when the company is solvent) or creditors winding up (when the company is not) is predicated on action by the members resolving that a winding up take place. As such, creditors wishing to pursue a remedy are normally confined to customary law bankruptcy procedures, where the adjudication de renunciation (adjudication of renunciation) or désastre (disaster) procedures are the only ones available for them to initiate. 3 The former is an order of the court, obtained at the creditor s behest, determining that, in default of debts being paid or cession générale (general, or voluntary, cession) being applied for by the debtor, the debtor is deemed to have renounced his property. 4 A dégrèvement (discumberment of security) procedure is then used to transmit the debtor s immovable property to whichever of the creditors was prepared to accept it on condition that the creditor would pay off all prior secured claims. Any movable property is disposed of in a parallel procedure called the réalisation (realisation). The désastre procedure, 5 whose function is to safeguard the interests and rights of creditors, involves the Viscount, an officer of the Royal Court, undertaking the role of akin to a trustee in bankruptcy and administering the process by which the debtor s estate is liquidated and distributed to the creditors. 6 Both processes are lengthy and 1 Available via the JLIB website at: < (last viewed 3 June 2013). 2 See, by this author, Company Law Study Guide (2012, Institute of Law Jersey, St Helier), Chapter 19; M. Dunlop, Jersey Company Law (2010, Key Haven Publications, Oxford). 3 See, by this author, Law relating to Security on Movable Property and Bankruptcy Study Guide (2012, Institute of Law Jersey, St Helier), Chapters 8-15; A. Dessain and M. Wilkins, Jersey Insolvency Law and Asset-Tracking (4th ed) (2012, Key Haven Publications, Oxford), Chapter 5. 4 Strictly speaking, a decision of the Royal Court by which the property of a debtor is adjugée renoncée (adjudged renounced). 5 Strictly speaking, a decision of the Royal Court by which the property of a debtor is placed en désastre (in disaster). 6 The office is an ancient one, being mentioned in the Grand Coutumier de Normandie (c ).

2 2 require the creditor to undertake several steps before obtaining satisfaction. 7 In addition, the Viscount s costs may be a considerable charge on the estate in a désastre. 8 In recent years, however, the courts in Jersey have begun to take into account creditors interests within the just and equitable winding up procedure. This procedure, which is also in Part 21 of the companies law, permits winding up on just and equitable grounds or on the grounds of expediency in the public interest. 9 It is available on application to the court made by the company, a director or member of the company, 10 the Minister for Economic Development or the Jersey Financial Services Commission (JFSC). 11 Under this procedure, the court which orders the winding up may also appoint a liquidator and direct the manner in which the winding up is to be conducted. 12 As early as 2002, Re Leveraged Income Fund Limited 13 confirmed, as Article 155 was derived from a United Kingdom provision, 14 the permissibility of having regard to case law from that jurisdiction to guide Jersey courts as to the interpretations placed on the meaning of the words just and equitable, but also stated that modern uses might require a more flexible interpretation. 15 Furthermore, in Re Poundworld, 16 the court established that it must consider what was in the best interests of the creditors and extended the scope of just and equitable to include what was convenient and would expedite the procedure. This had the result of making this type of winding up a possible substitute for the usual creditors winding up procedure, although originally it was only intended as an exceptional procedure for use in problematic cases, such as where the company was being run as a quasi-partnership, 17 where there was deadlock in management, 18 where the company s substratum (fundamental purpose) had gone 19 or where the affairs of the company were being carried out in a way that promoted fraud or misled the members. The court was of the view, however, that insolvent companies should normally be wound up by a creditors winding up and the court should be cautious before ordering a just and equitable winding up in the ordinary case of an insolvent company. In the Poundworld case, it was appropriate to do so, as it was clearly in the 7 Recently, however, in Re Estates and General Developments Limited (in liquidation) [2013] JRC 027, the court permitted a foreign receiver, appointed in the United Kingdom, to take control of and sell the immovable property without applying for an adjudication de renunciation or désastre proceedings on the basis of Article 49, Bankruptcy (Désastre) (Jersey) Law 1990, the local equivalent to section 426, Insolvency Act 1986 (United Kingdom). 8 Note that a creditor can only apply for the désastre of a debtor if there is a liquidated claim of at least 3000 (Rule 2, Bankruptcy (Désastre) (Jersey) Order 2006). 9 Article 155(1), Companies (Jersey) Law Ibid., Article 155(2). 11 Ibid., Article 155(3). 12 Ibid., Article 155(4). 13 Re Leveraged Income Fund Limited [2002] JRC Section 122(1)(g), Insolvency Act 1986 (United Kingdom). 15 Confirmed later in Re Belgravia [2008] JRC 161 and Bisson v Bish 2008 JLR Note Re Poundworld (Jersey) Limited 2009 JLR Note Bisson v Bish, above note 15, applying Ebrahimi v Westbourne Galleries [1973] AC Jean v Murfitt 1996 JLR Note 8c (cf. Re Yenidje Tobacco Co Ltd [1916] Ch 426). 19 Re Leveraged Income Fund Limited, above note 13, applying Re German Date Coffee (1882) 20 Ch D 169.

3 3 best interests of all the creditors for liquidators to be authorized to seek to secure the stock as soon as possible and to continue to trade to dispose of it on a retail basis. 20 Lately, the courts have also extended the just and equitable procedure to instances involving companies carrying out regulated business. In Re Centurion, 21 where the company was licensed to carry on trust company business and, inter alia, managed assets on behalf of third parties held in trusts and companies and had also been the subject of close regulatory attention by the JFSC, the court accepted that a just and equitable winding up was the most appropriate remedy as the company s business clients would have more confidence in such a procedure, which would be used essentially for a managed and orderly transfer of the company s business to a third party. Applying Re Belgravia, 22 a just and equitable winding up was the appropriate way of proceeding for a number of reasons, including the need for flexibility, the avoidance of conflict with the creditors, the need to protect the interests of the investors and the need for the appointment of an appropriately experienced liquidator. 23 The Facts: The group of companies in question were active in the retail trade in Jersey selling ordinary clothing and surfing wear. As a result of poor retail trading conditions, particularly in the last quarter of 2012, the group was in some difficulty and the shareholders had proved unwilling to inject any further investment. The group s bankers were also unwilling to extend the overdraft any further. As a result, the group s employees, some 47 full-time staff and 10 seasonal workers or so, had mostly gone unpaid since the difficulties began. The group also owed substantial liabilities, not just to the banks, but also to their suppliers, landlords and to the Comptroller of Income Tax and others. What stock the companies had was subject for the most part to retention of title clauses and had been substantially discounted for sale. The shelves in the retail outlets were bare and what items remained were at least a season out of date. In addition, there was a dispute with a landlord involving asbestos contamination in one of the retail outlets. All in all, the court accepted the group was in a dire financial situation and that the companies were insolvent on both cash-flow and balance sheet bases. The proposal to the court was brought by the representor, a director of the company, who believed that the companies could be restructured, provided they were able to free themselves from their historic debts and that new investment was forthcoming. In fact, a new private investor had been solicited on the basis that a sum of at least JEP 400,000 would be injected if the business of the group companies could be acquired by a NewCo to be owned jointly by the director and investor. As such, the director proposed that the companies be placed in liquidation and that the liquidators immediately enter into an agreement, a draft of which was produced to the court, and under which the group companies would sell such assets and business as NewCo 20 See also Re Charles Le Quense (1956) Limited [2011] JRC Re Centurion Management Services [2009] JRC Above note Later cases taking a similar view include Re Horizon Investments (Jersey) Limited [2012] JRC 039, Re Horizon Nominees Limited and Re Horizon Corporate Directors Limited [2012] JRC 113 and Re Maltese Holding Limited [2012] JRC 239.

4 4 wished to acquire with the price being met by a consideration 24 equivalent to 20% of the net profits of the acquired business arising within 1 year after the proposed acquisition. A sum equivalent to 25% of net sale proceeds would also be paid if any part of the acquired business were disposed of within the same time-frame. The consideration was estimated as being sufficient to enable payments to be made to the preferential creditors, whether in whole or in part, although there would be no dividend for the ordinary unsecured creditors. The Judgement: The court was mindful of the wide discretion it had in determining what was just and equitable under the law and to decide whether to make the order requested in the case. Citing Re Poundworld, 25 the court reiterated its capacity to order a winding up under Article 155 even in the case of an insolvent company, provided it were satisfied that there was a good reason for doing so, whether this was in the interests of creditors or for some other reason. The court did note the unusual feature of this case, which was the intention to enable the liquidators to enter into an agreement for the sale of the business and/or assets of the group companies to NewCo, in which the representor, an existing director of the group companies, had an interest. This was a type of prepackaged sale the court noted was quite often performed by administrators in the United Kingdom, although the procedure of administration itself did not exist in Jersey. 26 Although in some circumstances the court accepted such a sale may be in the best interests of creditors, given that there was also a potential for abuse, the court noted the Statement of Insolvency Practice No. 16, issued by the Joint Insolvency Committee for England and Wales and, in particular, its dealing with the issue of prepacks by reference to a number of principles contained in its text. Four paragraphs of the document were cited by the court, including paragraph 2 on the duties of practitioners and the associated risks they should bear in mind when conducting such a sale, ideally recording and detailing the reasons for such a sale in order to justify and explain why it was appropriate in the circumstances, and paragraph 5, which requires practitioners to be clear about their role as advisors to the company and not its directors, while the directors should be encouraged to seek independent advice, particularly important if there is a possibility, as in the instant case, of the directors acquiring an interest in the assets subject to a pre-pack. Also cited were paragraph 8, on the need to provide a detailed explanation and justification to unsecured creditors, who are not normally consulted in the sale, so that they can be satisfied the practitioner did have due regard to their position and interests, and 9, on disclosure requirements in relation to the identity of the acquirer as well as any relationship they may have with directors, shareholders or creditors of the company. As it was apparently the first occasion on which the court was invited to consider the possibility of a pre-pack, the court was particularly concerned that it was not being asked to approve a phoenix agreement which would simply continue the beneficial ownership in the assets of the business with the existing creditors being left behind. As the Statement of Insolvency Practice No. 16 viewed this as a highly material 24 Normally called cause in Jersey contract law. 25 Above note Another of the Channel Islands, Guernsey, introduced United Kingdom-style administration in the Companies (Guernsey) Law 2008.

5 5 factor, the court required the representor to confirm the statements in his affidavit, not only that he had no interest in the existing group apart from serving as director, but that the existing beneficial owners would not have any interest in NewCo. That done, the court was satisfied that it would be in the best interests of the creditors to wind up the group companies under Article 155 and for the liquidators to enter into the proposed arrangements. Nonetheless, it was not up to the court to direct the liquidators to enter into the agreement sought, but simply to authorise them to do so. It would fall to the liquidators to assess whether, in their judgment, the terms of the agreement would be in the interests of creditors. Furthermore, because of the lack of notice to creditors in the instant case, the liquidators should pay particular attention to the guidance given in Statement of Insolvency Practice No. 16. In doing this, the court accepted the arguments put forward by counsel for the representor as to the suitability of the proposed course of action, particularly mindful of the fact that: (i) the companies were hopefully insolvent and, without further funds, the directors could not continue business without risking accusations of wrongful trading; (ii) no further funding would be forthcoming from the shareholders or any other source for the existing group; (iii) the employees would be risk with a potential burden on the public purse; (iv) the closure of the activities would be a particular blow to the confidence of the retail sector in Jersey, not to mention leaving shopfronts empty; (v) there would be no dividend likely for any creditor if the businesses closed; (vi) no other procedure would achieve the same purpose as in the instant case because of the time that might elapse before any sale could be agreed. Were the proposal approved, not only would a number of the jobs be saved, about 40 in total, but there was a realistic possibility of a dividend to creditors within a 12-month period. Analysis and Impact: When contrasted with the limitations attached to the other insolvency procedures that might be available, the just and equitable winding up clearly offers the possibility of consideration of the creditors interest, although, paradoxically, the procedure itself cannot be initiated by them. Set in the wider context of the absence of a rescue regime in Jersey law, 27 the way in which the Jersey courts have used the Article 155 facility innovatively shows their capacity to respond to practice developments aimed at offering a wider range of choices and reflection of relevant interests than are available under the current law. The development of a pre-pack jurisdiction under this provision is a particularly innovative step. Pending any review of Jersey insolvency law that may eventually take place, these developments, including making available the prepack, seem to offer the widest choice to enable the restructuring of the debtor s business in appropriate cases. Paul Omar Professor of International and Comparative Insolvency Law, Nottingham Law School 3 June See, by this author, Finding Rescue: Creative Alternatives to the Classic Insolvency Procedures in Jersey (2012) 16 JGLR 248.