Before : |
Sir Michael Birt, Commissioner, and Jurats Ramsden and Pitman. |
IN THE MATTER OF THE REPRESENTATIONS OF THE ROYAL BANK OF SCOTLAND INTERNATIONAL LIMITED AND THE ROYAL BANK OF SCOTLAND INTERNATIONAL (HOLDINGS) LIMITED
AND IN THE MATTER OF ARTICLE 115 OF THE COMPANIES (JERSEY) LAW 1991
Advocate M. W. Cook for the Representors.
judgment
the commissioner:
1. These Representations concern applications by The Royal Bank of Scotland International Limited ("RBS International") and The Royal Bank of Scotland International (Holdings) Limited ("RBSI Holdings") respectively for orders under Article 115ZA of the Companies (Jersey) Law 1991 ("the Law") that various distributions made by each of the companies should be taken for all purposes as having been made in compliance with the requirements of Article 115 of the Law.
2. The Court granted the applications at the conclusion of the hearing. However, given that the original applications had been adjourned for further information and that, although a number of orders under Article 115ZA had been made since its introduction there is apparently no reasoned decision of the Court dealing with the Article, the Court indicated that it would give brief reasons for its decision in due course in the hope that this might be of assistance in future cases. What follows constitutes those reasons.
3. The present Article 115 of the Law came into force in June 2008 as a result of amendments brought in by the Companies (Amendment No.9) (Jersey) Law 2008. The relevant provisions of Article 115 provide as follows:-
"115 Restrictions on distributions
(1) A company may make a distribution at any time.
(2) A company shall not make a distribution except in accordance with this Article if the distribution -
(a) reduces the net assets of the company; or
(b) is in respect of shares which ... are required to be recognized as a liability in the accounts of the company.
(2A) ...
(3) A company (other than an open-ended investment company) may make a distribution only if the directors who are to authorize the distribution make a statement in accordance with paragraph (4).
(4) The statement shall state that the directors of the company who are to authorize the distribution have formed the opinion -
(a) that, immediately following the date on which the distribution is proposed to be made, the company will be able to discharge its liabilities as they fall due; and
(b) that, having regard to -
(i) the prospects of the company and to the intentions of the directors with respect to the management of the company's business, and
(ii) the amount and character of the financial resources that will in their view be available to the company,
the company will be able to -
(A) continue to carry on business, and
(B) discharge its liabilities as they fall due,
until the expiry of the period of 12 months immediately following the date on which the distribution is proposed to be made or until the company is dissolved under Article 150, whichever first occurs.
(5) A director who makes a statement under paragraph (4) without having reasonable grounds for the opinion expressed in the statement is guilty of an offence.
(6) ...
(7) A distribution made in accordance with this Article shall be debited by the company to -
(a) a share premium account, or a stated capital account, of the company; or
(b) any other account of the company, other than the capital redemption reserve or the nominal capital account.
..."
4. As stated in Re WPP PLC [2013] (1) JLR 175, the new Article 115 introduced a considerable change to the circumstances in which a company may make a distribution to its shareholders. Prior to its introduction, the governing principle was the maintenance of capital. Thus distributions could only be made out of profits. If there were no profits available for distribution, the company would have to redeem shares (if such shares were in issue) or proceed by way of a reduction of capital.
5. Article 115 changed all that. Distributions do not now have to be made out of profits and may be made out of any account except nominal share capital and the capital redemption reserve fund (if any). However, a new protection for creditors has been introduced. That is the requirement contained in Article 115(3) that the directors must make a statement of solvency as set out in Article 115(4). Furthermore, Article 115A provides that if a distribution or part of a distribution made by a company is made in contravention of Article 115 and at the time of the distribution a member knows or has reasonable grounds for believing that it is so made, the member is liable to repay the distribution.
6. After a while it was realised that difficulties might be caused as a result of a failure to comply with the technical requirements of Article 115(4) (i.e. the directors omitting to make the necessary statement) even though there was not in fact a problem with solvency. To that end, no doubt, the States introduced Article 115ZA of the Law by means of the Companies (Amendment No.11) (Jersey) Law 2014 ("the 2014 Amendment"). Article 115ZA is in the following terms:-
"Order treating distribution as made in accordance with Article 115
(1) Where a distribution has been made by a company in contravention of Article 115 and the company makes an application to the court, the court shall make an order that the distribution is to be treated for all purposes as if it had been made in accordance with that Article if the court -
(a) considers that all of the conditions specified in paragraph (2) are met; and
(b) does not consider that it would be contrary to the interests of justice to do so.
(2) The conditions referred to in paragraph (1)(a) are that -
(a) immediately after the distribution was made the company was able to discharge its liabilities as they fell due;
(b) at the time when the application is determined by the court the company is able to discharge its liabilities as they fall due; and
(c) where the distribution was made less than 12 months before the date on which application is determined, the company will be able to carry on business, and discharge its liabilities as they fall due, until the end of the period of 12 months beginning with the date on which the distribution was made.
(3) No notice of an application under paragraph (1) need be given to any creditor of the company, or any other person, unless the court otherwise directs."
7. It was clearly envisaged that the process for obtaining an order under Article 115ZA should not normally be complicated or controversial. Thus the Report accompanying the 2014 Amendment said as follows in connection with the new Article:-
"Article 115 of the Principal Law provides that a company can only make a distribution to its members if the directors authorising the distribution have made a solvency statement. However, there is currently no mechanism whereby such a distribution, which is technically ultra vires, can be ratified retrospectively where there was an inadvertent mistake. Article 32 of the draft Law seeks to remedy this omission by introducing a court process to ratify such distributions based on factors including: the solvency of the company at the time of the distribution, the solvency of the company at the time that the court hears the application, and that there are no reasons contrary to the interests of justice why such a ratification should not take place.
It is envisaged that, in cases where the solvency of the company is not in doubt, and it is clear that the failure to make a solvency statement was an innocent mistake by the directors, an order under Article 115ZA(1) should generally be made as a matter of course.
To ensure that the procedure is not unduly onerous, paragraph (3) of Article 115ZA expressly provides that no notice of an application under paragraph (1) need be given to any creditor of the company, or any other person, unless the court otherwise directs."
8. RBS International is a Jersey company licenced to carry on deposit taking business and other forms of financial services business. It is wholly owned by RBSI Holdings which is also incorporated in Jersey and which is in turn ultimately owned via various intermediate holding companies by The Royal Bank of Scotland Group PLC.
9. Since the introduction of Article 115 in its current form in 2008, each of RBS International and RBSI Holdings has declared a number of interim dividends at board meetings. These are set out in detail in the Representation of each company but we do not think it necessary to list them individually for the purposes of this judgment. Suffice it to say that between 29th September, 2009, and 19th December, 2014, RBS International resolved at six board meetings to make interim distributions which come in aggregate to £695m. RBSI Holdings, which owns other companies in the group as well as RBS International, resolved between 20th June, 2008, and 21st December, 2015, at seventeen board meetings to pay interim dividends totalling in aggregate £2,071,591,278.18.
10. Unfortunately, due to an administrative oversight, on none of these occasions did the directors of either company make a statement of solvency in accordance with Article 115(4), with the consequence that the distributions did not comply with the mandatory requirement of Article 115(3).
11. Accordingly, each company presented a Representation seeking an order under Article 115ZA that all the distributions be treated as if they had been made in accordance with Article 115 of the Law. The applications first came before the Royal Court on 15th December, 2016. The Court (presided over by Commissioner Clyde-Smith) adjourned the applications on the basis that the Court required a fuller explanation as to how the requirement for the statement of solvency had been missed over such a long period by the finance director or company secretary or auditors and for a more detailed explanation of the basis upon which the directors expressed themselves to be satisfied as to the current solvency of the two companies.
12. The matter came back before the Court as presently constituted on 27th April at which time the Court was provided with a second affidavit from the finance director of the two companies. That affidavit exhibited a letter from the former auditors of the companies.
13. The Court is satisfied that the applications should be granted in the light of the further information now provided.
14. As to the first point raised by the Court on the last occasion, the finance director stated that the RBS Group had a process to identify changes to applicable laws and regulations in the jurisdictions in which it operates. However, on this occasion, the change in the Law introduced by Article 115 was not identified at the time. Consequently, although the directors had always in fact considered the solvency of each of the companies at the relevant time, the need to make a formal solvency statement had been overlooked on each occasion. The companies' non-compliance with the requirements of Article 115(3) of the Law had been identified by the secretarial team in 2016 while reading a legal update reporting an application made to the Court by another company in relation to the same issue. As a result of the omission in this case, the two companies had commissioned a review of the legal and governance requirements in Jersey with the assistance of a secondee from an external Jersey law firm and no further omissions had been identified. As for the auditors, they had taken the view that they had sufficient evidence that the board had actually approved the dividends and that financially the dividends were properly paid and as a result they did not check specifically that all of the provisions of Jersey company law had been complied with.
15. Turning to the second issue raised previously by the Court, it is sub-paragraphs (a) and (b) of paragraph (2) of Article 115ZA which need to be considered. Sub-paragraph (c) is not relevant because all of the distributions were made more than twelve months before the date of the application to the Court. As to the requirement of sub-paragraph (a), the Court can accept without difficulty that this has been established given that both companies are still carrying on business long after the relevant distributions. Sub-paragraph (b) is the important one. We do not think it necessary to go into detail for the purposes of this judgment. The second affidavit of the finance director has expanded upon the financial position of both companies. RBS International is of course an entity regulated by the Jersey Financial Services Commission and therefore needs to comply with all the capital and asset requirements for deposit taking institutions. On the basis of the information now provided, we are quite satisfied that each company is able to discharge its liabilities as they fall due.
16. It is for these reasons that we felt able to grant the applications at the conclusion of the hearing.
17. The difficulty in this case arose because of the lack of detailed information accompanying the original application. Little explanation was given as to how the requirement for the solvency statement had been missed over such a long period given the stature and size of the two companies. Perhaps more significantly, a sufficient analysis of the basis upon which the directors expressed satisfaction as to the current solvency of the two companies was missing. It is the Court which, under Article 115ZA, has to be satisfied that a company is able to discharge its liabilities as they fall due. It is in those circumstances not satisfactory for the directors simply to state that in their opinion the company is solvent without an explanation of the basis upon which they have reached that conclusion. We can well understand therefore why the Court adjourned the application for further information at the previous hearing in December.
18. We wish to emphasise that the Court is conscious of what was said in the Report accompanying the 2014 Amendment and the desirability of such applications being fairly routine. We would certainly expect them normally to be capable of being dealt with on a Friday afternoon. However, in order to ensure that this is so, the application needs to provide sufficient financial information to enable the Court to see the basis upon which the directors have concluded that the company will be able to discharge its liabilities as they fall due and generally satisfy the requirements of paragraph (2) of Article 115ZA. A simple assertion that this is so without provision of any financial information is not sufficient to enable the Court itself to reach a conclusion on the matter.
19. We hope that, armed with such assistance as this judgment is able to give, future applications will be able to proceed in the routine manner envisaged at the time of the 2014 Amendment.
Authorities
Companies (Jersey) Law 1991.
Companies (Amendment No.9) (Jersey) Law 2008.
Re WPP PLC [2013] (1) JLR 175.
Companies (Amendment No.11) (Jersey) Law 2014.