01 May 2012
Lenders and LPA Receivers (Guernsey)
Guernsey is considered to be a creditor-friendly jurisdiction for leveraged structures. Many offshore financing and lending transactions involve the use of structures which include Guernsey special purpose companies, and as a consequence security will usually have been obtained over collateral which is situate in Guernsey or held through a Guernsey vehicle.
As the longer-term effects of the global financial crisis are felt, many lenders are encountering situations where either loan-to-value covenants are breached or actual payment default occurs in structures involving Guernsey companies. This note considers some of the enforcement routes available to lenders in these situations and outlines some of the relevant provisions of Guernsey insolvency law.
Security interests over shares in Guernsey companies
Where a lender has obtained security over shares in a Guernsey company as part of a lending transaction and a potential enforcement scenario arises, one of the key questions faced is whether to enforce the security at the Guernsey level (i.e. to sell the Guernsey company with the underlying assets in situ) or whether to enforce security at the level of those underlying assets. The critical factors here will typically include:
whether there is a tax advantage in maintaining the underlying assets in the current structure (this may well impact on the amount realised by the lender at the end of the enforcement process);
the number of creditors of the Guernsey company (other than the lender) and whether those creditors are secured;
the attitude of the borrower (e.g. will the borrower seek to frustrate the enforcement process); and the costs of enforcement at the shares level, as opposed to enforcement by way of a direct sale of the underlying assets.
If the Guernsey company is to be sold, then careful consideration should be given as to i) the future composition of the board of directors of the company and ii) the administration of the company in Guernsey.
Maintaining Guernsey companies
Retaining Guernsey companies with a view to a subsequent sale can assist in maximising proceeds. Even if the eventual outcome is an asset acquisition, the purchaser may have been bidding against parties seeking to buy the company so the price could be higher. Before a decision to retain is made it is however necessary to ascertain if the company is worth keeping. There will be no realistic prospect of a corporate sale if there is evidence that management and control has not been maintained in Guernsey.
An initial review of the company’s minute book will indicate whether the directors have held regular meetings in Guernsey to review performance and whether records have been kept up to date. This review will usually be undertaken by a Guernsey lawyer. If this indicates satisfactory corporate governance then a comprehensive review should be undertaken prior to taking a final decision on retention. Conversely, if there is little or no evidence of corporate governance the company is unlikely to be worth retaining.
A comprehensive file review will provide an accurate synopsis of the state of the company’s corporate governance and the completeness of its financial and legal records. If the evidence is that the company is worth retaining, the lender may decide to transfer administration from the borrower’s administrator and to change the directors to ensure against potential conflicts of interest.
Enforcing Guernsey share security
The Security Interests (Guernsey) Law 1993 (the “1993 Law”) provides that security over shares may be enforced by means of the exercise of a “power of sale or application”. The power of sale or power of application is not exercisable unless the secured party has served written notice on the debtor specifying the relevant event of default.
The secured party is under a duty to take all reasonable steps to ensure that the sale is made within a reasonable time and for a price corresponding to open market value at the time of sale. The 1993 Law is silent as to the manner of the sale – it could include private sale or auction (and there is no restriction on the purchaser being connected to the secured party). The power of application must be exercised on the same basis as the power of sale.
If the company is regulated by the Guernsey Financial Services Commission or there are conditions contained in the consent (if any) issued to the Guernsey company under the Control of Borrowing (Bailiwick of Guernsey) Ordinance, 1959, the consent of that regulator may be required before shares can be transferred.
Upon the sale or application, the proceeds are applied as follows:
costs and expenses of the sale;
discharge of any prior security interest;
discharge of the secured obligations of the secured party exercising the power of sale;
discharge of subsequent ranking security interests; and
return of the balance to the debtor or the appropriate insolvency official.
Use of powers contained in security interest agreements
It may be desirable in some circumstances for a lender to attempt to avail itself of its contractual rights against a distressed debtor in a manner which will not trigger a formal enforcement process. Typically, a Guernsey security interest agreement will contain provisions permitting the secured party to exercise voting rights in respect of the secured shares and/or granting a security power of attorney in favour of the secured party.
Depending on what was agreed at the time of the transaction, these rights/powers may be exercised either at any time or only following the occurrence of an event of default.
It may therefore be possible for a secured party to use these rights/powers to influence the operation of the Guernsey company by replacing some or all of the directors of the company and/or voting to approve or sanction certain transactions. Any director so appointed is likely to require an indemnity from his appointor, particularly if the company is likely to be insolvent or is about to become insolvent.
Impact of insolvency proceedings
The circumstances in which someone may be appointed to take control of a Guernsey company or the assets of a Guernsey company in the event that the company becomes insolvent are:
a. appointment of a liquidator on either a voluntary or compulsory winding up;
b. appointment of an administrator;
c. (upon the moveable property of the company situated in Guernsey being declared “en désastre”; or (
d. upon the issue of a preliminary vesting order under “saisie” proceedings (vesting certain rights and obligations on a judgement creditor) in a debtor’s immoveable property situated in Guernsey followed by an interim vesting order vesting the entirety of a debtor’s reality in the judgement creditor as trustee for all other claimant creditors in the immoveable property of the debtor.
Désastre and saisie are court proceedings which only apply to assets situated in Guernsey. The commencements of such proceedings do not necessarily mean that a company is insolvent. These proceedings are unlikely to be applicable to a Guernsey company unless it has substantial assets or immoveable property in Guernsey and are not covered by this summary.
The Companies (Guernsey) Law, 2008 as amended (the “Companies Law”) empowers the Court to make an administration order in respect of a Guernsey company if the Court is satisfied that the company does not satisfy or is likely to become unable to satisfy the solvency test (the test is deemed satisfied if the company’s assets exceeds its liabilities and the company is able to pay its debts as they fall due), and it considers that the making of an administration order will allow the survival of the company as a going concern or a more advantageous realisation of its assets than would be effected on a winding up.
An administration order may be sought by, amongst others, the company, the directors of the company, any member of the company and any creditor of the company. An administration order is an order directing that during the period for which the order is in force, the affairs, business and property of the company shall be managed by an administrator appointed for the purpose by the Court. The effect of making an administration order is that no resolution may be passed or order made for the company’s winding up and no proceedings may be commenced or continued against the company (without affecting secured rights or rights of set-off), except with the leave of the Court.
The Companies Law makes provision for a Guernsey company to be wound up voluntarily or compulsorily, in either case with a liquidator being appointed to wind up the company. A Guernsey company may be wound up voluntarily by passing a special resolution to that effect. A Guernsey company and any director, member or creditor of the company or any other interested party may apply to the Court to have a Guernsey company compulsorily wound up and a liquidator appointed on the grounds (inter alia) that the Guernsey company is unable to pay its debts and/or the court is of the opinion that is just and equitable that the company should be wound up. The duties of a liquidator are to realise all the assets of the company and discharge its liabilities and having done so, distribute any surplus amongst the members.
Please note that this briefing is only intended to provide a very general overview of the matters to which it relates. It is not intended as legal advice and should not be relied on as such.
© Carey Olsen 2012