DESASTRE AND INSOLVENCY

Desastre and insolvency proceedings are frequently confused as they both arise when a person or company is in financial difficulties with creditors. The two types of proceedings, however, have different consequences for the individual or company concerned.

Desastre proceedings

Desastre proceedings are activated during the enforcement process of a judgment against a debtor. As part of the enforcement process a creditor may with the permission of the Court cause H.M. Sheriff to arrest personalty of the debtor. Such personalty is again with the permission of the Court sold in order to pay the creditor. Once the personalty has been sold the arresting creditor actions H.M. Sheriff before the Royal Court, as sequestrator of the net proceeds of sale of the goods arrested, to pay him the sum which is owed to him. If, when H.M. Sheriff appears before the Court, he advises the Court that he is aware of other creditors who have claims against the debtor and that there are insufficient funds in hand to meet the claims, then a Commissioner will be appointed by the Court with a view to declaring a debtor to be "en desastre".

A Jurat of the Royal Court is appointed as a Commissioner for this purpose. The arresting creditor, H.M. Sheriff and the debtor should attend a meeting before the Commissioner so that a formal declaration might be made. A further meeting is then held at which the Commissioner will examine the claims and preferences of the various creditors and to declare a dividend. The debtor is summoned formally to attend such meeting. Following the meeting the Commissioner makes a report reflecting the distribution. The monies in the hands of H.M. Sheriff are distributed amongst the creditors in accordance with the report of the Commissioner.

It should be noted that even after a dividend is declared and the Commissioner has produced a report, the debtor is still liable to pay the balance due to any creditor in respect of any sums claimed. His liability is not extinguished. Furthermore, the debtor is not under any disability with regard to trading or financial activities in general. (There may, of course, be other proceedings if, for example, the Guernsey Financial Services Commission take the view that a person is not fit to be a director, but these are not within the scope of desastre proceedings.)

Insolvency

Bankruptcy legislation does enable the debtor or one of his creditors to take additional steps leading from desastre proceedings to bankruptcy. In many cases, however, creditors will not take any steps beyond the desastre proceedings. The payment of the divid end is viewed as a practical end to the creditors’ pursuit of the debtor notwithstanding the legal rights that may exist.

It should be noted, however, that the bankruptcy procedure provides a greater scope for the enforcement of creditors’ claims. Desastre proceedings can dispose only of such monies as are realised by H.M. Sheriff within the jurisdiction. Furthermore, the distribution of monies relates solely to monies held by H.M. Sheriff as sequestrator. Therefore, where monies are held by a bank and a creditor summons the bank direct, H.M. Sheriff is not in a position to realise such monies.

Within desastre proceedings there is furthermore no effective method of requiring a debtor to provide for frank disclosure of his assets and liabilities. Such procedure does exist within bankruptcy legislation.

As noted above, a debtor (either an individual or body corporate) subject to desastre proceedings is not, however, subject to any restriction on his ability to trade. A debtor in bankruptcy proceedings can be subjected to a wide range of disciplines and prohibitions in accordance with the terms of Guernsey law.

Having examined aspects concerning the creditors, it should be noted that there is one clear advantage to a debtor made the subject of bankruptcy proceedings. Whereas the liability of a debtor in desastre proceedings is not reduced, in bankruptcy proceedings a declaration of insolvency may allow a debtor the benefit of renunciation which shall have the effect of discharging the debtor from payment of his debts contracted before his application for a declaration of insolvency with certain exceptions as set out in the law.

Liquidation

In addition to the legislation concerning desastre proceedings and bankruptcy proceedings it should be remembered that where a company is unable to pay its debts (amongst a number of other reasons) it is possible for an application to be made to the Royal Court for an Order that a company be compulsorily wound-up. If such an Order is granted a liquidator is appointed by the Court and takes an oath in respect of such appointment. The liquidator is then responsible for the realisation of the company’s assets and the winding-up of its affairs. Prior to the distribution, however, of the assets the liquidator presents an account to the Commissioner of the Court.

The above notes represent a brief summary of the position in respect of the different types of proceedings. They do not represent a detailed analysis of the legislation in each particular field. Enquiries with regard to such matters should be addressed to F. Haskins & Co., who deal with all aspects of insolvency and bankruptcy proceedings.