The Regulations provide additional powers to a company’s creditors – firstly, in relation to provisional liquidations (an emergency procedure designed to safeguard the assets of a failing company), and secondly in relation to creditors’ winding-ups.
Provisional liquidations
In simple terms, a provisional liquidation is an emergency insolvency procedure whereby – prior to the commencement of formal insolvency proceedings – the court appoints a liquidator to preserve a company’s assets in order to maximise any future payments to its creditors. Under the Regulations, and in line with equivalent provisions of English law, a successful applicant must demonstrate that there is a real risk of dissipation of assets, or of the destruction of the books and records of the company. At the time of writing, no such applications have been made in Jersey, but it is expected that provisional liquidations will prove to be a useful addition to the restructuring and insolvency framework, particularly in contentious restructuring schemes.
Creditors’ winding-ups
The Regulations also introduced further provisions in relation to creditors’ winding-ups. In order to apply to commence a creditors’ winding up of a Jersey company under these provisions, a creditor must be able to demonstrate that the debtor company is (a) insolvent on a cash flow basis and (b) that the creditor has a claim against the debtor for an amount which exceeds £3,000.
Recent developments
Unlike those relating to provisional liquidations, these provisions have been considered by the Jersey courts, notably by the Court of Appeal in Representation of HWA 555 Owners, LLC (the HWA Case). Prior to the HWA case, it had been understood that the requirement to have a claim in excess of £3,000 meant that only a creditor with a liquidated (i.e. non—contingent) claim was able to instigate an insolvent winding up of a Jersey company. It was always understood that a creditor with a contingent claim (a claim that is conditional on the occurrence of a certain event) could only prove that claim once insolvency procedures had commenced.
The HWA case
The facts in the HWA Case concerned a series of applications in relation to a Jersey company which had guaranteed certain of its parent company’s debts. The insolvency of the parent company was not in dispute, nor was the liability of its subsidiary under the guarantee, and the sums involved far exceeded the amount of the minimum liquidated claim (£3,000).
The Court of Appeal in the HWA case concluded that the court does in fact have jurisdiction to consider applications from creditors with contingent claims who satisfied certain other criteria. The test set out by the Court of Appeal in the HWA Case is that the court must be satisfied (on the balance of probabilities) that “the value of the claim, whatever it ultimately turns out to be, must exceed £3,000″ (emphasis added).
In considering of what an appropriate contingent claim may consist, the Court of Appeal provided the example of a personal injury claim against a company, where the value of compensation remained to be assessed but in light of the severity of the injury in question damages would – in all probability – exceed £3,000. Conversely, claims which are subject to an arguable defence or counterclaim are not likely to meet the required burden of proof. In the HWA Case, the claim under the guarantee (a contingent liability) was not disputed, and as such the creditor had standing to apply for the winding-up of the company.
The HWA Case is relatively new case law, and has yet to be considered further by the Jersey courts (it should also be noted that the Court of Appeal’s judgment was not unanimous, and subject to a dissenting judgment which, whilst not disputing that the creditor could bring a claim, held that it could only be brought on narrower grounds than those approved by the majority.
As a judgment of the Court of Appeal, the HWA Case is binding on the Jersey’s lower courts. The HWA Case was subject to a settlement agreement between the parties and will not itself be subject to appeal.
Pending appeals in future cases or further legislative changes in Jersey, the HWA Case reflects the current law of Jersey in relation to the standing of contingent creditors in insolvency proceedings. Provided a creditor can demonstrate on the balance of probabilities that a contingent claim when determined will exceed £3,000 and that the debtor is insolvent, a contingent claim which is not subject to an arguable defence or counterclaim will be sufficient to form the basis of an application to court for a creditors’ winding up or a declaration that the company is insolvent.
Consideration for Jersey companies and their advisors
Discussions between clients and advisors in relation to potential insolvency proceedings should take account of the HWA Case, and consideration will need to be given to contingent liabilities, particularly those which are not in dispute, when considering strategy.
Aside from the HWA Case itself, we do not currently have any authority as to the approach that the Jersey courts may take, but in closing his judgment in the HWA Case, the President of the Court of Appeal noted that:
“In my judgment, the Royal Court can be trusted to reach a sound conclusion as to whether an unliquidated claim has a value over a prescribed amount; and the unliquidated nature of the claim, if it goes to lack of certainty as to whether there is in fact a debt at all, is a factor which the court will, as in the past, take into account in rejecting the application for a désastre.”
The Jersey courts have a long history of respecting the rights of creditors in insolvency proceedings, and of upholding the rights of secured creditors. It is therefore reasonable to expect developments in this area to proceed with caution and for the courts to consider each case on its facts. This is a developing area of the law of Jersey and one to watch with interest.
This article was first published in Jersey First For Finance, September 2024.
