ANALYSIS OF OFFSHORE PETITION FILINGS AND COURT ORDERS

SNAPSHOTOFFSHORE Corporate Insolvency & Restructuring Annual Review 2018 Current Trends 2019 Jan-June

This Snapshot Report provides an overview of the recent insolvency and restructuring petition filings and resultant court orders in respect of companies in six* offshore jurisdictions. Throughout the year, we closely monitor company notices and petition activity across our network of offshore offices in the following categories:

• Compulsory winding up, by shareholders or creditors;• Conversion of voluntary liquidation to court supervised liquidation;• Schemes of arrangement; and• Court requests for a reduction of share capital.

The key findings that emerge from our full-year, multi-jurisdictional review and analysis for 2018 are highlighted and explored further over the following pages, together with commentary on the developments over 2019 to date. Petitions against Asian enterprises incorporated offshore have declined somewhat, although there are still a number of high-profile individual cases making their way through the offshore courts.

Petition filings and conversion rates in each of the jurisdictions analysed are also explored in more detail, and the trends are placed in a global context.

We trust that you find our analysis over the following pages useful. Please don’t hesitate to get in touch with your usual Appleby contact should you wish to discuss anything in more detail.

Tony Heaver-WrenPartner | Dispute Resolution | Cayman

Tony Heaver-WrenPartner | Head of Insolvency & Restructuring Dispute Resolution | Cayman

SNAPSHOT

* Jersey’s corporate insolvency regime is not Petition-based but a summary of its insolvency and restructuring options is also included.

INSOLVENCY PETITIONS IN NUMBERS

CONTENTS

Total number of companies in Bermuda, BVI, Cayman, Guernsey, Isle of Man & Mauritius2

Compulsory winding-up Orders made by the Offshore courts

Average conversion rate of winding-up Petitions to Orders across the region

Average Petition to Order conversion time

Fewer winding up Petitions than the previous year or equivalent time period

2

Winding up Petitions The International Picture 3 The Offshore Picture 4Analysis of Filings by Jurisdiction Bermuda 5 British Virgin Islands 6 Cayman Islands 7 Mauritius 9 Guernsey 9 Isle of Man 10 Jersey 11

1 January 1st - June 1st 2 The statistics quoted for the Offshore region in the report are based on these six jurisdictions

Compulsory winding-up Petitions submitted to the Offshore courts193

744,255 764,765

62

105 26

62% 28%

7 weeks 5 weeks

-35% -11%

2018 2019 to date1

Annual Review: 2018-2019

WINDING UP PETITIONS - THE INTERNATIONAL PICTURE

OFFSHORE

Across the six offshore jurisdictions reviewed, there were 193 compulsory winding up petitions presented to the local courts in the course of 2018 and a further 62 so far in 2019.

Bermuda, Isle of Man and Guernsey all showed levels of activity in 2018 in line with previous years. Cayman petition filings in 2018 rose 50% relative to the previous year, in part due to seven local companies being liquidated after becoming embroiled in real estate investment fraud in the United States. After an uptick in activity in 2017, Mauritius and the British Virgin Islands (BVI) filings returned to previous levels in 2018.

The early signs are that 2019 is going to continue this easing of filings, despite widespread anticipation of a global slow-down during the period. Given 2019 filings to date, barring a late surge, 2019 filings are unlikely to overtake 2018 totals come year end. However, spikes in numbers are possible as the complex organisation of some corporate structures can mean that a cascade of insolvencies can result from a single troubled group. In Guernsey for example, the court recently issued orders against a group of nine funds and sub-funds belonging to beleaguered investment firm Belvedere Management Group.

THE UNITED KINGDOM

In 2018, the UK Gazette reported a little over 5,800 petitions to compulsory wind-up companies, as submitted by a creditor, shareholder or director. Such petitions peaked at 8,300 in 2008 and have been declining steadily until last year when a significant reversal of this trend incurred with 700 more petitions than the previous year - 2019 is currently on track to match it.

THE UNITED STATES

There were almost 50,000 business bankruptcy petitions filed back in 2011 but this figure had halved by 2015. Since then the annual decline in bankruptcy court petitions published by the Administrative Office of the US Courts has been much more marginal. Business petitions fell 6% for the second year running, to 22,103.

2016 2017 20182015235

5,460

200

5,389

296

5,111

193

5,816

24,98524,457

23,109

22,103

2019to date

622,616

Offshore

UK

COMPULSORY WINDING UP PETITION TOTALS

USA

Key

SNAPSHOT 3

COMPANY REGISTER SIZE

Latest figures available

Annual Review: 2018-2019

55

USA27,626,360

UK3,879,844

Offshore764,765

BVI, 402,907

Mauritius, 192 972

Cayman, 107,309

Isle of Man, 25,995

Guernsey, 19,253

Bermuda, 16,329

WINDING UP PETITIONS - THE OFFSHORE PICTURE

RATES OF CONVERSION

The rate of winding up petitions converting into orders is generally high in the Offshore region. With plenty of restructuring options on the table, winding up a company is usually the option of last resort and frequently successful.

Over the last year, Bermuda and BVI saw the highest rates of conversion of petitions to court orders appointing liquidators.

Guernsey petitions are not publicly available; it is only possible to review the number of winding up orders for the jurisdiction so conversion figures are unavailable.

Bermuda BVI Cayman Isle of Man Mauritius

5

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5

5

SPEED OF CONVERSION

Over the last year the time between filing and final hearing varied between four and eleven weeks. Judging from the 2018 conversion rate, petitions in Bermuda are resolved within one month, Mauritius and Cayman within two and BVI and Isle of Man within three months.

Typically, a final hearing will occur within two months but there are always several outliers; cases that for reasons of complexity or multiple rescue attempts take considerably longer to reach the point of a court order.

For Cayman, there are also separate figures available for the conversion rates of petitions for Schemes of Arrangement and Reduction of Capital. These follow a more intensive court process, a scheme typically requiring an initial filing, a directions hearing, advertisement, a scheme meeting, the filing of further evidence and then a sanction hearing. These can be completed in 8-10 weeks with the occasional outlier taking the average up to 13 weeks.

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SNAPSHOT 4

N.B. Guernsey petitions are not available, so calculations of conversion rates and speed are not possible.

Annual Review: 2018-2019

71% 86% 64% 63% 27%

2015 2016 2017

25

20

15

10

5

0

2018 2019to date

ANALYSIS OF 2018-19 FILINGS BY JURISDICTION

BERMUDA

During the course of 2018, Bermuda witnessed 14 compulsory winding up petitions, ten of which converted into court orders. 2019 looks likely to achieve a similar level, with seven petitions recorded thus far in the year. Petitions in Bermuda that do convert generally do so in a swift and orderly fashion, with many being processed within a month, quicker than anywhere else in the offshore region.

Petition levels have gradually declined as the years of economic turmoil have receded. Nevertheless, companies of all ages and sectors are susceptible to downturns - 2019 has so far seen local retailer Bluck’s of Bermuda go into liquidation after 175 years, citing lifestyle changes, while 80-year-old Hong Kong construction company Hsin Chong recently filed for provisional liquidation with the Bermuda court, after over expansion on the mainland over the past few years has led to a bond default.

One of the most notable cases from 2018 concerned Noble Group, which completed a USD$3.5 billion restructuring by using a provisional liquidation program approved by the Bermuda court in order to emerge as smaller, unlisted coal-trading business having once been Asia’s biggest commodity trader.

Notices of the reduction of share capital remained at a typical level in 2018 in the mid-thirties, but 2019 looks to be much busier, with 25 already reported so far.

BERMUDA WINDING UP PETITIONS AND RESULTING ORDERS

Petitions

Orders

Key

SNAPSHOT 5

BERMUDA’S INSOLVENCY REGIME

The Companies Act 1981 and the Winding Up Rules 1982 govern insolvencies and reorganisations in Bermuda. There are two types of insolvent liquidations - voluntary and compulsory.

Compulsory liquidations are commenced by way of a petition presented to the Supreme Court in Bermuda upon which the Court will be asked to make a winding up order.

Creditors may petition for a winding up order or the company may resolve to petition to wind itself up under this procedure.

Voluntary liquidations, usually referred to as a ‘creditors voluntary’ or CVL, occur where members of a company decide to wind up the company deemed insolvent. A meeting of creditors is then convened to decide on the appointment of a liquidator. As CVL’s do not require the involvement of the courts, they are not measured in this report.

A winding up petition to the court sets out the basis for the winding up order and the appointment of a provisional liquidator. Court-supervised liquidation usually commences with the making of a winding up order after the hearing of the petition. The winding up order sets the date for evaluation of claims and appoints either a liquidator or the Official Receiver.

Restructuring Options

A scheme of arrangement is a compromise or arrangement between a company and its members or its creditors. An application to, and sanction of, the court is required.

A company may want to reduce its share capital in order to create distributable reserves and/or eliminate losses, return surplus capital to shareholders, assist a buyback or redemption of shares, or distribute assets to shareholders. In our experience, creating distributable reserves and/or eliminating losses are the main reasons.

Annual Review: 2018-2019

ANALYSIS OF 2018-19 FILINGS BY JURISDICTION

BRITISH VIRGIN ISLANDS

Across 2018 there were 37 applications to the BVI court to appoint a liquidator, and of these, just five progressed no further as the companies concerned were able to resolve their situation. The other applications resulted in a court order and progressed to the compulsory winding up stage.

In BVI, the members of an insolvent company also have an alternative option to using the court and can pass a resolution appointing an eligible insolvency practitioner as liquidator of the company and, indeed, some of the biggest liquidations seen in BVI have been shareholder driven. 19 appointments to insolvent companies were made without applications, using member resolutions.

Combined, there were 51 liquidations ordered over the course of the year, much more in line with previous levels of activity following 2017’s unusually high total following the collapse of several Asian conglomerates. 2018 saw fallout from the energy transport sector such as the restructuring of oil & gas driller QGOG Constellation leading to the liquidation of several BVI subsidiaries. The holding company of Primorsk International Shipping, the operator of a fleet of ice-class oil tankers in the Arctic, was another casualty.

While some insolvencies are the result of unfortunate business decisions or timings, others arise out of shareholder conflict. One recent example concerns the Russian online retail giant Ulmart (UHL). UHL shareholders Koshigi Ltd and Svoboda Corporation, both BVI-incorporated, were ordered to pay a million-dollar figure after a London tribunal found they had acted, amongst other things, in concert to divert corporate opportunities away from UHL in an unfairly prejudicial manner. A judgment handed down by a BVI court upheld a worldwide freezing and asset disclosure order against the two companies. The order against Svoboda is of particular interest because it was a rare example of the BVI Court winding up what was by then a company registered elsewhere.

With China still very much a wait-and-see, and most of the recent travails in the energy sector following oil price fluctuations now resolved, 2019 has gotten off to relatively calm start. There have just been three court orders to date with member-appointed liquidations only slightly ahead. Nevertheless, there have been some big names involved; the collapse of fiduciary firm Mossack Fonseca has been well documented and its BVI-subsidiary has just received a court liquidation order, while Russian mobile broadband services provider Yota’s ill-fated investment into phone manufacturing has recently led to insolvency proceedings.

BVI’S INSOLVENCY REGIME

Corporate insolvency in the BVI is governed by the Insolvency Act 2003 and the Insolvency Rules 2005. The effect of an insolvent liquidation is to put the affairs of an insolvent company in the hands of a professional liquidator who is required to take possession of, protect and realise the company’s assets for the benefit of the company’s creditors.

Proceedings are typically brought in the Commercial Court of the Eastern Caribbean Supreme Court in the BVI. A court application (the filing of a petition) may be made by a creditor, the company, its directors, and its shareholders, the Attorney General or the Financial Services Commission. The grounds for appointment are that the company is insolvent, it is just and equitable that the company be wound up or it is in the public interest to wind it up. The most common ground is insolvency.

As an alternative to the court appointment of a liquidator, the members of an insolvent company may, by a majority of at least 75%, pass a resolution appointing an eligible insolvency practitioner as liquidator of the company. Liquidation marks the end of a company’s business and does not have a rescue function. Once the liquidation is complete, the company will then be struck from the register of companies in BVI and dissolved.

Restructuring Options

The BVI Business Companies Act provides two mechanisms for achieving a wide range of corporate restructurings by way of court approval:

• Schemes of arrangement, which are equivalent to those available in England; and • Plans of arrangement, which are equivalent to those available in US jurisdictions.

Both mechanisms provide for compromises to be reached between a BVI company and its creditors or members.

Just and Equitable

BVI companies may see more “just and equitable” petitions, currently a relatively rare breed in BVI. The cases typically involve allegations that there is some deadlock in the management of the company, or that there has been some fraud or mismanagement. On 14 June 2018, the Court of Appeal delivered a decision in Delco Participation SA v. Green Elite Ltd. Green Elite was an asset holding company that had sold its main asset some years before. The company opposed the application to wind it up on the basis that its business could include dealing with the proceeds of the sale. The Court of Appeal disagreed. In its judgment, the court appears to have accepted that the relevant touchstone was whether the life of the company had come to an end, such that it was “impossible” to carry on the business of the company. The court took the view that the winding-up process was ancillary to the main purpose and that it was far from being part of its business and it has undoubtedly opened the door further to just and equitable petitions in BVI.

Applications to the court for the appointment of a liquidator

375 Applications did not

proceed further

32 Court Orders to proceed issued

19 Liquidators appointed directly by shareholders

51Liquidations proceeded

SNAPSHOT 6

BVI COMPULSORY LIQUIDATION APPLICATIONS AND NOTICES 2018

Annual Review: 2018-2019

ANALYSIS OF 2018-19 FILINGS BY JURISDICTION

CAYMAN

After a very busy few years in the aftermath of the economic recession and legacy fund liquidations, the number of insolvency petitions working their way through the Cayman courts were receding through 2017. 2018 reversed this trend.

In 2018, the Cayman Islands recorded 65 petition filings across all categories (compared to 57 in the previous year), with 45 converting into orders. Although petition filings for schemes of arrangement and reductions of share capital both fell sharply, petitions for an order that a company be placed under court supervised liquidation or be wound up were to close their highest levels recorded.

There has been no dominant sector driving 2019 petition filings, which have been made up of a wide range of industries and enterprises including a Madoff investor, the troubled smartphone manufacturer Yota (who also features in our BVI coverage) and the fallout of an illegal seizure of an East European TV channel.

The time taken for an initial petition to reach a court order varied widely in Cayman, with some taking just a matter of weeks and others involving significant legal and factual disputes taking almost five months.

CAYMAN ISLANDS INSOLVENCY REGIME

The Companies Law (2018 Revision) and the Companies Winding Up Rules 2008 (as amended) are applicable to corporate insolvencies. The Companies Law also provides a regime for what are known as arrangements and reconstructions, enabling companies to reach compromises or arrangements with their creditors or members.

Whereas voluntary liquidations generally do not involve the court’s supervision, involuntary liquidations may be commenced by a creditor petitioning the court on the ground that the debtor company is insolvent and obtaining a winding-up order.

There are two routes into a liquidation that is subject to the oversight of the Cayman Court. The first of these is a winding up petition (most commonly a compulsory process initiated by creditors or shareholders of the company) and the second is by conversion of an out-of-court voluntary liquidation into a court supervised liquidation, further to a petition seeking that conversion.

Restructuring Options

Scheme of Arrangement. A debtor company may commence a formal financial reorganisation by petitioning the court for its approval of a scheme of arrangement.

Reduction of Capital. Provided the Articles allow, the amount of capital held by a Company can be reduced by returning capital, pursuant to the authority of a special resolution of its shareholders. Once the special resolution is passed, the Company petitions the court to seek confirmation of the resolution.

Although a capital reduction can form part of a scheme of arrangement between an insolvent company and its creditors, on a stand-alone basis, a capital reduction is not an insolvency remedy and indeed will not be available when there is any risk of non-payment to the company’s creditors.

20182016 2017

2229

29

1817

249

226

8

37

2019to date

41

32

8

8

CAYMAN ANNUAL PETITION FILINGS

Winding Up Petition

Court Supervision (Sections 124 & 131)

Reduction of Share Capital (Section 15)

Scheme of Arrangment (Section 86)

Key

SNAPSHOT 7Annual Review: 2018-2019

CAYMAN CONTINUED

INSOLVENCY PETITIONS

Frequently, insolvent companies elect to enter a liquidation through the two-step approach of appointment of a voluntary liquidator, followed by a petition to convert the liquidation to bring it under the court’s supervision.

Combined with winding up applications, these two classes of Cayman petitions for court liquidations are collectively referred to as ‘insolvency petitions’ for the purposes of this report.

There were 56 insolvency petitions in total over 2018, making up well over three-quarters of the total petitions filed over the period. They converted into 40 court orders. 16 petitions either failed or were resolved and did not progress any further. Conversion rates for insolvency petitions over the last few years have typically hovered around 75%.

CAYMAN INSOLVENCY PETITIONS AND ORDERS 2018

MARKET NOTE

One of the largest insolvency cases involved Dubai-based Abraaj Investment Management Limited (Abraaj), which provided investment management services to the private equity investment group known as The Abraaj Group. Abraaj, which claims to have managed almost USD14bn in funds, was forced into liquidation last June after a group of investors commissioned an audit to investigate the alleged mismanagement of at least USD300 million in its healthcare fund. Once the Middle East and North Africa’s largest private equity firm, the demise of Abraaj has had reverberations across the private equity and fund finance industry. Fund managers in the Middle East can expect much closer scrutiny of their internal operations and governance arrangements in future.

Grounds for Winding Up/Bankruptcy

It is an abuse of process to issue winding up proceedings on the basis of a debt about which there is a real and substantial dispute. The question of whether an alleged dispute has reached that threshold, itself comes before the courts fairly regularly. In one 2018 case, the court was asked to consider making winding up orders in In the Matter of China Hospitals Inc & China Healthcare Inc, in spite of both companies disputing the underlying debt, which amounted to approximately USD175 million and was based on a final arbitration award in Hong Kong.

In the China Hospitals case, the court decided to grant the winding up orders and refuse the adjournment applications. The court noted that the mere fact that the final award was being appealed was insufficient to justify a conclusion that the debt was disputed on substantial grounds. The petitioner was prima facie entitled to immediate winding up orders on the insolvency grounds. The court confirmed that the burden was on the companies to establish the substance of the dispute they raised and they failed to do so in this matter. The court also took the view that there was strong legal policy in favour of upholding final arbitration awards in countries which are party to the New York Convention (such as Hong Kong). The judgment demonstrates that a winding up petition grounded on an unsatisfied final arbitration award will not be defeated unless robust evidence is produced to demonstrate a dispute on substantial grounds (e.g. very serious departures from the rules of natural justice).

Last minute attempts to adjourn the hearing of a winding up petition were rejected by the Cayman Court in In the Matter of Harlequin Hotels and Resorts Ltd. The background to the case involved investors attempting to recoup funds in the Harlequin Group in connection with an alleged scam which led to a publicised Serious Fraud Office enquiry in the UK and civil proceedings in England, Ireland, St. Lucia, and St. Vincent and the Grenadines. The St. Vincent member of the Harlequin Group issued a statutory demand against Harlequin Cayman, seeking repayment of an inter‐company debt. Although the company admitted the debt, it asserted a right to net off the debt against various other inter‐company debts without providing a credible legal or factual basis for this exercise. However, the petition appeared to be unopposed, until the eleventh hour, when counsel appeared and sought an adjournment in order to file evidence. In the exercise of its discretion, the court ordered that the company should be wound up and refused the company’s application to adjourn the petition.

The court made clear that in the Cayman Islands there is no entitlement to an adjournment of a winding up petition as of right, particularly at the last minute, and investigating the affairs of an insolvent group of companies may constitute grounds for a just and equitable winding up order separate and apart from the company being insolvent.

SNAPSHOT 8

ANALYSIS OF 2018-19 FILINGS BY JURISDICTION

32

24

1315

4

153

Winding Up Petitions did not proceed

Petitions for Court Supervision (Sections 124 & 131)

Winding Up Court Orders

Provisional Liquidation

Orders for Liquidation under Court Supervision

Court Supervision Petitions did not proceed

Winding Up Petitions

SCHEMES OF ARRANGEMENT

The formal court process of a Scheme of Arrangement has remained at low levels since the peak years immediately following the global economic crisis. However, numerous companies have been engaged in workout and restructuring negotiations during the period.

REDUCTION OF CAPITAL

Petitions for capital reductions spiked in 2016 following the return of capital to shareholders and other capital reorganisations of solvent companies. Since then, numbers have reduced to single digit annual numbers, of which half have successfully converted into orders.

6 Winding Up Court Orders

Annual Review: 2018-2019

MAURITIUS

The large population of Mauritius (1.3 million) compared to most offshore locations means that there are a correspondingly higher number of active trading companies; almost 200,000 (including 20,000 Global Business Companies) and therefore a higher insolvency figure. To date, Mauritius has reported 88 petitions, lower than in previous years, converting into 24 orders for 2018. There is often a big lag in reporting, and this conversion figure is therefore likely to increase in the coming months.

However, even discounting the time lag, the conversion rate is expected to remain low. Banks are now more willing to put clients into administration in a bid to rescue businesses faced with financial difficulties. The restructuring of loans has also been a popular approach, particularly with international businesses.

In view of the delays, costs and the possibility of applications being resisted by debtors, the creditors tend to reach settlements with debtors rather than pressing for court orders in Mauritius. A recent amendment to the Insolvency Act has also reduced the monies available to a liquidator for distribution among the company’s creditors, making the process less appealing.

ANALYSIS OF 2018-19 FILINGS BY JURISDICTION

MAURITIUS’ INSOLVENCY REGIME

Under Mauritian law, the main insolvency procedures are Liquidation and Receivership. Receivership enables secured creditors (such as a bank that has made a secured loan to the company) to enforce their charges, usually by sale of property or other assets.

Liquidation is the process of winding up a company unable to pay its debts by selling all or part of the business, or individual assets, in order to distribute the proceeds among the creditors and (if there is a surplus) shareholders. There are two types of liquidation for insolvent companies:

• Compulsory liquidation by the court (measured in this report) • Creditors’ voluntary liquidation

As an alternative to liquidation, the Insolvency Act 2009 introduced administration, which provides an opportunity for the company to continue in existence, or alternatively to ensure better returns for the company’s creditors and shareholders.

Mauritian law also provides for restructuring of companies outside of a formal liquidation or administration. This can be either by way of a compromise with creditors approved at a creditors’ meeting, or a scheme of arrangement approved by the court.

GUERNSEY’S INSOLVENCY REGIME

There are two quite different corporate insolvency procedures available through the Companies (Guernsey) Law 2008. The first, administration, aims to provide the debtor with the chance to trade normally and survive its financial difficulties and continue as a going concern. The second, compulsory liquidation, results in the dissolution of the debtor and is more relevant where the debtor has no realistic chance of surviving.

The States of Guernsey have published draft legislation which recommends amendments to the current corporate insolvency legal regime, in particular to make it modern and effective, ensuring that the consequences of business failure are fairer and more predictable. It is considered that the amendments will provide welcome clarity in the area of corporate insolvency, particularly where there have been perceived gaps in the legislation or disparities between the powers of administrators and liquidators in the Bailiwick.

The Draft Legislation is expected to move towards formal legislation during the middle part of 2019, but is currently in consultation.

2017

2016

2015

11

10

20

2019to date

2018 13

14

GUERNSEY COURT ORDERS ISSUED AND LIQUIDATORS APPOINTED

SNAPSHOT 9

GUERNSEY

Guernsey petitions are not publicly available; it is only possible to review the number of winding up orders for the jurisdiction.

Since 2016, Guernsey liquidation orders have been steadily increasing and 2019 has already surpassed the total for the previous year. These recent orders include a number of funds connected to Belvedere Management Group, which has been accused of financial mismanagement.

As a point of note, in the 2018 matter of Canargo Limited, the Royal Court heard what is understood to be the first successful application in Guernsey to seek to place a company into liquidation for failure to provide a member of the company with a set of accounts.

Annual Review: 2018-2019

88

2018 Mauritius Petitions

ANALYSIS OF 2018-19 FILINGS BY JURISDICTION

ISLE OF MAN

The Isle of Man consistently sees the lowest number of petitions and orders out of all the jurisdictions surveyed. Over 2018 there were just eight petitions and five resulting orders. Three of the petitions were in fact inter-related asset-holding companies subject to divorce proceedings.

There are a number of factors contributing to the low count. Unless a debtor company has recoverable assets, or the Financial Services Authority is prepared to fund a liquidation in the public interest, then often insolvent companies will simply cease trading and eventually be struck off the Register. Moreover, as the Isle of Man’s voluntary liquidation procedure is both user friendly and relatively inexpensive, the vast majority of companies wound up in the Isle of Man do so voluntarily.

Finally, the common use of Manx companies for the tax efficient holding of assets means that insolvencies are inherently less frequent than for companies that trade.

In a recent development, an Isle of Man High Court decision confirmed that in cases where a company is hopelessly insolvent, it would generally be inappropriate for a contributory (a member of a company on the commencement of its winding up) to sit on the Committee of Inspection, the purpose of which is to supervise the liquidation and to fix the remuneration of the liquidator. This brings the Isle of Man into line with the England and Wales Insolvency Act 1986.

CREDITORS VOLUNTARY LIQUIDATIONS

The Isle of Man’s corporate law regime is attractive to secured creditors who in most cases will exercise their rights to appoint receivers out of court to save costs, rather than go down the court winding up route.

During 2018 there were 25 Creditors’ Voluntary Liquidations, higher than the 15 that were recorded in 2017. Previous years have seen as many as 70 such liquidations.

ISLE OF MAN’S INSOLVENCY REGIME

Companies in the Isle of Man can either be incorporated under the Companies Act 1931 or the Companies Act 2006. The primary legislation governing insolvent companies can be found in the 1931 Act and is applicable to companies incorporated under the 2006 Act.

There are two types of insolvency proceedings available:

• Creditors’ voluntary liquidation • Compulsory liquidation ordered by the court

A creditors’ voluntary liquidation is frequently used by insolvent companies that are unable to pay their debts as they fall due. A debtor company can seek to wind itself up by way of a members’ voluntary liquidation but if the directors of the company are unable to make the statutory declaration of solvency then the company must proceed by way of a creditors’ voluntary liquidation. Alternatively, creditors of a company can file a claim for the appointment of a liquidator (i.e. an involuntary liquidation) under the Chancery Procedure at the High Court of Justice.

Liquidation can stop the company’s creditors’ position from deteriorating and bring closure to an unsustainable position for the company’s directors, with all the attendant anxiety and stress. Since the directors’ powers cease upon liquidation, it is the liquidator who takes responsibility for selling the company’s assets, distributing the funds to the creditors and dealing with the company’s employees.

Restructuring Options

Isle of Man law does not provide for company voluntary arrangements and administrations. Debtors can, however, use the process set out in both the 1931 Act and the 2006 Act for arrangements, mergers and consolidations.

Schemes of arrangement involve a company entering into a compromise or arrangement with its creditors or members, or both.

The majority of new Isle of Man companies are now incorporated under the highly flexible Companies Act 2006. Conversion from the 1931 Act to the 2006 Act is a relatively simple process that is commonly undertaken to provide access to this flexibility. Provided the 2006 Act company can meet a statutory solvency test, a reduction of share capital can take place without the need to make a court application.

Petitions to the court for an order winding-up a company8

25 Creditors voluntary liquidation

5 Court Orders to proceed issued

3 Petitions did not proceed to liquidation

ISLE OF MAN INSOLVENCY WINDING UP ACTIVITY 2018

SNAPSHOT 10Annual Review: 2018-2019

Jersey’s courts are also willing to grant recognition of overseas insolvency procedures where appropriate. In particular, recognition of foreign insolvency office holders including receivers and administrators is frequently granted, ensuring that secured creditors’ rights are protected (as they are in Jersey’s principal insolvency procedures). Secured creditors holding Jersey law security interest agreements have a number of very flexible options to enforce their security swiftly and cost-effectively without involving the courts.

By far the most frequently used winding up procedure is a summary winding up available for solvent companies on a voluntary and administrative basis backed by solvency statements made by the directors. The directors themselves may handle the winding up or liquidators may be appointed in more complex cases.

Recent case law provides helpful guidance on the winding up of insolvent Jersey trusts, whereas foundations are subject to similar statutory regimes as described above. Again the frequency of such insolvencies appears very low.

Restructuring Options

In terms of restructuring, corporate schemes of arrangement in Jersey have been seen in similar numbers to the Cayman Islands over the past few years. These have proved effective and flexible, and can be used in parallel with other jurisdictions on a cross-border basis, as are similar insurance schemes.

Capital reductions can also be carried out with, and in some circumstances without, the sanction of a court, providing a useful tool in restructuring.

ANALYSIS OF 2018-19 FILINGS BY JURISDICTION

JERSEY’S INSOLVENCY REGIME

Jersey’s corporate insolvency regime is not Petition based. The Bankruptcy Law applies to both personal insolvency situations and also incorporated bodies. Désastre is the procedure for the winding up of the affairs of a company or individual, and is the only process that can be instigated by a creditor. It is administered by the Viscount, who is an officer of the Royal Court in Jersey with the Viscount, in essence, performing the role of an official receiver. This is the equivalent to a court ordered compulsory winding up.

The Companies Law as amended is applicable to corporate insolvencies. In particular, part 21 of the Companies Law sets out a variety of winding-up procedures: summary winding up (voluntary solvent winding up), creditors’ winding up (voluntary insolvent winding up, which can only be instigated by shareholders rather than creditors) and just and equitable winding up, which is a court-led process. Part 18 of the Companies Law allows for compromises and arrangements to be entered into with creditors or other persons.

A creditors winding up is a more frequently used procedure. The process is not court-driven but is instigated by the insolvent company itself and leading to the appointment of a liquidator.

Corporate insolvencies are also sometimes dealt with by way of an application for winding up on a just and equitable basis. This option provides great flexibility in dealing with both insolvent and solvent companies forming part of a group and also with cross border businesses. The initial application is often made ex parte.

Désastre Proceedings

Corporate insolvency in general and désastre proceedings in particular are relatively rare in Jersey in practice. There were only two such désastre proceedings in 2018, and just the one published so far in 2019, a fairly typical rate.

11SNAPSHOT Annual Review: 2018-2019

2018 Désastre proceedings

CONTACT USRESEARCH METHODOLOGY

The data for this publication has been collected from a review of the published court filings, newspaper advertisements and Registrar notices in Bermuda, British Virgin Islands, the Cayman Islands, Guernsey, Jersey, Isle of Man and Mauritius, between 1 January 2018 to 1 June 2019.

The conversion rate is the number of initial filings that later converted into actual court orders. The placement of court petitions and orders for public inspection can be an uneven process, so figures are subject to change as new information becomes available.

Cases have been attributed to the year that they commenced, so for example a case that began with a November 2015 petition and resulted in a January 2016 court order would be included as part of the 2015 count.

Appleby is one of the world’s leading offshore law firms. Our global teams of legal specialists advise public and private companies, financial institutions and private individuals.

We are regularly recognised for our professionalism, integrity and excellent client service, and these are the values we pride ourselves on and are at the core of our business.

Our global presence enables us to provide comprehensive, multi-jurisdictional legal advice at the times most beneficial to our clients.We operate in 10 highly regarded and well-regulated global locations. These include the key offshore jurisdictions of Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, Isle of Man, Jersey, Mauritius, and the Seychelles, as well as the international financial centres of Hong Kong and Shanghai.

We are a full service law firm providing comprehensive, expert advice and services across corporate, dispute resolution, property, regulatory and private client and trusts practice areas. We work with our clients to achieve practical solutions whether from a single location or across multiple jurisdictions.

John WastyPartnerGroup Head, BermudaDispute Resolutionjwasty@applebyglobal.com

Anthony WilliamsPartnerGroup Head, GuernseyDispute Resolutionawilliams@applebyglobal.com

Yahia NazrooPartnerGroup Head, MauritiusDispute Resolutionynazroo@applebyglobal.com

Eliot SimpsonPartnerGroup Head, Hong KongDispute Resolutionesimpson@applebyglobal.com

Mark HolligonPartnerGroup Head, Isle of ManDispute Resolutionmholligon@applebyglobal.com

Michael Cushing PartnerJerseyDispute Resolutionmcushing@applebyglobal.com

Andrew WillinsPartnerGroup Head, British Virgin IslandsDispute Resolutionawillins@applebyglobal.com

Tony Heaver-WrenPartner, Head of Insolvency & RestructuringCayman IslandsDispute Resolutiontheaverwren@applebyglobal.com

© Appleby Global Group Services Ltd 2019. Published in the Isle of Man. All Rights Reserved.

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