Restructuring and insolvency in gibraltar

MULTI-JURISDICTIONAL GUIDE 2014/15

RESTRUCTURING AND INSOLVENCY

© This article was first published in the Restructuring and Insolvency Multi-Jurisdictional Guide 2014/15 and is reproduced with the permission of the publisher, Thomson Reuters. The law is stated as at 1 July 2014.

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Restructuring and insolvency in Gibraltar: overview Peter Howitt and David Borge Ramparts

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FORMS OF SECURITY

1. What are the most common forms of security granted over immovable and movable property? What formalities must the security documents, the secured creditor or the debtor comply with? What is the effect of non-compliance with these formalities?

Immovable property

Common forms of security and formalities. The most common forms of security for immovable property are:

• Mortgage. A mortgage is a charge over property by a debtor to a creditor as security for a loan. It grants the mortgagee a right to possession of the property on default of the loan, subject to the mortgagor's right to redemption once the loan is repaid.

• Fixed charge. A fixed charge can be placed over an asset as security for a loan. Title remains with the charger, who is not normally entitled to dispose of the asset unless the charge holder consents or the loan is repaid.

The documents creating these securities must be in writing and signed by the person granting the security (and usually the recipient) and are usually executed as deeds. Most mortgages and fixed and floating charges created in and granted by Gibraltar companies must be registered at Companies House within 21 days of creation. Late registration or rectification of the registered details can be obtained by making a court application. Pledges do not require registration.

Effects of non-compliance. Failure to register these charges will make them void against a liquidator or creditor of the company.

Movable property

Common forms of security and formalities. The most common forms of security for movable property are:

• Mortgage and fixed charge. See above, Immovable property.

• Floating charge. This can be over the whole, or a class of assets belonging to a company. It allows the company to deal with the charged assets in the ordinary course of business until the charge "crystallises" due to, for example, a loan default or the liquidation of the borrower.

• Pledge. This can be used by placing an asset (commonly shares) under a creditor's control. Ownership of the asset transfers to the creditor if there is a loan default.

The formalities are the same as in respect of security over immovable property, see above, Immovable property.

Effects of non-compliance. The effects of non-compliance are the same as in respect of security over immoveable property (see above, Immovable property).

CREDITOR AND CONTRIBUTORY RANKING

2. Where do creditors and contributories rank on a debtor's insolvency?

On a debtor's insolvency, creditors and contributories rank as follows:

• Fixed charge holders.

• Remuneration of liquidator.

• Preferred creditors (see below).

• Floating charge holders.

• Unsecured creditors.

• Shareholders.

Additionally, any electronic money safeguarded by an authorised or small e-money lender must, in the event of insolvency, be paid to the relevant e-money holders in priority to all other creditors (with the exception of any fixed charges or the liquidator's costs of distributing the asset pool).

The Companies Act 1930 sets out the priority for payment of preferred creditors. In summary these are:

• Certain local rates.

• Certain specified taxes.

• Wages or salary, not exceeding GB£1,000.

• Certain types of statutory compensation due, not exceeding GB£500.

• All amounts payable by the company in respect of social security contributions.

The debts for payment of preferred creditors rank equally and must be paid in full unless there are insufficient assets to meet them, in which case they are reduced in the proportions set out in the Companies Act.

UNPAID DEBTS AND RECOVERY

3. Can trade creditors use any mechanisms to secure unpaid debts? Are there any legal or practical limits on the operation of these mechanisms?

The most common mechanisms used by trade creditors are:

• Retention of title clauses. These prevent title to sold goods from transferring before the purchaser has paid the purchase price in full. Difficulties arise if the goods become mixed or incorporated into other goods so as to lose their identity. In such

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cases it may be possible to "trace" the proceeds of sale of the goods.

• Third party guarantees. These allow creditors to enforce their right to an unpaid debt against a guarantor.

4. Can creditors invoke any procedures (other than the formal rescue or insolvency procedures described in Questions 6 and 7) to recover their debt? Is there a mandatory set-off of mutual debts on insolvency?

Creditors can initiate legal proceedings to obtain judgments for unpaid debts.

A judgement creditor can enforce the judgment by applying to the court to obtain either:

• A charging order over any interest beneficially held by the judgment debtor.

• An attachment of earnings order.

• A third party debt order.

• A stop order or stop notice.

The Bankruptcy Act 1934 rules concerning mutual debts apply to companies as well as individuals. Account will be taken of what is owed by the creditor to the debtor, which will be set off against the debt. However, if a creditor has notice of the insolvency at the time of providing credit to the debtor, it will not be entitled to claim the benefit of the set-off.

STATE SUPPORT

5. Is state support for distressed businesses available?

The Gibraltar Government has an insolvency fund intended to deal with claims by certain employees of insolvent companies who are owed salaries and pension contributions.

RESCUE AND INSOLVENCY PROCEDURES

6. What are the main rescue/reorganisation procedures in your jurisdiction?

Arrangement or compromise

Objective. To rehabilitate the debtor company.

Initiation. On application to the court, any creditor, member, liquidator (if the company is being wound up) or administrator (if the company is in administration) can request that a meeting of members or creditors be held to vote on a proposed arrangement.

Substantive tests. The Companies Act does not set out a substantive test that the court must apply.

Consents and approvals. If 75% (in value) of the creditors or members (or class of members) agree on a proposal then an application can be made to court to have it sanctioned. A court sanction makes the arrangement binding on the company and its creditors, members and (if the company is being wound up) its liquidator and contributories.

Supervision and control. Prior to a provisional liquidator or a liquidator being appointed, control of the company remains with the company's directors unless the company goes into liquidation and control is transferred to a liquidator or provisional liquidator.

Protection from creditors. Protection is only available to the extent that an arrangement is entered into after the commencement of winding-up of the company.

Length of procedure. There is no statutory time frame.

Conclusion. The arrangement or compromise concludes when all of its terms have been satisfied. Unless it is wound up, the debtor company continues to exist.

7. What are the main insolvency procedures in your jurisdiction?

Winding-up by the court

Objective. To wind-up the company and distribute its assets to its shareholders and creditors.

Initiation. A court winding-up commences on the presentation to the court of a winding-up petition by either:

• The company, its contributories (subject to certain requirements).

• The company's creditors (only if the court is satisfied that there is a prima facie case for the winding-up).

Substantive tests. Winding-up petitions can be presented if:

• The company decides to do so by passing a special resolution.

• Default is made in delivering a statutory report or in holding a statutory meeting.

• The company does not commence its business within a year of incorporation, or suspends its business for a whole year.

• The number of members is reduced, in the case of a private company, below one, or, in the case of any other type of company, below seven.

• The company is unable to pay its debts. A company is deemed unable to pay its debts if either:

- the company fails to pay (in whole or in part), a creditor after the creditor has served a statutory demand for more than GB£500 in the execution of a judgement, decree or order of a court; or

- a court determines that the company is unable to pay its debts taking into account its contingent and prospective liabilities.

• The court is of the opinion that it is just and equitable to do so.

Consents and approvals. A special resolution is required if a company decides to present a winding-up petition. Otherwise, the court simply needs to be satisfied that one of the substantive tests has been met.

Supervision and control. This is exercised by the liquidator, once appointed.

Protection from creditors. At any time after the presentation of a winding-up petition and the making of a winding-up order, the company, any creditor or shareholder can apply for either:

• A stay of any existing actions or proceedings.

• An injunction to restrain further proceedings in any action or proceeding against the company.

The court can stay or restrain the proceedings accordingly on such terms as it sees fit.

Length of procedure. This varies depending on the company's circumstances.

Conclusion. Once all the company's assets have been realised and appropriate distributions have been made to the creditors and shareholders, the court can order the company's dissolution. The liquidator needs to report the order to the Registrar of Companies


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within 14 days of being issued by the court or will otherwise be guilty of an offence.

Voluntary liquidation

Objective. See above, Winding-up by the court.

Initiation. Voluntary liquidation commences when a company passes a resolution to do so.

Substantive tests. A company can be wound up voluntarily if:

• A period fixed by the articles for the duration of the company expires, or if the company is to be dissolved in accordance with the articles, and the company in a general meeting passes a resolution requiring the company to be wound up voluntarily.

• The company resolves to do so by special resolution.

• The company resolves by extraordinary resolution to the effect that it cannot by reason of its liabilities continue its business, and that it is advisable to wind up.

A "members" voluntary winding-up occurs where a majority of a company's directors deliver a declaration of solvency to the Registrar of Companies. The declaration should state to the effect that the directors, after having made a full inquiry into the company's affairs, believe that the company will be able to pay its debts in full within the 12 months following the commencement of the winding-up.

If such declaration of solvency is not possible, then the liquidation will be a "creditors" voluntary winding-up.

There are procedural differences between the two types of voluntary winding-ups.

Consents and approvals. Both special and extraordinary resolutions require 75% shareholder approval, the only difference being that special resolutions can only be passed at general meetings of which not less than 21 days' notice has been given to all of the shareholders.

Supervision and control. See above, Winding-up by the court.

Protection from creditors. See above, Winding-up by the court.

Length of procedure. See above, Winding-up by the court

Conclusion. As soon as the affairs of the company are fully wound up, the liquidator must call a general meeting of the company and a meeting of the creditors to present the liquidator's account of the winding-up. Each of the meetings must be called by being advertised in the Gibraltar Gazette at least one month before the meetings and a return must be sent to the registrar within one week of the final meeting. The company will be deemed to have been dissolved three months after the date of registration of the return by the registrar.

Winding-up subject to the supervision of the court

When a company has passed a resolution for voluntary winding-up, the court can make an order that the voluntary winding-up continue subject to the supervision of the court with liberty for creditors, contributories or others to apply to the court on whatever terms and conditions the court thinks just.

STAKEHOLDERS' ROLES

8. Which stakeholders have the most significant role in the outcome of a restructuring or insolvency procedure? Can stakeholders or commercial/policy issues influence the outcome of the procedure?

Stakeholders

No one type of stakeholder has a particularly significant role in the outcome of a restructuring or insolvency procedure.

Influence on outcome of procedure

If either the creditors or members were responsible for initiating the voluntary winding-up then they can take a more proactive role and therefore have greater influence on the outcome. Most arrangements or compromises are voted on and adopted if the majority agree to them.

LIABILITY

9. Can a director, partner, parent entity (domestic or foreign) or other party be held liable for an insolvent debtor's debts?

There are a number of circumstances in which a director, partner, parent entity (domestic or foreign) or other party can be liable for an insolvent debtor's debts.

Director

Directors can be liable in the following circumstances:

• Breach of common law and equitable duties. Directors owe the company:

- fiduciary duties of good faith and loyalty;

- common law duties of skill and care;

- an equitable duty of confidence.

Directors can be held liable in damages to the company for breaching these duties. For example, where a director contracts a debt (by way of goods or services) on a company's behalf and does not honestly believe on reasonable grounds that the company will be able to repay the debt.

• Fraudulent trading. If, in the course of winding-up, it is found that the company's business has been carried on with intent to defraud creditors of the company, the court can declare that any of the directors (whether past or present) who were knowingly parties to the fraudulent trading can be held personally liable for the debts, without limitation. Each director found to be a knowing party to the fraudulent trading will be guilty of an offence and liable on conviction to be imprisoned for one year.

• Misapplication. This applies where during the course of winding-up, any past or present director, manager, liquidator, officer of the company or person involved in the formation or promotion of the company has either:

- misapplied any company money or property;

- been guilty of any breach of trust or misfeasance in relation to the company.

In that case, the court can order the guilty party to compensate the company.

Partner

The only type of partnership that exists under Gibraltar law is a limited partnership. Every partner in a limited partnership is jointly liable with the other partners for all debts and obligations of the firm incurred while he is a partner and after his death his estate is also severally liable in administration for such debts and obligations, so far as they remain unsatisfied, but subject to the prior payment of his separate debts.

However, there are two types of partners: general partners and limited partners. General partners' liabilities in this respect are unlimited whilst those of limited partners' are generally limited to the amount that they agreed to contribute to the partnership (as set out in their limited partnership agreement). However, a limited partner may incur unlimited liability if the partner becomes involved in the management of the partnership as though they were a general partner.


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Parent entity (domestic or foreign)

Since each company is a separate legal entity which has separate legal rights and liabilities, parent companies are not normally held responsible for the debts or actions of their subsidiaries. However, in certain circumstances (for example, in the presence of fraud), under UK common law, the courts may "pierce the corporate veil" of a company to place the debts and liabilities of a subsidiary on its parent or shareholders.

Other party

See Question 10.

SETTING ASIDE TRANSACTIONS

10. Can an insolvent debtor's pre-insolvency transactions be set aside? If so, who can challenge these transactions, when and in what circumstances? Are third parties' rights affected?

Challenges against pre-insolvency transactions can be made against:

• Fraudulent preferences. Any transaction entered into by the company, if insolvent at winding-up, can be set aside (and reversed) by the company's liquidator as a fraudulent preference within three months of commencement of a winding-up if its effect and dominant intention is to prefer one creditor over other creditors of the company.

• Floating charges. Floating charges created within six months of the commencement of winding-up are partially or wholly invalid unless the company was solvent immediately after the creation of the charge. They are valid up to the value of any cash consideration paid to the company at the time of or subsequent to the creation of the charge (together with interest on that amount at the rate of 5% per annum).

• Conveyance or assignment to trustees. A conveyance or assignment by a company to trustees for the benefit of all its creditors is void.

In respect of dispositions after the commencement of winding-up, any disposition of property made, transfer of shares or alteration of the members of a company is void.

As to third parties, bona fide purchasers for valuable consideration without notice or knowledge of the company's insolvency or possible insolvency are generally protected under the Company Act and Bankruptcy Act.

CARRYING ON BUSINESS DURING INSOLVENCY

11. In what circumstances can a debtor continue to carry on business during rescue or insolvency proceedings? In particular, who has the authority to supervise or carry on the debtor's business during the process and what restrictions apply?

Arrangement or compromise

Control of the company remains with the company's directors unless the company goes into liquidation and control is transferred to a liquidator or provisional liquidator.

Winding-up

Liquidators in voluntary and court winding-ups can carry on the business of the company, to the extent necessary for the beneficial winding-up of the company.

ADDITIONAL FINANCE

12. Can a debtor that is subject to insolvency proceedings obtain additional finance both as a legal and as a practical matter (for example, debtor-in-possession financing or equivalent)? Is special priority given to the repayment of this finance?

A liquidator in a court winding-up can raise money secured on the assets of the company. This additional funding is a liquidation expense and has priority over other claims.

MULTINATIONAL CASES

13. What are the rules that govern a local court's recognition of concurrent foreign restructuring or insolvency procedures for a local debtor? Are there any international treaties or EU legislation governing this situation? What are the procedures for foreign creditors to submit claims in a local restructuring or insolvency process?

Recognition

Under section 426 of the UK Insolvency Act 1986, the courts of Gibraltar can apply to the UK courts for assistance in insolvency proceedings over which the Gibraltar courts have jurisdiction.

The EU Regulation (EC) 1346/2000 on insolvency proceedings (Insolvency Regulation) applies in Gibraltar. Its aim is to ensure that any insolvency proceedings against a debtor are recognised in each EU member state from the time those proceedings are opened and become effective. Gibraltar is part of the EU by virtue of the UK's membership and as a specified European territory, the UK is responsible for Gibraltar's external affairs.

In the event of a conflict between the provisions of section 426 and the Insolvency Regulation, EU law prevails as a matter of supremacy but it is likely that in such cases the Gibraltar courts would take a complementary approach to reduce the possibility of a conflict.

Concurrent proceedings

Under the Insolvency Regulation, further insolvency proceedings can be opened in jurisdictions in which the debtor has an establishment. Article 2(h) defines this as "any place of operations where the debtor carries out a non-transitory economic activity with human means and goods". However, any secondary winding-up proceedings, must be limited to the assets held in that member state and must run parallel to the main proceedings.

The officer of the main insolvency proceedings can request a stay of enforcement proceedings in any secondary proceedings to protect the assets in that jurisdiction. This is only so long as this would not prejudice the creditors in the secondary proceedings.

In some circumstances, insolvency proceedings will have been initiated already in a state in which the debtor's centre of main interest is not located. Such proceedings can continue despite recognition of other proceedings and are referred to as "territorial proceedings".

The secondary proceedings, and any enforcement action arising from these, can be problematic if the aim of the primary proceedings is a rehabilitation of the company. To circumvent this, the officer of the proceedings in the primary proceedings can request assistance from the courts in the secondary jurisdiction to ensure they are notified of any applications and have an opportunity to be heard.

International treaties

The Insolvency Regulation is the main international treaty (see above).


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There are no special provisions for foreign creditors.

REFORM

14. Are there any proposals for reform?

The Insolvency Act 2011 has been passed by Parliament and is reported to come into effect on 1 September 2014. The main purpose of the Act is to:

• Modernise Gibraltar insolvency law.

• Provide greater protection to creditors of insolvent companies.

• Offer more options for companies in financial distress.

Key features of the new legislation include:

• New alternatives for companies that need to stabilise their financial position, such as the company voluntary arrangement.

• Creditors appointing a company administrator. The procedures set out in the Act will encourage companies to grant floating charges over their assets to creditors to reduce the risk of an administration order being made against the company in the event of default on any borrowing.

• Secured creditors appointing a receiver.

• A wider variety of defined voidable transactions with longer periods of vulnerability for challenge by a liquidator.

• The court's power to issue disqualification orders in respect of directors, liquidators, receivers and insolvency practitioners.

• The pursuit of directors for their personal assets if found liable for continuing to trade when they either knew or ought to have known that there was no reasonable prospect of the company avoiding going into liquidation.

• The requirement of companies to provide a "worst case scenario" plan for repayment of funds to potential creditors when looking to borrow.

In addition, the Companies Act Bill has been published and the Companies Act 2014 is also expected to come into effect on 1 September 2014.

As with the Insolvency Act 2011, the new Companies Act represents a major renovation of Gibraltar company law and will implement changes and improvements in a wide variety of areas. The Companies Act 2014 includes updated and provisions relating to:

• The introduction of different types of model articles.

• The protection of shareholders against unfair prejudice.

• Charge registration requirements and formalities.

• Electronic communications (including via the web).

• Derivative actions.

• Arrangements and reconstructions.

• Mergers.

• Corporate liquidation.

ONLINE RESOURCES

Finance Centre Department

W www.gibraltar.gov.gi/finance-centre

Description. The Finance Centre Department is responsible for:

• Advising the Finance Minister on all financial services policy matters.

• Liaising with the private sector and regulator in Gibraltar.

• Financial services legislation.

• Co-ordination of communication relating to strategic initiatives involving the IMF, OECD, EU.

• Other financial services-related matters.

Financial Services Commission

W www.fsc.gi

Description. The Financial Services Commission is the statutory body responsible for financial services in Gibraltar.

Gibraltar legislation

W www.gibraltarlaws.gov.gi

Description. This official website contains all Gibraltar primary and secondary legislation consolidated to date.

EU legislation

W http://eur-lex.europa.eu

Description. This official website has all EU legislation and other public documentation in the 23 official languages of the EU.

Description. This official website has all EU legislation and other public documentation in the 23 official languages of the EU.


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Practical Law Contributor profiles

Peter Howitt, Lead Solicitor

Ramparts T +350 200 68453 F +350 200 68453 E [email protected] W www.ramparts.eu

Professional qualifications. Legal Practice Course, 1999; England and Wales, Solicitor, 2002; Gibraltar Solicitor, 2012

Areas of practice. Commercial; corporate; e-commerce; payments; gaming; tax.

Non-professional qualifications. BA Law & Criminology, University of Sheffield

Languages. English

David Borge, Associate

Ramparts T +350 200 68450 F +350 200 68453 E [email protected] W www.ramparts.eu

Professional qualifications. Legal Practice Course, 2010; England and Wales, Solicitor, 2012

Areas of practice. Tax; gaming; intellectual property.

Non-professional qualifications. Pharmacy MPharm (Hons), Cardiff University, 2002

Languages. English and Spanish

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Restructuring and insolvency in gibraltar