By David Wilson
TLC for TCBs
22 February 2010
After a tough few years for Jersey’s trust company businesses, the courts have adopted a softer approach for when a company is in trouble.
Since the formal regulation of trust company businesses (TCBs) was introduced in Jersey approximately 10 years ago, the regulatory regime has been tightening. The consequence for a few Jersey TCBs has been a somewhat unpleasant demise. Recently the Royal Court of Jersey endorsed a new approach that allows TCBs that do not make the regulatory grade to pass away more peacefully and with less destruction for their underlying clients.
The Jersey Financial Services Commission (JFSC) initially issued TCBs either with full licences or licences that enabled the TCBs to benefit from transitional provisions if they were not able to meet the standards at the outset. Most passed the test.
Not passing muster
However, one company that did not, Anchor Trust, challenged unsuccessfully the JFSC’s refusal to grant it a licence in the Royal Court and the Court of Appeal.
In respect of another company, Chimel Trust, on the JFSC’s application the Royal Court appointed external accountants to manage the business on the basis that the principal was subject to a criminal investigation. The managers discovered that, in many cases, appropriate due diligence, as required by the various JFSC guidelines and the anti-money laundering legislation, had not been carried out. The process ultimately led to Chimel being declared bankrupt, but this was not a good solution for many of Chimel’s clients.
However, practice evolves, and at the end of last year, in respect of another TCB, Centurion Management Services, a new approach was adopted.
A different path
The Jersey court ordered the winding up of Centurion pursuant to Article 155 of the Companies (Jersey) Law 1991 on the grounds that it was just and equitable to do so. Centurion had been the subject of close regulatory attention. The JFSC had previously required the appointment of the applicants as directors of Centurion in order to bring Centurion’s corporate governance, in terms of span of control, in line with the relevant code of practice. It had also issued directions requiring third parties to act as co-signatories and more recently to attend all board and committee meetings.
Centurion was insolvent on both the balance sheet and cashflow tests and there was no prospect of the company trading out of its current situation. Centurion’s board, in conjunction with the JFSC, recognised that the best way forward was to sell its book of business and so entered into a sale and revenue-sharing agreement with a third-party trust company business, by which the buyer would acquire those client entities that met its take-on procedures and standards in return for a share of the revenue received following the take-on of those clients.
This approach was beneficial to the underlying clients in that it allowed for a smooth passage of their affairs to a new service provider managed by trust professionals rather than external advisers. It also gave the new service provider the opportunity to gain a book of business, with the ability to examine it before taking it on.
The remedy of just and equitable winding up has been used flexibly by the courts in England and Jersey, particularly where no other winding up procedure has seemed appropriate.
It gives the court supervisory control over the administration of the winding up and any liquidator appointed is directly accountable to the court.
It has been used in the past where speed of action has been essential, where there is deadlock and there has been a complete breakdown of the relationship between shareholders, such as in small companies that have many of the characteristics of partnerships, and to facilitate an investigation into a company’s affairs.
In this case the key to the decision was the need for Centurion to continue its regulated business while it was being run down. It was recognised that the liquidator may need to take steps that, although in the best interests of the underlying clients, may not necessarily be in the best interests of the creditors. If the court had ordered a creditor’s winding up, for example, then arguably the liquidator would not have been able to have done so.
While the remedy reinforces the Jersey court’s flexibility of approach in relation to insolvency proceedings, it also exposes a potential deficiency in Jersey’s armoury of insolvency legislation - that of the ability to enter into administration, whether with a view to rebirth or to closure, as in the case of Centurion.
However, the case does potentially offer a role model in terms of a board of directors working with the regulator, the prospective liquidator, the creditors and a purchaser of the client entities that is prepared to be dynamic and flexible in order to wind down the financial services business in the best interests of all concerned.
David Wilson is a partner at BakerPlatt in the Channel Islands