COMPANIES (AMENDMENT NO.8) (JERSEY) LAW 200-

CONSULTATION PAPER NO 4. 2003 CONSULTATION PAPER 2003-04 COMPANIES (AMENDMENT NO.8) (JERSEY) LAW 200- AND BANKRUPTCY (DÉSASTRE) (AMENDMENT NO.5) (JERSEY) LAW 200- Issued July 2003

CONSULTATION PAPER The Jersey Financial Services Commission invites comments on this Consultation Document. Comments should reach the Commission by 30 September 2003. Responses should be sent to: Paul de Gruchy Advocate, Authorisation Division Jersey Financial Services Commission PO Box 267 Nelson House David Place St Helier Jersey JE4 8TP Telephone: 01534 822112 Facsimile: 01534 822047 E-mail: p.degruchy@jerseyfsc.org Unless specifically requested otherwise, it is the Jersey Financial Services Commission s policy to make the contents of all responses available for public inspection. COMPANIES (AMENDMENT NO.8) (JERSEY) LAW 200-1

CONSULTATION PAPER CONTENTS Pages 1 Executive summary 3-5 2 Background 6-7 3 Redemption of Shares Sources of Funds 8-9 for Redemptions 4 Realisable Value and the Solvency Test 10-12 5 Financial Test for Redeeming or Repurchasing 13-19 Shares and other Creditor Protection Issues. 6 Disqualification of Directors 20 7 Winding up Provisions 21-29 8 Non-Petition and Contractual Subordination 30-31 9 Changes to the Désastre Law 32-33 10 Summary of questions and comments sought 34-38 ANNEXES A Companies (Amendment No.8) (Jersey) Law 200- B Bankruptcy Désastre (Amendment No.5) (Jersey) Law 200- C Parts XI and XII of the Companies (Jersey) Law 1991, as amended up to and including 1 September 2002. COMPANIES (AMENDMENT NO.8) (JERSEY) LAW 200-2

1- EXECUTIVE SUMMARY OVERVIEW 1.1 The Jersey Financial Services Commission (the Commission ) aims to ensure that the Companies (Jersey) Law, 1991, as amended (the Companies Law ), provides a legal framework for companies which reflects the needs of the Island s economy. 1.2 This consultation paper (the Paper ) sets out a number of the Commission s proposals in relation to the Companies Law and seeks views on these proposals. The Paper also describes the Commission s current policy and practices in the principal areas that will be affected by the proposals. 1.3 The primary purpose of the Companies (Amendment No.8) (Jersey) Law 200- ( Amendment No.8 ) is to amend certain provisions of the Companies Law that relate to the winding up of companies incorporated in Jersey. Since both the Companies Law and the Bankruptcy (Désastre) (Jersey) Law 1990, as amended (the Désastre Law ) set out procedures that apply in relation to insolvent companies, it is essential that, insofar as is possible, the relevant provisions of the two laws should be the same. A draft of the Bankruptcy (Amendment No.5) (Jersey) Law 200- ( Amendment No.5 ) will therefore be submitted to the relevant Committee of the States (the Committee ) for consideration at the same time as Amendment No.8, with a view to both pieces of legislation being enacted simultaneously. 1.4 Given that the policy considerations behind many of the principal changes proposed by Amendment No.5 and Amendment No.8 are identical, this Paper will also raise and seek views on the proposals set out in Amendment No.5. To this end, the Paper has been produced in close collaboration with the Viscount s Department. 1.5 A number of the proposals raised in this consultation paper have no equivalent in the Désastre Law. In particular, several proposals are made in relation to the redemption or purchase of shares by a company pursuant to Article 55 of the Companies Law. These proposals include an examination of the solvency tests that a company may be required to satisfy prior to making a distribution of its assets, raising the question of whether criminal liability should be imposed upon directors who resolve to make a redemption or purchase of shares in certain circumstances, and a consideration of the circumstances in which payments by a company in respect of the redemption or purchase of its own shares may be recovered. 1.6 This Paper also takes the opportunity to discuss the manner in which a number of changes introduced by Companies (Amendment No.6) (Jersey) Law ( Amendment No.6 ) but disapplied by the Companies (Redemption and Financial Assistance) (Jersey) Regulations 2002 (the Regulations ), following late representations by interested bodies, should be legislated for permanently, within the main body of the Companies Law. COMPANIES (AMENDMENT NO.8) (JERSEY) LAW 200-3

1- EXECUTIVE SUMMARY - CONTINUED 1.7 In addition to the above, Amendment No.8 also proposes other significant changes. Among these are extending the powers of the Royal Court in relation to the disqualification of directors; the introduction of a new power allowing either the Commission to apply to the Royal Court to wind up a company in the public interest; and the introduction of provisions that will clarify the status of certain contractual relationships in the event of a subsequent insolvency of a contracting Jersey party. 1.8 It should be emphasised that an extensive consultation with professional bodies has already been completed by the Viscount s Department in relation to Amendment No.5. Further, the majority of the provisions of Amendment No.8 had originally been raised for inclusion in Amendment No.6, and have therefore also been the subject of previous lengthy consultation. The main issue that has not been previously consulted upon concerns proposed amendments to be made to the manner in which directors may resolve to redeem or purchase shares, including the proposal that criminal sanctions be imposed upon directors who unreasonably redeem or purchase shares. 1.9 Given the lengthy gestation of the two amendments, the complexities of ensuring consistency between two substantial statutes, and the consultation processes that have already taken place, the law draftsman has already produced drafts of the two amendments. It is likely that a number of changes will be made to the drafts before they are placed before the Committee: there are a number of provisions that will no doubt need to be further amended in the light of consultation, and certain provisions (such as those relating to non-petition and contractual subordination clauses) have yet to be incorporated in the amendments. The Commission believes that such drafts are nevertheless helpful in clarifying the detail and practical effects of the proposals set out in this Paper. Such drafts also allow detailed comments to be made in relation to specific provisions of the law as part of the consultation. A copy of the two draft amending laws are included as Annexes A & B. The Paper should be read in conjunction with the draft legislation, which sets out in more detail the wider principles described in the Paper. The draft of Amendment No.8 does not include a draft of Article 55 of the Companies Law. However, for reference purposes, a copy of that article, in its current form (as amended by the Regulations) is attached as part of Annex C. 1.10 It is also suggested that the Paper be read in conjunction with a conformed copy of the Companies Law and an up-to-date copy of the Désastre Law. These laws are available from the Jersey Legal Information Board, www.jerseylegalinfo.je. COMPANIES (AMENDMENT NO.8) (JERSEY) LAW 200-4

1- EXECUTIVE SUMMARY - CONTINUED 1.11 The purposes of the Paper are to (a) set out the background and particulars concerning each of the proposals; (b) request, in confidence, information that will assist the Commission in determining what action, if any, should be taken; and (c) invite comment from all interested parties. CONSULTATION 1.12 The Commission issues this paper under Article 8(2) of the Financial Services Commission (Jersey) Law 1998, as amended, where the Commission may, in connection with the carrying on of its functions consult and seek the advice of such persons or bodies whether inside or outside the Island as it considers appropriate. 1.13 The Commission invites written comments from all interested parties on this Paper and the specific questions posed by it. 1.14 Following a general period of consultation, the Commission in conjunction with the Viscount proposes to finalise with the Law Draftsman the terms of the amendments. 1.15 The Commission would like to be in a position to place Amendment No.8, together with the Amendment No.5, before the Committee by the end of 2003. COMPANIES (AMENDMENT NO.8) (JERSEY) LAW 200-5

2 - BACKGROUND 2.1 Jersey is a leading financial centre. The Island s financial services industry has well established banking, fund management, investment, and trust and company administration sectors, which have, in more recent years, been supplemented by a steady growth in insurance business. In addition, Jersey has a thriving local economy that has created a steady demand for Jersey trading companies. The changes proposed by the amendments will affect all companies incorporated in Jersey, and will be relevant to Jersey companies used for both local and international purposes. 2.2 The total number of Jersey registered companies as at 31 December 2002 was 33,043. The number of companies incorporated in 2002 was 2,829. On average, around 10 Jersey companies each year are subject to a creditors (insolvent) winding-up. 2.3 Companies are registered and administered in accordance with the Companies Law and the Control of Borrowing (Jersey) Order 1958, as amended. The regime governing insolvent companies is set out in the Companies Law and in the Désastre Law, which, as already stated, will be altered in parallel with the changes to the Companies Law. 2.4 The principal remedy open to an unsatisfied creditor of a Jersey company is to bring an application to have the company declared en désastre, under the Désastre Law. It should be noted that a creditor has no power to commence a winding up of the company under the Companies Law, though Amendment No.8 proposes that a creditor should have the ability to bring an action to convert an existing summary winding up of a Jersey company into a creditors winding up. THE COMMISSION 2.5 The Commission is a statutory body corporate established under the Financial Services Commission (Jersey) Law 1998, as amended, and is responsible for, among other things, maintaining a register of Jersey companies in accordance with the Companies Law. 2.6 The Commission s guiding principles require it to have regard to: 2.6.1 the reduction of the risk to the public of financial loss due to dishonesty, incompetence or malpractice by, or the financial soundness of, persons carrying on the business of financial services in or from within the Island; 2.6.2 the protection and enhancement of the reputation and integrity of the Island in commercial and financial matters; 2.6.3 the best economic interests of the Island; and, in pursuit of the above, 2.6.4 contributing to the fight against financial crime. COMPANIES (AMENDMENT NO.8) (JERSEY) LAW 200-6

2 - BACKGROUND - CONTINUED THE VISCOUNT 2.7 Jersey s Viscount is the Chief Executive Officer of the Royal Court and in that capacity is appointed official office-holder in cases of corporate and personal insolvency declared under the Désastre Law. 2.8 In administering désastre proceedings, of which there are on average some 20 declarations per year, the Viscount is required to examine and investigate the affairs of both corporate and personal debtors, primarily in accordance with the Désastre and Companies Laws. COMPANIES (AMENDMENT NO.8) (JERSEY) LAW 200-7

3 - REDEMPTION OF SHARES SOURCES OF FUNDS FOR REDEMPTIONS BACKGROUND AND PROPOSAL 3.1 Prior to the introduction of Amendment No.6, the Companies Law permitted payments of premium by a limited, par value company when redeeming (Article 55) or re-purchasing (Article 57) its shares to be made wholly or partly from a share premium account. Amendment No.6 altered this provision so that such payments could only be made from the share premium account for shares of the class concerned. This was a consequential change made as a result of the introduction, in Amendment No.6, of a range of new types of company, with the word class being used in Article 39(1) to distinguish between share premium accounts created in respect of different types of share, such as, for example, limited and unlimited shares. 3.2 However, the drafting of Article 39 required the creation of different share premium accounts for each class of shares issued, rather than simply for each type of share. As originally drafted, Article 55 tracked this wording, requiring any redemption to be funded from a class-specific share premium account. This would have greatly limited the flexibility available to new and existing structures. Given the potentially deleterious effects of such a change, the Regulations were drafted and came into force at the same time as Amendment No.6. The Regulations effectively disapplied the offending Article 55(3)(b)(i), which limited payments of premium upon redemption or purchase of shares to a class-specific share premium account. 3.3 It is proposed that the change effected by the Regulations be made permanent, by providing that payments of premium by a limited, par value, company when redeeming (Article 55) or purchasing (Article 57) its shares may be made wholly or partly from any share premium account. ALTERNATIVE COURSES OF ACTION 3.4 As well as the Commission s preferred option, set out at 3.3, there are a number of alternative courses of action that have been considered in relation to this issue: 3.4.1 allow the change made by Amendment No.6 to have full effect by repeal of the relevant Regulations, which might be the preferred course if it is considered that the proceeds of one class of shares should not be used to redeem or purchase a different class of shares; 3.4.2 as for 3.4.1 but make transitional provisions so that any share premium account may be used to fund the premium on the redemption or purchase of shares issued at the time that Amendment No.6 is to have full effect; 3.4.3 change Article 39(1) so that only one share premium account is required (though more than one would be permitted) irrespective of whether the company issues one or more classes of limited or unlimited shares, or both at a premium; and also change Article 55 as in 3.3 above. COMPANIES (AMENDMENT NO.8) (JERSEY) LAW 200-8

3 - REDEMPTION OF SHARES SOURCES OF FUNDS FOR REDEMPTIONS - CONTINUED 3.5.1 Do you agree that, in principle, it is not necessary to prohibit the use of the proceeds of the issue of one class of shares in redeeming or repurchasing a different class of shares? 3.5.2 Do you agree that it would be helpful to replace the Regulations with permanent legislation? 3.5.3 If so, which of the methods set out in paragraphs 3.3 and 3.4 would you prefer? 3.5.4 Would you object to any of the proposed courses of action and if so, which one(s) and why? COMPANIES (AMENDMENT NO.8) (JERSEY) LAW 200-9

4 - REALISABLE VALUE AND THE SOLVENCY TEST 4.1 The Companies Law requires that, before the directors make any payments to shareholders, whether by way of redemptions or purchase of shares or distributions, they must consider the effect of the payment on the solvency of the company. Part of the solvency test is that the directors must be satisfied that, immediately following such payments, the assets of the company will not be less than its liabilities. 1 4.2 Substantially the same solvency test is also applied in other places in the Companies Law. Two of these applications in relation to mergers and continuance, were introduced by Amendment No.6. The other principal area where a solvency test is applied to a Jersey company arises in circumstances where the shareholders seek to sanction an action of a director that would otherwise be a breach of that director s duties under Article 74. 4.3 Prior to Amendment No.6, the wording of the solvency test was such that it was the value of the assets that was to be compared with the liabilities of the company 1. However, such a general term was ambiguous and allowed the valuation to be carried out on more than one basis, some of which could be disadvantageous to interested parties. Therefore, Amendment No.6 changed the wording to realisable value. 4.4 Subsequently it was recognised that there was still an uncertainty in the meaning of the new term, particularly where the test had to be applied immediately after the proposed payment would be made (Articles 55, 58 and 114). In those cases, it was unclear whether the law required that a fire sale value be used or a value that would result from an immediate but orderly disposal of the asset (which might still be somewhat less than that expected at maturity). For assets such as some highly complex financial instruments, and real property, a fire sale value might be very much less than that available from an orderly disposal. Further, in a company with long-dated assets and liabilities, where the liabilities and assets were matched, it was possible for a position to be reached where a company could arguably be prevented from making a payment to shareholders, whether by way of dividend or in connection with the redemption or purchase of shares, in circumstances where there was no prejudice to either creditors or remaining shareholders arising from such distribution. 4.5 The implications of this uncertainty were most acute in relation to Article 58, where the directors would be guilty of a criminal offence if financial assistance was given without meeting the requirements laid down in the Article. To allow time for further consultation without delaying the effective date of the remainder of Amendment No.6, temporary corrective action was taken by means of the Regulations, but applied to this Article only. A similar criminal offence is now proposed to be added to Article 55 (see paragraph 5.7.3). 1. A In some cases, the liabilities of the company must be aggregated with the amounts standing to the credit of its capital accounts for the purposes of the test. COMPANIES (AMENDMENT NO.8) (JERSEY) LAW 200-10

4 - REALISABLE VALUE AND THE SOLVENCY TEST - CONTINUED 4.6 The Commission believes that the issue of the solvency test should be reconsidered in order to ensure that such test is as clear and unambiguous as possible, affording creditors proper protection yet allowing companies as much flexibility as possible in the areas where the solvency of the company currently falls to be considered. Ideally, such a solvency test should be applied throughout the Companies Law. 4.7 There are a number of options that may help to achieve this end. One is to revert to the term value, though the ambiguity of this term is such that the judgment of the directors of a company as to the value of assets will largely determine the protection afforded to that company s creditors. For this reason, the Commission does not support this option. 4.8 Another possible solution might be to attempt to define the term realisable value. However, it may be extremely difficult to provide a definition that would afford creditors proper protection while avoiding the difficulties that companies are presently facing under the existing solvency test. 4.9 A third approach would be to alter the wording of the whole solvency test so that the immediacy of it applies only to the ability of the company to be able to discharge its liabilities. The comparison of the realisable value of the company s assets with its liabilities would then be considered separately. The consideration would then be of the realisable value of property, rather than the immediately realisable value of property. In the case of illiquid or fixed term assets, this alteration may enable the directors to take a more realistic view of the amount that a company is likely to realise for its assets. 4.10 A further option could be to dispense with the requirement for that part of the test that involves the comparison of the company s assets with its liabilities, whilst retaining the requirement for the company to continue to be able to discharge its liabilities as they fall due immediately following the relevant event. It is arguable that the balance sheet test does little to protect creditors: provided a company is able to pay its debts as they fall due, no creditor will be prejudiced by any use of the company s funds (though the balance sheet test may offer some protection to other classes of shareholders in the company). 4.11 The solvency test required by UK company law does not involve any comparison between assets and liabilities. However it does require the directors to consider the future of the company over the next 12 months, to ensure that there are no foreseeable circumstances that may prevent the company from meeting its obligations to creditors. 4.12 As discussed in Section 5, one of the proposed enhancements to the safeguards relating to the redemption and purchase of shares under Article 55 is the addition of this feature of the test. If this were adopted across all applications of the solvency test and the asset/liability comparison test were to be deleted, it would bring the Jersey provisions more closely in line with those applicable to companies in the UK. COMPANIES (AMENDMENT NO.8) (JERSEY) LAW 200-11

4 - REALISABLE VALUE AND THE SOLVENCY TEST - CONTINUED 4.13 The Commission would welcome comments on all aspects of this issue but, in particular, in relation to the questions posed below, or on any other ideas as to how best to resolve the difficulty. 4.13.1 Which of the options described above do you consider to be most appropriate, and why? 4.13.2 Do you consider that any of the options would cause particular difficulties in relation to one or more of the applications of the solvency test within the Companies Law? If so, please explain why. 4.13.3 In particular, do you think that there would still be adequate protection for both creditors and shareholders if the second part of the solvency test (the balance sheet test) were to be deleted? Please explain why you hold this view. 4.13.4 Do you think that the requirement for the directors to formally consider the future prospects of the company is preferable to a consideration of the balance sheet of the company? COMPANIES (AMENDMENT NO.8) (JERSEY) LAW 200-12

5 - FINANCIAL TESTS FOR REDEEMING OR PURCHASING SHARES AND OTHER CREDITOR PROTECTION ISSUES OVERVIEW OF THE CHANGES 5.1 The conditions for any redemption of shares by a limited company are set by Article 55 and they apply also to purchases of shares under Article 57. A review of certain aspects of those provisions is necessary for three separate, but inter-related, reasons 5.1.1 The provisions defining the solvency test are among those that use the term realisable value in conjunction with the immediacy of the application of the test (see section 4 of this Paper). 5.1.2 As a result of the consultation process for Amendment No.6 the Commission s attention was drawn to creditor protection issues arising from the changes made to the provisions for redemptions and purchases to accommodate no par value shares. This prompted a review of those provisions, although it was decided that Amendment No.6 should not be delayed whilst this was carried out. The conclusion reached from the review was that some additional safeguards for creditors of either type of company should be added via Amendment No.8. 5.1.3 The changes made by Amendment No.6 to the financial test applicable to the redemption or purchase of shares were intended primarily to make them equally applicable to the new no par value companies as to the par value companies. However, the effect of the change was to impose the widest scope of the test to all redemptions or purchases, whereas previously some parts of the test had not applied in some cases. The resulting difficulties were recognized shortly before Amendment No.6 came into force and, since there had not been a deliberate change of policy, a temporary remedy was effected by means of the Regulations, to allow time for further consideration. SOLVENCY TEST 5.2 The current requirements of the Companies Law, including the modifications made by the Regulations, are that any redemption or purchase of shares by a limited company (other than an open-ended investment company) may only take place, if the directors reasonably believe that, immediately after the redemption/purchase: a) the company will be able to discharge its liabilities as they fall due; b) if payment is made from share premium account (in the case of a par value company), or from stated capital (in the case of a no par value company) the realisable value of the company s assets will not be less than its liabilities; and c) if payment is made from unrealised capital or revenue profits, the realisable value of the company s assets will not be less than the aggregate of its liabilities and the amounts standing to the credit of its capital accounts. COMPANIES (AMENDMENT NO.8) (JERSEY) LAW 200-13

5 - FINANCIAL TESTS FOR REDEEMING OR PURCHASING SHARES AND OTHER CREDIT OR PROTECTION ISSUES - CONTINUED 5.3 Prior to Amendment No.6, a solvency test was only a pre-requisite for a redemption or purchase if any payments were to be made from a share premium account or unrealised profits. One consequence of the changes to these provisions made by Amendment No.6 was that the full test would have become applicable irrespective of the source of funds used for the payments. The Commission agreed with industry submissions that this was unnecessary, and through the Regulation allowed a company to redeem or purchase shares without a complex consideration of the company s balance sheet if, for example, the redemption was funded by a new issue of shares. From a creditor s perspective, such a redemption would be of no effect. 5.4 The Commission considers that there is no reason why any redemption or purchase should take place if the company is not able to discharge its liabilities as they fall due or will not be able to do so as a result of such redemption or purchase. It is therefore intended that that part of the test (sub-paragraph 5.3(a) above), should be retained in all cases. 5.5 In the absence of any potential for a creditor to be prejudiced by redemptions or purchases that are funded solely out of either the proceeds of a fresh issue of shares or from net realised profits, there seems to be no reason why any additional test should be applied in those cases. However, it is considered that some additional safeguards are necessary where payments are to be made from any of the other permitted sources. Therefore, it proposed to make permanent the temporary arrangements introduced by the Regulations (sub-paragraphs 5.2 (b) and (c) above). This will largely reflect the position of the Companies Law prior to the introduction of Amendment No.8. 5.6 It is not proposed that any further changes be made in this area in relation to the treatment of redemptions made by open ended investment companies. 5.6.1 Do you agree that, irrespective of the source of funds used, no redemption or purchase should take place if immediately afterwards the company would not be able to discharge its liabilities as they fall due and therefore that the test detailed in paragraph 5.2(a) above should be required for all redemptions and purchases? 5.6.2 Do you agree that, subject to any changes that may be made in relation to the solvency tests used in the Companies Law generally, the additional tests in paragraphs 5.2(b) and 5.2(c) above should be required in the circumstances detailed in those paragraphs and should not apply if payments are made solely from either the proceeds of a fresh issue of shares or from net realised profits? COMPANIES (AMENDMENT NO.8) (JERSEY) LAW 200-14

5 - FINANCIAL TESTS FOR REDEEMING OR PURCHASING SHARES AND OTHER CREDIT OR PROTECTION ISSUES - CONTINUED FURTHER IMPROVEMENTS IN CREDITOR PROTECTION AND THE INTRODUCTION OF CRIMINAL LIABILITY UPON DIRECTORS 5.7 Additional requirements are proposed in response to concerns raised as to potential weaknesses in the creditor protection provisions relating to redemptions and purchases. If implemented, such changes will apply to any redemption or purchase, irrespective of the source of funds for payments, but will not apply in the case of an open-ended investment company. The proposed new requirements are as follows:- 5.7.1 LOOKING TO THE FUTURE - The directors should be required to consider the prospects of the company over the twelve months following any redemption or purchase as part of the process of being satisfied that the company will be able to discharge its liabilities as they fall due. This will be expressed as a requirement that the directors of the company, having made full inquiry into the affairs and prospects of the company, should be of the opinion - that, having regard to the prospects of the company and to the intentions of the directors with respect to the management of the company s business in the following year and to the amount and character of the financial resources that will in their view be available to the company during that period, the company will be able to continue to carry on business as a going concern (and will be able to pay its debts as they fall due during that year,) until the termination of the period of one year immediately following the date on which the payment is proposed to be made or until the company is dissolved under Article 150, whichever should first occur. 5.7.2 WRITTEN DECLARATION - The directors should not merely be satisfied in their minds on all aspects of the solvency tests but should make a written statement to this effect. It is proposed that this declaration be delivered to the Registrar. 5.7.3 NEW CRIMINAL OFFENCE - Any director who does not have reasonable grounds for making such a statement would be guilty of a criminal offence. It should be noted that a director will not commit an offence if a company subsequently becomes insolvent in the twelve months following a distribution: the proposed offence is in relation to making a statement of solvency without making full inquiry into the affairs and prospects of the company, or forming a clearly unreasonable conclusion following that inquiry. COMPANIES (AMENDMENT NO.8) (JERSEY) LAW 200-15

5 - FINANCIAL TESTS FOR REDEEMING OR PURCHASING SHARES AND OTHER CREDIT OR PROTECTION ISSUES - CONTINUED 5.8 The concept of a written declaration and the new criminal offence associated with it follow the current and proposed future practice in the UK. In addition, the wording of the proposed declaration is based on that set out in s.173 of the UK Companies Act, 1985, as amended and in s63 of the DTI White Paper in relation to the proposed UK Companies Bill, is in keeping with developments in international standards of corporate governance generally, and is aimed at ensuring that directors fully and properly consider both the company s current position and future prospects prior to approving any redemption or purchase of shares. It should be noted that there is no requirement under the UK legislation that the director have a fraudulent intent in approving the redemption. 5.9 Currently, Article 181 of the Companies Law provides that, if a company is subject to a creditors winding up within a year of any redemption or purchase of shares being made by the company, the shareholders who benefited from the redemption or purchase and, if they cannot show reasonable grounds for believing the company was solvent at the time of the distribution, the directors, may be required to contribute to the assets of the company available for distribution to the creditors. There are further articles that have effect in this area, such as those in relation to fraudulent and wrongful trading. These articles provide a power for the court to make directors financially liable for their actions but, perhaps surprisingly, do not impose any criminal sanction. 5.10 It is intended that these new measures will provide to creditors and other shareholders of a company additional comfort that the solvency of the company has been properly considered prior to any distribution of company assets by way of redemption or purchase of shares. In addition, the new measures will raise standards of corporate governance by applying to all redemptions and purchases, rather than being limited to cases where the company subsequently becomes insolvent. 5.10.1 Do you agree that the additional test detailed in 5.7.1 should be introduced as a pre-requisite to all redemptions and purchases (other than for an open-ended investment company), irrespective of the source of funds for the payments? 5.10.2 Do you agree in principle with the proposal that directors make a formal written declaration prior to authorising the redemption or purchase of shares, and be required to lodge that declaration with the Registrar of companies? What do you think is a practical time period within which such declaration should be filed? Do you foresee any practical difficulties arising from this proposal? 5.10.3 Do you believe that all of the directors should sign the declaration, or should the requirement only be imposed upon those directors approving the redemption/purchase? COMPANIES (AMENDMENT NO.8) (JERSEY) LAW 200-16

5 - FINANCIAL TESTS FOR REDEEMING OR PURCHASING SHARES AND OTHER CREDIT OR PROTECTION ISSUES - CONTINUED 5.10.4 Do you consider that the written statement should be delivered to the Registrar before any payments are made in connection with a redemption or purchase, or is it sufficient for the statement to be retained in the company s records to be produced if required subsequently by a court? 5.10.5 Do you agree that it should be a criminal offence for any director to make the statement without having reasonable grounds for the opinions expressed? 5.10.6 Do you consider that there should also be a criminal offence for authorising a redemption or purchase without having first made the formal declaration? 5.10.7 Do you agree that the criminal offence ought to arise in all circumstances, or do you think it should be limited to those circumstances where the company subsequently becomes insolvent? 5.10.8 Do you think that any of the proposed changes to Article 55 would cause difficulties in relation to the operation of existing structures? If so, would you like to see the existing provisions of the Companies Law preserved for companies incorporated prior to the implementation of Amendment No.8? DIFFERENCES BETWEEN PARTS XI AND XII OF THE COMPANIES LAW 5.11 In reviewing the creditor protection issues in this area generally, the Commission became aware of areas of possible inconsistencies between Parts XI (Articles 55-59) and XII (Articles 60-65) of the Companies Law that result from the introduction of no-par value companies. 5.12 In theory, both parts of the law may be used to effect a reduction in the capital of a company available to creditors on a winding up. Part XI of the Companies Law applies to the redemption or purchase by a company of its own shares, and, prior to such redemption or purchase taking place, the directors must satisfy themselves as to the solvency of the company in the manner set out above. Part XII concerns circumstances where a company may reduce its capital accounts in other ways, often requiring the approval of the Royal Court prior to the reduction taking effect. 5.13 A copy of the current text of the two Parts, (as amended by the Regulations), is attached at Annex C. COMPANIES (AMENDMENT NO.8) (JERSEY) LAW 200-17

5 - FINANCIAL TESTS FOR REDEEMING OR PURCHASING SHARES AND OTHER CREDIT OR PROTECTION ISSUES - CONTINUED 5.14 The concerns that have been raised in relation to this part of the Companies Law are set out in the remaining paragraphs of this Section. At the present time the Commission is deliberately not offering any preferred approach to dealing with these inconsistencies. The practical applications of these two Parts may well be such that they have only minimal significance. The purpose of identifying them in this consultation paper is to obtain a wider view on the relative impact, if any, of the inconsistencies in order to determine if changes are necessary and, if so, whether they should be made in conjunction with Amendment No.8 or planned for some future amendment. 5.15 One interpretation of Article 62(2) is that it expressly limits the application of the creditor protection provisions set out in the following three paragraphs of that article to reductions of share capital. Unless a court were to take the view that the phrase and in any other case extended the court s power to no-par value companies, it appears that a reduction in the stated capital of a no-par value company is not subjected to the same scrutiny that applies to a par value company. 5.15.1 Has this anomaly caused any difficulties to date? Do you anticipate that it may cause difficulties in the future? 5.15.2 Do you think that Article 62(2) should be amended to ensure that the creditor protection provisions of Article 62(3)-(5) will apply to reductions of stated capital of a no-par value company as well as to reductions of share capital (which is defined to also include share premium) of a par value company? 5.16 In the event that the share capital of a company is reduced in circumstances prejudicial to a creditor of the company, Article 65 limits the liability of any shareholder who was a member at the time of the reduction to an amount not exceeding that which was outstanding on the share prior to the reduction. This provision does not appear to take account of the fact that the shareholder may, as a result of the reduction, receive a repayment of paid up capital. The result of this provision is the paradoxical situation whereby it is likely that the amount a shareholder could be required to contribute in the above circumstances varies in inverse proportion to the amount that has been paid out to him: at one extreme, the holder of fully paid up shares who receives a payment on the reduction of share capital would have no potential future liability to the company under this article. 5.17 This provision becomes even more anomalous when considered in the light of Article 181, an amendment to which is proposed by Amendment No.8 and which is discussed in greater detail at paragraphs 7.26 7.28 of this Paper. Article 181 provides, briefly, that in the event that creditors are prejudiced by a redemption or purchase of shares under Article 55 or 57 of the Companies Law, in certain circumstances the shareholder can be liable to repay the amount of any distribution made to him. COMPANIES (AMENDMENT NO.8) (JERSEY) LAW 200-18

5 - FINANCIAL TESTS FOR REDEEMING OR PURCHASING SHARES AND OTHER CREDIT OR PROTECTION ISSUES - CONTINUED 5.18 In addition, Article 65 only appears to apply to par value companies. It is not clear why this provision should not equally apply to no par value companies. 5.18.1 Do you believe that the anomalies between the treatment of repayments made to shareholders under Parts XI and XII of the Law exist for good reason? If so, please explain why. Alternatively, if it is the case, please give your reasons why you believe it would be helpful if the anomalies were to be removed. 5.18.2 Please describe the circumstances associated with any difficulties caused by the anomalies. 5.18.3 Do you think that Article 65 should be amended to require a shareholder to repay any distribution made to him as a result of the reduction plus any amount previously outstanding on the shares? If so, please explain why. 5.18.4 Do you think that the protection to creditors offered by Article 65 should be extended to no-par value companies? If so, please explain why. 5.18.5 Do you agree that there should be consistency in Part XII of the Companies Law between the treatment of par and no-par value companies? COMPANIES (AMENDMENT NO.8) (JERSEY) LAW 200-19

6 - DISQUALIFICATION OF DIRECTORS 6.1 The Royal Court currently has the authority, under Article 78 of the Companies Law, on the application of the Commission, the Committee or the Attorney General, to order that an individual may not be a director or involved in the management of any Jersey company, or from Jersey be directly or indirectly involved in the management of any non-jersey company for a period of up to fifteen years. Under the proposed new Article 43 in Amendment No.5, the Viscount will have a duty to refer questions in this area to the Attorney General, who may consequently wish to make an application to the court. 6.2 In circumstances where an individual has shown himself to be unfit to be involved in the management of a company, there must be a question over the suitability of such person to hold other offices that are positions of trust, such as, for example, the position of a liquidator, trustee or Centenier. It is unsatisfactory that the Royal Court does not at present have the authority, if it deems it appropriate and in the public interest, to order that such an individual should not hold certain defined private or public positions. It is proposed that a new Article 78 be introduced that would give the Royal Court such a power. Under the proposed new Article 24 of the Désastre Law, an individual that has been declared en désastre is automatically subject to this prohibition for the duration of the désastre. 6.3 It is proposed that the Royal Court should only be permitted to exercise such a power upon the recommendation of the Attorney General, the Committee or the Commission (in respect of forbidding the individual from holding private office), or upon the recommendation of the Attorney General (in respect of forbidding the individual from holding public office). 6.3.1 Do you agree in principle with the proposal to allow the Royal Court to impose restrictions on disqualified directors from holding other offices, both private and public? 6.3.2 Do you have any specific comments in relation to the proposed new Article 78? COMPANIES (AMENDMENT NO.8) (JERSEY) LAW 200-20

7 - WINDING UP PROVISIONS 7.1 Amendment No.8 proposes a number of amendments in relation to the winding up of Jersey companies. The principal changes relate to the nature of a summary winding up, the creation of a new power allowing the Committee or the Commission to seek to wind up a company in the public interest and a raft of detailed provisions concerning the effects of a winding up. These provisions reflect similar proposals put forward in relation to the Désastre Law, and are generally aimed at increasing creditor protection and clarifying certain procedures within the Companies Law. 7.2 As a draft of the proposed amendments accompanies this Paper, it is not thought necessary or desirable to attempt to paraphrase the amendments within this Paper. It is anticipated that the draft amendments will be read in parallel with this Paper. CHANGES TO REGIME GOVERNING SUMMARY WINDING-UP 7.3 A number of changes are proposed to that part of the Companies Law governing the summary winding-up of Jersey companies. One of the principal attractions of a summary winding up is that it allows a company to be wound up without requiring it to appoint a liquidator. However, care must be taken to ensure that, in the absence of a liquidator, the directors remain fully accountable to all parties that may be adversely affected by their actions during the winding-up. Many of the changes proposed in this part of the Companies Law aim at ensuring that the rights of creditors are protected in the context of a summary winding-up. 7.4 The first significant change proposed is to amend Article 145 to restrict the availability of a summary winding up to companies which either have no liabilities or are able to discharge all liabilities as they fall due. As a matter of principle, if a company defaults upon a debt, the creditor is entitled to the comfort that results from the appointment of a liquidator over that company s assets. The current position, whereby a company which is unable to pay its debts as they fall due but believes it will be able to pay such debts within six months, is permitted to enter into a winding up that does not require the appointment of a liquidator, is not felt to offer sufficient creditor protection. 7.5 As would be expected, there are a number of amendments consequential upon this change. Among these, Article 147 confirms that a summary winding-up commences at the time that the special resolution to commence a winding up and the statement of solvency issued in relation thereto are filed at the Registry. COMPANIES (AMENDMENT NO.8) (JERSEY) LAW 200-21

7 - WINDING UP PROVISIONS - CONTINUED 7.6 It is suggested that Article 146 be amended to allow the late filing of a special resolution and statement of solvency in relation to a summary winding up. In the past, the Registrar has occasionally been presented with resolutions and statements later than the 21 day deadline prescribed by the Companies Law. This can lead to difficulties, as it may be impractical to convene a directors meeting and the Registrar does not have the discretion to permit late filing of the relevant documents. It is suggested that, on payment of a late filing fee, the Registrar should be permitted to accept late filing of such documents. The winding up will not, however, begin until the resolution and statement are filed. The question of who is liable to pay the late filing fee is a practical one for the company in question and its administrators to resolve: effectively, they will be faced with the choice of finding the monies to pay the late filing fee or arranging for the resolution and statement of solvency to be passed once more. 7.7 Directors, or, where one has been appointed, the liquidator of a company subject to a summary winding-up, currently have the power under Article 151 to convert a summary winding-up to a creditors winding up. It is proposed that this Article be subject to minor amendment to reflect the new circumstances under which a company may seek a summary winding-up. 7.8 A more substantial proposed change is the new Article 151A, which will, for the first time, allow creditors and members of a company to apply to the Royal Court to convert a summary winding-up to a creditors winding up. As well as bolstering creditor protection, this measure will help to ensure that directors are held fully accountable to shareholders during the course of a winding-up. A creditor will not have the power to instigate a winding up, only to bring an action seeking to convert an existing summary winding up into a creditors winding up. 7.8.1 Do you agree with the proposal to limit the availability of the summary winding-up procedure to companies able to pay their debts as they fall due? 7.8.2 Do you think it would be helpful to allow late filing of resolutions lodged under Article 146? 7.8.3 Do you have any comments in relation to the proposals allowing a summary winding up to be converted to a creditors winding up? COMPANIES (AMENDMENT NO.8) (JERSEY) LAW 200-22

7 - WINDING UP PROVISIONS - CONTINUED WINDING UP ON JUST AND EQUITABLE AND ON PUBLIC INTEREST GROUNDS 7.9 As currently drafted, the Companies Law allows the Royal Court to wind up a company if it is of the opinion that it is just and equitable to do so. An application to wind up a company on those grounds may be made to the Royal Court by the company, any director or member of the company or, in the case of financial businesses regulated under a number of stated laws, by the Commission. It is proposed that this power remains, though widened to allow the Commission to make such an application in respect of any Jersey company, rather than limiting this power to regulated businesses. 7.10 Currently, however, there is no power allowing the Commission and/or the Committee to apply to the Royal Court seeking the winding up of a Jersey company on any other grounds. In the absence of such a power, the Commission can only take limited action in relation to companies that may pose a significant reputational risk to the Island. It is therefore proposed that a power be introduced allowing application to be made to the Royal Court to seek the winding up of a Jersey company on the grounds that it is expedient in the public interest to do so. 7.11 Jersey is known as a well-regulated jurisdiction. Great care is taken to ensure that Jersey companies are not used in a manner that may cause damage to the Island s reputation. However, no matter how well regulated a jurisdiction is, the possibility that companies may be used for illegal activities, or may fall into the ownership of criminals or those associated with money laundering or terrorism, cannot be wholly discounted. The strength of the Island s existing regulation provides a significant deterrent to those seeking to use Jersey companies for unacceptable purposes. However, it is felt that a power to wind up a company in the public interest is needed in order to ensure that the Commission can take appropriate steps to protect the reputation of the Island in circumstances where an existing Jersey company poses a clear reputational risk to the Island. 7.12 The Court would be given wide powers to make orders in relation to companies that it agrees ought to be wound up in the public interest. It may, for example, order the appointment of a liquidator, or make specific orders to ensure that the rights of third parties who have dealt with the company in good faith are protected. 7.13 It is anticipated that such a power would be used rarely. It is a nuclear option and it is unlikely that the Royal Court would order that a company be wound up in the public interest unless the grounds for doing so are very clear. Nevertheless, in cases where the activities or ownership of a Jersey company pose a significant reputational risk to the Island, and where an alternative solution cannot be found to eliminate that risk, it is appropriate that a power exists for winding up companies in the public interest. While it is difficult to provide a comprehensive list of the circumstances under which such a power might be used, examples would include if the beneficial owner of a company was known to be involved in terrorist activity or drugs smuggling, or if the company had been carrying out an activity that falls within the Commission s published list of sensitive activities, such as, for example, arms trading. COMPANIES (AMENDMENT NO.8) (JERSEY) LAW 200-23