A trusted place to restructure

As home to many holding companies, Guernsey was forced to upskill in the area of restructuring and insolvency in the wake of the financial crisis. Today, it has become a jurisdiction of choice for businesses in distress

Restructuring and Insolvency work is big. As the economy squeezes, this discipline tends to grow and many of the huge international matters are ending up before the courts in the Channel Islands. 

Mathew Newman, who leads Ogier’s Guernsey dispute resolution team, says business is brisk. “After perhaps a slight dip in 2017, insolvency work is back with a vengeance in Guernsey,” he says.

He highlights the different types of work under way: large-scale restructurings under a scheme of arrangement or administration order; property holding companies or investment funds whose loan to value ratios have gone the wrong way, leaving them insolvent; and fraud and asset tracing work, sometimes with a Guernsey holding company but often with a foreign insolvency practitioner trying to recover assets or information held in Guernsey.  

Newman adds: “We’re also seeing a lot more work for company boards, who are concerned about their own positions when their company is on the brink of insolvency, and also for creditors looking to enforce their debts. Occasionally, we might also get a good old-fashioned contested winding up application.”

So why is Guernsey so often used for international restructuring and insolvency? 

David Jones, a Partner in the Guernsey dispute resolution and litigation team at Carey Olsen, explains that there are still a lot of big businesses with holding companies situated in Guernsey. 

“When the need for restructuring or threat of insolvency arises, advisers tend to choose the safest place jurisdiction-wise – and that’s often Guernsey,” he says. “Many funds experienced financial distress post-2008 (during the credit crunch) and this was a period in which Guernsey upskilled in this area to deal with the increasingly difficult financial climate. 

“The professional services layer specialising in restructuring and insolvency in Guernsey is also a lot stronger now than a decade ago. The statutory framework is such that UK lawyers are familiar with how it works and the court system on the island has a long-standing track record of dealing with restructuring cases.” 

Abel Lyall, a Partner at Mourant Ozannes, agrees that Guernsey has a legal framework that facilitates insolvency options. “Our insolvency regime is one that will be broadly ‘familiar’ to foreign office-holders and draws on UK insolvency and company law. Courts regularly apply English common law principles to insolvency issues,” he says.

“For example, creditors can apply to court for administration orders or to put a company into winding up. We have experienced insolvency practitioners to take appointments, knowledgeable insolvency lawyers to advise them and efficient courts to determine disputes.”
 
Working in partnership 

How effectively do Guernsey offices work with London lawyers, insolvency practitioners and liquidators to get the job done? According to Lyall, the relationship is typically good and invariably flexible. 

“We work closely with London law firms and both local and London insolvency practitioners,” he says. “It is a relatively small industry and we tend to build strong working relationships with them.” 

He points out that the particular role of each will depend on the nature of the insolvency. “Where one has a large, multijurisdictional restructuring, of which Guernsey is but one part of a bigger picture, there will often be a London law firm and/or accounting firm that leads the instruction, with local support from Guernsey advisers,” he explains.

“Equally, where we have other matters more focused on Guernsey, the Guernsey-based advisers will take a lead role. It’s an efficient and cost-effective way of working.”

Alasdair Davidson, a Partner at Bedell Cristin, echoes these sentiments but also points to the geographical advantages. “We are on good terms with the leading London law firms who deal with insolvency and restructuring. One of the other advantages of Guernsey as a centre for this kind of work is that we are only a hop, skip and a jump from London and with no time difference. It works well.” 

Insolvency law changes

Guernsey’s new corporate insolvency law was originally due to come out at the end of the first quarter of 2019, but it has so far been delayed. Ogier’s Newman argues that the new legislation will be important in bringing Guernsey into line at least with other comparable offshore jurisdictions – and to some extent with the UK – in respect of the powers of liquidators, which will be greatly enhanced.  

“The new power of the Guernsey court to wind up foreign-registered companies will, I think, interplay quite nicely with the new substance requirements that are now in place,” says Newman. “I think it will give rise to an increase, rather than a decrease, in court work as a result.” 

Todd McGuffin, a Partner at Guernsey law firm Babbé, has been heavily involved in the structuring of the new law. He is confident that it will be introduced between the third and fourth quarter of this year at the latest. 

McGuffin rejects claims that the changes are just mere tweaks around the edges of existing legislation. “The new legislation is long overdue,” he says. “The changes are significant. For instance, the Royal Court will for the first time be able to wind up foreign companies. 

“The new law will also provide more powerful tools to office-holders to attack transactions made at an undervalue, and to examine directors, allowing the insolvency professionals to seek to recover funds of creditors on a potentially more informed basis.”  

Reputation building

It is claimed that the new law will enhance Guernsey’s international reputation as a transparent and creditor-friendly jurisdiction.

“Whilst our jurisdiction has always been creditor-friendly (look at the moratorium in the administration regime, which allows secured creditors to enforce their security notwithstanding the administration order in place), I think the new rules will give rise to more transparency,” Newman says. 

He adds: “A constant complaint you hear from creditors is that office-holders don’t need to file anything with the Registry of Companies and don’t need to produce reports on a timely basis, and I think the new rules will allay those concerns. 

“Equally, the obligation on office-holders to report delinquent directors has to be a good thing. At the moment, it’s not an obligation and is often only used by office-holders to bring commercial pressure on those individuals to settle liabilities.”  

Lyall agrees that while Guernsey already has a reputation as a transparent and creditor-friendly jurisdiction, the changes to the law can only build on this. 

“It will introduce stronger powers for liquidators to pursue actions for the benefit of creditors, including the conduct of examination of officers and the pursuit of undervalue transaction claims. Hopefully, the changes will make the process more efficient – for example, the ability to pay creditors from an administration and then dissolve the company, rather than undertaking an otherwise unnecessary compulsory winding up.”

Complex cases 

Having a track record in dealing with complicated and high-profile cases has allowed the Channel Islands to build a reputation of competency and expertise. 

Davidson at Bedell Cristin name-checks one case involving a healthcare company, which proved particularly sensitive. “It was sensitive not just from a commercial perspective, but also from the point of view of media coverage. There were not just employees to take into consideration, but residents and patients. All the advisers involved knew they could have faith in the Guernsey court system and that the process would be smooth. Four Seasons Healthcare (with a holding company on the island) is a good example of a Guernsey case demonstrating a well-executed process.” 

Jones at Carey Olsen picks out the administration and subsequent liquidation of Joannou & Paraskevaides (Overseas)  (JPO), which began in 2018 and is ongoing.  JPO is a Cypriot construction company with a holding company in Guernsey. In recent years, it was involved in huge infrastructure projects in the Middle East, including football stadia. It found itself with real cash flow difficulties and was placed in administration, then liquidation. Guernsey was chosen as the best place to conduct the insolvency proceedings. 

“The company had more than 10,000 employees across the world – which in turn meant books and records around the globe. When you consider that data protection laws are different in each country, you realise how time-consuming just collecting initial information is,” says Jones. 

“After the initial collection of data, which could take a year, you might be looking at another two to three years to complete the liquidation process, particularly if litigation follows.”  

The focus is on taking the minimum time possible to explore all avenues and ensure the best possible outcome for creditors, says Jones.

Ogier is currently working on the contentious administration of a group holding company that has assets all around the world and various claims against third parties in different jurisdictions. Newman explains: “We have a number of hostile creditors. Keeping them at bay while working with the administrators to manage the day-to-day operations of the underlying businesses is a significant challenge.”   

The Brexit factor 

So, what does the future look like for those involved in insolvency and recovery work? Jones believes that Brexit could have a notable impact. “Lots of Guernsey funds will be invested in sterling and if the currency dives, then financial distress is likely to result,” he says. “There may also be an impact on London’s position as a restructuring centre. Nobody really knows what will happen in this space post-Brexit.” 

Bedell Cristin’s Davidson also thinks there may be a knock-on effect. “Brexit could be a good reason to redomicile – some restructuring may have been put on hold prior to this. There may be an increase in work as a result of this.”