Friday, 15 February 2013

Jersey: capital maintenance, reduction of capital and the protection of creditors

The Royal Court (Samedi Division) has delivered an important judgment - Re WPP Plc [2013] JRC031 - concerning the effect of the Companies (Amendment No.9) (Jersey) Law 2008 and the Companies (Amendment No.2) (Jersey) Regulations 2008 ("the 2008 amendments") on the courts' approach to the protection of creditors on a reduction of capital. Amongst other things the 2008 amendments introduced into Jersey company law (through amendments to the Companies (Jersey) Law 1991) a new procedure for reductions of capital including the requirement for directors to make a solvency statement. The court held that following these amendments the principle of capital maintenance was of limited application in Jersey, with (new) Article 115 of the 1991 Act making clear that distributions were no longer restricted to being made out of profits. More specifically, the court held (para. [24]):

We reiterate that the 2008 amendments do not remove the duty of the Court to have regard to the interests of creditors in relation to any reduction of capital. The sole effect of the 2008 amendments is that, where the reduction effectively transfers funds from a capital account such as a share premium account (from which distributions may be freely made under Article 115 subject only to the solvency requirement) to a non-capital account (from which distributions may be made on exactly the same basis), it is hard to envisage the Court concluding that creditors may be prejudiced or that any other measure to protect creditors is required. We emphasise however that these observations apply only to a reduction of this nature. Where any other form of reduction is proposed, the Court may still require measures to be taken to satisfy it that creditors will not be prejudiced by the reduction.

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