The Law imposes a requirement for directors to form a conclusion as to the solvency of a company as a prerequisite to a number of corporate actions including the repurchase of its own shares, a reduction of capital and the continuance of a Jersey company into another jurisdiction. In the recent decision of Crystal Lake the Court considered the interpretation of Article 115 of the Law, which provides that a company may only make a distribution if the directors who are to authorise the distribution make a statement confirming, amongst other things, that the company in question will be able to discharge its liabilities as they fall due for a period of 12 months immediately following the date on which the distribution is proposed to be made or until the company is dissolved, whichever first occurs. Given the similarity of solvency test requirement under Article 115, when compared with other corporate actions such as those mentioned above, this judgment is of quite significant practical importance.

In this particular case, it had been alleged that there had been non-compliance with Article 115 in relation to various dividends that had been declared between 2008 and 2016. The facts and supporting corporate authorisations relevant to the distributions in question were examined by the Court. As part of the Court’s analysis the distributions were divided into three categories. It was ultimately held that a separate solvency statement signed by the directors is not necessary and the requirement can be discharged if appropriate wording is contained in the minutes or resolutions approving the distribution. The following postscript paragraph of the judgment will be of particular interest to Jersey directors:

‘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.’

Notwithstanding the usual practice of documenting the considerations and reasonable grounds supporting the making of a solvency statement in minutes, but having a separate solvency statement that strictly follows the wording in the Law, the case of Crystal Lake provides authority for position that the statement required by the Law can be properly satisfied by appropriately drafted minutes.

It is important to note that the judgment makes clear that where there is no reference to Article 115 or solvency in the minutes approving a distribution, the absence of any corporate authorisations documenting the directors deliberations regarding solvency means it could not be said that there was any solvency statement as required by the Law. Whilst it may well be the case that preparation for the meeting would have inevitably involved consideration of, inter alia, questions of solvency and the directors may have been satisfied as to the solvency of the company when making the decisions that they did, the requirements of the Law will not have been met.

It is also interesting to note that in its judgment the Court was happy to rely on its jurisdiction to make an order under Article 115ZA of the Law, which essentially allows the Court to make an order that a distribution that has been made in contravention of the requirements of Article 115 (including the requirement for the directors to give a solvency statement) is to be treated for all purposes as if it had been made in accordance with Article 115. This is interesting in the context of Crystal Lake as it is clear the Court was comfortable that the disputed distributions were going to be upheld either by the Court concluding that the disputed distributions were compliant with Article 115 or by the Court utilising its authority under Article 115ZA (which they did in fact do for one category of the disputed distributions). We can only speculate whether the Court, if presented with a similar fact pattern, though in the context of a different corporate action, such as a reduction of capital where there is no equivalent of Article 115ZA to save non-compliance of the statutory procedure, would be as quick to conclude compliance with Article 55(9) (being the corresponding requirement for a solvency statement from the directors).

Directors of Jersey entities will be very aware of the importance of getting solvency statements right and ensuring there is an appropriate paper trail that evidences the reasonable grounds for the directors making the solvency statement. Failing to have reasonable grounds for making a solvency statement is an offence under the Law. We previously considered what constitutes “reasonable grounds” and what directors may wish to turn their minds to when making this assessment here. It remains to be seen whether the directors of a Jersey company, legal advisors and financial advisors will move away from the well-established practice in recent times of demonstrating compliance with the statutory requirements by including appropriate wording in the relevant board resolutions as well as obtaining a separate solvency statement signed by each of the directors present at the meeting approving the relevant corporate action.

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