Options for Reforming Guernsey s Insolvency Regime

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1 Commerce and Employment States of Guernsey Discussion Paper Options for Reforming Guernsey s Insolvency Regime Purpose and type of consultation The purpose of this discussion paper is to seek feedback from businesses, stakeholders, consumers, industry associations, practitioners and any other interested parties on potential reform of Guernsey s system of commercial insolvency and personal bankruptcy. The Commerce and Employment Department (the Department ) is seeking feedback, comments and suggestions on: A range of policy options for reforming Guernsey s bankruptcy and insolvency regimes, General options for reform of personal bankruptcy, and More detailed proposals on the reform of company insolvency. Closing date: 31 December 2014 The Commerce and Employment (C&E) Board: Would like to invite and receive comments from all interested stakeholders, financial services businesses, customers, and consumers about the proposals outlined in this consultation paper. Aims to work closely with stakeholders and industry to ensure Guernsey adopts the most appropriate reforms to protect and enhance its economy, to ensure equitable outcomes for debtors and creditors and to support the financial services industry. See section 7 How to respond for full details of how to respond to this consultation.

2 Closing Date: 31 December Introduction 1.1 Executive Summary The Department has been considering a comprehensive review of Guernsey s insolvency framework for some time. Revising insolvency law is a substantial project with significant resource implications in terms of officer time in developing the policy, time committed by experts that participate in working groups and provision of feedback on proposals, also in resources necessary to draft the relevant legislation. The purpose of this discussion paper is to seek initial feedback from interested parties and other stakeholders on a range of high level issues which need to be resolved before more detailed proposals can be prepared. In addition to the discussion of those high level issues this paper sets out some more detailed proposals on the reform of corporate insolvency as that is an area which is a priority and where there is general support for a review. Reviewing corporate insolvency is an important issue for the financial services industry and the broader business community in Guernsey. 1.2 Structure of this Paper This paper is structured as follows: Section 2 outlines the process for further developing this policy and future steps (of course, progress will depend on the level of support and feedback received on this paper as well as on the support from the States of Deliberation). Section 3 provides an overview of how advanced economies can benefit from effective insolvency regimes. That section also discusses the current advice from international organisations on effective insolvency regimes and how they can contribute to supporting economic growth through increasing credit and lending. Section 4 discusses some high level policy issues which need to be determined to confirm the direction of travel for insolvency law reform. Included in this is a discussion of whether or not a single legislative regime should be contemplated or whether there should be a separation between commercial and personal insolvency. The questions relating to the reform of personal insolvency are contained in section 4.1; any respondents wishing to comment on the personal insolvency aspects of the reform only should complete that section. Section 5 contains more detailed proposals for reforming corporate insolvency by amending the Companies Law and seeks feedback on those proposals. This section is the first stage in reforming corporate insolvency and the Department expects that there will be further work undertaken with stakeholders as the project progresses and the proposals are finalised. 2 Introduction

3 Commerce and Employment Options for Reforming Guernsey s Insolvency Regime Section 6 sets out a brief summary of the current state of insolvency law in Guernsey. That section is provided to inform discussions and provide the context and background for some of the proposals. It is not intended to be a definitive statement of the current law of Guernsey but may assist those non practitioners who may desire to be involved in this consultation and are seeking information on the current state of the law. Section 7 provides a list of all consultation questions and provides instructions on providing feedback and a response to this consultation. The Department is keen to receive feedback on all aspects of insolvency law from practitioners or any other stakeholder or person with an interest in or experience of insolvency in Guernsey or elsewhere. If you have feedback or comments that go beyond the specific consultation questions the Department would welcome that feedback. 1.3 Background Guernsey s insolvency regime has remained largely unchanged for many years. In the area of personal insolvency there has been no substantial reform for more than half a century; with the regime largely governed by the customary law procedures of désastre and saisie. The corporate and commercial insolvency regime is somewhat more modern with the last significant change occurring with the introduction of the concept of administration into the Companies (Guernsey) Law, The Companies (Guernsey) Law, 2008 ( the Companies Law ) largely adopted the existing insolvency regime, subject to minor amendments which took into account the substantive changes to Guernsey Companies Law. At the time the Companies Law was introduced the Department announced its intention to conduct a more substantial review of Insolvency Law. Effective, equitable and transparent insolvency laws are an essential ingredient in modern economies. By ensuring that creditors have a clear understanding of how to enforce their claims, how a liquidation or bankruptcy would progress, and how all the creditors are likely to be treated the result is that the overall quality of credit in an economy is improved. Effective insolvency laws can also lead to an increase in the flow of credit in an economy as there is greater certainty surrounding the recovery of debts. By ensuring that the affairs of an insolvent debtor can be properly managed, the result is that, creditors are likely to receive a larger, and more equitable, share of the debtor s estate. Unlike the current situation, particularly in personal insolvency, where there can often be a race to recover assets leaving some creditors better off than others. Effective insolvency laws also improve the ability of debtors to obtain credit. By raising the overall quality of credit, and introducing additional forms of security, greater certainty can lead to a greater willingness to lend money by credit providers, thus allowing business access to finance which can facilitate growth. Introduction 3

4 Closing Date: 31 December Background Personal Bankruptcy Effective bankruptcy laws allow debtors to undergo a period of rehabilitation allowing them to make appropriate arrangements with creditors to restructure and repay debts over time. This can result in creditors getting a better return over time by using facilities such as individual voluntary arrangements to restructure payment schedules and allow some debt to be written off. In addition, bankruptcy laws allow debtors to undergo a period of financial rehabilitation where their affairs can be managed by another to maximise recovery for creditors. Once that period has expired, individuals can continue with their financial lives. This lessens the likelihood of undue hardship for debtors, and provides creditors with better means of assessing credit risk and a greater chance of more equitable recovery. An issue in practice with the current arrangements in Guernsey is that individuals do not generally undergo a period of bankruptcy to allow rehabilitation, and instead creditors can continue to pursue debts through recurrent désastre proceedings. This can lead to both a race for assets at the outset with assets being removed from the estate, reducing recovery for other creditors but also to persistent hardship for individuals who are faced with the prospect of repeated désastre proceedings as they rebuild their financial lives. There are bankruptcy laws in place in Guernsey but for a variety of reasons they are rarely used Background Commercial Insolvency Insolvency governs what happens when a business fails. The Global Financial Crisis of 2008 and the subsequent recession that affected most advanced economies had created an increased focus on many jurisdictions insolvency laws. Prior to 2008 a jurisdiction s insolvency law was not a major factor in the decisions on legal domicile by investors and businesses. The world had experienced an unprecedented period of stable and consistent growth and businesses were more concerned with establishment issues rather than exit strategies. However in the new global environment investors are giving greater consideration to exit strategies. It is now an important factor that businesses consider when choosing a domicile. Investors and businesses dislike uncertainty and this is where a clear and effective insolvency regime can bring substantial competitive advantages to a jurisdiction. Having in place a clear, simple and effective insolvency regime is an important aspect of a jurisdiction s legal regime. By revising its insolvency regime, Guernsey can enhance its competitiveness over other jurisdictions by ensuring that in the event that a business, fund, trust, or other financial service product is unsuccessful there is a clear and effective means of resolving that entity and realising the best value for creditors. This will provide important security and certainty for the users of Guernsey s financial services industry as well as the business community in general. 4 Introduction

5 Commerce and Employment Options for Reforming Guernsey s Insolvency Regime 2 The Reform Process, Project Timetable and How to Respond The Department identified the reform of insolvency law as a potential workstream following the implementation of the Companies Law. It has formed a part of the Department s business plan for the past few years, however, resource limitations and other priorities resulted in insolvency law reform not being granted priority until recently. In 2013 the Department established a working group of insolvency practitioners that would be responsible for advising the Department on further reforms. That working group consists of representatives from the legal and accounting professions, as well as officers from the Department and representatives from HM Sheriff s office and the Guernsey Financial Services Commission. This paper has been considered by the working group and represents an initial discussion paper outlining potential areas for further reform. 2.1 Next Steps Given the substantial content of this discussion paper the Department considers that a 10 week consultation period is appropriate. Following that consultation process the Department anticipates that it would be necessary to seek in principle approval from the States for the reform of insolvency law. That initial States Report would cover high level issues such as whether to implement new legislation, the creation of necessary public offices, whether reform of personal and corporate insolvency should progress together or as separate work streams, seeking of approval to prepare the necessary legislation in parallel with the final policy proposals. If approved it is anticipated that there will be further work undertaken with stakeholders on the proposals and draft legislation in order to ensure that there is adequate feedback from stakeholders on the final form of the legislation. Drafting a new and comprehensive insolvency and bankruptcy regime is a significant undertaking and the resource implications, particularly with respect to legislative drafting, should not be underestimated. The Reform Process, Project Timetable and How to Respond 5

6 Closing Date: 31 December How to Respond. The Department invites comments from all interested parties, including insolvency professionals, industry associations, consumer representatives, and members of the public. The closing date for submissions is: 31 December 2014 Responses may be provided in writing, and ed submissions are preferred. Responses should be made to: Alternatively they may be posted to: Insolvency Law Review Attn: Finance Sector Policy Unit Commerce & Employment Department Raymond Falla House P O Box 459 Longue Rue St Martin Guernsey GY1 6AF 6 The Reform Process, Project Timetable and How to Respond

7 Commerce and Employment Options for Reforming Guernsey s Insolvency Regime 3 The Key Attributes and Benefits of Effective Insolvency 3.1 General Objectives of Effective Insolvency It is generally agreed that there are two main objectives of an effective insolvency regime, namely to 1 : 1) allocate risk among participants in a market economy in a predictable, equitable, and transparent manner, and 2) protect and maximise value for the benefit of all interested parties and the economy in general The Allocation of Risk The allocation of risk among market participants is critical to all market based economies. Insolvency law defines who bears the risk of business failure. In order to be effective it must do so in a manner which is predictable and equitable. Market participants must be able to make a judgment on the risk they are taking in a particular transaction. Different countries make different policy choices on who bears the risk in a business failure and those choices are often described as the insolvency regime being creditor friendly or debtor friendly. For example some jurisdictions, such as Guernsey, the UK, Jersey, Isle of Man, Australia and New Zealand, are considered creditor friendly and it is the owners and managers of businesses who bear the risk of failure. In a creditor friendly regime it is the creditors of an insolvent business that are in control and they have the option to liquidate the company regardless of the wishes of the owners and managers of the company. In debtor friendly jurisdictions the owners and managers of the company may have greater control when a business is in financial difficulties. The United States of America is generally considered a debtor friendly country as Chapter 11 of the US bankruptcy code allows a company to seek protection from creditors while the owners and managers restructure the business. This gives the owners and managers the ability to avoid insolvency and maintain control of the business in certain circumstances. In a debtor friendly regime it is the creditors that bear the risk of failure. These are broad categorizations only as all jurisdictions have elements of each. In the USA there are other chapters of the bankruptcy code that deal with liquidations in a similar manner to the UK, while jurisdictions such as the UK have introduced concepts such as administration and Creditor Voluntary Arrangements which allow for businesses to seek protection from creditors while the business is restructured or sold. While useful shorthand, describing a regime as creditor or debtor friendly is not perhaps helpful in accurately describing the process of insolvency in a particular jurisdiction other than in very general terms. The Department has considered the options for reform and has come to the provisional conclusion that Guernsey s insolvency regime should remain broadly consistent with the general approach taken in the UK and therefore would remain consistent with the creditor friendly approach adopted in the past. Although the Department believes that the Administration process will be retained, other restructuring processes, such as Creditor Voluntary Arrangements, may be introduced depending on the feedback received from this consultation process. 1 See IMF working paper on orderly and effective insolvency procedures available at The Key Attributes and Benefits of Effective Insolvency 7

8 Closing Date: 31 December Predictable, Equitable and Transparent Regardless of what overall policy choices are taken it is critical that market participants can properly assess the risks of failure, predict how the courts will apply the insolvency regime, and that the regime will be applied in a transparent and effective manner. These are the key objectives of effective insolvency procedures. At the present time Guernsey s insolvency regime is silent on some issues. Generally where Guernsey Law is silent on an issue the Royal Court will look to the principles set down by jurisdictions with similar legislation. In the case of insolvency law the Guernsey courts will often look to decisions of the English courts as our current insolvency law is based on early UK legislation. The Court will often use its powers as the supervisor of the administration and insolvency process to make orders giving the Administrator or Liquidator the necessary powers to properly deal with the insolvent company. So, despite the fact that there are some gaps in Guernsey s statutory insolvency regime the Royal Court has been able to effectively manage the process and provide for acceptable outcomes. This approach has however led to the need for administrators and liquidators to make more regular applications to Court which adds additional cost and reduces recovery for creditors. The Department believes that having more detailed statutory provisions would increase certainty and reduce cost Maximizing Value As far as the second main objective is concerned, Guernsey s regime is relatively straightforward. The Preferred Debts (Guernsey) Law 1983 is relatively simple and ranks most creditors equally in an insolvency. Nevertheless there are arguably some gaps in the overall regime, of which the Preferred Debts Law is a part, which mean that value in an insolvency may not be maximised. For example there is no ability to register a fixed or floating charge over a company s assets and this creates uncertainty for unsecured creditors as they are unable to assess the level of security held by other creditors when making lending decisions. There is also a need for greater powers to restrict assets being removed in the period leading up to insolvency or claw them back after the event. Introducing a revised modern and effective insolvency regime can increase the quality and availability of credit in an economy and thus foster economic growth. It also allows financial services businesses to better understand and manage the risks to their business. This can facilitate quality credit growth that supports investment in the economy and allows financial services businesses to minimize the deterioration of the value of their assets when recovering debts from insolvent companies and individuals. 8 The Key Attributes and Benefits of Effective Insolvency

9 Commerce and Employment Options for Reforming Guernsey s Insolvency Regime 3.2 International Guidance on Effective Insolvency Laws Unlike financial services regulation, anti money laundering or combatting terrorist financing, there are no generally accepted global minimum standards for insolvency laws as this is primarily an issue of domestic policy for sovereign nations. There are however a range of documents published by international organisations such as the International Monetary Fund (IMF), Organisation for Economic Co Operation and Development (OECD) and the World Bank that are intended to provide guidance and assistance to jurisdictions that are introducing or developing their insolvency regimes. The Department has considered those documents as they represent global best practice. The legislative recommendations made by those international organisations include a set of the key principles which ought to be considered when embarking on a reform of insolvency law. Insolvency law systems should: 1) integrate with a country s broader legal and commercial systems, 2) maximise the value of a firm s assets and recovery by creditors, 3) provide for the efficient liquidation of both non viable businesses and businesses whose liquidation is likely to provide a greater return to creditors as well as reorganization and restructuring of viable businesses that can be resolved and allowed to continue in existence, 4) strike a careful balance between liquidation and reorganisation, that allows for the easy conversion of proceedings from one proceeding to the other, 5) provide for equitable treatment of similarly situated creditors, including similarly situated foreign and domestic creditors, 6) provide for timely, efficient, and impartial resolution of insolvencies, 7) prevent the improper use of the insolvency system for other purposes, 8) prevent the premature dismemberment of a debtor s assets by individual creditors seeking quick judgments thus preserving assets and ensuring equitable recovery for all creditors, 9) provide for a transparent procedure that contains, and consistently applies, clear risk allocation rules and incentives for gathering and dispensing information to creditors and shareholders as appropriate, 10) recognise existing creditor rights and respect the priority of claims with a predictable and established process, and 11) establish a framework for cross border insolvencies with recognition of foreign proceedings. The Key Attributes and Benefits of Effective Insolvency 9

10 Closing Date: 31 December 2014 The World Bank in its guidance for jurisdictions recommends that jurisdictions implement insolvency regimes that contain the following features: 1) There should be clearly defined rules for taking security over real and personal property, ideally with a system of registration for those security interests such as registration of mortgages, charges and other forms of security where appropriate, 2) There should be a clear and effective system of enforcing debts, 3) The legislative framework should enable and support corporate workouts and restructurings designed to restore an enterprise to financial viability where possible. It may also be advantageous to allow informal workout processes such as voluntary negotiation or restructuring, 4) Insolvency systems should effectively protect the rights of parties in proceedings by ensuring that due process is applied. This involves ensuring that all the parties have proper notice and a right to be heard on disputes and can be afforded sufficient information to protect their rights and efficiently resolve disputes, 5) Access to the insolvency systems should be efficient and cost effective and both debtors and creditors should be entitled to apply for insolvency proceedings, 6) The insolvency regime should provide for an effective moratorium that provides a clearly defined period where the unauthorized disposition of the debtor s assets is prohibited and suspends all actions by creditors to enforce their rights or remedies, 7) Insolvency proceedings should be managed by appropriately skilled and experienced insolvency representatives, 8) Insolvency Law should provide for appropriate representations of creditors through creditors committees or other effective means of ensuring that creditor s interests are recognised, 9) Once insolvency proceedings commence there should be a means of taking prompt and effective measures to preserve and protect the insolvent estate and the debtor s business, 10) The regime should allow interference with the performance of contractual obligations which may be continuation, rejection or assignment of contracts where appropriate, 11) It should be possible to avoid antecedent transactions in clearly defined circumstances to prevent the dissipation of the insolvent estate and avoid any preferential payments to specific creditors, 12) The regime should allow for the rights of creditors and the priorities of claims to be established quickly and promptly, 13) There should be an effective regime for the quick and easy reorganization and restructuring of a debtor s affairs that allows for fair negotiation and approval by the majority of creditors, 10 The Key Attributes and Benefits of Effective Insolvency

11 Commerce and Employment Options for Reforming Guernsey s Insolvency Regime 14) Insolvency procedures should take into consideration international issues, treat foreign creditors equally with domestic creditors and properly recognise foreign insolvency procedures, and provide a framework for managing cross border insolvency issues, 15) Insolvency procedures should be overseen by an independent and impartial judiciary that has the necessary skills and competence to manage the business effectively. In preparing this discussion paper the Department has considered these overarching principles and issues and attempted to develop general policy and specific proposals that are broadly consistent with best practice as identified by international organisations, which also reflects the particular needs of Guernsey. Many of the necessary elements are already in existence in Guernsey, others do exist but the Department believes that they require modernisation and amendment to maximise effectiveness. The Key Attributes and Benefits of Effective Insolvency 11

12 Closing Date: 31 December General policy issues 4.1 Reform of Personal Bankruptcy Personal bankruptcy law in Guernsey is largely based on a combination of long established customary law procedures and some longstanding legislation. To date, the Department has received less feedback from stakeholders, practitioners and the community on the various issues surrounding personal bankruptcy law, whilst there has been considerable comment from the financial services industry on the corporate and commercial regime. Accordingly, whilst the Department has received feedback that reform of certain aspects of the personal insolvency regime would be desirable, this part of the project is at a different stage in the policy formulation process. There are fewer specific recommendations and the Department is in the process of gathering information to understand the issues and formulate the best approach to reform. Accordingly this section of the Discussion Paper seeks more general high level feedback and has fewer detailed proposals Désastre The Department does not believe that it is necessary to make any changes to désastre at the present time. Désastre is an effective method of enforcing judgments of the Royal Court. Whilst it does perform some functions of insolvency law, it is not purely an insolvency process and is more an effective means of enforcing court judgments in a quick and cost effective manner. The Department is not convinced that substantial change to désastre would be of significant benefit as it is generally a quick and cost effective means of enforcing judgments. The Department is however interested in receiving feedback from interested parties on whether this approach is the correct one and whether there may be merit in reforming or codifying aspects of désastre, as for example has occurred in Jersey. Practical experience with désastre proceedings has provided examples of where insolvency law reform is necessary, although these are less a reflection of the adequacy of désastre but instead examples of issues with the broader personal bankruptcy regime. For example it is often the case that when HM Sheriff attends a place of business to enforce a judgment there may be insufficient assets available to meet that judgment as the assets may have been transferred, subject to some form of security, or be assets necessary to enable the debtor to make a living such as tools of trade, etc. The result of this is often that the judgment cannot be satisfied. This indicates that it may be appropriate to introduce some form of statutory bankruptcy regime that would operate in parallel with désastre to allow for relevant assets to be preserved, thus maximising recovery Saisie Saisie is another area where the Department does not, at this stage, believe that fundamental reform is necessary. Saisie applies to real property and is considered to be a generally effective means of realising and distributing a debtor s real property. Saisie proceedings are more complex than désastre proceedings as they involve real rather than personal property. 12 General policy issues

13 Commerce and Employment Options for Reforming Guernsey s Insolvency Regime Issues Common to Désastre and Saisie Both of these customary law procedures are reasonably effective at realising assets and distributing those assets to creditors. To that extent they do perform some of the functions of insolvency law. However, there are aspects of insolvency law which are absent from these customary law procedures. For example they do not offer the ability to return a debtor to solvency through entering into a compromise with creditors. Essentially once it has reached the stage of désastre or saisie the only option is the liquidation of assets. There is also no capacity for a debtor to undergo some form of rehabilitation. This is particularly the case with désastre in that if désastre proceedings fail to realise sufficient assets to meet all the potential liabilities there is nothing to prevent creditors biding their time and instituting further désastre proceedings at some future stage. Question 1: Do you have any comments on how effective désastre proceedings are, and are there any areas where this procedure should be altered? Question 2: Do you have any comments on how effective saisie proceedings are, and are there any areas where this procedure should be altered? Loi ayant rapport aux débiteurs et à la renonciation The only Guernsey personal bankruptcy procedure entirely governed by statute is found in the Loi ayant rapport aux débiteurs et à la renonciation and the Ordonnance relative a la renonciation of 1929 ( the 1929 procedure ). These statutory provisions permit an application to be made to the Royal Court for a declaration of bankruptcy and are the closest equivalent in Guernsey to the English concept of bankruptcy, with the potential for the debtor eventually to be discharged from his liabilities after the realisation and distribution of his assets. This legislation has been in existence for many years but is rarely used, and very few applications have been made for relief under this regime. The reasons why it is not used more often are not entirely clear as the law does contain a range of provisions that provide for effective bankruptcy and eventual discharge. Conventional wisdom is that the procedures in the renunciation laws are complicated and expensive and it appears that this is the primary reason why the procedure is rarely used. The Department would like to understand why the 1929 procedure is not used to examine whether it can be amended to make it more effective and attractive to debtors or whether it should simply be repealed and replaced with modern legislation based on bankruptcy in other jurisdictions. Question 3: Do you have any personal or professional experience of the 1929 procedure and or applications made under that legislation? If so, the Department would welcome your comments and feedback on the regime generally. Question 4: Should the 1929 legislation be retained, amended or repealed and replaced? Question 5: If it is to be retained or amended please explain how the legislation can be improved and made more effective. Question 6: If you think that the 1929 legislation should be repealed and replaced, what key features do you think should be present in a new Law? General policy issues 13

14 Closing Date: 31 December Possible Additions to the Personal Bankruptcy Regime The fact that the personal bankruptcy regime is fairly rudimentary means that there is scope for improvement by the addition of a relatively small number of new procedures and rules. For example the introduction of a low value debt relief order, as is currently being considered in Jersey, and some form of individual voluntary arrangements which might provide alternatives to bankruptcy Low value debt relief order Some jurisdictions have a special procedure for cases where a person of very limited means can apply to have certain debts frozen and then written off after a period of time. There are typically strict limits on the total amount of debt and the kind of debts that can be subject to the order and very strict limits on the amount of assets and income a person may have before they are eligible to apply for an order, as well as requirements that a person has lived in the jurisdiction for a minimum period of time and has not previously applied for an order in the last few years. In the UK, a Debt Relief Order serves this purpose. In Jersey, the Chief Minister s Department is consulting on introducing an equivalent process called a Viscount s Remission Order. The introduction of such a process would allow those of very limited means to be able to seek some form of rehabilitation period. It would also avoid the prospect of repeated désastre applications seeking to enforce relatively small debts. This would provide social benefits as it allows those with very limited incomes a means of managing excessive debt burdens. The proposals in Jersey are that an individual would be entitled to apply for a Viscounts Remission Order if: The total debts do not exceed 25,000, They do not own a motor vehicle worth more than 2,000, They do not possess other assets exceeding 5,000, Their disposable income does not exceed 100 per month (after deduction of tax, social security and normal household expenses) Once granted the debts would be frozen for a period of 12 months following which the individual will be discharged from all qualifying debts since the application. More information on the Jersey proposals are available at: and administration/c Download Social Desastre consultation document LO.pdf This would provide a degree of protection for the least well off in society. Question 7: Do you think there is a need for a low value debt relief process in Guernsey? Question 8: Should the Department consider proposals along the lines of those under consideration in Jersey or are there alternatives that might be better suited to the situation in Guernsey? 14 General policy issues

15 Commerce and Employment Options for Reforming Guernsey s Insolvency Regime Individual Voluntary Arrangement ( IVA ) Procedure Another potentially useful tool is the introduction of some form of voluntary arrangement such as that which exists in England and Wales. Part VIII of the UK Insolvency Act 1986 provides a statutory framework for an IVA as an alternative to bankruptcy. Essentially, an IVA allows an individual debtor to enter into an agreement, with the approval of 75% of their creditors, to make a single monthly payment to creditors through an insolvency practitioner (or trustee in bankruptcy) towards the discharge of their debts for a fixed period of time. At the end of the period of the agreement, they will be freed from their liabilities without many of the adverse consequences of bankruptcy. The attraction for creditors is that they are likely to recover a greater percentage of the debt than they would through bankruptcy proceedings where the debtor s assets are insufficient to meet their liabilities due to the additional time that the debtor is given to make repayments. For the debtor it allows them to consolidate debts and repay them over a different timescale, and avoid a declaration of bankruptcy. The IVA process is widely used In England and Wales; there were 46,694 IVAs to the end of This is therefore a very widely used procedure and a similar procedure could potentially be a valuable addition to our personal insolvency law. Question 9: Do you agree that a simple statutory scheme based on the concept of the UK IVA procedure would be a valuable addition to Guernsey s personal insolvency law? Other Potential Additions or Amendments Certain features of bankruptcy legislation found in other jurisdictions are not found in Guernsey s current personal insolvency procedures: There could be a procedure for allowing a bankrupt s affairs to be managed by a professional trustee for a period of, say, 3 5 years following which the bankrupt can be discharged from bankruptcy and manage his or her own affairs again. There is no public bankruptcy register that records when an individual has sought bankruptcy protection. This makes it difficult for creditors to properly determine whether a person is credit worthy, There is no general restriction on activities of undischarged bankrupts e.g. obtaining of credit, holding of company directorships, although some Guernsey legislation does restrict the ability of bankrupt individuals to hold certain positions, The Department would also be interested in hearing from all interested parties on whether there are any other issues that ought to be considered in the reform of Guernsey s personal insolvency law regime. Question 10: Should any or all of the above features be introduced into Guernsey Law? Question 11: What are your views on introducing a simple personal bankruptcy regime based on the UK Insolvency Act 1986? Question 12: Are there other more appropriate jurisdictions that Guernsey could look to for useful precedents for bankruptcy legislation? Question 13: What other features should the Department consider in addition to those listed above? How would your suggestions further improve Guernsey s personal insolvency regime? General policy issues 15

16 Closing Date: 31 December Reform of Commercial Insolvency When it comes to commercial insolvency there is a more comprehensive regime for companies as well as various and diverse regimes for other legal entities. The general approach when drafting legislation has been to include insolvency provisions within each piece of legislation that creates a legal entity. For example the Companies Law deals with the insolvency of Guernsey companies, whiles the Limited Partnerships (Guernsey) Law, 1995 has a regime for Limited Partnerships. This reflects policy decisions taken by the States as they have developed and introduced Guernsey s commercial law framework. However this has led to a situation where there are different commercial insolvency procedures depending entirely on the particular entity in question. There is no reason why the liquidation of a limited partnership with legal personality should follow an entirely different process than the liquidation of a company. Both are legal entities which hold assets and can carry on business and there is therefore an argument that they should be subject to the same insolvency laws Companies Law The Companies Law regime is the most advanced and comprehensive insolvency regime in Guernsey. However, there are still a range of areas which could be further developed to minimise the need for insolvency practitioners having to seek the guidance and approval of the Courts throughout the winding up process. Section 5 sets out more detailed discussion surrounding potential changes to the Companies Law insolvency regime as this is the area where the Department is most advanced in its consideration of reform Other legislation There is a range of commercial legislation in Guernsey each of which has its own, albeit limited, insolvency regime. These are contained in the Limited Partnerships (Guernsey) Law, 1995 the Partnerships (Guernsey) Law 1995, the Foundations (Guernsey Law), 2012 and the Limited Liability Partnerships (Guernsey) Law, Each of these has a separate regime governing the insolvency of each entity. The legislation is concise and provides relatively little guidance by way of rules and procedure to establish how an entity should be wound up if it is insolvent. Even though the provisions in these various laws are relatively brief it must also be acknowledged that this has not appeared to create significant difficulties for the island s financial services industry. There have been few occasions when these types of entities have been placed into insolvency and it may be the case that the current regime is all that is necessary. However on balance at the present time the Department considers that it may be beneficial to provide more detail in the legislation on how these entities are to be dealt with in an insolvency. That could potentially be achieved in a number of ways: a separate comprehensive insolvency law covering all entities; amendment to all legislation inserting common insolvency provisions; or amendment to the Companies Law extending that regime to those other legal entities, with relevant modifications given their specific nature. Question 14: Have you had any experience in working with the insolvency provisions in the Partnerships, Limited Partnerships, Foundations or Limited Liability Partnerships Laws? What has been your experience and do you consider those regimes generally effective? Question 15: What reforms, if any, do you consider necessary to these insolvency regimes? Question 16: If you consider the current regime which covers these entities to be sufficient, why do you consider that reform is unnecessary? 16 General policy issues

17 Commerce and Employment Options for Reforming Guernsey s Insolvency Regime Single or Separate Regimes Option 1 The Department is keen to seek feedback on the potential merit of creating a single piece of legislation dealing with insolvency generally. A single insolvency law could include provisions dealing with personal insolvency as well as all forms of commercial insolvency. Many jurisdictions have taken the approach of creating comprehensive insolvency legislation that covers all entities and individuals. The United Kingdom has a single Insolvency Act that deals with legal entities and natural persons. Even though the UK has a single Act, it does not in fact have a single insolvency regime. The Insolvency Act contains separate regimes for individuals and legal persons. The treatment of bankrupt individuals is necessarily different from insolvent companies and other legal entities. Individuals still require sufficient funds to pay for their basic needs and an object of bankruptcy proceedings is to facilitate the financial rehabilitation of individuals. Accordingly the bankruptcy process is about realising assets to repay debts but also about providing sufficient financial resources to ensure the bankrupt can meet his or her basic necessities. After a period of time, usually 3 years, the bankrupt is discharged and can then resume managing his or her own financial affairs. When it comes to companies and other legal entities, while there are provisions for rehabilitation such as administration, the goal of the insolvency process is to maximise the value of assets that can be recovered from the legal entity (and then to end its legal existence). Commercial insolvency does not have to consider the interests of the debtor and is far more focused on realising maximum value for the creditors of the legal entity. What this effectively means is that a single insolvency law still requires the development of two distinct processes within a single piece of legislation. Choosing to implement a single legal framework for insolvency will not necessarily result in delivering legislation sooner or creating a less complex system than the alternative of separate legislation. Option 2 Another potential option is to separate personal and commercial insolvency laws, but deal with the insolvency of all forms of commercial legal entities in one piece of legislation. This could either be a new piece of legislation or through extension of a Companies Law regime to other legal entities with necessary modifications. Option 3 At the opposite end of the scale, an alternative is to leave corporate insolvency, provisions relating to other legal entities and personal bankruptcy in various separate pieces of legislation. Usually this involves creating standalone bankruptcy legislation and including provisions on corporate and commercial insolvency in the legislation governing each entity. This is the approach that Guernsey has taken in the past and is also used in many other common law jurisdictions such as Australia and New Zealand. For Guernsey there are advantages and disadvantages of each alternative. The advantages and disadvantages of these are listed in the tables below. General policy issues 17

18 Closing Date: 31 December 2014 Option 1 developing a single insolvency law are: Advantage Single comprehensive legislation which would be readily accessible to practitioners. Some savings in overall legislative drafting time as there could be some common processes. Could be modelled on the UK Insolvency Act providing a useful source of precedent and judicial consideration. This would also be familiar to users of Guernsey s financial services industry as there is general familiarity with the UK insolvency regime. Disadvantage Substantial drafting effort as this would be a very significant undertaking. It would be necessary to progress corporate and personal insolvency in unison which may lead to a delay in the implementation of corporate insolvency reform. Would require a Projet de Loi and Privy Council approval which would add to legislative timetable. For Options 2 and 3, which involve separate legislative regimes the advantages and disadvantages are: Advantages The Companies Law contains an enabling provision permitting amendment to the insolvency provisions. Therefore a reformed corporate insolvency provision could be implemented by Ordinance. Commercial insolvency can be developed and introduced faster without having to wait for personal bankruptcy provisions to be further developed. The financial services industry is already familiar with the fact that the insolvency and personal bankruptcy laws are separate and distinct. Disadvantages Given that there are limited resources available for drafting there is the risk that reform of the personal bankruptcy regime may be delayed. It would still be necessary for a Projet de Loi to be submitted implementing any substantive reforms to the legislation governing other commercial entities. There may be a need to duplicate some key concepts in the insolvency and the bankruptcy regimes resulting in more legislation that might otherwise be necessary. Over time there is a risk of the legislative regimes becoming more disparate and it may be more difficult to keep the legislation internally consistent. Question 17: Please explain which option you would prefer; a single insolvency law, separate personal and commercial insolvency laws or separate personal, company and other insolvency provisions. Question 18: Do you consider there to be any particular advantage or disadvantage which makes you prefer one option over the other? Please explain why that advantage or disadvantage is material. 18 General policy issues

19 Commerce and Employment Options for Reforming Guernsey s Insolvency Regime Rules Insolvency law is highly procedural in nature. It is common practice for jurisdictions to enact primary legislation that sets out the substantive law relating to insolvency. That primary legislation usually allows for the publication of rules that govern the procedural issues associated with the primary legislation. This allows for procedural issues to be dealt with swiftly through delegated legislation and/or rules which then allow the procedural issues to evolve more swiftly as circumstances change. This has the advantage of ensuring that the process and procedure of insolvency can evolve relatively quickly, however in most jurisdictions it does involve the establishment of a rules committee charged with developing and adjusting the rules over time. Some of the matters that could potentially be dealt with via insolvency rules include: Court procedure and practice such as filing of applications, directions, service of documents, etc, The way in which creditors meetings should be called and run including issues such as notice periods and the establishment of creditors committees, Proving debts, setting aside statutory demands, and quantification of claims, Qualifications for appointment as a liquidator, how liquidators are remunerated and supervised by the Court, Procedures for the investigation of an insolvent company or bankrupt person s affairs such as the form of statements of affairs, examination of accounts and assessment of assets, The manner in which a bankrupt s affairs can be managed by a trustee or official receiver, Procedures for seeking an early discharge from bankruptcy, Publication of standard forms to be used during bankruptcy and insolvency procedures. The Department does not at present have a view on whether insolvency rules are necessary or appropriate for Guernsey and seeks the views and feedback of stakeholders on this issue. It may be appropriate to develop a legislative regime and then allow the Royal Court to develop such rules and procedures as it considers necessary to properly administer the regime separately. This may also allow greater flexibility for practitioners, although it is possible that that rules issued under primary legislation could provide greater certainty and clarity. Question 19: Do you consider that the development of insolvency rules would be necessary and appropriate in the Guernsey context? Question 20: Apart from the issues indicated in 4.2.4, are there any other issues that ought to be dealt with through insolvency rules rather than in the primary legislation? General policy issues 19

20 Closing Date: 31 December Creating an Official Receiver Many jurisdictions create a public office charged with overseeing the insolvency regime. This role is sometimes known as an Official Receiver. In the UK Official Receivers are employees of the Insolvency Service whilst in Jersey the Viscount s office performs similar functions. An Official Receiver ordinarily has a range of functions including: An Official Receiver is entitled to appear at all applications for winding up and bankruptcy orders. This allows the Official Receiver to oversee the appointment of liquidators, intervene in an insolvency in the public interest, and act as a form of independent oversight for insolvency practitioners, Acting as a liquidator of last resort for companies that have insufficient assets to cover the costs of appointing a professional liquidator. Essentially the Official Receiver conducts an investigation into the relevant assets and liabilities, and winds the company up in a relatively short period. Given that the company has insufficient assets to cover the costs of liquidation it would be necessary for the Official Liquidator to have access to alternative funding to fulfil this function, Working with insolvency practitioners to understand the reason for business failure and over time recommending changes to the Law as appropriate or taking other action where necessary. For example in many jurisdictions liquidators are required to prepare a report on the reason for a company s failure; it may be for business reasons or alternatively because of misconduct on behalf of the directors or officers of the company, Taking action to disqualify directors that have failed to properly meet their responsibilities when such action is justified by the liquidators report, Maintaining a register of bankrupt individuals, Overseeing bankruptcy trustees who may be managing the affairs of individuals who are subject to bankruptcy orders, Administering regimes such as Individual Voluntary Arrangements or Low Value Debt Relief Orders, Assisting overseas authorities with information where there are cross border insolvency issues. The Department does not at present have a view on whether it is necessary to create an Official Receiver or equivalent. It is a common feature of many insolvency regimes but is an office that has not been obviously necessary in Guernsey to date, although it is possible that may reflect existing insolvency law rather than any lack of demand. HM Sherriff s office performs some of the functions commonly performed by an official receiver and it may be possible to expand that role rather than create an entirely new public office. 20 General policy issues

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