Trusts Law Am No 7 - industry proposals - Jersey Finance Update... · Web viewEffect of memorandum...

Companies (Jersey) (Amdt No. 12) Law 201-

Summary PapersCONFIDENTIAL

Content

JFL Companies (12) Law Working GroupJune 2016

s

Introduction..............................................................................................................................- 5 -

Art. 10 – Effect of memorandum and articles (WY) & CO).......................................- 6 -

Art. 17 (2)(b) – Change of status of private company (WY)...................................- 8 -

Art. 17(3) – (CO)....................................................................................................................- 10 -

Art. 17A(1) – Calculation of number of members (WY)...........................................- 12 -

Art. 18 (1) – Capacity of company (O)...........................................................................- 14 -

Art. 35 – Rule of law relating to issue of shares at discount etc. abolished (WY) - 15 -

Art. 38 – Alteration of capital of par value companies and Art. 38A Alteration of capital of no par value companies (WY) (MO)............................................................- 16 -

Art. 39 (1a) – Share premium accounts for par value companies and Art 39A (3) – Stated capital accounts for no par value companies (WY) (CO).......................- 17 -

Article 50 – Share Certificates (MO)...............................................................................- 18 -

Art. 51 – Certificate to be evidence of title (W)..........................................................- 19 -

Art. 52(4) –Variation of class rights (CO/MO)..............................................................- 20 -

Art. 55 –Power to issue redeemable shares and Art 57 Power of company to purchase its own limited shares (CO) (MO).................................................................- 21 -

Art. 58A(2) –Treasury shares (MO).................................................................................- 22 -

Art. 61B –Registration of solvency statement and minute of reduction (O)....- 23 -

Part 14 – Directors and Secretary (W)...........................................................................- 24 -

Art. 74(2) & (4) –Duties of directors (CO) (MO) (A)...................................................- 25 -

Art. 77 –Indemnity of officers and former officers (CO)..........................................- 26 -

Art. 89 - Requisition of meetings (WY)..........................................................................- 27 -

Art. 90 – Definitions of special resolution and Art. 91 - Notice of meetings (WY) (O) (CO).................................................................................................................................... - 28 -

JFL Companies (12) Law Working GroupJune 2016

CONFIDENTIAL Companies (12) Law Working Group – Summary Papers June 2016

Art. 95 – Resolution in writing (CO)................................................................................- 30 -

Art. 96(1) – Proxies (O).......................................................................................................- 31 -

Art. 100 – Filing of resolutions (CO) (JFSC)...................................................................- 32 -

Art. 102 (1) – Interpretation – Part 16 (EY) (JFSC).....................................................- 33 -

Art. 108 (2) - Delivery of accounts to registrar (EY).................................................- 35 -

Art. 113 – Appointment and removal of auditors (O)...............................................- 36 -

Article 115 – Restrictions on distributions (A).............................................................- 37 -

Part 18B – Mergers (TLWP)................................................................................................- 38 -

Art. 127FC – Notice to creditors (O)...............................................................................- 39 -

Art. 127FJ(4)(d)(ii) – Pre-registration steps: where all merging bodies are companies (MO)...................................................................................................................- 40 -

Art. 127R – Notice to creditors of application to Commission for authorisation to seek continuance overseas and Article 127T – Application to Commission for authorisation to seek continuance oversees (O).......................................................- 41 -

Part 21 – Winding up of Companies (BC)......................................................................- 42 -

Art. 150 (4)(b) – Application of assets and dissolution (WY).................................- 43 -

Art. 176(10) – Transactions at an undervalue and Art.176A (11) – Giving of preferences (CO)...................................................................................................................- 44 -

Article 181 – Liability in respect of purchase or redemption of shares (MO)...- 47 -

Art. 201A(1) Keeping of records by registrar (JFSC).................................................- 49 -

Other......................................................................................................................................... - 50 -

Appendix 1..............................................................................................................................- 57 -

Appendix 2..............................................................................................................................- 68 -

Appendix 3..............................................................................................................................- 73 -

Appendix 4..............................................................................................................................- 75 -

3


Introduction1. This document sets out the proposals received for Amendment No. 12 of the

Companies (Jersey) Law 1991. This document should be considered in conjunction with the Companies (Jersey) Law 1991.

2. Where reference is made to an article, the reference is to the article in the Companies (Jersey) Law 1991. Where reference is made to another provision or law, the extract of that provision/law is provided for ease of reference.

3. The following abbreviations have been adopted throughout this document:

The Law means the Companies (Jersey) Law 1991CA85 means the Companies Act 1985CA2006 means the Companies Act 2006GPO means the Companies (General Provisions) (Jersey) Order 2002COBO 1958 means the Control of Borrowing (Jersey) Order 1958Bankruptcy Law means the Bankruptcy (Desastre) Jersey Law 1990

4


Art. 10 – Effect of memorandum and articles (WY) & CO)1. Article 10 provides that the memorandum and articles, when registered, bind the

company and its members to the same extent as if they had been “signed and sealed” by the company and each member:

2. Where shareholders are individuals (and in instances where the shareholders are non-Jersey entities) the concept of sealing is not relevant, but other formalities may be required (e.g. witnessing).

3. This provision is modelled on section 14 CA85:

4. It is an issue particularly in circumstances where the articles contain power of attorney/agency provisions (e.g. in relation to compulsory transfers of shares by an unwilling shareholder) which in the case of an individual requires that the signature be witnessed.

5. One issue that arises is: what does "sealed" mean in this context? Under English law, it would mean executed with the same level of formality required in respect of powers of attorney, and therefore the highest level of formality under English law. This enabled English company articles to include powers of attorney.

6. Section 33 CA2006 has replaced section 14 CA85 but no longer refers to "sealed", which we understand means that there is now some doubt as to whether powers of attorney can be included in English company articles.

14 Effect of memorandum and articles

(1) Subject to the provisions of this Act, the memorandum and articles, when registered, bind the company and its members to the same extent as if they respectively had been signed and sealed by each member, and contained covenants on the part of each member to observe all the provisions of the memorandum and of the articles.

(2) Money payable by a member to the company under the memorandum or articles is a debt due from him to the company, and in England and Wales is of the nature of a specialty debt.

Companies Act 2006

33 Effect of company's constitution

(1) The provisions of a company's constitution bind the company and its members to

10 Effect of memorandum and articles

(1) Subject to the provisions of this Law, the memorandum and articles, when registered, bind the company and its members to the same extent as if they respectively had been signed and sealed by the company and by each member, and contained covenants on the part of the company and each member to observe all the provisions of the memorandum and articles.

5


7. It is suggested (CO) that Jersey sticks with the CA85 approach but with the need to clarify what we mean by "sealed" – and in particular, that this would include power of attorney (which under Jersey law requires to be witnessed)

8. Further, consider (WY) whether this article could be amended along the lines that the articles bind the company and members to the same extent as if they had been executed by the company and each member in accordance with all formalities required, in Jersey or elsewhere, for the articles to bind the company and each member?

9. CA85 was clearer than the Law that the effect was not only in respect of the original members as at incorporation, but also subsequent members (e.g. see section 18 CA85, and note this has been further improved by the approach in section 33 CA2006 which moves away from the association with "registered".

10. It would thus be helpful (CO) if the requirement that powers of attorney be witnessed did not apply where contained in articles of association. This way there would be certainty that powers conferred on directors to sign transfer forms on behalf of recalcitrant shareholders in the context of compulsory transfer provisions would be enforceable against individual shareholders.

Companies Act 2006

33 Effect of company's constitution

(1) The provisions of a company's constitution bind the company and its members to

6


Art. 17 (2)(b) – Change of status of private company (WY)1. Under Article 17(2)(b), a private company shall be subject to the Law as though it

were a public company if (among other things) it circulates a prospectus relating to its securities:

2. Where a prospectus is exempted from the consent and content requirements of

the GPO by virtue of falling within Article 3(2) of that Order, the company will nevertheless be treated as a public company:

Companies (General Provisions) (Jersey) Order 2002Article 3 Application

(1) Except as provided by paragraph (2), this Part applies to a prospectus relating to securities in or membership of a company.

(2) It does not apply –

(a) if the company holds a permit as a functionary specified in Group 1 of Part 2 of the Schedule to the Collective Investment Funds (Jersey) Law 1988;

(aa) if the company is a certificate holder, within the meaning of the Collective Investment Funds (Jersey) Law 1988;

17 Change of status of a private company

(2) A private company shall be subject to this Law as though it were a public company if –

(a) otherwise than in accordance with a direction under Article 16(2), it enters the name of a person in its register of members so as to increase the number of its members beyond 30, and their number for the time being remains above 30;

(b) it circulates a prospectus relating to its securities; or

(c) it is a market traded company within the meaning of Part 16.

7


(b) if the company is an unregulated fund within the meaning of the Collective Investment Funds (Unregulated Funds) (Jersey) Order 20085; or

(c) to the issue of a document relating to a scheme intended to facilitate or to encourage the holding of shares or debentures in a company by or for the benefit of –

(i) directors or former directors (which shall be taken to include people performing or who have performed the functions of directors by whatever name called) of the company, the company’s subsidiary or holding company or a subsidiary of the company’s holding company;

(ii) the bona fide employees or former employees of the company, the company’s subsidiary or holding company or a subsidiary of the company’s holding company; or

(iii) the wives, husbands, widows, widowers or minor children or minor step-children of such directors or employees or former directors or employees.

3. Consider a provision to the effect that (particularly in the context of employee share schemes) the issue of a prospectus that falls within Article 3(2) of the GPO will not cause the issuer to be treated as a public company.

4. Some law firms in Jersey have taken a “house” view that an offer of shares/share options to employees does not constitute an “offer” for the purposes of the definition of prospectus (it appears that this is on the basis that the shares/options are “given” to employees).

5. It would appear that it is at best uncertain whether such an analysis is correct.

8


Art. 17(3) – (CO)1. Currently Article 17(3) requires a private company that enters the name of any

person in its register so as to increase the number beyond 30, to give written notice of that fact to the registrar.

2. If this provision is intended (as we think it is) to enable public notice of the moment when a private company is "deemed" to be a public company, and presumably when it no longer "deemed" to be a public company, then this Article may need to be amended so that further notice would be given when the company was no longer "deemed" to be a public company.

3. However, careful thought is required as to the potential consequences of such an amendment regarding Takeover Code application, the Panel's policy approach during the most recent changes to the Code jurisdiction provisions was to focus on what information is available in publicly available sources.

4. Accordingly, it may not be advisable to move to a position where there is a full notification regime whenever companies become or cease to be "deemed" public companies.

5. Consider exercising the power under Article 17D to abolish the 30 member limit and move to a private/public distinction based on whether a company has circulated a prospectus similar to Guernsey.

6. Also amend the definition of prospectus to include the same carve outs in relation to employees as appears in Article 3(2)(c) of the GPO 2002:

Companies (General Provisions) (Jersey) Order 2002

Article 3 Application

(1) Except as provided by paragraph (2), this Part applies to a prospectus relating to securities in or membership of a company. (2) It does not apply –

(a) if the company holds a permit as a functionary specified in Group 1 of Part 2 of the Schedule to the Collective Investment Funds (Jersey) Law 1988;

(aa) if the company is a certificate holder, within the meaning of the Collective Investment Funds (Jersey) Law 1988;

(b) if the company is an unregulated fund within the meaning of the Collective Investment Funds (Unregulated Funds) (Jersey) Order 20085; or

(c) to the issue of a document relating to a scheme intended to facilitate or to encourage the holding of shares or debentures in a company by or for the benefit of – (i) directors or former directors (which shall be taken to include people

performing or who have performed the functions of directors by whatever name called) of the company, the company’s subsidiary or holding company or a subsidiary of the company’s holding company;

(ii) the bona fide employees or former employees of the company, the company’s subsidiary or holding company or a subsidiary of the company’s holding company; or

(iii) the wives, husbands, widows, widowers or minor children or minor step-children of such directors or employees or former directors or employees.

9


7. Article 3(2)(c) appears only to apply to documents which are exclusively for the classes of people referred to in the Article rather than acting as a carve out from the 50 offer total in the definition of prospectus. The effect of this is to undermine the effectiveness of Article 17A and to attract the application of the Takeover Code to transactions involving companies which have more than 50 directors and employees.

10


Art. 17A(1) – Calculation of number of members (WY)1. Under Article 17A(1), in determining the number of members of a company, no

account shall be taken of a member who is a director or employee, or (subject as provided in the article) a former director or employee.

2. The article makes no mention of spouses and similar, and how that would affect the calculation of the number of members.

3. Consider amending the Article to provide specific reference to spouses and children as is found in Article 6 COBO 1958.

Control of Borrowing Order 1958

6 Grant of options to employees]

(1) Nothing in this Order shall require the consent of the Commission to the grant by a company, a company connected with it or a relevant trustee of options to acquire or dispose of securities of the first-mentioned company where the options are granted to or for the benefit of –

(a) bona fide employees or former employees of the company or of another company with which it is connected;

(b) spouses, civil partners, surviving spouses or surviving civil partners, of such employees or former employees; or

(c) children or step-children under the age of 20 years of such employees or former employees.

(2) In this Article –

(a) “company” includes any body corporate; and

(b) “relevant trustee” means a person holding securities of a company in trust for the purpose mentioned in paragraph (1).

(3) For the purposes of this Article –

(a) a company is connected with another company if that other company –

(i) is the holding company of the first-mentioned company,

(ii) is the subsidiary of the first-mentioned company,

(iii) is a subsidiary of the holding company of the first-mentioned company, or

(iv) holds an interest in the equity share capital of the first-mentioned company for the purpose of securing a contribution to that company’s own activities by the exercise of any control or influence arising from that interest;

(b) a company is a subsidiary of another company and the other company its holding company if that other company –

(i) holds a majority of the voting rights in it,

(ii) is a member of it and has the right to appoint or remove a majority of its board of directors, or

(iii) is a member of it and controls alone, pursuant to an agreement with other members, a majority of the voting rights in it,

or if it is a subsidiary of a company which is itself a subsidiary of that other company;

11


12


Art. 18 (1) – Capacity of company (O)1. Where a company is used for charitable purposes, the unlimited corporate

capacity provision in the Law arguably makes a company incompatible with the new Charities Law, which requires charities to apply their funds for exclusively charitable purposes.

2. One way to harmonise the Law with the new Charities Law would be to amend this Article to provide for an exception in respect of charitable companies.

3. However, it would be preferable for this to be addressed in the Charities Law as it is likely that any change would necessitate an assumption to be added to opinions, which is undesirable.

13


Art. 35 – Rule of law relating to issue of shares at discount etc. abolished (WY)1. Article 35 abolishes the rule of law relating to the issue of shares at a discount.

2. If shares are issued at a discount, the question arises of whether or not they can be credited as fully paid (to avoid a liability to contribute under Article 192(5)(a)), are such shares no different to part paid shares, or no different to bonus shares if the company applies its reserves in payment of the discounted element.

3. The Law is unclear, and consideration should be given as to whether there should be a positive statement in Article 35 as to the status of a share issued at a discount.

4. An arguably preferable solution would be to include a definition of what “paid up” means (in addition to it including “credited as paid up”).

5. An example of a situation where such a definition would prove helpful would be, “paid up to the amount agreed to be paid in respect of the share (whether par or no par) by the subscriber to the shares”.

14


Art. 38 – Alteration of capital of par value companies and Art. 38A Alteration of capital of no par value companies (WY) (MO)1. (WY) Under Article 38(1)(d) a par value company may, by altering its

memorandum, subdivide its shares into shares of smaller amounts.

2. (WY) Each other sub-paragraph of Article 38(1) states or implies that the ability to alter the capital applies to both issued and unissued shares (sub-articles (b) and (ea) are express, sub-articles (c) and (e) are implied by referring to fully paid shares and sub-articles (a) and (f) imply the creation or cancellation of unissued shares).

3. (WY) Sub-article (d) is therefore uncertain (notwithstanding that it refers to a company’s “shares, or any of them”). It is therefore uncertain that a company can sub-divide unissued shares.

4. (WY) We avoid this uncertainty by cancelling any unissued shares under (f) and sub-dividing issued shares under (d), but we note that some other firms purport to sub-divide unissued shares.

5. (MO) Amend Articles 38 and 38A such that they state that a company can alter share capital by special resolution in any manner (including in any of the manners listed in those Articles) subject to other provisions of the Law (e.g. variations, reductions of capital).

6. (MO) This would negate any suggestion that the lists of alterations referred to in Article 38 and 38A are exhaustive.

7. (MO) It would also be helpful to include a provision confirming that it is possible to create, or convert shares into, convertible shares and clarifying what the impact of a subsequent conversion of a share is on the authorised and issued share capital.

15


Art. 39 (1a) – Share premium accounts for par value companies and Art 39A (3) – Stated capital accounts for no par value companies (WY) (CO)1. (WY) As a point of clarification, under Article 39(1)(a), how does a company

transfer such amounts? By resolution of its directors, by ordinary resolution or by special resolution?

2. The previous article 39A(c) required a special resolution in order to transfer an amount from P&L or any capital or redemption reserve to its stated capital account.

3. Was the intention of the change in law to allow this to be done without a special resolution?

4. (CO) Consider including express provision enabling capital contributions to the share premium and stated capital accounts (ie immediately credited to those accounts, rather than credited once the sums received and presumably initially booked to P&L or a non-statutory capital account).

5. Article 39(1)(a) states that where shares are issued at a premium "a sum equal to the aggregate amount or value of those premiums shall be transferred… to a share premium account."

6. The term "value" is ambiguous and it contrasts with the equivalent no par provision (39A(3)(b)) which states "the value, as determined by the directors, of the "cause" received by the company, otherwise than in cash, for the issue of that class."

7. Consideration should be given to conforming Article 39(1)(a) with Article 39A(3).

16


Article 50 – Share Certificates (MO)1. Amend Article 50 to state that the requirement to issue share certificates can be

dis-applied in a company's articles of association. It is difficult to see what benefit there is in compelling a company to issue share certificates. It is not clear what "unless the conditions of allotment of the shares otherwise provide" means.

17


Art. 51 – Certificate to be evidence of title (W)1. Article 51(1) states that “[a] certificate sealed by the company, or signed either

by two of its directors or by one of its directors and its secretary, specifying any shares held by a member is prima facie evidence of the member’s title to the shares.”

2. It is unclear whether this requirement for a seal refers solely to a physical seal to be applied and/or physical signatures, or whether it possible for share certificates to have seals on them or signatures which are "laser printed"?

3. If currently only physical is permitted, would it be appropriate to allow laser printing (or other electronic communication) of the same?

4. Note that Article 51 provides that a share certificate, executed in accordance with that Article, is "prima facie evidence" of the member's title to the shares, so it has important evidentiary consequences.

5. The issue of corporate seals is addressed by Section 50, CA2006. Under English law, there is no requirement that shares be sealed, although a company’s articles of association may require every share certificate to be sealed. However, share certificates made under the company’s common seal are prima facie evidence of title to the shares in question. Section 768(1) CA2006.

6. We have taken the view for some time that printing signatures is acceptable if an enabling provision is included in the articles.

18


Art. 52(4) –Variation of class rights (CO/MO)1. This provision seeks to define what a variation of class rights means, and appears

to be definitive.

2. A similar issue arises in England as to whether other matters can be made "class rights" per the articles or whether that would run contrary to Russell v Northern Bank Development Corporation Ltd [1992] 1 WLR 588 (Appendix 1) (fetter on statutory power).

3. Query whether we should allow choice, through the articles, as to what is or is not a variation of class rights.

4. Subject to the above, an additional issue is the alignment of Article 52(4)'s description of what a variation of class rights means with the relevant English law. Some have expressed the view that Article 52(4) may go further than English law, but others do not agree and think it may be narrower.

5. The key issue is the use of the term "benefits" in Article 52(4)(c).

19


Art. 55 –Power to issue redeemable shares and Art 57 Power of company to purchase its own limited shares (CO) (MO)1. (CO) We previously considered including in Amendment No. 11 a provision

allowing shares to be surrendered. This was dropped at the last minute, consider whether to include it in Amendment No. 12.

2. (CO) Section 659 of CA2006 expressly permits surrender for no consideration.

3. (MO) Add wording to Article 55 confirming that solvency statements for redemptions, purchases of own shares and distributions do not need to be in writing.

4. (MO) Add an ability in Article 57 to cancel nil paid shares (and even better part paid shares as well) subject to any safeguards considered necessary e.g. solvency statement, special resolution. Or allow them to be bought back.

20


Art. 58A(2) –Treasury shares (MO)1. Treasury shares can be (a) cancelled, (b) sold, (c) transferred for the purposes of

an employee share scheme or (d) held. Limb (b) only permits the "sale" of treasury shares. It is not clear if this must be a sale for cash and it seems to prohibit a transfer for no consideration. Consider if added flexibility would be desirable here to make it clear that shares can be transferred for any purpose/nil consideration (eg security enforcement where shares in treasury are given in security) or sold for cash or non-cash consideration.

2. It would be helpful to clarify how treasury shares are to be dealt with in a company's accounts i.e. are they deemed to remain paid up on buy back such that any disposal is treated as a credit to P&L (but query how this works when the redemption or purchase of shares can be funded from any source of funds), or are they deemed nil paid and any disposal is treated as a credit to nominal and share premium / stated capital? There may be a mismatch between Jersey and the UK as a result of the sources that can be used to fund a redemption or purchase of shares.

21


Art. 61B –Registration of solvency statement and minute of reduction (O)

1. In relation to the requirement to file with 15 days:

(i) extend to 21 days (or 15 working days if wish to align with English law);

(ii) make it an offence if do not do so (again to align with English law); and

(iii) provide that failure to file does not affect the validity of the resolution (but further consideration required as to what that means, when (as per the law, the reduction only becomes effective on registration of the statement and minute).

2. In relation to the requirement to provide a solvency statement in Article 61B(1)(a) clarify that only a copy and not the original is required as the Registry are taking the view that the original should be delivered which can lead to timing issues.

3. Either removal of the requirement for an ‘amount’ of share premium to be stated or preferably the removal of the requirement for share premium to be included in the minute pursuant to Article 61(B)(2)(a).

4. In the alternative, rather than amending Article 61(B)(2)(a), consider deleting it entirely. Sub-clauses (b), (c) and (d) seem to contain the necessary information. It is not clear what is achieved by stating the amount of the capital accounts given, for example, a company can distribute away share premium (and therefore deplete its capital accounts) without this being disclosed on the public record. Linked to this, consider if Article 4A(1)(a) needs to be amended to make clear that the references to amounts of share capital is to nominal capital only and not nominal capital and share premium.

22


Part 14 – Directors and Secretary (W)1. Concerns were expressed over group transactions with a lack of corporate benefit.

2. It was noted that New Zealand law specifically provides that a subsidiary company may act in the interests of its holding company, even if that is not technically acting in the subsidiary’s own interests.

3. A similar provision is proposed for the Law, which could remove the need to seek shareholder approval.

New Zealand Companies Act 1993

Article 131: Duty of directors to act in good faith and in best interests of company

(1) Subject to this section, a director of a company, when exercising powers or performing duties, must act in good faith and in what the director believes to be the best interests of the company.(2) A director of a company that is a wholly-owned subsidiary may, when exercising powers or performing duties as a director, if expressly permitted to do so by the constitution of the company, act in a manner which he or she believes is in the best interests of that company’s holding company even though it may not be in the best interests of the company.(3) A director of a company that is a subsidiary (but not a wholly-owned subsidiary) may, when exercising powers or performing duties as a director, if expressly permitted to do so by the constitution of the company and with the prior agreement of the shareholders (other than its holding company), act in a manner which he or she believes is in the best interests of that company’s holding company even though it may not be in the best interests of the company.(4) A director of a company that is carrying out a joint venture between the shareholders may, when exercising powers or performing duties as a director in connection with the carrying out of the joint venture, if expressly permitted to do so by the constitution of the company, act in a manner which he or she believes is in the best interests of a shareholder

23


Art. 74(2) & (4) –Duties of directors (CO) (MO) (A)1. (CO) The solvency statement is different from those used for distributions,

redemptions etc. Query whether it should be conformed?

2. (MO) We do not agree with the suggestion that the solvency statement in Article 74(2) should be conformed to that required for distributions etc. One of the benefits of not requiring a statement is the ability to approve matters under Article 74(2) even if the directors have not specifically considered the issue. We also think the approach in Article 74(2) is consistent with general principles of company law i.e. provided the company is solvent the directors owe their duties to the company (its members) and Article 74(2) reflects that. Conformity is not a sufficient reason to make this change.

3. (A) The standard interpretation is that Article 74(2) permits all the members to authorise or ratify a breach and that Article 74(3) permits a majority to authorise provided that a director who is a member (or anyone connected) is not included in the majority being either not entitled to vote or having their votes disregarded.

4. The potential interpretation issue is that Article 74(4) and (5) refer to "Where the resolution authorising or ratifying the act or omission...." which arguably could also encompass and apply to a resolution under Article 74(2). The mischief would then be if you had a sole member who was a director or connected, then you would have no-one entitled to vote on the written resolution (Article 74(4)) or where all the members were directors or connected, their votes would be disregarded at the meeting (Article 74(5)).

5. In support of the standard interpretation though, Article 74(2) doesn't specifically refer to "a resolution" (whereas Article 74(3) does) and Articles 74(4) and (5) refer to "the resolution" which lends support to the argument that (4) and (5) only apply to (3) and not (2).

6. Perhaps for clarity Articles 74(4) and (5) should expressly refer to Article 74(3).

24


Art. 77 –Indemnity of officers and former officers (CO)1. (CO) Consider conforming director indemnity provisions to the newer English law

position.

2. (CO) Consider whether Article 77(2)(d) – carve out for liability against which the company normally maintains insurance for persons other than directors – is unduly narrow. E.g. what if the company is an SPV with no employees; in principle, is there reason why a director cannot be exempt from any liability which the insurance market is willing to insure? See section 233 CA2006 which seems to encapsulate that approach.

3. (MO) Amend Article 77 to provide that a company may indemnify an officer against or exempt an officer from liability if and to the extent that it is permitted by the company's articles of association. Any restrictions (if any) can then be adapted according to, for example, the expectations of the market where the company's shares are listed.

25


Art. 89 - Requisition of meetings (WY)1. Where shareholders requisition a meeting, there does not appear to be a

provision pursuant to which they can require the directors to circulate a statement, cf. section 314 of the CA2006 and Article 95ZB(3) the Law 1991.

26


Art. 90 – Definitions of special resolution and Art. 91 - Notice of meetings (WY) (O) (CO)1. (WY) The Article provides that a resolution is a special resolution if the [relevant

majority] of the members pass it. Surely it is not a percentage of members entitled to vote, it must be a relevant percentage of the voting rights attaching to the shares. The current provision may be read to suggest that if there are, say, 10 members, then 7 of them can pass a special resolution, regardless of how many shares/votes they hold. Similarly, Article 91 as recently amended allows the articles to require a “greater majority of such persons” – the only “majority referred to in that Article is “a majority in number of the persons who have the right to attend and vote at the meeting” (who hold not less than 90%...). Surely it is not the “greater majority” that the articles need to require, it is the percentage of votes that they hold that is relevant.

2. (CO) Article 91(1) of the Law provides that a provision of a company’s articles is void in so far as it provides for the calling of a meeting of the company, or a class of members by shorter notice than 14 days. There are exceptions to this rule by consenting to short notice or notice of adjourned meetings and a company’s articles of association may also provide expressly for longer periods of notice.

3. Under English law, section 306 of the CA2006 sets out the ‘clear days’ rule, which provides that any period of notice is to be calculated by excluding both the day the notice is served and the day of the meeting.

4. Dunlop on Jersey Company Law acknowledges that in circumstances where a company has adopted the Companies (Standard Table) (Jersey) Order 1992 (“Standard Table”), Regulation 34 provides that an ordinary meeting of shareholders requires at least 14 clear days’ notice. ‘Clear days’ is defined in the Standard Table so as to exclude the day when the notice is given or deemed to be given and the day for which it is given (ie the day of the meeting). However, in circumstances where the Standard Table has not been adopted and articles do not reference clear days, the position is still not clear. The Law is essentially the same as the CA85 in this regard, as it referred to “days” in the statute in respect of notice periods with reference to “clear days” in Table A. Commentary on the CA85 provides that where articles of association do not specify that the notice must be a certain number of clear days there is authority for the proposition that the words mean “clear days’ notice”. This commentary is based on the case of Mercantile Investments and General Trust Co v International Company of Mexico [1983] and Re Hector Whaling Ltd [1936].

5. Two Jersey cases support the ‘clear days’ rule as follows:

6. In Parish of St. Ouen v Minister of Planning and Environment and Plemont Estates Ltd [2014] JRC 043, it was stated that the ‘date for ‘service of notice’ would be 29th August (today)’ and thus ‘14 days from now, takes us to 12th September.’ The Royal Court, in this instance, used clear days in interpreting ‘within 14 days of the service of the notice’.

7. The Courts in Minister for Planning and Environment v Mary de Faye Herold and Sea View Investments Limited [2014] JRC 020 accepted that, upon notice on the 7th August 2014, August 21st was within 14 days of the notice, and the appeal to find otherwise was dismissed. Thus, the day of notice (7th) was not counted, as

27


‘days’ were interpreted as ‘clear days’, as if it were, the opportunity would have expired by midnight on the 20th.

8. It was noted that it would be beneficial for a ‘clear day’ rule to be added to the Amendment No.12 wish list.

9. (CO) Article 1 defines a special resolution by reference to Article 90 and Article 90(1) defines special resolution by reference to Article 90(1A). It is not clear that Article 90(1A) is limited in its application to resolutions which are required to be passed as special resolutions by the Law. Arguably it also applies to resolutions which, under the terms of a company's articles, must be passed by a greater than 2/3 majority. This may encompass a broader category of resolutions than resolutions which must be passed as special resolutions under the Companies Law. For example, certain reserved matters may, under the terms of a company's articles, require 75%, 90% or unanimous approval in order to be sanctioned. The approval of such matters may be confidential or market sensitive and should not have to be filed. It would be helpful if Article 90(1) could be amended to read "A resolution is a special resolution when it is required to be passed as a special resolution by this Law and it has been passed by the majority specified in paragraph (1A)…".

10. The requirement for 95% consent to short notice for special resolution should be conformed to Article 91, so the threshold is 90%.

28


Art. 95 – Resolution in writing (CO)1. Article 95 is currently silent on whether the relevant threshold of members is by

reference to vote on show of hands or on a poll.

2. English law (CA 2006 section 284) is clear that it is on a poll basis, and we suggest we need similar clarity in our law.

3. That said, it has to be the right answer so not considered a material risk at present.

29


Art. 96(1) – Proxies (O)1. In Article 96(1) of the Law there is distinction between proxies of private

companies being entitled to speak at shareholder meetings and proxies of public companies who are not entitled to do so.

2. There seems to be no explanation as to why it was limited to private companies, and if there was a reason, it does not seem to still be valid. Article 96(1) of the Law mirrors section 372 CA85. Even prior to the Companies Act 1948 the Cohen Committee recommended all proxies should be entitled to speak and the Jenkins Committee encouraged the abolition of the distinction set out in the 1948 act. It was finally amended in 2006.

3. Currently proxies of a private company can speak at shareholder meetings but proxies of public companies cannot. CA2006 removed this distinction so it is suggested that the same change is made here.

30


Art. 100 – Filing of resolutions (CO) (JFSC)1. (CO) Suggest it is made clear that shareholders agreements, joint venture

agreements etc do not need to be filed under any circumstances.

2. (JFSC) Propose a cross reference is made in Article 100(4) to Article 61B(1) so as to ensure that a late fine can be charged by the registrar in respect of special resolutions not filed within 15 days of being passed (as stipulated under Article 61B(1)).

31


Art. 102 (1) – Interpretation – Part 16 (EY) (JFSC)(EY) Article 102 Companies Law: harmonisation of definition of “auditor”

1. The definition of an “Auditor” at Article 102 (1) includes a definition of both individuals and firms (partnership and company), both of which refer to “recognized professional body”. For a “qualified partnership”, they meet the definition of an auditor where more than half of the partners are qualified with a recognized professional body or an EEA equivalent qualification.

2. Article 113A (4) (b) “(4) If (b) the auditor is a firm, the report must be signed in his or her name by the individual in the firm who is responsible to it for examining and reporting on the accounts, for and on behalf of the auditor.” includes requirements in relation to both the firm and the individual. The question is how this interacts with the definition of “Auditor”.

3. The best way to illustrate the issue is by an example as follows:

If an EEA audit partnership has more than 50% of its members with an EU equivalent qualification, the firm would meet the definition of an “auditor” under Article 102 (1). However based on the definition of an individual auditor, this requires the individual to have a UK or Irish qualification only.

(JFSC) Article 102 Companies Law: amendment to definition of "exempt company"

4. As you know, Part 16 of the Law includes the “Recognized Auditor” regime. This is a regime under which audit firms that audit Jersey companies with securities traded on an EEA regulated market are subject to an inspection regime that has been deemed “equivalent” by the European Commission. Such companies are defined as “market traded companies” in Article 102 of Part 16.

5. Currently, “a company that is an issuer exclusively of debt securities admitted to trading on a [EEA] regulated market, the denomination per unit of which is at least €50,000 or, in the case of debt securities denominated in another currency, equivalent, at the date of issue, to at least €50,000” is not treated as a market traded company by virtue of paragraph (a) in the definition of “exempt company” in Article 102.

6. The genesis for that domestic legislative exception is the current wording of Article 45(1) of the Statutory Audit Directive (SAD) 2006/43/EC.

7. However, Directive 2014/56/EC will amend Article 45(1) of the SAD as shown in yellow highlighted text below, with the current €50,000 denomination limit effectively increasing to €100,000. Member States have to transpose the provisions of Directive 2014/56 into domestic legislation by 17 June 2016.

8. We need to replicate that change in the Law to avoid companies falling into the scope of the “market traded company” space unnecessarily. This would necessitate an amendment to paragraph (a) of the definition of “exempt company”. The change would need to be made by 17 June 2016 but, given the transitional wording in the amendment to Article 45(1) of SAD, it could be made before that date.

32


9. The change to the definition of “exempt company” could be made by Order (Article 102(3)). Alternatively, is there a forthcoming amendment to the Companies Law we could slip this in to?

10. Article 45 is amended as follows:

paragraph 1 is replaced by the following:

‘1. The competent authorities of a Member State shall, in accordance with Articles 15, 16 and 17, register every third-country auditor and audit entity, where that third-country auditor or audit entity provides an audit report concerning the annual or consolidated financial statements of an undertaking incorporated outside the Union whose transferable securities are admitted to trading on a regulated market of that Member State within the meaning of point 14 of Article 4(1) of Directive 2004/39/EC, except when the undertaking in question is an issuer exclusively of outstanding debt securities for which one of the following applies:

(a) they have been admitted to trading on a regulated market in a Member State within the meaning of point (c) of Article 2(1) of Directive 2004/109/EC of the European Parliament and of the Council (24) prior to 31 December 2010 and the denomination per unit of which is, at the date of issue, at least EUR 50,000 or, in the case of debt securities denominated in another currency, equivalent, at the date of issue, to at least EUR 50,000;

(b) they are admitted to trading on a regulated market in a Member State within the meaning of point (c) of Article 2(1) of Directive 2004/109/EC from 31 December 2010 and the denomination per unit of which is, at the date of issue, at least EUR 100,000 or, in case of debt securities denominated in another currency, equivalent, at the date of issue, to at least EUR 100,000.

33


Art. 108 (2) - Delivery of accounts to registrar (EY)Account Filing Obligations when change in circumstances

1. There is an issue in relation to “Public Company” accounts filing obligations under Article 108 (2), where there is a change in circumstances for the company, for instance;

Liquidation of a “Public Company”; Continuance in / out of Jersey; Mergers; Proposed de-mergers.

2. Article 108 (2) requires audited accounts to “be delivered to the registrar within 7 months after the end of the financial period to which they relate.” The issue is what the accounts requirements are in the intervening period between the end of the “financial period” and the “filing date”.

3. By way of illustration, if two Jersey public companies with a financial period of 31 December 2015 were merged on 31 March 2016, what accounts filing requirements exist for the previous two companies, as opposed to the merged company?

34


Art. 113 – Appointment and removal of auditors (O)1. Disapplication of the audit requirement for a company that has entered into a

summary winding up.

2. Once a company has entered into a summary winding up, Article 148(2) provides that the company’s powers “shall not be exercised except so far as may be required – (a) to realise its assets; (b) to discharge its liabilities; and (c) to distribute its assets in accordance with Article 150.” Arguably the provisions of the Law requiring the production of audited accounts (articles 105 and 113 and article 148) are not entirely consistent with the limitation of powers in article 148(2).

3. Article 105 states that (1) “the directors of a company must prepare accounts” and (5) “A Company’s accounts must be – (a) approved by the directors; and (b) signed on their behalf by one of them.” On the appointment of a liquidator, the powers of directors cease (Article 149 (2)) and therefore a key element of Article 105 is rendered inconsistent with liquidation.

4. This would be consistent with the position in the UK and Guernsey, where instead of preparing audited accounts, a liquidator arranges for a receipts and payments accounts to be prepared in accordance with “Statement of Insolvency Practice 7: Presentation of Financial Information in Insolvency Proceedings”

5. This change could be achieved relatively easily by amending the Companies (Exemptions) (Jersey) Order 2014 (Disapplication of audit requirement) to extend article 3 to companies that have entered into a summary winding up and have appointed a liquidator.

35


Article 115 – Restrictions on distributions (A)1. If a structure is utilising an automatic preferential dividend (e.g. a debt like

instrument), the positive requirement for a solvency statement can substantially affect the efficiency of the operation of the funds flow and lead to a risk that (if the solvency statement is not made) the dividend payment is unlawful.

2. This renders each payment at risk of unwind for all time, even if any subsequent insolvency takes place years later. We have a very cumbersome court process that would be a fix, but that may not always be an appropriate solution.

3. There is also little clarity about when a dividend may be clawed back. The Companies (Jersey) Law 1991, as amended states that if a shareholder knows or ought to know that Article 115 has not been complied with: is this merely about whether the shareholder knew a solvency statement was not given, or does it extend to where the shareholder knew (or ought to have known) that a statement if given must have been incorrect?

36


Part 18B – Mergers (TLWP)1. See Paul Matthams memo to Trust Law Working Party 5/9/13 on proposed

changes to the merger regime (Appendix 2).

37


Art. 127FC – Notice to creditors (O)1. Is Article 127FC clear enough on how these provisions operate if there are no

known creditors in same way as Articles 127(R) / 127(T)?

38


Art. 127FJ(4)(d)(ii) – Pre-registration steps: where all merging bodies are companies (MO)1. In the case of a solvent merger, the directors of the merging companies must sign

a solvency certificate confirming that in their opinion the merger will not unfairly prejudice any interests of any creditor of that merging company.

2. This provision stifles the use of the merger provisions because it is an impossible test; how can a director conclude that the merger will not affect any interest of any creditor, particularly in the cross border merger context where creditors will at least suffer the prejudice of having to sue in another jurisdiction.

3. Further, directors of the merging companies who will not be directors of the merged company may be reluctant to conclude that creditors will not be prejudiced since they will have no involvement in management going forward.

39


Art. 127R – Notice to creditors of application to Commission for authorisation to seek continuance overseas and Article 127T – Application to Commission for authorisation to seek continuance oversees (O)1. Is it clear enough in Article 127R(1) and Article 127T(2)(c) how these

provisions operate if there are no known creditors?

40


Part 21 – Winding up of Companies (BC)1. Proposed amendments to the creditors winding up procedures in light of

discussions involving inter alia Aries.

2. See the agreed principles between ARIES and the Jersey Law Society Financial and Commercial Law Sub-committee (the "Law Society Sub-committee") concerning corporate insolvency law reform (Appendix 3).

41


Art. 150 (4)(b) – Application of assets and dissolution (WY)1. This article permits “interim” distributions to members in a winding up. However,

such distributions appear to be permitted only if the directors reasonably believe that the company will be able to discharge the liabilities.

2. Where a liquidator has been appointed under Article 149, surely interim distribution should be permitted where the liquidator reasonably believes that the company will be able to discharge the liabilities?

42


Art. 176(10) – Transactions at an undervalue and Art.176A (11) – Giving of preferences (CO)1. See Sinead Agnew's piece on the Pauline Action etc in the J&GLR of Feb. 2012

(Appendix 4) that, on Article 17(10) of the Bankruptcy Law, she says that "there is no limiting period ... where the transaction is made with a person connected with a debtor or with an associate …".

2. Discuss whether anyone agrees with that view and whether we need to fix these sections (and Bankruptcy Law).

17 Transactions at an undervalue

(1) If a debtor has at a relevant time entered into a transaction with a person at an undervalue the court may, on the application of the Viscount, make such an order as the court thinks fit for restoring the position to what it would have been if the debtor had not entered into the transaction.

(2) The court shall not make an order under paragraph (1) if it is satisfied –

(a) that the debtor entered into the transaction in good faith for the purpose of carrying on a business or, in the case of a company, its business; and

(b) that, at the time the debtor entered into the transaction, there were reasonable grounds for believing that the transaction would be of benefit to the debtor.

(3) Without prejudice to the generality of paragraph (1) but subject to paragraph (5), an order made under paragraph (1) may do all or any of the following things, namely –

(a) require property transferred as part of the transaction to be vested in the Viscount;

(b) require property to be so vested if it represents in a person’s hands the application either of the proceeds of sale of property so transferred or of money so transferred;

(c) release or discharge (in whole or in part) security given by the debtor;

(d) require a person to pay in respect of a benefit received by him or her from the debtor such sum to the Viscount as the court directs;

(e) provide for a surety or guarantor whose obligation to a person was released or discharged (in whole or in part) under the transaction to be under such new or revived obligation to that person as the court thinks appropriate;

43


(f) provide–

(i) for security to be provided for the discharge of an obligation imposed by or arising under the order,

(ii) for the obligation to be secured on any property, and

(iii) for the security to have the same priority as the security released or discharged (in whole or in part) under the transaction;

(g) provide for the extent to which a person –

(i) whose property is vested in the Viscount by the order, or

(ii) on whom an obligation is imposed by the order,

is to be able to prove in the “désastre” of the debtor for debts or other liabilities that arose from, or were released or discharged (in whole or in part) under or by, the transaction.

(4) Except to the extent provided by paragraph (5), an order made under paragraph (1) may affect the property of or impose an obligation on any person, whether or not he or she is the person with whom the debtor entered into the transaction.

(5) An order made under paragraph (1) –

(a) shall not prejudice an interest in property that was acquired from a person other than the debtor and was acquired in good faith and for value, or prejudice any interest deriving from such an interest; and

(b) shall not require a person who in good faith and for value received a benefit from the transaction to pay a sum to the Viscount, except where the person was a party to the transaction.

(6) In considering for the purposes of this Article whether a person has acted in good faith, the court may take into consideration –

(a) whether the person was aware –

(i) that the debtor had entered into a transaction at an undervalue, and

(ii) that the debtor was insolvent or would as a likely result of entering into the transaction become insolvent; and

(b) whether the person was an associate of or was connected with either the debtor or the person with whom the debtor had entered into the transaction.

44


(7) For the purposes of this Article, a debtor enters into a transaction with a person at an undervalue if –

(a) he or she makes a gift to that person;

(b) he or she enters into a transaction with that person –

(i) by way of a marriage settlement, or

(ii) on terms for which there is no “cause”, or

(iii) for a “cause” the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the “cause” provided by the debtor.

(8) Subject to paragraphs (9) and (10), the time at which a debtor entered into a transaction at an undervalue is a relevant time for the purpose of paragraph (1) if the transaction was entered into during the period of 5 years immediately preceding the making of the declaration.

(9) The time to which paragraph (8) refers is not a relevant time unless –

(a) the debtor was insolvent when he or she entered into the transaction; or

(b) the debtor became insolvent as a result of the transaction.

(10) If the transaction at an undervalue was entered into with a person connected with the debtor or with an associate of the debtor, paragraph (9) does not apply and the time to which paragraph (8) refers is a relevant time unless it is proved that –

(a) the debtor was not insolvent when he or she entered into the transaction; and

(b) the debtor did not become insolvent as a result of the transaction.

(11) For the purposes of this Article “cause” has the meaning assigned to it by the customary law of Jersey.

45


Article 181 – Liability in respect of purchase or redemption of shares (MO)

1. There is a mismatch between Article 181 (clawback on redemption / purchase) and the equivalent provision in the Bankruptcy Law.

2. The Bankruptcy Law needs to be updated to reflect the more recent change in Article 181.

Bankruptcy (Désastre) (Jersey) Law 1990

45A Liability in respect of purchase or redemption of shares

(1) This Article applies where a declaration has been made in respect of a company (other than an open-ended investment company) and –

(a) it has within 12 months before the declaration made a payment under Article 55 or Article 57 of the Companies Law or under Regulations made under Article 59 of that Law in respect of the redemption or purchase of its own shares;

(b) the payment was not made wholly out of profits available for distribution or out of the proceeds of a fresh issue of shares made for the purpose of the redemption or purchase; and

(c) the aggregate realisable value of the company’s assets and the amount paid by way of contribution to its assets (apart from this Article) is not sufficient for the payment of its liabilities and the expenses in connection with the “désastre”.

(2) In this Article, the amount of a payment that has not been made wholly out of profits available for distribution or out of the proceeds of a fresh issue of shares made for the purpose of the redemption or purchase is referred to as “the relevant payment”.

(3) Subject to paragraphs (5) and (6), the court on the application of the Viscount may order–

(a) a person from whom the shares were redeemed or purchased; or

(b) a director,

to contribute in accordance with this Article to the company’s assets so as to enable the insufficiency to be met.

(4) A person from whom any shares were redeemed or purchased may be ordered to contribute an amount not exceeding so much of the relevant payment as was made in respect of his or her shares.

(5) A person from whom shares were redeemed or purchased shall not be ordered to contribute under this Article unless the court is satisfied that, when the person received payment for his or her shares –

(a) the person knew; or

(b) the person ought to have concluded from the facts known to him or her,

that immediately after the relevant payment was made the company would be unable to discharge its liabilities as they fell due, and that the realisable value of the company’s assets would be less than the aggregate of its liabilities.

(6) A director who has expressed an opinion under Article 55(9) of the Companies Law may be ordered, jointly and severally with any other person who is liable to contribute under this Article, to contribute an amount not exceeding the relevant payment, unless the court is satisfied that the director had grounds for the opinion expressed.

(7) Where a person has contributed an amount under this Article, the court may direct any other person who is jointly and severally liable to contribute under this Article to pay to him or her such amount as the court thinks just and reasonable.

(8) Article 45B does not apply in relation to liability accruing by virtue of this Article.

(9) The States may by Regulations extend or modify the provisions of this Article in such ways as may appear to be reasonably necessary in consequence of any Regulations made under Article 59 of the Companies Law

46


47


Art. 201A(1) Keeping of records by registrar (JFSC)

1. The Commission would support an amendment of Article 201A(1) on the following lines.

2. “The information that is contained in a document that is required to be delivered to the registrar under this Law …”

3. If this amendment is made, it will be entirely clear that under Article 202(1) “a record kept by the registrar” is read in this context.

48


Other1. Extend list of exemptions to Companies (Transfer of Shares –

Exemptions) (Jersey) 2014 beyond US, Canadian and EU exchanges (MO)

Could the list of jurisdictions to which the Companies (Transfer of Shares – Exemptions) (Jersey) Order 2014 applies be extended? This Order removes the need to have written share transfers and to produce share certificates where shares are listed on an approved exchange. At present it's limited to US, Canada and the EU. It would be helpful to extend to Australia, HK, South Africa etc. This might help some of our larger listed clients, looking for secondary listings. We can't recall why it was limited to US, Canada and the EU.

49


2. Add equivalency to Section 110 of the Insolvency Act 1986 (MO)

Consider including an equivalent of section 110 Insolvency Act 1986 (but do not include it in "insolvency legislation" section).

Insolvency Act 1986

110 Acceptance of shares, etc., as consideration for sale of company property

(1)This section applies, in the case of a company proposed to be, or being, wound up voluntarily, where the whole or part of the company’s business or property is proposed to be transferred or sold.

(a) to another company (“the transferee company"), whether or not the latter is a company registered under the Companies Act 2006, or

(b) to a limited liability partnership (the “transferee limited liability partnership").

(2) With the requisite sanction, the liquidator of the company being, or proposed to be, wound up (“the transferor company") may receive, in compensation or part compensation for the transfer or sale—

(a) in the case of the transferee company, shares, policies or other like interests in the transferee company for distribution among the members of the transferor company, or

(b) in the case of the transferee limited liability partnership, membership in the transferee limited liability partnership for distribution among the members of the transferor company.

(3)The sanction requisite under subsection (2) is—

(a) in the case of a members’ voluntary winding up, that of a special resolution of the company, conferring either a general authority on the liquidator or an authority in respect of any particular arrangement, and

(b) in the case of a creditors’ voluntary winding up, that of either the court or the liquidation committee.

(4) Alternatively to subsection (2), the liquidator may (with that sanction) enter into any other arrangement whereby the members of the transferor company may—

(a) in the case of the transferee company, in lieu of receiving cash, shares, policies or other like interests (or in addition thereto) participate in the profits of, or receive any other benefit from, the transferee company, or

50


(b) in the case of the transferee limited liability partnership, in lieu of receiving cash or membership (or in addition thereto), participate in some other way in the profits of, or receive any other benefit from, the transferee limited liability partnership.

(5)A sale or arrangement in pursuance of this section is binding on members of the transferor company.

(6)A special resolution is not invalid for purposes of this section by reason that it is passed before or concurrently with a resolution for voluntary winding up or for appointing liquidators; but, if an order is made within a year for winding up the company by the court, the special resolution is not valid unless sanctioned by the court.

51


3. (CO)

Consider carrying out a general review of the securities law provisions in COBO and GPO. E.g. on ESOPs, there is an inconsistency between Art 3 GPO, Article 6 COBO and the definition of prospectus. In any event, we are due to do a review of the prospectus regime post A11 consultation and power to amend definition of "prospectus".

[It is time to revise the definition of prospectus to bring it more into line with the UK and EU, or at the very least more in line with Guernsey and IOM. We are not competitive with the other CDs.]

52


4. (MO)

There is still doubt as to whether any authorisation or ratification obtained pursuant to Article 74(2) or (3) would cover a breach of customary law duties by the directors in addition to the statutory breach of Article 74(1). The CA2006, Section 170(3) makes it clear that the corresponding common law duties have been replaced by the relevant sections of the CA2006. It is recommended that a similar provision be introduced to the Law re Article 74(1) which would provide certainty on this point.

The scope of Article 74(2) could then be widened along the lines of Section 239 of CA2006. Section 239 enables the members to ratify after the event any conduct by a director "amounting to negligence, default, breach of duty or breach of trust in relation to the company" and not merely a breach of the statutory general duties of directors under CA Section 170ff. (See also Section 180 for approval in advance, which is less wide as it seems to be referring back to the common law position).

This, however, should be expressed not to extend to cases where ratification or approval is already provided for under the Law, e.g. under Article 76, and where the act in question is incapable of the ratification by members e.g. an unlawful distribution or return of capital – see Section 239(7) for provisos having similar effect.

53


5. (O)

We have a current deal where it is important that the offshore entity chosen question has the ability to trade shares in dematerialised form through the CHESS system attached to the ASX. As you are aware, a Jersey entity is unable to participate in that system given that only CREST is fully recognised and that the recent Order does not cover the ASX.

We have enquired as to whether the position would differ in Guernsey. The response is that they have far greater flexibility. Under Guernsey law:

- a company does not need to issue share certificates; and

- shares are transferrable in the manner provided by the companies articles (so no need for stock transfer forms).

As a result, it is likely that we will lose a salient part of the deal to Guernsey. It appears that this is an area where we are uncompetitive.

54


6. Simplified Business Entity

The United Nations Commission on International Trade Law (UNCITRAL) has been running a working group on company law. The working group is concerned with creating a new legal entity called the ‘Simplified Business Entity’ (SBE) which would allow a state to confer limited liability status on individual traders. A Model Law on a Simplified Business Entity has been created.

Would this be of interest to small and medium enterprises in Jersey?

55

https://documents-dds-ny.un.org/doc/UNDOC/LTD/V15/005/91/PDF/V1500591.pdf?OpenElement


Appendix 1

*588 Russell v Northern Bank Development Corporation Ltd. and Others

House of Lords

11 June 1992

[1992] 1 W.L.R. 588

Lord Griffiths, Lord Jauncey of Tullichettle, Lord Lowry, Lord Mustill and Lord Slynn of Hadley

1992 April 8; June 11

Company—Capital—Increase—Agreement between shareholders preventing increase in share capital of company without written consent—Whether restriction on company's statutory power to alter share capital—Companies (Northern Ireland) Order 1986 (S.I. 1986 No. 1032 (N.I. 6)), art. 131

In 1979 the control of two companies was vested in a new holding company with an authorised share capital of £1,000 divided into 1,000 shares of £1 each. The plaintiff and the second to fourth defendants were each allocated 20 shares and the first defendant bank 120 shares, with the remaining shares not being allocated. The plaintiff and the second to fourth defendants, together with the company, thereafter executed a shareholders' agreement whereby they undertook, inter alia, that “no further share capital shall be created or issued in the company… without the written consent of each of the parties hereto.” In 1988 notice was given of an extraordinary general meeting to consider a proposal that the share capital of the company be increased. On the plaintiff's application for an injunction restraining the defendants from voting upon the resolution the judge, dismissing the application, held that the shareholders' agreement purported to fetter the company's statutory right pursuant to article 131 of the Companies (Northern Ireland) Order 1986 1 to increase its share capital and was unenforceable. On the plaintiff's appeal the Court of Appeal in Northern Ireland, by a majority, upheld the judge's order.

On the plaintiff's appeal: —

Held , allowing the appeal, that although a provision in a company's articles of association restricting its statutory power to alter the articles, or a formal undertaking by the company to that effect, would be invalid, individual shareholders might lawfully make a private agreement as to the exercise of their voting rights that did not purport to bind the company or shareholders not party to the agreement; that the agreement between the plaintiff and the second to fourth defendants, being a personal agreement not binding future shareholders, was enforceable, whereas the execution of the agreement by the company constituted a formal undertaking fettering its statutory powers which was unenforceable; and that, accordingly, the company's undertaking being severable from that of the shareholders and the

56


remedy of injunction inappropriate, the case would be remitted for a declaration on the validity of the agreement as between the shareholders (post, pp. 589F, 593A–D, 594E–595A, B–C, D–E).

Dicta of Lord Davey in Welton v. Saffery [1897] A.C. 299, 331, H.L.(E.) and of Russell L.J. in Bushell v. Faith [1969] 2 Ch. 438, 447, C.A. considered.

*589

Decision of the Court of Appeal in Northern Ireland [1992] B.C.L.C. 431 reversed.

The following cases are referred to in the opinion of Lord Jauncey of Tullichettle:

Allen v. Gold Reefs of West Africa Ltd. [1900] 1 Ch. 656, C.A.

Bushell v. Faith [1969] 2 Ch. 438; [1969] 2 W.L.R. 1067; [1969] 1 All E.R. 1002, C.A.

Southern Foundries (1926) Ltd. v. Shirlaw [1940] A.C. 701; [1940] 2 All E.R. 445, H.L.(E.)

Welton v. Saffery [1897] A.C. 299, H.L.(E.)

The following additional cases were cited in argument:

Cane v. Jones [1980] 1 W.L.R. 1451; [1981] 1 All E.R. 533

Greenhalgh v. Mallard [1943] 2 All E.R. 234, C.A.

Peveril Gold Mines Ltd., In re [1898] 1 Ch. 122, C.A.

Punt v. Symons & Co. Ltd. [1903] 2 Ch. 506

APPEAL from the Court of Appeal in Northern Ireland.

This was an appeal by the plaintiff, Samuel Thomas Russell, from the order of the Court of Appeal in Northern Ireland (Hutton C.J. and Kelly L.J.; MacDermott L.J. dissenting) [1992] B.C.L.C. 431 upholding the order of Murray J. on 9 June 1989 refusing to grant the plaintiff an injunction restraining the first four defendants, the Northern Bank Development Corporation Ltd., Edward Winston Napier, John Andrew Topping and the personal representative of Kenneth Calderwood Gore McIlgorm from considering or voting upon any resolution to create or issue any new share capital in the fifth defendant, Tyrone Brick Ltd.

The facts are stated in the opinion of Lord Jauncey of Tullichettle.

Representation

Robert L. McCartney Q.C. and John Thompson (both of the Northern Ireland Bar)

57


for the plaintiff.

F. P. Girvan Q.C. and W. B. S. Stephens (both of the Northern Ireland Bar) for the defendants.

LORD GRIFFITHS

Their Lordships took time for consideration.

11 June. My Lords, for the reasons given by my noble and learned friend, Lord Jauncey of Tullichettle, I would allow this appeal.

LORD JAUNCEY OF TULLICHETTLE

My Lords, during the 1970s the Northern Bank Ltd. and its wholly owned subsidiary the Northern Bank Development Corporation Ltd. lent or invested substantial sums of money to or in two brick making companies in Killough, County Down, and Dungannon, County Tyrone. The former company was unsuccessful and incurred huge losses whereas the latter company prospered exceedingly. In 1979 the corporation devised a scheme whereby the control of both companies came to be vested in a new holding company whose name after some changes became Tyrone Brick Ltd. (“T.B.L.”) with an authorised share capital of £1,000 divided into 1,000 shares of £1 each. An essential part of the scheme was that the four executives who ran the Dungannon brick works should manage T.B.L. and to that end 20 shares in T.B.L. were alloted to each of them. A further 120 shares *590 were alloted to the corporation but no allotment was made of the remaining 800 shares. On 14 November 1979 a shareholders' agreement was executed by the four executives, who were Mr. Samuel Russell, the plaintiff, Mr. Edward Winston Napier and Mr. John Andrew Topping, the second and third defendants, and Mr. Kenneth Calderwood Gore McIlgorm, now deceased, whose personal representative is the fourth defendant and by T.B.L. Although the corporation bore to be a party to the agreement it never executed it. The agreement provided, inter alia:

“Whereas: 1. The corporation and the executives (hereinafter collectively called ‘the shareholders') are the holders of the entire issued share capital of the company. 2. The shareholders have agreed to regulate the relationship between them with regard to the management and control of the company so long as they shall remain shareholders of the company.

“Now this agreement witnesseth as follows: 1. The terms of this agreement shall have precedence between the shareholders over the articles of association and the parties agree to do, execute and perform such further acts, deeds, resolutions, consents, documents and things as may be necessary to give effect to this clause. Where the articles of association are silent on any matter, the provisions of this agreement shall operate between the parties. Where there is conflict between the provisions of this agreement and the articles of association the parties hereto shall co-operate where necessary to have the articles amended from time to time to take account of the provisions of this agreement and any subsequent consequential changes. Where this agreement requires any future action to be taken by the board of

58


directors or by the members of the company the shareholders as such shareholders or as the parties entitled to nominate the board of directors of the company will co-operate and do all such things as are necessary to implement such future action. 2. The provisions of this agreement shall not be amended without the written consent of each of the parties hereto. 3. No further share capital shall be created or issued in the company or the rights attaching to the shares already in issue in any way altered (save as is herein set out) or any share transfer of the existing shares permitted, save in the following manner, without the written consent of each of the parties hereto. 4. Save as hereinafter provided the shareholders (or a person entitled to any share in the company in consequence of a transfer as hereinafter provided) may at any time transfer any share registered in the name of such shareholders subject to the following terms and conditions: (a) Any of the shareholders (or a company entitled to a share in consequence of a transfer as provided for in clause 6 hereof) (hereinafter called ‘the proposing transferor’) desiring to transfer any share in the company shall give notice in writing (hereinafter called the ‘the transfer notice’) to the company of its desire to transfer the same. Such notice shall constitute the company its agents for the sale of such share in accordance with the provisions following at the ‘fair value’ to be fixed by the auditors for the time being of the company in manner laid down in clause 5 hereunder. The transfer notice may include more than one share and in such case shall operate as if it were a separate notice in respect of each such share… 5. The *591 auditors for the time being of the company acting as experts and not as auditors shall on the application of the directors certify in writing the ‘fair value’ of such shares in the company… 6. The shareholders may at any time transfer any share registered in the name of such shareholder to: (i) in the case of a shareholder being a body corporate to a body corporate which is in relation to such shareholder a holding company or a subsidiary company or a subsidiary company of the same holding company or in the case of a statutory body any other statutory body established as its succes- sor; or (ii) in the case of an individual to any wife, widow, husband, widower child or lineal descendant of such member. 7. While the corporation remains a shareholder in the company it shall have the right on written notice to the board of directors of the company to require the board of directors forthwith to co-opt such additional directors to the board of the company which together with the then existing directors of the company nominated by the corporation would constitute a majority of the board of the company. The executives as directors of the company further hereby jointly and severally covenant with the corporation to do all things necessary within their powers as directors to implement the provisions of this clause.”

On 10 March 1988 the board of T.B.L. gave notice to the shareholders of an extraordinary general meeting to be held on 30 March 1988 to consider the following two ordinary resolutions:

“1. That the capital of the company be increased from £200 to £4,000,000 by the creation of 3,999,800 ordinary shares of £1 each ranking pari passu with the existing issued ordinary shares in the capital of the company.

59


2. That upon the recommendation of the directors it is desirable to capitalise the sum of £3,999,800 being part of the amount standing to the credit of the company's reserves and accordingly that the directors be authorised and directed to appropriate the said sum for distribution to the holders of the ordinary shares of £1 each on the register at the close of business on 31 December 1987 in proportion to the amounts paid up on the issued ordinary shares of £1 each then held by them respectively and to apply such sum on behalf of such holders in paying up in full 3,999,800 of the unissued ordinary shares of £1 each in the capital of the company such shares to be allotted and distributed as fully paid up to and amongst such holders in the proportion of 19,999 new shares for every 1 ordinary share held on that date and that such shares shall rank for all purposes pari passu with the existing issued ordinary shares of the company provided that this authority shall expire five years from the date hereof.”

The first resolution erroneously referred to an increase in capital from £200 instead of from £1,000 but nothing turns on this. Before the meeting the plaintiff issued a writ against the other three original shareholders and the personal representative of the deceased, Mr. McIlgorm claiming, inter alia:

“1. An injunction to restrain the defendants and each of them whether by themselves or by their respective servants or agents or proxies from considering and/or voting upon items 1 & 2 of a notice of resolution dated 10 March 1988 for an extraordinary general *592 meeting of Tyrone Brick Ltd. to be held on 30 March 1988 at 10.30 a.m.

2. Damages for breach of contract. 3. Further and other relief…”

The parties went to trial on the issue of whether the arrangement was binding on all the shareholders including the corporation who had not executed it. On this issue the plaintiff was successful and no further question thereanent arises. However during the course of the trial the judge, Murray J., of his own motion, ordered that T.B.L. be joined as a defendant under R.S.C., Ord. 15, r. 6(2)(b) and thereafter dismissed the action on the ground that article 3 of the agreement constituted an attempt to fetter T.B.L.'s statutory power to increase its capital and was accordingly invalid and ineffective in law. The Court of Appeal [1992] B.C.L.C. 431 by a majority, MacDermott L.J. dissenting, upheld Murray J's. conclusion on invalidity and dismissed the appeal.

In March 1988 article 131 of the Companies (Northern Ireland) Order 1986 (S.I. 1986 No. 1032 (N.I. 6)) was in force and was in, inter alia, the following terms:

“(1) A company limited by shares or a company limited by guarantee and having a share capital, if so authorised by its articles, may alter the conditions of its memorandum in any of the following ways.

(2) The company may —

(a) increase its share capital by new shares of such amount as it thinks expedient;…”

Article 1 of the articles of association of T.B.L. incorporates the regulations contained

60


in Part II of Table A in the first Schedule to the Companies Act (Northern Ireland) 1960 of which regulation 44 provides:

“The company may from time to time by ordinary resolution increase the share capital by such sum, to be divided into shares of such amount, as the resolution shall prescribe.”

It follows that of as the date of the proposed extraordinary general meeting T.B.L. had statutory power to increase its share capital.

The issue between the parties in this House was whether article 3 of the agreement constituted an unlawful and invalid fetter on the statutory power of T.B.L. to increase its share capital or whether it was no more than an agreement between the shareholders as to their manner of voting in a given situation. Both parties accepted the long established principle that “a company cannot forgo its right to alter its articles:” Southern Foundries (1926) Ltd. v. Shirlaw [1940] A.C. 701, 739, per Lord Porter. A principle that was earlier stated in Allen v. Gold Reefs of West Africa Ltd. [1900] 1 Ch. 656, 671, per Lindley M.R.:

“the company is empowered by the statute to alter the regulations contained in its articles from time to time by special resolutions (sections 50 and 51 [of the Companies Act 1862]); and any regulation or article purporting to deprive the company of this power is invalid on the ground that it is contrary to the statute: Walker v. London Tramways Co. (1879) 12 Ch.D. 705.”

Murray J. and MacDermott L.J. both considered that this principle applied also to the right of a company to alter its memorandum and I agree that this must be the case. Mr. McCartney for the plaintiff advanced a number of arguments to the effect that the agreement in no way contravened the above principle in as much as it was merely an agreement between shareholders outside the scope of company legislation *593 which in no way fettered the statutory power of T.B.L. to alter its memorandum and articles. Mr. Girvan, on the other hand, submitted that the agreement was not only a voting arrangement between shareholders inter se but was tantamount to an article of association which constituted a restriction on the power of T.B.L. to alter its share capital.

My Lords while a provision in a company's articles which restricts its statutory power to alter those articles is invalid an agreement dehors the articles between shareholders as to how they shall exercise their voting rights on a resolution to alter the articles is not necessarily so. In Welton v. Saffery [1897] A.C. 299, 331, which concerned an ultra vires provision in the articles of association authorising the company to issue shares at a discount, Lord Davey said:

“Of course, individual shareholders may deal with their own interests by contract in such way as they may think fit. But such contracts, whether made by all or some only of the shareholders, would create personal obligations, or an exceptio personalis against themselves only, and would not become a regulation of the company, or be binding on the transferees of the parties to it, or upon new or non-assenting shareholders. There is no suggestion here of any such private agreement outside the machinery of the Companies Acts.”

61


I understand Lord Davey there to be accepting that shareholders may lawfully agree inter se to exercise their voting rights in a manner which, if it were dictated by the articles, and were thereby binding on the company would be unlawful.

I turn to examine the agreement in more detail. It appears from the narrative clauses that the agreement was intended to regulate the relationship between the shareholders with regard to the management and control of T.B.L. Clause 1 provides that the terms of the agreement shall have precedence “ between the shareholders over the articles of association” (the emphasis is mine). It further provides that where there is a conflict between the provisions of the agreement and the articles parties shall co-operate where necessary to have the articles amended to take account of the provisions of the agreement. It further provides that no further share capital shall be created or issued in T.B.L. without the written consent of the parties to the agreement. T.B.L. was incorporated under a previous name on 13 July 1979 and the agreement was executed on 14 December of that year. Since that date no attempt has been made to amend the articles for the purposes of clause 1 but I do not find that in any way surprising because clause 3 affects only existing shareholders and does not purport to bind other persons who may at some future date become shareholders in T.B.L. by allotment or transfer. Clause 3 at least so far as shareholders are concerned constitutes an agreement collateral to the provisions of regulation 44 of Table A and is, as MacDermott L.J. has concluded, neither in substitution for nor in conflict with that regulation.

However it must be remembered that the agreement was executed not only by the shareholders but also by T.B.L. In Bushell v. Faith [1969] 2 Ch. 438 one of the articles of a private company provided that in the event of a resolution being proposed at a general meeting of the company for the removal of a director any share held by him should carry three votes per share. The issued capital of the company was *594 equally divided between three persons and an attempt by two shareholders to remove the third from the office of director failed because his 300 votes outnumbered the 200 of the two other shareholders. It was held that the article in quesion was not invalidated by section 184 of the Companies Act 1948 which empowered a company by ordinary resolution to remove a director. Russell L.J. said, at pp. 447–448:

“Mr. Dillon argued by reference to section 10, and the well known proposition that a company cannot by its articles or otherwise deprive itself of the power by special resolution to alter its articles or any of them. But the point is the same one. An article purporting to do this is ineffective. But a provision as to voting rights which has the effect of making a special resolution incapable of being passed, if a particular shareholder or group of shareholders exercises his or their voting rights against a proposed alteration, is not such a provision. An article in terms providing that no alteration shall be made without the consent of X is contrary to section 10 and ineffective. But the provision as to voting rights that I have mentioned is wholly different, and it does not serve to say that it can have the same result.”

Both parties sought to derive comfort from this dictum. Mr. McCartney relied on it as demonstrating that a provision as to the exercise of voting rights, even although it had the effect of preventing a resolution being passed, was nevertheless valid. Mr.

62


Girvan argued that the effect of clause 3 was the same as that of an article containing a provision that “no alteration should be made without the consent of X.”

I do not doubt that if clause 3 had been embodied in the articles of association so as to be binding on all persons who were or might become shareholders in T.B.L. it would have been invalid but it was, of course, not so embodied. To my mind the significant part of this dictum for the purposes of this appeal is the words “articles or otherwise” occurring in the first sentence thereof. These words appear to recognise that it is not only fetters on the power to alter articles of association imposed by the statutory framework of a company which are obnoxious.

Turning back to clause 3 of the agreement it appears to me that its purpose was twofold. The shareholders agreed only to exercise their voting powers in relation to the creation or issue of shares in T.B.L. if they and T.B.L. agreed in writing. This agreement is purely personal to the shareholders who executed it and as I have already remarked does not purport to bind future shareholders. It is, in my view, just such a private agreement as was envisaged by Lord Davey in Welton v. Saffery [1897] A.C. 299, 331. T.B.L. on the other hand agreed that its capital would not be increased without the consent of each of the shareholders. This was a clear undertaking by T.B.L. in a formal agreement not to exercise its statutory powers for a period which could, certainly on one view of construction, last for as long as any one of the parties to the agreement remained a shareholder and long after the control of T.B.L. had passed to shareholders who were not party to the agreement. As such an undertaking it is, in my view, as obnoxious as if it had been contained in the articles of association and therefore is unenforceable as being contrary to the provisions of article 131 of the Companies (Northern Ireland) Order 1986. T.B.L.'s undertaking is, however, independent of and severable from that of the shareholders and there is no reason why the latter should not be enforceable by the shareholders *595 inter se as a personal agreement which in no way fetters T.B.L. in the exercise of its statutory powers. I would therefore allow the appeal.

It only remains to consider the relief which would be afforded to the plaintiff. He stated in evidence that he had no objection to the proposed resolutions in themselves but that he wished to establish the validity of clause 3 and was concerned that if further capital were issued he might in future be faced with a rights issue without the necessary cash to take it up with the result that his position might be weakened in relation to other shareholders. In these circumstances it would be inappropriate to grant him the injunction sought in his writ. In my view the proper order would be a declaration as to the validity of clause 3 of the agreement as between the shareholders. No argument was addressed to your Lordships as to the form of such a declaration and accordingly the case must be remitted back to the Court of Appeal to make the appropriate order in the light of such submissions as counsel may think fit to make thereanent. As T.B.L. was brought into the proceedings at the instance of the trial judge and as little or no extra expense has been occasioned by its presence the plaintiff should have his costs only against the first to fourth defendants.

LORD LOWRY

My Lords, I have had the advantage of reading in draft the speech of my noble and

63


learned friend, Lord Jauncey of Tullichettle. I agree with it and, for the reasons given by my noble and learned friend, I, too, would allow the appeal and make the order which he proposes.

LORD MUSTILL

My Lords, I, too, would allow this appeal for the reasons given by my noble and learned friend, Lord Jauncey of Tullichettle.

LORD SLYNN OF HADLEY

My Lords, for the reasons given by my noble and learned friend, Lord Jauncey of Tullichettle I, too, would allow this appeal and make the order which he proposes.

C. T. B.

Representation

Solicitors: Sharpe Pritchard for P.A. Duffy & Co., Belfast; Herbert Smith for Carson & McDowell, Belfast.

Appeal allowed. Plaintiff's costs against first to fourth defendants.

64


Appendix 2Memorandum from Paul Matthams to the Trust Law Working Group, 5 September 2013

65


66


67


68


69


Appendix 3Agreed principles between ARIES and the Jersey Law Society Financial and Commercial Law Sub-committee (the "Law Society Sub-committee") concerning corporate insolvency law reform

There have been discussions between members of ARIES and the Law Society Sub-committee concerning the reform of Jersey's corporate insolvency laws.

The following principles have been agreed in relation to such reform:

There is no appetite for any new form of insolvency procedure. There is no support for any form of insolvency procedure which includes a

moratorium against a secured creditor enforcing its security. Instead, a reform of the existing creditors' winding up procedure contained in

the Companies (Jersey) Law 1991 (the "1991 Law") is supported. The principles of this reform are outlined below. These changes should be made in the next set of company law amendments (being Companies Amendment Law Number 12).

Dégrèvement should be reformed. There should be additional methods to enforce a hypothec over Jersey immovable property: a secured party should have a power of sale and/or the ability to appoint a receiver.

The principles concerning the reform of the creditors' winding up procedure are as follows:

The creditors' winding up procedure should be extended to enable certain applicants to apply to court for a winding up order - these applicants would be the same as for a désastre (i.e. the company, a creditor (in the prescribed amount) and the Commission (in the case of a regulated entity)).

The making of this order would be at the discretion of the court. The powers of a liquidator would be conformed (where possible) with the

powers of the Viscount in a désastre. It would be made expressly clear that the appointment of a liquidator will not

affect the ability of a secured party to enforce a Jersey law security interest or exercise its rights under a Jersey law security agreement - covering both the Security Interests (Jersey) Law 1983 and the Security Interests (Jersey) Law 2012.

It would also be made expressly clear that the appointment of a liquidator would not affect the ability of a secured party to enforce a foreign law security interest or exercise its rights under a foreign law security agreement.

There should be consistency with the Désastre Law. Therefore, amendments to the Désastre Law should be made at the same time to achieve (as far as possible) equal treatment of secured creditors across the two regimes. This would include the following amendments: (a) the making of a declaration will not affect the ability of a secured party to enforce a Jersey law security interest or exercise its rights under a Jersey law security agreement - covering both the Security Interests (Jersey) Law 1983 and the Security Interests (Jersey) Law 2012 and (b) the making of a declaration would not affect the

70


ability of a secured party to enforce a foreign law security interest or exercise its rights under a foreign law security agreement.

There should also be consistency with aircraft mortgages and the Aircraft Registration Law.

14 September 2015

71


Appendix 4Sinéad Agnew. ‘Some Thoughts on the Relationship Between the Pauline Action and the Désastre Regime in Jersey’. J&GLR Volume 16 Issue 1, February 2012

1 Until the judgment of Birt DB (as he then was) in In re Esteem Settlement[1] ten years ago, the Pauline action was a little known and little used Jersey customary law action. The Esteem judgment clarified the nature and operation of the action in general terms but its relationship with Jersey’s désastre regime remains unclear. The purpose of this note is briefly to compare the extent of the protection offered to creditors by the Pauline action and art 17 of the Bankruptcy (Désastre) (Jersey) Law 1990 (“the Désastre Law”) and to consider how a Pauline action is likely to be affected by the fact that the plaintiff may not be the only creditor.

The Pauline action and art 17 of the Désastre Law—a brief comparison

2 The origins of the Pauline action may be found in Roman law: its purpose is to allow a creditor to revoke an alienation of assets by his debtor to a third party, which has been made in order to defeat the interests of creditors.[2] As Birt DB explained in Esteem, the Pauline action is personal, revocatory and restitutionary in nature.[3] The creditor may reverse a transfer by the debtor of the debtor’s own property to a third party, as long as the creditor can show that (a) he is a creditor of the debtor; (b) the transfer of assets is made when the debtor is insolvent or the transfer renders him insolvent; (c) the debtor makes the transfer with the intention of defrauding his creditors; and (d) the transfer causes actual prejudice to the creditor himself.[4] If the transfer of assets is made for value, the creditor must also demonstrate that the recipient was “privy to the real nature of the transaction” before the transfer will be reversed.[5] If the elements of the cause of action are made out, the third party recipient will be ordered to give up the original assets or their proceeds of sale[6] and, possibly—if the transfer was for value and the recipient was privy to its real nature[7]—any profits made by the recipient from the assets after the Pauline action has been commenced.[8] The defence of change of position[9] is available to an innocent recipient who has changed his position in good faith in reliance on the receipt.[10] According to Birt DB in the Esteem case, the Pauline action is an action personelle réelle, which attracts a prescription period of ten years.

3 The Pauline action stands alongside the statutory bankruptcy regime. The closest statutory equivalent is art 17 of the Désastre Law, which provides, amongst other things, as follows—

“(1) If a debtor has at a relevant time entered into a transaction with a person at an undervalue the court may, on the application of the Viscount, make such an order as the court thinks fit for restoring the position to what it would have been if the debtor had not entered into the transaction.

(2) The court shall not make an order under paragraph (1) if it is satisfied—

(a) that the debtor entered into the transaction in good faith for the purpose of carrying on a business or, in the case of a company, its business; and

(b) that, at the time the debtor entered into the transaction, there were reasonable grounds for believing that the transaction would be of benefit to the debtor.”

4 Article 17 has several features. For its purposes, good faith turns on whether the recipient was aware that the transfer was at an undervalue, was made at a time when

72


the debtor was insolvent or would likely lead to his insolvency and whether the recipient was an associate of or connected to the debtor.[11] A transaction at an undervalue means a gift or a transaction by way of a marriage settlement or on terms for which there is no cause or where the value of the cause provided is significantly less than that provided by the debtor, cause having its usual meaning in Jersey customary law.[12] The statutory mechanism applies to transactions at an undervalue made within a period of five years immediately preceding the making of a declaration that the debtor was en désastre,[13] provided that the debtor became insolvent before or as a result of the transaction itself.[14] There is no limiting period in cases where the transaction is made with a person connected with a debtor or with an associate of the debtor.[15] Finally, a bona fide purchaser for value is not required to give up any benefit from the transaction unless he was a party to the transaction and the property interests of more remote recipients are protected.[16]

5 In two respects the Pauline action offers more extensive protection to creditors than that available under art 17. First, the ability of a creditor to reverse a transaction under art 17 is limited to transactions occurring in the five years before the debtor’s désastre, whereas the prescription period for the Pauline action is a more generous ten year period. Secondly, if a creditor can raise a Pauline action, he is not limited to reversing transactions at an under-value; as long as he can demonstrate that the recipient knew what the debtor was up to, he may also reverse transactions at full value. It is right to point out, however, that it may be more difficult to get a Pauline action claim off the ground because the creditor must show that the debtor entered into the transaction with the intention to prejudice his creditors, whereas art 17 is neutral as to the debtor’s intention. That said, the test for intention established in Esteem is fairly creditor-friendly. A creditor must show that the debtor was dishonest, but the fact that the defeat of creditors is the natural result of a transaction is a material factor in assessing whether the necessary state of mind is established and the creditor need only show that the intention to defeat creditors was a substantial purpose of the debtor—it need not have been his only or dominant purpose.[17] In Esteem itself the court found that Sheikh Fahad (the debtor) had the capacity to arrange his affairs to defraud his creditors, failed to attend the hearing of the Pauline action and gave no explanation for the transfers of assets to Abacus (the third party recipient). These factors, together with its (not altogether favourable) view of Sheikh Fahad’s character, caused it to infer the requisite intention to defraud on his part. This shows that the court will not always require the creditor to identify an explicit, fully articulated intention to defraud on the part of the debtor. Intention may be inferred from the circumstances surrounding the transaction and in practical terms the evidential burden may not be too difficult to surmount, thus making the Pauline action a useful and potentially more potent alternative to an art 17 application.

A coterie of creditors

6 There is a paucity of authority as to when, if ever, a Pauline action plaintiff must share the spoils of a successful Pauline action with other creditors. The Esteem judgment is silent on this question and in the Golder case,[18] the only other significant Pauline action judgment given in the last fifty years in Jersey, the Pauline action plaintiff was the only creditor. Either GT was Sheikh Fahad’s only creditor in Esteem or none of his other creditors was aware of or wished to be involved in the Pauline action. In any case, if there are no other creditors there is no reason why the Pauline action plaintiff should not keep the spoils of his successful claim to himself.

7 If other creditors do exist, the impact of their existence on the conduct and outcome of the Pauline action depends on whether désastre proceedings are commenced by them or the debtor himself and if so, when. Three potential scenarios arise in which art 10(1) of the Désastre Law may play a role. Article 10(1) provides as follows—

73


“(1) With effect from the date of the declaration a creditor to whom the debtor is indebted in respect of a debt provable in the ‘désastre’ shall not—

(a) have any other remedy against the property or person of the debtor in respect of the debt;

(b) commence any action or legal proceedings to recover the debt; or

(c) except with the consent of the Viscount or by order of the court, continue any action or legal proceedings to recover the debt.”

8 If the debtor himself or another creditor were to start désastre proceedings and obtain a declaration of désastre before the commencement of the Pauline action, the effect of art 10(1) would be that the désastre procedure would take precedence and the Pauline action plaintiff could not commence his action at all. He could only invite the Viscount to commence the action on his behalf and, perhaps, that of other creditors too.

9 Alternatively, if désastre proceedings were commenced after the Pauline action were commenced and a declaration of désastre were granted before judgment was delivered, as a result of art 10(1) the plaintiff would require the Viscount’s consent for the continuance of the Pauline action. The Viscount might well allow the Pauline action to continue unless he thought that art 17 provided a better route to recovery of the debtor’s assets. If he thought that the Pauline action was to be preferred and was aware of other creditors who were or might have been prejudiced by the transfer of the debtor’s assets to the recipient he would probably seek to be joined to the action on their behalf or, indeed, be substituted as plaintiff on behalf of all prejudiced creditors. Finally, if désastre proceedings were commenced after the Pauline action had been started but no declaration had been made before the conclusion of the Pauline action, the plaintiff would not need the Viscount’s consent for the continuance of the action. However, the Viscount might again intervene in the Pauline action and ask the court to stay the proceedings pending the grant of a declaration in the désastre proceedings. Again, if a declaration were granted and the Viscount thought it appropriate, he could seek to take on the mantle of plaintiff in the Pauline action on behalf of all prejudiced creditors. In either case, the Pauline action plaintiff could well end up having to share the fruits of the action with other creditors and it is likely that appropriate costs orders would be made to reflect the changes to the conduct of the action.

10 In light of the above, it may be said that the Pauline action represents a potentially more powerful weapon in creditors’ hands than art 17 of the Désastre Law, as long as the hurdle of establishing the requisite intention can be cleared. However, its utility against a debtor who has multiple creditors may be of limited value if those other creditors seek to stymie the action by commencing désastre proceedings in a strategic fashion. Further clarification from the Royal Court on the relationship between the customary law action and the statutory procedure would be welcome.

Sinéad Agnew, LLB (Dub), MJuris (Oxon), MPhil (Cantab), of Gray’s Inn, Barrister, is a PhD candidate in law at the London School of Economics.

[1] 2002 JLR 53.

[2] Justinian, Book IV, Title VI, para 679, no 6.

[3] In re Esteem Settlement 2002 JLR 53, 138.

[4] Ibid, 124, 126–127, 128–129, 132, 134.

[5] Ibid, 130.

74


[6] Golder v Société des Magasins Concorde Ltd 1967 JJ 721.

[7] Domat, Les Lois Civiles dans leur Ordre Naturel, livre II, section II, Nouvelle Edition, 194.

[8] In re Esteem Settlement 2002 JLR 243, 253–254.

[9] As to the meaning of good faith, see Niru Battery Mfg Co v Milestone Trading Ltd [2003] EWCA Civ 1446 and Abou-Rahmah v Abacha [2006] EWCA Civ 1492.

[10] In re Esteem Settlement 2002 JLR 53, 134–135.

[11] Article 17(6).

[12] Article 17(7).

[13] Article 17(8).

[14] Article 17(9).

[15] Article 17(10).

[16] Article 17(5).

[17] In re Esteem Settlement 2002 JLR 53, 134.

[18] Golder v Société des Magasins Concorde Ltd 1967 JJ 721.

75


Table

(CO) Carey Olsen(O) Ogier(MO) Mourant Ozannes(BC) Bedell Cristin(JFSC) Jersey Financial Services Commission(JFL) Jersey Finance Limited(WY) Ward Yates(W) Walkers(EY) Ernst & Young

76

Trusts Law Am No 7 - industry proposals - Jersey Finance Update... · Web viewEffect of memorandum...

Documents

Transcript of Trusts Law Am No 7 - industry proposals - Jersey Finance Update... · Web viewEffect of memorandum...