RESPONSES The Minister for Economic Development invites comments on the matters set out in this Position Paper. The closing date for responses is 12 May 2006. Responses should be sent to Paul de Gruchy Director – Finance Industry Development Economic Development Department c/o 5th Floor Cyril Le Marquand House The Parade St Helier JE4 8QT Telephone: 01534 440413 Facsimile: 01534 440409 e-mail: email@example.com David Wild at Jersey Finance Limited is co-ordinating an industry response that will incorporate any matters raised by local firms or entities. His contact details are: David Wild Jersey Finance Limited 27 Hill Street St Helier Jersey JE2 4UA Telephone: 01534 836004 Facsimile: 01534 836001 e-mail: David.Wild@jerseyfinance.je It is the policy of Jersey Finance to make individual responses it receives available to the Economic Development Department upon request, unless a respondent specifically requests otherwise. The contents of any response may form the subject of discussions with industry bodies and other interested parties.1. INTRODUCTIONIn 2003, a consultation paper was issued by the Jersey Financial Services Commission (the ?Commission?) in relation to proposed amendments to the Companies (Jersey) Law (the ?Law?). As a result of the response to that consultation, a number of the proposals made by the Commission were refined. In addition, since the Companies (Amendment No.8) (Jersey) Law was approved by the States in June 2005, a number of suggestions have been made by industry practitioners to the Economic Development Department in relation to potential improvements to the Law. This position paper sets out a number of proposed amendments to the Law. Where possible, changes to the Law will be implemented through Regulations, as they can be brought into force in an expedited timescale. Where this is not possible, changes will be made by Amendment to the Law. It is hoped that this Amendment would be in a position to be approved by the States early in the autumn of 2006.It should be noted that the proposed changes set out in this paper are not comprehensive. There will be a small number of changes aimed primarily at clarifying the existing provisions of the Law, which are unlikely to be contentious and upon which it would not be sensible to consult. This position paper differs from a consultation paper. The majority of matters set out in this paper have already been the subject of consultation, a number arise directly from further consideration of Amendment No.8, with the remainder responding to developments in other jurisdictions and which are expected to be widely welcomed by those affected by the Law. The purpose of this paper therefore is to inform the wider community of the results of previous consultations and of the proposed amendments to the Law. It is anticipated that this paper will form the basis of law drafting instructions, and that the proposals set out in this paper are only likely to be materially altered in the face of compelling argument.2. THE PROPOSED CHANGESSolvency Tests (Articles 55(9), 115) Amendment No.8 introduced a new form of ?solvency test? for Jersey companies considering making a distribution of assets (in whatever manner) to its members. The test requires the directors of the company who authorise the corporate action to make a statement in a prescribed form:
The statement shall state that the directors of the company authorising the redemption, having made full enquiry into the affairs and prospects of the company, have formed the opinion ?(a) that, immediately following the date on which the payment is proposed to be made, the company will be able to discharge its liabilities as they fall due; and(b) 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 and to the amount and character of the financial resources that will in their view be available to the company, the company will be able to continue to carry on business and will be able to discharge its liabilities as they fall due until the expiry 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 first occurs.
Two problems have been identified with this test. Firstly, the new test was designed to avoid the need to have accounts prepared prior to making a decision as to whether assets existed sufficient to justify making a distribution. However, ?having made full enquiry? is unclear and in most cases legal advice would recommend that directors prepare accounts in order to satisfy that requirement. Secondly, as it is an absolute requirement that the directors make full enquiry prior to making the statement, if it subsequently comes to light that full enquiry was not made, an argument could be made that the distribution itself was not validly made, and therefore those who received a distribution in good faith could be compelled to repay it.It is proposed that a better way of incorporating this type of solvency test into the Law is to remove the words ?having made full enquiry into the affairs and prospects of the company? from Articles 55 and 115 and to introduce into Article 115 an offence the equivalent of Article 55(10):
A director who makes a statement [under paragraph (8)] without having reasonable grounds for the opinion expressed in the statement is guilty of an offence.
The end position would then be that it is a question of fact whether the solvency statement has been made and the distribution is valid, but it would then be a question for the court to decide whether the director had reasonable grounds for making that statement and therefore whether the director committed an offence. In determining whether the director had reasonable grounds it is likely that the court would consider the degree of enquiry that the directors made into the company?s affairs and prospects.Financial Assistance (Article 58) It is proposed that this article should be deleted. Financial assistance provisions have become a complex set of requirements that have to be satisfied in a wide range of circumstances for little clear end. Practically, this has caused a significant burden to those contemplating takeovers of Jersey companies for many years.In transactions involving groups of companies, preparing the various resolutions that are required to ?whitewash? assistance can be a voluminous task. This adds to the costs and risks of doing business in Jersey without bringing any clear benefit to the Island. Australia and New Zealand have already abolished their provisions relating to financial assistance and the UK is expected to do the same. The emphasis of the Law is moving to provide as much flexibility as possible, provided that the company remains solvent and there is no fraud on minority shareholders. Sufficient remedies already exist if financial assistance results in insolvency or a fraud on a minority of shareholders and, this being the case, it is felt that the protection that the article purports to provide is no longer necessary. Registered Office Provisions (Articles 67, 71 & 205) Under the current Law, every Jersey company must have a registered office in Jersey. There is, however, no penalty for a breach of this requirement, though a penalty does exist, under Article 44, if the Registrar of Companies is not told of any change to the location of the register of members, which would usually, though not necessarily, be the registered office. The current requirement is simply that the company has a registered office. There is, however, no requirement for the person who provides the registered office to agree to this: in other words, a company can give any address in Jersey as its registered office and there is no mechanism for ensuring that the registered office has any relationship with the company in question. This poses significant risks to the Island. To provide a registered office is a regulated activity, and the Commission relies upon regulated corporate service providers to carry out ongoing due diligence against the owners of Jersey companies. It is therefore vital that a mechanism exists which ensures that the address given as the registered office address is bona fide: in other words, that the owner of a registered office address is willing to accept communications addressed to the company. The best practical way of achieving this is requiring all formal correspondence from the Registry to be sent to the company?s registered office address: if the person providing the address does not wish to provide the registered office for the company he will then be put on notice that his address is being used and will be able to inform the Registrar that this should not be the case. The Registrar will then be able to take steps to wind up the company.