Jersey Unreported Judgments

Companies - minutes relating to distributions

[2021]JRC104

Royal Court

(Samedi)

14 April 2021

Before     :

R. J. MacRae, Esq., Deputy Bailiff, and Jurats Pitman and Austin-Vautier

 

IN THE MATTER OF CRYSTAL LAKE INVESTMENTS LIMITED

AND IN THE MATTER OF SHAWNE LAKE ENTERPRISE LIMITED

Advocate J. Harvey-Hills for the Representors.

Advocate N. A. K. Williams for the Trustee.

judgment

the deputy bailiff:

1.        On 19^th March 2021 we heard argument in relation to this matter, which involves a point of interpretation in respect of whether or not company minutes in relation to two Jersey companies complied with the obligation on the part of directors to provide solvency statements pursuant to Article 115 of the Companies (Jersey) Law 1991, as amended ("the Law"). 

2.        Crystal Lake Investments Limited ("Crystal") is a company incorporated in Jersey on 15^th November 2002.  It is an investment holding company now owned by RBC Trustees (Jersey) Limited ("RBC Trustees") in its capacity as trustee of a family trust.  The shares in Crystal are now held in the name of two companies on bare trust for RBC Trustees. 

3.        RBC Trustees took over the trusteeship of the trust and RBC Trust Company (International) Limited ("RBC") the administration of Crystal from Zedra Trust Company (Jersey) Limited ("Zedra") on 13^th December 2016.  Zedra became trustee of the trust and administrator of Crystal following the sale of the Barclays trust and fiduciary business to Zedra on 5^th June 2015. 

4.        Shawne Lake Enterprises Limited ("Shawne") was a company originally incorporated in the British Virgin Islands but incorporated in Jersey on 21^st February 2003.  Its ultimate beneficial owner is the same as Crystal.  It is also an investment holding company.  It is administered by RBC.  It has the same history in respect of its administration as Crystal, having been administered by Zedra until 13^th December 2016 and prior to that as part of Barclays' trust and fiduciary business until 5^th June 2015. 

5.        The accounts of Crystal and Shawne were provided to the Court.  These indicated that throughout the period with which the Court is concerned and at the date of the hearing, both companies enjoyed strong positive balance sheets and substantial reserves of cash.  Both were plainly solvent at all material times and no question of insolvency or inability to discharge liabilities as they fell due was at any stage an issue for either entity. 

6.        It is necessary to examine the relevant statutory provisions in this case before turning to the facts.

The statutory provisions

7.        The relevant provisions of Article 115 of the Law provide: 

"(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 (in accordance with the generally accepted accounting principles adopted in the preparation of the most recent accounts of the company prepared under Article 105 or, if none have been, proposed to be adopted in the preparation of the first accounts of the company so prepared) are required to be recognized as a liability in the accounts of the company.

...

(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."

8.        The need to make a "solvency statement" on the part of the directors was considered by the Royal Court in the matter of the Representation of WPP Plc [2013] (1) JLR 175.  In that case (which involved the Court approving a proposed reduction of capital), Birt, Bailiff giving the decision of the Royal Court said in respect of the amendments to the Law which included the introduction of Article 115:

"14. Advocate Temple submits that the position in Jersey is now different and that, unlike in the United Kingdom, the principle of the maintenance of capital has been considerably attenuated. He submits therefore that, for a reduction of the type in this case where there is simply a transfer from the share premium account to a reserve account, the interests of the creditors cannot be prejudiced and there is no need to obtain their consent or for the company to consider any of the other means of protection for creditors envisaged in the passage cited above at paragraph 12.

15. He points out that, at the time the Law was enacted, the position in the UK was governed by the Companies Act 1985. Section 263 of that Act provided that distributions could only be made out of profits available for distribution and these were in turn defined as its accumulated realised profits, so far as not previously distributed or capitalised, less its accumulated realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made.

16. The position under the Law concerning distribution was substantially similar prior to 2008 (see Article 115 of the Law as originally enacted) although a Jersey company was also permitted in certain circumstances to make distributions out of unrealised profits.

17. Accordingly, in both jurisdictions a company could only make distributions out of profits. It could not do so out of capital accounts such as a share premium account, unless the payment fell within the provisions for redemption and purchase of shares contained in Part 11 of the Law.

18. It is our understanding from the information provided to us in this case that, although the position in the United Kingdom is now governed by the Companies Act 2006, and has been relaxed in one or two respects, nevertheless it remains broadly as previously. In particular Section 830 of the 2006 Act provides that a company may only make a distribution out of profits available for that purpose and the profits available for distribution are still defined in the same way as previously, namely its accumulated realised profits, so far as not previously utilised by distribution or capitalisation, less its accumulated, realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made. Thus the principle of the maintenance of capital is still retained in the United Kingdom, as described in the passage from Tolley quoted at paragraph 5 above.

19. The position in Jersey, however, is now very different. As a result of the amendments introduced by the Companies (Amendment No.9) (Jersey) Law 2008 and the Companies (Amendment No.2) (Jersey) Regulations 2008 (together the "2008 amendments") the principle of the maintenance of capital is now of very limited application in Jersey. In particular, Articles 114 and 115 of the Law were repealed and replaced with new provisions. So far as relevant, Article 115 now provides as follows ...

20. As can be seen therefore, distributions are no longer restricted to being made out of profits. They may be made out of a share premium account or any other account except the nominal capital account or a capital redemption reserve account. No matter what account the distribution is made from, the directors must sign the relevant solvency statement and that is now the key protection for creditors."

9.        It is not uncommon for directors to fail to comply with their obligations under Article 115.  Accordingly, the Law was subsequently amended by the introduction of what is now Article 115ZA. 

10.      The report which accompanied the Companies (Amendment No.11) (Jersey) Law 2014, when it was lodged for debate by the States in early 2014 said, inter alia:

"55. The purpose of this Article is to amend the definition of a 'distribution' to exclude any transaction which does not result in a reduction in the net assets of the company. This removes a perceived risk that the definition might catch certain common commercial transactions (such as the giving of a guarantee by a subsidiary in respect of its parent's indebtedness), thereby rendering them unlawful unless the procedure laid down by Article 115 of the Principal Law (which requires the making of a solvency statement prior to any distribution) has been followed.

...

58. There was anecdotal evidence that the requirement for a solvency statement was sometimes overlooked by directors of Jersey companies when authorizing a distribution to members. There is currently no mechanism whereby such a distribution, which is technically ultra vires, can be ratified retrospectively. Article 32 of the Draft Law seeks to remedy this 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.

59. As set out in the Supplemental Response Paper, the Government envisages 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.

60. 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."

11.      Article 115ZA provides:

"(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."

The issue

12.      Between 2008 and 2016, Crystal and Shawne respectively, through their boards of directors, declared a series of dividends.  Each dividend was declared further to approval at a board meeting of each company. 

13.      RBC contended that the minutes which approved these dividend payments did not clearly comply with the requirements of Article 115.

14.      The earliest minute related to a board meeting on 30^th June 2008 and the last to a meeting on 13^th December 2016.  Accordingly, all the board meetings took place when either Barclays' fiduciary business or Zedra were administering the two companies. 

15.      Zedra argues that in fact there was compliance with the provisions of Article 115 on each occasion.  Zedra also volunteered to the Court that the decision in this case has implications beyond the circumstances of these two companies, as there are a significant number of companies currently or previously administered by Zedra, and Barclays prior to it, where similar issues to those which arise in this matter also require consideration.   

16.      Both RBC and Zedra agree that there is no dispute that in the event that there was non-compliance with Article 115 in this case, then the test under Article 115ZA is met and accordingly the Court would order that the distributions be treated for all purpose as if they had been made in accordance with Article 115. 

17.      The distributions/dividends have been divided into four categories by virtue of the fact that the board minutes in respect of the various dividends are not in the same form. 

18.      It is useful to consider the categories of dividend in the order in which they were made as different considerations apply to each and the Court's conclusions in relation to the dividends declared are not the same. 

Category A dividends

19.      There were five such dividends.  They were the subject of board meetings between 30^th June 2008 and 27^th January 2009.  Dividends from Crystal were resolved upon on 30^th June 2008, 5^th August 2008 and 27^th January 2009; and from Shawne on 5^th August 2008 and 4^th December 2008.  The smallest dividend declared was €3,000 and the largest comprised of €10,000, $40,000 and £70,000. 

20.      The "Type A minutes" as they were described to us were in similar form and the first post-dated, we were told, the coming into force of Article 115 by only 10 days.  An example of this was the meeting of the directors of Shawne on 4^th December 2008.  Two corporate directors are recorded as having been present.  The minutes of the previous meeting were taken as read and under the title "Interim Dividend" the minute reads: 

"It was resolved THAT an interim dividend be declared from non-UK source income in the sum of EUR 100,000.00 payable to the income shareholder of the Company registered on 4 December 2008 for payment on 5 December 2008 ... 

There being no further business to discuss the Chairman closed the Meeting." 

21.      There is no reference to Article 115 or solvency in the minutes.  It was argued on behalf of Zedra that, having regard to the affidavit sworn by Mr Dwyer, one of the signatories of the corporate directors who was present at this and many of the subsequent meetings, that the process of preparing for the board meeting inevitably involved consideration of, inter alia, questions of solvency.  Mr Dwyer says that "the signatories for the corporate directors carefully considered the solvency of both Crystal Lake and Shawne Lake when each of the dividends was declared.  When making their assessment, they were cognisant of the requirements of Article 115 of the Law.  Indeed [but not in relation to the Category A minutes] the requirements were expressly stated within the majority of the minutes in question.  It is plainly the case that in signing the minutes, the directors were indicating their belief that the Companies had complied with the law.  The required statement had, therefore, been made."   

22.      It may well be that the directors were satisfied of the solvency of the companies when making the decisions that they did which are reflected by the Category A minutes but the members of the Court were satisfied that it could not be said that there was any solvency statement as required by Article 115 in relation to these five dividends.  Accordingly, we ordered that, pursuant to Article 115ZA those dividends be treated as made in accordance with Article 115.  In this regard we were satisfied that the "historic" and "current" solvency tests under Article 115ZA(2)(a) and (b) were and are met. 

Category B dividend

23.      There was only one minute that fell into this category, a minute of the meeting of the Shawne board on 2^nd March 2010.  Under the title "Dividend" it is provided that: 

"It was resolved

THAT an interim dividend should be declared by the Company on the income shares in the total sum of EUR 60,000 being EUR 600 per share payable to the shareholders of the Company registered on and for payment on 02/03/2010. 

It was noted

THAT pursuant to Articles 114 and 115 of the Companies (Jersey) Law 1991, as amended, the directors of the Company who are to authorise the distribution must have formed the opinion that: 

(1)       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 

(2)       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)   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:-

(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 of the Companies (Jersey) Law 1991, as amended, whichever first occurs. 

There being no further business to discuss, the Chairman closed the Meeting." 

24.      We will come to our conclusion in relation to the Category B minutes when we have considered the Category C minutes.  

Category C dividend

25.      The Category C minutes (including one slightly different set of minutes which were called the "Category C1 minutes") were greatest in number and included all the relevant minutes from 27^th July 2012 to 13^th December 2016 inclusive.  There were 12 minutes in total and all were decisions of the Crystal board.  The smallest dividend was £4,125 and the largest was $1,270,000.  The Category C minutes included the minutes of the meeting of the Crystal board on 5^th December 2016.  Under the title "Declaration of interim dividend" the minute provides: 

"It was noted

THAT pursuant to the Articles, the Directors may declare that dividends can be paid to shareholders according to their rights and interests in the Company. 

It was further noted

THAT pursuant to Articles 114 and 115 of the Companies (Jersey) Law 1991, as amended (the "Law") a company can only make a distribution of assets to its members if the directors of the company who are to authorise a distribution of the company's assets make a statement that they have formed the opinion:

(1)       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

(2)       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)   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:-

(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 of the Law, whichever first occurs (the "Statement"). 

RESOLUTIONS:

After due consideration

It was resolved

THAT an interim dividend should be declared by the Company on the income shares in the total sum of 34,161.09 POUNDS STERLING being 341.61 POUNDS STERLING per share payable to the shareholders of the Company registered on for payment on 5^th day of December. 

TERMINATION:

There being no further business to discuss, the Chairman closed the Meeting."

26.      The only difference between the Category C1 minutes (of which there was only one set) and the other Category C minutes is the following reference between "Declaration of interim dividends" and "Resolutions" under the title "Documents", where it is provided:

"The following documents were tabled to the meeting:

(1) A Statement signed by each of the directors present at the meeting." 

27.      This "statement" has not been found and we do not know what it said or even if there ever was such a statement. 

28.      In relation to the Category B and Category C minutes, it is said by RBC that whilst these minutes contain references to solvency and set out the terms of the relevant statutory provisions in full, neither contain any actual statement by the directors authorising the relevant dividends to the effect that they have actually formed the requisite opinions required under Article 115.  Accordingly, RBC's view is that it is "not clear" that the Category B or Category C minutes discharge the formal obligations required.  RBC note the importance of solvency statements as a critical protection for creditors and rightly argue that compliance with the statute is an important matter - failure to comply with Article 115 by making a solvency statement without reasonable grounds being a criminal offence.

29.      There is no relevant authority on this point. 

30.      Zedra relies upon the affidavit of Mr Dwyer which shows that there were updates from time to time as to the wording in template minutes that were used to approve dividends.  The Category B minutes are an example from March 2010.  In relation to the Category B minutes, it is noted that the minutes, prior to reciting the relevant part of Article 115 say that directors who are to authorise the distribution "must have formed the opinion that" and then went on to set out the terms of Article 115(4) in the context of declaring the dividend.  The wording of the minute shows that it was a condition precedent to declaring the dividend that the directors had made a solvency statement and by implication the wording of the minute is not merely evidence that they considered the solvency of the company but an implication that by making the distribution the directors were making the solvency statement required by the statute.  Counsel for Zedra make the point that the provisions of Article 115 do not say that the "statement" to be made under Article 115 needs to be made in a particular form.  There is, for example, no requirement for a specific "certificate" as required by the equivalent Guernsey legislation. 

31.      In respect of the Category C minutes, these are in similar form to the Category B minutes save that the resolution to declare the dividend comes after recitation of the relevant statutory provision and sets out that the company can "only make a distribution of assets to its members if the directors of the company who are to authorise the distribution of the company's assets make a statement that they have formed the opinion ..." and then goes on to set out, again, the opinion required under Article 115(4).  It is said that this is clear evidence that the directors not only had formed the opinion required by Article 115(4) but amounts to a statement that the directors had formed that opinion as required by Article 115. 

32.      After careful consideration and not without some hesitation we agreed with the argument advanced by Zedra in relation to the Category B and C minutes.  We concluded that they are compliant with Article 115 of the Law and the contents of the minutes do amount to the making of a solvency statement, as required. 

33.      If we were wrong on this then, for the reasons set out above, we would have made an order under Article 115ZA. 

Postscript      

34.      Notwithstanding the conclusion that we have come to, it is essential that in the future all minutes relating to distributions are compliant with the clear wording of Article 115.  The appropriate place for a solvency statement is in the minutes which relate to a particular distribution.  Each set of minutes should contain a specific statement to the effect that the directors have formed the opinion required by statute. 

Authorities

Companies (Jersey) Law 1991, as amended. 

Representation of WPP Plc [2013] (1) JLR 175. 

Companies (Amendment No.11) (Jersey) Law 2014