18 May 2009
Recent cases in Jersey have highlighted the need for perspective and pragmatism in small jurisdictions, says David Cadin
Flexibility and fairness are crucial in a small jurisdiction, with limited resources and legislation and both of these principals have been used recently in Jersey to deal with new situations.
The Belgravia Financial Services Group comprised a group of companies which acted as fund administrators and managers for certain funds into which third party investors had invested. It had come to the attention of the Jersey Financial Services Commission on the basis of concerns about its management, or rather lack of management and matters came to a head when the States of Jersey Police executed numerous search warrants against the companies and others.
The funds were left in limbo; key members of the Belgravia Group were no longer willing to be involved with the companies and the Belgravia companies were unable to fulfil their responsibilities as managers and administrators of the funds. Investors in the funds, and indeed the Jersey Financial Services Commission, were naturally very concerned.
In September 2008, the Royal Court made orders placing the Belgravia companies into just and equitable winding up, even though it was unclear whether all the companies were insolvent on a cash flow basis. The Royal Court took a broad overview of the situation and its powers. It found that the just and equitable regime was simply that, a procedure to be used when it was right so to do and it was not one that was limited to specific, identified circumstances. Moreover, the fact that some that companies were not insolvent was not a bar to a just and equitable winding up, especially given that in this case, an investigation into the companies and their affairs was required as a matter of urgency. Overlying all of this however were the interests in the investors in the funds which needed to be protected. The only way to achieve this expeditiously was to utilise the just and equitable winding up procedure.
However, there is only one article in the Companies (Jersey) Law (1991) which deals with just and equitable winding up and it does not incorporate any substantive provisions. The court took this as an invitation to incorporate all those provisions that it thought relevant, and indeed, a few more. In particular, having decided that the interests of investors needed to be protected, it incorporated not only other provisions of the Companies Law (and some of those such as a moratorium on claims were intended to be binding even against non-parties) but also additional powers and duties which allowed the Belgravia companies to continue to operate and to manage and administer the funds until a new manager could be found.
This represented something of a departure from previous jurisprudence which had generally viewed insolvency as terminal and simply required the Viscount (or indeed, the liquidator on a creditors’ winding up) to get in the debtor’s assets and to liquidate the insolvent estate for the benefit of creditors as soon as practicable. In the case of the Belgravia companies, bringing the shutters down and crystallising assets and liabilities would not have been in the interests of the investors in the underlying funds. Accordingly, the court took the view that the best way forward was to appoint liquidators under the just and equitable regime and to give them directions to manage the companies and to fulfil contractual responsibilities on an on-going basis.
Whether this is the start of a US-style Chapter 11 regime or UK administration remains to be seen but in the current climate, flexibility in insolvency regimes must be generally beneficial for creditors and others. Indeed, at the beginning of March, the court placed Poundworld, a local retailer, into a just and equitable winding up rather than into a creditors’ winding up to ensure that the company could continue to trade all its remaining stock (thereby maximising the return for creditors) rather than having the items seized and sold by their shipper or landlord.
David Cadin is a partner at Bedell Group