In review: insolvency law, policy and procedure in Isle of Man – Lexology

An extract from The Insolvency Review, 7th Edition

Insolvency law, policy and procedure

In the 2015 edition of this publication, we noted that there had been some significant movement in Manx insolvency law, especially in the area of the mechanisms available for challenging a sealed winding-up order. At that time, we noted that there was had been an increase in judicial criticism of the Isle of Man’s legislation and rules in respect of winding up. As these reforms do not appear to be high on the legislative agenda, there has not been any change to either the legislative framework or the winding-up rules. Nevertheless, the Isle of Man courts continue to do an admirable job of ensuring that the ageing rules continue to function in the modern world. Accordingly, the statutory framework and substantive law remain unchanged in this edition.

i Statutory framework and substantive law

Insolvency law on the Isle of Man is governed primarily by the following legislation:

  1. the Fraudulent Assignments Act 1736;
  2. the Preferential Payments Act 1908;
  3. the Preferential Payments and Other Acts (Financial Adjustments) Act 1973;
  4. the Companies Act 1931–2004; and
  5. the Companies Act 2006.

The primary legislation governing insolvent companies can be found in Sections 155 to 276 of the Companies Act 1931. This is supported by the Companies (Winding-up) Rules 1934.

The regime in the Isle of Man, perhaps not surprisingly given its proximity, shares many similarities with the regime in England and Wales and, indeed, with many common law jurisdictions. This is owing in part to the fact that the Isle of Man Companies Act 1931 was based on the Companies Act 1929 (an Act of Parliament). Nevertheless, there are certain idiosyncrasies and features unique to Isle of Man insolvency law and procedure that have developed over time. Added to the divergence in Manx and English and Welsh insolvency law and procedure as a result of the passage of time and interpretation is that English and Welsh legislation has been subject to amendment that the Manx legislation has not.

The Fraudulent Assignments Act 1736 states that ‘all fraudulent Assignments of Transffers of the Debtor’s Goods or Effects shall be void and of no Effect against his just Creditors, any Custome or Practice to the contrary notwithstanding’.

A transaction will be void under the 1736 Act if, and only if, it is entered into dishonestly (i.e., if the debtor enters into the transaction with the intention to defraud his or her creditors). The 1736 Act applies to present and ascertained future debts at the time of the transaction in question. However, it does not apply to claims filed after the transaction. Further, assignment or transfer of debtors’ goods is only void against existing creditors; it is not illegal to protect property against future creditors. Accordingly, one may enter transactions with a view to, and for the purpose of, protecting property against potential future creditors that do not presently exist.

ii Policy

In Donnell v. Siboney, Deemster Doyle, then Second Deemster of the Isle of Man, stated: ‘To present a petition to wind up a company is a very serious step to take. It can result in the death of the company.’

To present a petition to wind up a company is therefore considered to be a serious matter and not to be done lightly. It might therefore be argued that there should be some reluctance for the Isle of Man courts to decide to wind up a company. It is the case, however, that courts are routinely required to make serious decisions on a variety of important issues and the fact that presentation of a winding-up petition might be considered a last resort will not prevent the court from winding up a company if there are good grounds for doing so.

The Lehman Brothers Inc v. Navigator Gas Management Limited judgment states:

It is well-settled law that if a creditor with standing makes application to have a company wound up, and if the court is satisfied that such company is unable to pay its debts, a winding-up order will follow unless there is some special reason to the contrary. Further, in such circumstances and being so satisfied, the court would assume that a winding-up order should be made. The burden rests with any objector to show special reasons why such an order should not be made.

It follows that if a company is considered to be unable to pay its debts, the Isle of Man courts will not hesitate to wind it up unless that company or other objectors can show special reasons not to, and the burden is on them to do so.

The practicality is that if a winding-up petition is presented and a company is deemed unable to pay its debts, the chances of its survival are minimal. There are certain mechanisms that allow schemes of arrangement or receivership, but if a company is in financial difficulty and finds itself unable to pay its debts as they fall due, and a creditor in receipt of an undisputed debt wishes to wind up the company, there is a very good chance that the creditor will succeed.

iii Insolvency procedures

There are a variety of options available to an insolvent company on the Isle of Man:

a it can be wound up either voluntarily by its creditors or by the court, or subject to the supervision of the court;

  • it can appoint a receiver by way of application to the court, or a charge holder can appoint a receiver in accordance with the terms of the security document; or
  • a liquidator may make an application to the court to sanction a compromise or a scheme of arrangement.

Winding-up proceedings by the court are discussed in Section I.iv, below.

There is no provision for the appointment of an administrator in the Isle of Man, nor is there a position of administrative receiver under Isle of Man law. However, foreign administrators are recognised and are likely to be assisted by the Isle of Man courts if such a request is made. The court has sought the assistance of the English High Court under Section 426 of the Insolvency Act 1986 to place an Isle of Man company into administration under the laws of England and Wales.

The Manx legal position on the appointment of receivers is by and large the same as the pre-1986 position in England and Wales. There is no requirement that a receiver should have any qualification as long as he or she has reached full age, although practically it would be difficult to envisage a situation in which a receiver would not be an experienced or appropriately qualified insolvency practitioner.

Unless the power to appoint a receiver has been granted by way of debenture or other appropriate agreement, it will be necessary to apply to the court for a receiver to be appointed. The court’s jurisdiction to appoint a receiver in the Isle of Man follows the common law position and will only be exercised to aid some legal or equitable right. The appointment must be of some advantage to the applicant and the property in question must have some value.

Appointment of a receiver by debenture or under a charge will be in accordance with the terms of the security document. Subject to any terms to the contract, the appointor may remove or replace the receiver at any point he or she chooses.

The jurisdiction of the Manx court to effect schemes of arrangement has been described as being ‘extremely wide’. A liquidator has power to apply to the court for convening a meeting of the creditors and contributories for a vote to be held upon the scheme. If three-quarters (in value) of the creditors or members present and voting agree to the scheme of arrangement or compromise then, if this is sanctioned by the court, it is binding on the creditors, members and liquidator.

The Manx courts have a history of proactively assisting overseas courts in respect of insolvency matters. The First Deemster stated in a case involving US Chapter 11 proceedings of an Isle of Man company that the ‘substantive insolvency proceedings should be confined to one jurisdiction with other courts worldwide, where necessary, acting in an ancillary capacity and recognising and assisting the jurisdiction of the primary court’. In this case the Manx court was content for the US court to be the primary court.

The island’s court system is modern and efficient and ancillary insolvency proceedings can be dealt with in a timely manner.

iv Starting proceedings

The language of the Companies Act 1931 is that insolvency proceedings before the court are commenced in the Isle of Man by way of a winding-up petition. The following parties may commence an application to wind up an Isle of Man company:

  1. the company;
  2. the Isle of Man Treasury (in respect of public companies in limited circumstances);
  3. any creditor or creditors (including contingent or prospective creditors);
  4. any contributory or contributories; and
  5. 10 or more policyholders in the case of an insurance company.

An application to wind up an Isle of Man company may be made by any or all of the above-listed parties either together or separately.

Notwithstanding the foregoing, there are further limitations on when a contributory or a contingent or prospective creditor may bring a winding-up petition. Contributories are only entitled to present a winding-up petition if their shares were allotted at least six months before the commencement of the winding-up petition (or they have devolved to the contributory through the death of the original holder). Contributories may present a petition if the members of the company have been reduced to below two.

Before an application for winding up by prospective or contingent creditors can be heard by the court, the creditors must establish a prima facie case for winding up and provide security for costs.

In addition to the foregoing, the Financial Supervision Commission may present a winding-up petition if it is in the public interest for the company to be wound up.

The Isle of Man courts have discretion on hearing a winding-up petition to make such orders that they see fit and may dismiss, adjourn, make any interim order or any other order that they deem appropriate in the circumstances. The only limitation on the court’s discretion is that it may not refuse to make a winding-up order on the grounds that the only assets of the company have been mortgaged to or beyond their value, or that the company has no assets. Indeed, those will ordinarily be reasons to wind up a company. Once a winding-up petition has been presented, the company or any creditor or contributory may apply for a stay of the winding-up proceedings or oppose the winding-up proceedings.

While the island’s insolvency legislation does not presently grant the court jurisdiction to review, rescind or vary a winding-up order, the Staff of Government Division has confirmed that the Manx courts have an inherent jurisdiction at common law to review, rescind or vary a winding-up order when such an order is necessary in the interests of justice. The manner in which the court will review a winding-up order, the area covered by the courts and how they will exercise their powers are all uncertain, although it is presumed that such a review will be on a similar basis to the powers granted under Rule 7.47 of the Insolvency Rules 1986 (an Act of Parliament).

v Control of insolvency proceedings

Once the court has appointed a liquidator it is, for all intents and purposes, the liquidator that controls the insolvency proceedings subject to his or her compliance with statute and the Companies (Winding-Up Rules) 1934. The court is required to ‘take cognisance’ of the liquidator’s conduct, and must enquire into any failings by the liquidator and take such action as it may think expedient. The court has power to require a liquidator to attend before it and be examined on oath in respect of the winding up.

The directors of the company must provide the liquidator with a statement of the company’s affairs within 14 days of the winding-up order or the appointment of a provisional liquidator. As soon as is practicable after receipt of the statement of affairs, the liquidator must submit a preliminary report to the court giving, inter alia, the reasons for the failure of the company and whether, in his or her opinion, further enquiry is desirable into the promotion, formation or failure of the company or the conduct of its business.

vi Special regimes

There are no special insolvency rules.

vii Cross-border issues

Because of the size of the Isle of Man, its location and its role as an international business centre, many company liquidations involve cross-border issues.

The approach of the Manx court has been to provide assistance to foreign courts and to seek the assistance of foreign courts where necessary, such as by way of a letter of request. The Manx court has been prepared to extend the scope of Manx common law to assist overseas liquidators when there was no statutory power to provide such assistance.

The principle of (modified) universalism is a principle recognised by Manx common law and provides that personal and corporate insolvency should be unitary and universal, a principle that was applied by the Privy Council in the case of Cambridge Gas.

As the island’s insolvency case law continues to develop, there is a clear trend towards assisting overseas courts and claimants rather than putting hurdles in their way. The Manx court of appeal, known as the Staff of Government Division, in the case of Obertor v. Gaetano, interpreted the Judgments (Reciprocal Enforcement) (Isle of Man) Act 1968 (the 1968 Act) in a purposeful way so as not to require an English judgment creditor to have to register that judgment under the 1968 Act before being able to serve a statutory demand on the judgment.

In Interdevelco v. Waste2energy Group, the Manx court refused the application of a creditor to wind up an Isle of Man company as the company was already in Chapter 11 proceedings before the United States Bankruptcy Court for the District of Delaware. The court stated that, in the circumstances, there was no need for ‘additional substantive winding-up proceedings to take place in the Isle of Man’.

Overview of restructuring and insolvency activity

As Isle of Man companies are predominantly used for international trade or asset holding, it is the state of the global economy rather than the local economy that determines the number of insolvencies.

As a Crown Dependency, the political situation in the United Kingdom can also affect the Isle of Man. It is unknown what effect, if any, that leaving the European Union, with or without a deal, will have on the Manx, or indeed the UK, economy in the short, medium or long term and what effect, if any, it may have in respect of insolvencies.


Leave a Reply

Your email address will not be published. Required fields are marked *