New compromise

A problem typical to insolvent/quasi-insolvent restructurings is that claims are often structured in two different ways. They are either structured as to require unanimity among a creditor class for changes to the fundamental terms that require modification for a satisfactory deal to be delivered; or held by such a broad universe of creditors that a comprehensive ­negotiation and ­settlement with the ­creditors is a practical impossibility.

Practitioners faced with these issues in the UK often turn to a scheme of arrangement to assist in implementing a solution. This process binds all creditors of a particular class to a specific compromise ­provided that an appropriate majority of that class approves the proposal and it is ­sanctioned by the court – effectively, those who vote against the proposal or decline to participate are ‘crammed down’.

Although it is possible to promote a scheme of arrangement in England for a Guernsey incorporated company, until recently there was no Guernsey court process to deliver an equivalent compromise for local insolvent debtors. In turn, the ‘real world’ effectiveness of an English court-sanctioned compromise where the debtor had significant assets in Guernsey would be at risk.

In the summer of this year, however, a comprehensive new Companies Law was introduced in Guernsey. The law ­consolidates much of the existing local ­legislation and, among other important changes, introduces compromise/arrangement processes modelled closely on the English scheme rules. Accordingly, a ­compromise or arrangement agreed by the relevant majority of creditors and approved by the Royal Court in Guernsey will be ­binding on all creditors of a particular class, regardless of whether they voted in favour of the proposals. The relevant rules are almost identical to those applicable to an English scheme in that: an application may be brought by the company, a creditor or ­member, liquidator or administrator; the required approval thresholds have been set at a majority representing 75 per cent in value of the creditors or class of creditors present and voting at the relevant meeting; and the statement to be circulated to ­creditors must explain the effect of the ­proposals and state the material interests of directors.

Although there are a number of small differences in the rules, there are two ­important areas where the regimes differ.

First, Guernsey has for some time ­maintained a developed regime for the establishment and operation of protected cell companies (PCCs) – essentially single corporate vehicles containing statutorily ring-fenced ‘cells’ – and a scheme is available in respect of such PCCs and an application for a scheme may be made by a receiver of a cell of a PCC.

Second, when approving the scheme the Royal Court in Guernsey may ­consider whether: the majority of creditors are acting in good faith in the ­interests of the class they profess to ­represent; and the different interests of ­creditors are such that they should be treated as belonging to a ­different class. It will be interesting to see whether the Royal Court will in practice consider that these factors must, or simply may, be taken into account.

Although English precedent is not ­directly binding in Guernsey, it is expected that the significant body of law that has developed over many years in England relating to the issues surrounding the meaning of the terms ‘class’, ‘compromise’ and ‘creditor’ will carry significant weight when the first proposals come before the Royal Court.

The new legislation operates in conjunction with other administrative provisions relating to companies, so that where the transaction amounts to an alteration of the company’s constitution, the Royal Court will allow the scheme procedure to be used to bring those changes into effect. There are additional provisions relating to the sanction granted by the Royal Court where there is a transfer of an undertaking from one company to another as part of the arrangement.

The ability to effectively compromise claims is welcomed and, ­considering the current climate, it may not be long before the process is applied in ­practice.

Nick Gamble is a partner and ­Mathew ­Newman an ­associate at Ogier