Update: Changes to Local Insolvency Rules

An important change to the order of priority of payment by the estate of a Gibraltar company in the event of an insolvency was made by the Insolvency (Amendment) Rules 2020 on the 27^th February 2020. The order of priority is still governed by the Insolvency Rules 2014. The Government of Gibraltar therefore continues to be a preferential creditor in respect of taxes and social security, after fixed charges and the expenses of the insolvency, but the amount of the preferential claim is now unlimited (instead of capping the amount at £5,000 and £10,000 respectively, as was formerly the case).

In an insolvency the order of priority leaves unsecured creditors only taking a dividend (if there are any monies remaining) after secured and preferential creditors are paid and this has not changed. What has changed is the potential size of the amount payable in priority to the Government as preferential creditor and therefore placing social security and taxes up the creditor ladder for distribution of assets in an insolvency.

There is certainly a public policy argument in favour of this change, namely, that taxes are used to fund public services and should therefore be given priority. In other countries where the amount is not unlimited, the preferential debt is set at a level that could wipe out unsecured creditors. There is also an argument that in cross-border insolvencies the local insolvency regime should exercise local priority over local assets.

Perhaps, too, but that is for another day, whether the world has become a victim of too much globalisation. This is bound to become a critical question that will prompt considerable debate in the aftermath of the Coronavirus – should the global supply chain for goods and provision of services be allowed to rely so heavily on China. The last ‘crisis of globalisation’ was the financial crisis of 2008/2009 (known as the ‘credit crunch’). That brought the global economy to the brink and it was only the massive bail-out of banks by western governments that averted the collapse of the entire financial system. Still, it caused the biggest recession in living memory. It was the most intense professional experience I have had in my career – as it was unfolding you could not tell from one week to the next where the contagion effect in the banking system would end.

But staying on topic, what does this change mean for businesses (local and international)? Obviously, it has a potential impact on the level of dividend payment in an insolvency, so businesses need to be aware of this, for example, when extending credit terms or lending unsecured. As this will only have an impact on other unsecured creditors where Government is also a creditor, there would be no adverse impact if debts due to the Government were paid in the ordinary course of business outside an insolvency, and lenders could require borrowers to report more regularly, through lending covenants in financing transactions, in respect of taxes/social security, and/or take security.

Speaking to Grant Jones of Simmons Gainsford Gibraltar (an insolvency practitioner specialist), this was his early assessment:

“With the introduction of administration and the benefits we have seen this brings to insolvent companies in administration locally, as a result of this priority change we would expect to see more engagement with the Government of Gibraltar as a preferential creditor in respect of administrators proposals, if there are funds available in cases of administration. In a liquidation, I would expect to see less engagement and it would then just be a straight calculation of the potential tax liabilities. But uncapping the ‘preferential debt’ could negate administration ‘turnarounds”, or perhaps even the chances of saving the company if the Government is more likely to get its money as a preferential creditor in a liquidation instead. However, since these decisions require business acumen, I would expect the Government to apply reasonable commercial judgment, especially in a small jurisdiction like ours.”

Nigel Feetham QC