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Jersey Unreported Judgments |
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You are here: BAILII >> Databases >> Jersey Unreported Judgments >> Representation of Regus Plc 26-Oct-2020 [2020] JRC 226A (26 October 2020) URL: http://www.bailii.org/je/cases/UR/2020/2020_226A.html Cite as: [2020] JRC 226A |
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Letter of Request - reasons for the decision
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Before : |
R. J. MacRae, Esq., Deputy Bailiff, and Jurats Olsen and Blampied |
IN THE MATTER OF THE REPRESENTATION OF REGUS PLC
AND IN THE MATTER OF THE INHERENT JURISDICTION OF THE COURT
AND IN THE MATTER OF AN APPLICATION TO ISSUE A LETTER OF REQUEST TO THE DISTRICT COURT OF LUXEMBOURG CITY RESPONSIBLE FOR COMMERCIAL MATTERS (TRIBUNAL D'ARRONDISSEMENT DE ET À LUXEMBOURG, SIÉGANT EN MATIÈRE COMMERCIALE)
IN RESPECT OF REGUS PLC FOR THE APPOINTMENT OF A TRUSTEE IN BANKRUPTCY
Advocate R. J. McNulty for the Representor.
judgment
the deputy bailiff:
1. On the 10th September 2020 we made various orders in this case. We now give the reasons for our decision.
2. The Representor Regus Plc ("Regus") is a company which was incorporated in Jersey on the 8th August, 2008. It is registered as a public limited company with the Jersey Companies Registry.
3. Subsequently, on 1st September, 2008, Regus was registered as a société anonyme (a public limited company) with the Luxembourg Register of Companies and Commerce with its 'place of central administration' being an address in Luxembourg. Accordingly Regus is, unusually, a "dual hatted" entity, as described in the papers put before us.
4. Regus is part of the IWG Group, formerly known as the Regus Group ("the Group") and, through two intermediate holding companies is a subsidiary of IWG Plc, also a Jersey incorporated company (also registered and administered in Switzerland), the shares of which are traded on the London Stock Exchange.
5. The Group is a leading provider of office facilities with premises all over the world. Regus was incorporated as a holding company in order to establish the Group's headquarters in Luxembourg. However as part of a Jersey court approved scheme of arrangement for the Regus Group in 2016, the holding company became IWG Plc. The reason that Regus was registered both in Jersey and Luxembourg was to ensure that as a matter of good practice the UK Takeover Code continued to apply to the company and that Regus was subject to the jurisdiction of the UK Takeover Panel, although, following the 2016 scheme of arrangement, this is said to be no longer necessary.
6. The function of Regus is to act as a guarantor of the rental obligations of other companies in the Group that act as tenants of office premises. As such, Regus provides over 700 guarantees in respect of unpaid rent and service charges owed by such tenant companies. Regus has no employees and its administrative functions are carried out in Luxembourg. Two of its directors are resident in Luxembourg and the third in the United Kingdom.
7. Although Regus is potentially liable for unpaid debts to the tune of hundreds of millions of pounds, in fact prior to April 2020 no claims had ever been made on the guarantees.
8. The 2019 accounts for Regus disclose that its assets were limited to £14.6 million and the note to the accounts, which were approved by the board of directors on the 24th July 2020, said that market conditions, in particular the impact of the Covid-19 crisis, may exhaust the company's assets and prevent it from successfully raising sufficient funds from its shareholders.
9. Indeed the tenant companies, the leases of which were subject to guarantees provided by Regus, have experienced a rapid and substantial fall in income since the outbreak of the global public health crisis. By the September 2020 quarter date, the quantum of unpaid rent was expected to reach approximately £78.1 million. Some tenant companies have entered into insolvency processes in various jurisdictions.
10. The total value of the contingent liabilities of Regus under the guarantees is approximately £812 million. The guarantees represent 661 premises in approximately 50 different jurisdictions. The company has indemnities from third parties amounting to £110.7 million. These indemnities apply to certain leases only.
11. The Court had before it a valuation report and a separate solvency analysis which concluded that Regus would be cash flow insolvent by the end of 2020. These reports were provided to the Court in a confidential exhibit to an affidavit sworn by Mr Regan. The Court accepted that for the purpose of this application this material should be kept confidential but indicated that decision was subject to review by the Court and is plainly subject to the liberty to apply provisions. Accordingly the directors of Regus concluded that it would be unlikely to have sufficient income and assets to meet its liabilities as they fell due in the short to medium term.
12. It was submitted to us that Regus's centre of main interest was in Luxembourg and that therefore the Luxembourg court would accept bankruptcy jurisdiction over Regus. It was said that the considerations which the Luxembourg court might find persuasive were the fact that certain administrative functions of Regus were carried out in Luxembourg, its board meetings took place there and, as already stated, two directors were resident in Luxembourg, certain assets of Regus were situated in Luxembourg and the company was tax resident there.
13. Exhibited to the affidavit sworn on behalf of Regus was a draft Letter of Request which Regus invited the Court to consider sending to the District Court of Luxembourg City responsible for commercial matters ("the Luxembourg court"). The effect of the draft Letter of Request, if issued by this Court, was to ask for the assistance of that court in placing the company into bankruptcy in Luxembourg.
14. The draft Letter of Request invited the Luxembourg court to make a bankruptcy order and appoint a trustee in bankruptcy of Regus which, inter alia, shall accord creditors who would have a priority under Article 32 of the Bankruptcy (Désastre) (Jersey) Law 1990 ("the Désastre Law") to have the same priority status in the Luxembourg bankruptcy as they would have under the Désastre Law, thus protecting any Jersey creditors.
15. The Representation of Regus first came before the Court for hearing on 1st September 2020. Owing to various concerns expressed on behalf of the Court, the Representation was then adjourned. The areas of concern were as follows.
16. First, the Court wished to be satisfied as to whether or not Regus was subject to the economic substance rules contained in the Taxation (Companies - Economic Substance) (Jersey) Law 2019 ("the Substance Law"). Subsequent to the hearing further evidence was filed on behalf of Regus to the effect that it was not a 'resident company' for the purpose of the Substance Law. This was confirmed in correspondence from the Comptroller of Taxes.
17. Secondly, the Court wished to have clarification of a matter which it identified in the 2019 accounts for Regus showing a disposal during the year in the sum of £644,564,800, which appeared to represent the bulk of Regus's assets. We will return to this issue below.
18. Thirdly, and connected to the second issue, the Court wished to understand how the Luxembourg law of Insolvency might treat the 2019 disposal because, as a matter of Jersey law, it appeared to the Court that in the event of the company being subject to Jersey désastre such a disposal might be subject to the Viscount's power to set aside the disposal as a transaction at an undervalue pursuant to the provisions of Article 17 of the Désastre Law. The Court was keen to understand whether or not creditors of Regus might be prejudiced by a bankruptcy in Luxembourg in respect of an application to set aside the 2019 disposal.
19. Fourthly, the Court wished for clarification in relation to a number of miscellaneous matters such as the identity of the person or persons corresponding on behalf of Regus, requiring the presence of a director (Mr Regan) to address the Court directly when the Representation was heard and for clarification of certain other matters referred to by Mr Regan in his affidavit.
20. The provisions of the Substance Law provide that a Jersey company must be managed and directed in Jersey in relation to its 'relevant activity' as defined in the Law, its core income generating activities must be carried out in the Island, and it must have adequate employees, expenditure and physical assets in Jersey.
21. However, a company incorporated in Jersey shall not be regarded as resident in Jersey if its business is centrally managed and controlled outside Jersey in a country or territory where the highest rate at which the company may be charged a tax is 10% or higher and the company is resident for tax purposes in that country or territory. In this case Regus is tax resident in Luxembourg and is subject to a statutory corporate income tax rate of 24.94%.
22. As to the 2019 disposal of assets, this was explained further in a supplemental affidavit sworn by Mr Regan on 7th September 2020. Mr Regan explained that the disposal was a consequence of the Scheme of Arrangement approved by the Court in 2016. This led to a capital reduction in the company and a resolution by the shareholders which recommended that the balance of the share premium account be repaid to shareholders (companies ultimately owned by IWG Plc). Accordingly, in July 2017 Regus approved a distribution to IWG Plc of £9,203,574 which was not paid until 30th January 2019. On the same day, Regus declared a dividend in specie of £635,361,199 which was settled by the transfer of the shares held by Regus in IWG Global Investments Sarl. We were provided with the board minutes approving this distribution. The board minutes contained a solvency statement under Article 115 of the Companies (Jersey) Law 1991 to the effect that following the distribution Regus would still be able to discharge its liabilities as they fell due and to carry on its business and discharge its liabilities until the expiry of a period of twelve months immediately following the date upon which the distribution is made, or until the company is dissolved under Article 150 of the Companies (Jersey) Law 1991, whichever is the sooner. These minutes were contained in confidential exhibits to Mr Regan's affidavit (see paragraph 11 above). The distribution was agreed to by the board having regard to, inter alia, an advisory report which considered the likelihood of any guarantees being called at that time. At that stage, the analysis of the likelihood of guarantees crystallising noted that on the basis of two payments per year, for a total of ten years, the likelihood of exceeding the estimated guarantee of liability was less than 1% across the portfolio. The board also considered the insurance policy which Regus had, this policy having an aggregate value substantially smaller than the possible claims that Regus may receive now but, at that stage, a sum significantly in excess of what was regarded as the likely level of the claims which might be made. Accordingly the directors agreed that the distributions would not prejudice the financial situation of Regus, and that Regus was and would remain solvent both before and after distributions had been made. Accordingly, the Court now was able to understand the reasons for the 2019 distribution.
23. As to the Court's concern in respect of the effect of the Luxembourg insolvency in respect of the potential right of creditors to set aside the 2019 disposal as an undervalue, the Court was furnished with an additional legal opinion from Nauta Dutilh, advocates of Luxembourg. This opinion set out the legal requirements under Luxembourg law for the purposes of a company considering making an interim dividend distribution and the basis for setting aside transfers made during what they called "the hardening period". Under Luxembourg law, directors must exercise a standard of care of a reasonable prudent business man - bon père de famille, a duty familiar to those practising Jersey law.
24. The "hardening period" during which, under Luxembourg law, transactions without reasonable consideration may be voided, is no more than six months and ten days prior to the adjudication of bankruptcy. Acts committed prior to this date can be declared void if the other party to the transaction was aware of the company's inability to meet its payment obligations. Further Pauline actions were available to avoid transactions undertaken by a debtor that were fraudulent with respect to a creditor and caused the creditor damage. On the evidence available to the Court it appeared that it might be very difficult as a matter of Luxembourg law to void the 2019 disposal in insolvency proceedings in that jurisdiction. It was argued on behalf of the company that the position under Luxembourg insolvency law was such that there would 'be no prejudice to the creditors in allowing the bankruptcy to proceed in Luxembourg'.
25. The members of the Court were not at all sure that this was the case from a comparative analysis of the provisions of Article 17 of the Désastre Law, notwithstanding the submissions we received from the Viscount in which she described various difficulties that may lie in the way of a creditor, through the Viscount, seeking to set aside such a transaction in Jersey. The Viscount added that the circumstances of Regus meant that she would be required to engage Luxembourg advisers and that there might be various difficulties for her in managing a 'Luxembourg case'.
26. Counsel for Regus conceded that the existence of bankruptcy proceedings in Luxembourg would not of itself preclude a creditor from seeking to commence bankruptcy proceedings in this jurisdiction as the Court would retain a discretion to place the company en désastre notwithstanding the transmission of the proposed Letter of Request.
27. At the hearing we were told that each of the tenant companies was part of the Group. Each company had a different level of solvency. Some landlords therefore were unlikely to call on the guarantees made by Regus. The Group as a whole was still solvent at the date of the hearing. Further, Mr Regan told us on oath that it was the intention of Regus to keep trading if it could.
28. It was submitted to us that it was in the interests of the creditors to issue the request to the Luxembourg court and for the Luxembourg court to exercise jurisdiction over Regus as a désastre would involve the cessation of all business activities of Regus and the vesting of its assets in the Viscount. In contrast the Luxembourg court process, although not a formal rescue procedure in the same way as for example an English administration order, would not necessarily result in the liquidation of Regus. The legal personality of Regus would not be affected and the company would not be wound up until after the close of the bankruptcy proceedings and would continue to exist if certain conditions were met. If the creditors of the company received satisfaction of their claims and assets remained after the settlement of those claims, then the bankruptcy proceedings would be closed by the Luxembourg court and the company be allowed to pursue its activities as a going concern. Accordingly there were similarities with the administration procedure available to the English courts.
29. The directors considered that it was in the best interests of the creditors to avoid concurrent insolvency proceedings in two jurisdictions. Furthermore it was said, although there were no creditors before the Court to confirm this, that it was understood by certain creditors that they were dealing with a Luxembourg business and a Luxembourg bankruptcy would be something that would be expected by them, and that the interest of the creditors would be 'no worse' under Luxembourg law than under a Jersey désastre.
30. The Court was hampered when considering the exercise of its jurisdiction by the absence of creditors able to address the Court in relation to their interests. The Court did consider adjourning the Representation for the purpose of creditors being convened. We were persuaded that this was unnecessary for two reasons. Firstly, this would have caused delay and there was a degree of urgency in seeking a bankruptcy order from a Luxembourg court. Secondly, we were told that much of the material being placed before the Court in relation to the affairs of Regus was confidential and might be prejudicial to the company if it were disclosed to a substantial body of creditors and more generally prior to a declaration of bankruptcy by a court. It was also contended, as set out above, that because the outcome for the creditors would be unaffected by the venue of the bankruptcy, it was not necessary to convene them. However, we were unable to make such a finding.
31. As the Court held in REO Power Station [2011] JRC 232A at paragraph 16:-
32. When considering whether or not to issue a letter of request the Court does so pursuant to its inherent jurisdiction to seek the assistance of a foreign court if it is in the interests, in particular of the creditors, to do so.
33. The Court was troubled by the failure to convene creditors in this case and in general it is preferable for creditors to be convened to the hearing of such an application, and at any convening hearing it is essential for the Royal Court to be addressed upon this issue and have before it sworn evidence explaining why creditors should not be convened.
34. In this case, owing to our concerns in relation to the absence of creditors, we declined to order, as was sought by the counsel for Regus, that "no proceeding or enforcement process in / and out of any court or tribunal shall be commenced or continued by or against Regus Plc or affecting its business or property, except with a written consent of Regus Plc, or with leave of the Luxembourg commercial court".
35. We thought that such an order would be an unnecessary and inappropriate fetter on the right of a creditor to come to this Court to seek orders in relation to what is after all a Jersey company. Furthermore, in the order the Court ultimately made we, in addition to ordering that the Letter of Request be issued to the Luxembourg court, "granted liberty to apply to the creditors (in particular recipients of guarantees given by the Representor) to set aside this order", and ordered that the Letter of Request and the order made by the Court be served within fourteen days by letter or email upon the recipients of guarantees given by Regus.
36. Nonetheless, as recited in the Letter of Request the Court "reached the conclusion that it would be in the best interests of creditors of Regus to make this request with the assistance of the Luxembourg commercial court" and stated that Regus "has shown to the satisfaction of the Royal Court that it is just and convenient that this Letter of Request should be issued".
37. Accordingly, we requested that the Luxembourg court consider the request for assistance and exercise its jurisdiction pursuant to the relevant Luxembourg legislation as a matter of comity, to act in aid of and be auxiliary to this Court by making a bankruptcy order pursuant to the Luxembourg commercial code in substantially the form of the order which we provided to the Luxembourg court in the Letter of Request.
38. We further direct that a copy of this judgment be provided to the Luxembourg court.
39. By way of a postscript, we note that on 14th September 2020 a creditor and recipient of a guarantee from Regus made a successful application, subsequent to the hearing, for a copy of the Act of Court and of the Representation. It appeared from the correspondence from that creditor company seen by the Court that the application to the Luxembourg court on behalf of Regus was made prior to all creditors of Regus having been given a copy of the order and Letter of Request. The Order of the Court specified that the Order and the Letter of Request be served within 14 days by letter or email. We make no criticism of Regus or its counsel by reciting these facts, but the very fact of this application being made (the matter was ultimately adjourned by consent and the relief sought by the creditor was not determined by the Court) shows the importance of, as a general rule, giving creditors the opportunity to be heard on such an application.
