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18 January 2013
The first Guernsey company was formed in 1883. Since that time, the fundamental legal processes in company incorporation have remained largely unchanged. However, it is now proposed to introduce a new company law in Guernsey, modernising the existing law and consolidating the secondary legislation that has augmented The Companies (Guernsey) Law 1994.
Two guiding principles of the new law are: to reduce regulatory requirements and create a simpler and more commercially attractive environment to do business in Guernsey; and to provide an appropriate and comprehensive system of corporate controls and governance.
Clearly, there is some friction between the objectives and the draftsman has sought to balance the two. While the new law will give Guernsey a concise, comprehensive and modern law relating to company matters, it also aims to retain the flexibility that makes offshore jurisdictions so attractive. It will also introduce new concepts to Guernsey that have been adopted to develop and improve the island's companies' law.
Areas of increased flexibility
A substantive change in approach is to increase operational flexibility by creating the Office of the Registrar of Companies, who will be responsible for providing Guernsey with a modern infrastructure for administering companies through an IT enabled service.
The incorporation of companies will become an administrative process and the Royal Court will be removed from the process. It will no longer be necessary to obtain the consent of the Guernsey Financial Services Commission (GFSC) - except in relation to incorporated cell companies (ICCs) and protected cell companies (PCCs) - or the Law Officers prior to the incorporation of a company. Registration can occur on the day of an applicant's choice.
In addition, the administrative procedures for amalgamating a company and migrating a company in or out of Guernsey have been streamlined by abolishing the requirement for Royal Court approval. Both procedures will now require the consent of the GFSC (although amalgamations will only require consent in certain limited circumstances), followed by an application to the registrar. Flexibility has also been increased in the following ways:
- Single member companies may be created, abolishing the requirement for at least two shareholders;
- Standardised articles for incorporation may be created;
- A company will be deemed to have 'unlimited objects', unless the memorandum is specifically restricted. This is an attempt to deal with technical ultra vires issues;
- Unlimited-liability companies may be incorporated and 'mixed' liability companies may also be incorporated;
- There is no longer a requirement for an AGM;
- Future changes to the Companies Law may be made by local ordinance; a quicker process than a new law;
- Redeemable preference shares may still use a share premium account or a fresh issue of shares to fund redemptions, but there is also now increased flexibility, as the draft law provides that there is no requirement for shares to be redeemed out of a particular account or source;
- Previously, the ability to make dividends was limited to being from profits available for such purpose. However the new law provides that payments can be made provided that the company can pass the solvency test immediately after payment;
- A regime to provide for exemption from audit may be set up. Broadly, all companies may resolve to be exempt, save for regulated companies and those specified in any regulations promulgated by the Commerce and Employment Department; and#There is no requirement for a company secretary.
Enhancing corporate governance
Under the previous law, matters concerning auditors were limited. The powers of an auditor have been enhanced to investigate companies, including giving auditors rights to obtain information about resolutions and meetings of the company.
Provisions have been made governing the circumstances in which an auditor can be removed, and auditors are also given rights to be able to communicate with a company's members about their removal.
The concept of the annual return will change from being information provided to the company registry to an annual validation of information that the registrar already holds about the company.
Full details of a company's directors and members will be kept by the company and the registrar, although residential addresses will not be automatically available to the public to protect them from improper use.
Corporate governance has also been enhanced in the following ways:
- A possible codification of director's duties, if this is considered desirable, will occur in the future;
- Transactions between directors and their companies will be regulated;
- There is a regime of civil penalties that can be imposed by the registrar for breaches of law to ensure compliance without needing to proceed to court;
- The registrar is responsible for maintaining a register of disqualified company directors;
- There are more requirements so as to ensure that the register is kept up to date (previously it was an annual update);
- The law will permit the passing of secondary legislation to confer functions on the UK Panel on Takeovers and Mergers to supervise takeover and merger activity involving Guernsey publicly listed companies.
The new law has not been without controversy. Although the detail is not yet clear, there will be a requirement for directors and/or corporate service providers to take reasonable steps to identify the beneficial ownership of a company.
There was industry criticism of the previously drafted section dealing with this matter and at the time of writing the industry has yet to see further drafts for consideration.
Although the concept of arrangements and reconstructions is not new to English law, Guernsey law has not previously included any provisions to allow a company to come to such an arrangement with its creditors or members. It is an area in which practitioners felt the law had been lacking.
The court is given power to sanction an arrangement or reconstruction if 75 per cent of creditors or members (as the case may be) present and voting at a meeting summoned by the court vote in favour of the proposal.
At present Guernsey has no squeeze-out provisions. This has caused certain companies to try and replicate such rights in their articles. There are, however, other solutions.
The new law will contain a 'Takeovers' section, which allows a purchaser of a company to use squeeze-out provisions in relation to dissenting shareholders if 90 per cent of that company's shareholders have otherwise agreed to transfer their shares to the purchaser.
The dissenting 10 per cent of shareholders may be forced to sell their shareholding to the purchaser upon expiration of one month from receiving a notice to acquire from the purchaser at the price the purchaser has agreed with the other shareholders.
Consolidation of all company-related matters has allowed for a new solvency test to be put into place.
A sole test will be used in relation to all issues, including companies converting into PCCs, transfer of incorporated cells between ICCs, conversion of companies into limited-liability companies, migrations, dividend distribution and financial assistance.
What has not changed?
Guernsey company law continues to be able to differentiate itself from its competitors in a number of ways, as well as the new areas of flexibility and enhanced governance.
- There is no statutory requirement for a Guernsey resident individual to be a director of a Guernsey company (although the policy of the Guernsey Financial Services Commission and tax planning may intervene);
- Directors of Guernsey companies may be individuals or corporate entities
- The ability to migrate and amalgamate companies; and
- PCCs and ICC legislation is largely unaffected but simply consolidated into the main law.
The new law is still in draft form and there is likely to be further discussion on areas such as beneficial ownership. The good news for Guernsey is the rhetoric and principles are there, as in the support of the government. The devil, however, remains in the detail.
Paul Christopher is a partner and Gemma Campbell is a trainee at Ozannes