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06 March 2015
Guernsey has recently seen a number of relatively high-profile schemes of arrangement. In December 2013 the then Channel Islands Stock Exchange went through a scheme in the Royal Court of Guernsey, and in 2014 and early 2015 two listed companies, Assura Group Limited (Assura) and Friends Life Group Limited (FLGL), were also the subject of scheme applications to the Guernsey court (the former of which was sanctioned in late January 2015 and the latter awaits the court convened meeting in March 2015). Guernsey's first (and so far only) reported scheme of arrangement was the sanction hearing in Re Montenegro Investments Limited (in administration) ([2013-14] GLR 345), which involved, among other things, an insolvent company going through a scheme proposed by its joint administrators in order to return its undertaking to solvency through a newly incorporated British Virgin Islands vehicle. The judgment, while concerning the sanction of the scheme, focused on the insolvency law aspects that followed the sanction.
However, taking together the schemes in Montenegro, Assura and FLGL provide valuable guidance as to how Guernsey courts will deal with schemes of arrangement in future, and demonstrate how Guernsey is willing to take a flexible, yet relatively familiar (to English lawyers) approach in order to provide a sensible and fair outcome for those involved.
In Guernsey, schemes of arrangement are governed by Part VIII of the Companies (Guernsey) Law 2008 (as amended), which contains provisions largely similar to those in England. As no practice statement or direction has been used by the Royal Court to date, English practice directions and practice statements are also used in Guernsey as guidance and best practice; this was confirmed in both the Assura and FLGL schemes.
An applicant seeking the court's assistance in relation to a scheme must ensure that the proposed transaction is an arrangement or compromise for Part VIII to be engaged. This is relatively simple if the arrangement is between a company and its creditors, as it is clear that the creditors will be compromising their rights. However, in a member scheme the English courts have made it clear (and the Guernsey courts have subsequently accepted) that there must be a commercial give and take on both sides for the proposed transaction to fall within the scope of an "arrangement". This appears to cover a multitude of transactions, including takeovers and many types of corporate restructuring.(1)
A potential stumbling block when seeking court approval for a scheme of arrangement is that of different classes of company members or creditors, and the potential need for a number of different meetings for the different classes in order to ensure fairness and that all classes of members or creditors are given fair opportunity to object to the scheme. It is essential for the company to bring such issues to the attention of the court at an early stage of the process to avoid potential problems later on. In the Assura and FLGL schemes, the Royal Court not only agreed with the classic view that a class "must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest" (Sovereign Life Assurance v Dodd  2 QB 573 at 583) but also took into account the 2002 English practice statement and the careful analysis in both Re Hawk Insurance Co Limited  EWCA Civ 241 and Re BTR plc  1 BCLC 740, in respect of class composition and the court's role in dealing with class composition as a matter of its jurisdiction at the first hearing of the scheme. The court also took into account the helpful summary of the issues that any court must consider when looking at the question of class composition (and indeed whether there is actually more than one class of member or creditor) set out in the Hong Kong case Re UDL Holdings Limited  1 HKC 172.
In Montenegro, the Royal Court accepted that the matters which should guide the court's exercise of discretion when considering whether to sanction a scheme are those summarised by the court in the English case Re TDG Plc  EWHC 2334 (Ch) at 29, which in turn referred to Buckley On Companies Acts (15th edition). Those matters are as follows:
This approach of adopting the four-point test from English case law was also confirmed by the Royal Court in the sanction hearing of the Assura scheme. This differs from the approach now taken in Jersey, where the Jersey courts have recently held that the fourth limb of the test – the blot test – is, in effect, subsumed into the third limb. In Guernsey, the court prefers to keep the fourth limb separate as an overarching part of the test as a whole and as an important exercise of discretion in the round.
In England and Wales and Jersey, the applicant can control the timing of the effectiveness of a scheme, to a certain extent, because the scheme becomes effective only when the court's sanction is filed with Companies House or the Jersey Registrar of Companies, respectively. In Guernsey, by contrast, there is no such provision. The position therefore is that the scheme becomes effective at the moment that the sanction is given by the court.
However, in the recent Assura scheme, the Guernsey court again demonstrated its flexibility by exercising its inherent jurisdiction to declare the effective date of the scheme as a date in the future (by tying in the effective date with the definition of the effective date in the scheme document). This was required in order to accommodate the requirements of the UK listing authority and the London Stock Exchange where the Assura shares were traded. The court's willingness to assist, despite the lack of legislation, demonstrates that the court will exercise its inherent jurisdiction to fill such gaps where required and assist the applicant (and acquiring parties) in achieving their goals.
Any member schemes relating to a Guernsey incorporated company must be brought in Guernsey. There is potentially a jurisdictional choice for companies going through creditor schemes, depending largely on the company's centre of main interests (where UK courts will, it is understood, assume jurisdiction over a Guernsey company scheme if the centre of main interests is in the United Kingdom). However, recent experiences demonstrate that in a small jurisdiction where the judges are familiar with how schemes of arrangement operate, an applicant will generally progress quicker and more efficiently through the scheme process. The flexible approach to schemes and willingness to follow English authority and best practice also bring a significant element of familiarity to those UK-based professionals advising a company on where to bring its scheme application.
For further information on this topic please contact Mathew Newman or Erin Trimble-Cregeen at Ogier by telephone (+44 1481 721 672), fax (+44 1481 721 575) or email (email@example.com or firstname.lastname@example.org). The Ogier website can be accessed at www.ogier.com.
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