Option Four: Investigations

An investigation is a review of the affairs of a Company to determine if there are any rights of action as regards the Directors of the Company or any other party. There are certain statutory duties required of Liquidators and Examiners to review the affairs of the company in this regard. While a Receiver may not have the same statutory duty a Receiver also has the right to take legal proceedings on behalf of the company be it against the Directors or some other party.

If during the course of the investigation any apparent preferences or rights of action come to light the liquidator should determine whether or not any particular transaction san/should be set aside

The extent and nature of any investigation will vary from company to company but will inevitably include the following:

1. Question Management

2. Committee of Inspection

3. Examination of minute books and other records

4. Comparison of assets with last audited accounts

5. Trading losses

6. Transactions with related companies and connected persons

7. Unearth any rights of action of the Liquidator.

8. The Liquidator considers whether the company traded fraudulently or recklessly.

Restriction

Liquidators of insolvent companies have a statutory obligation to report to the Office of Director of Corporate Enforcement within 6 months of the date of their appointment. Liquidators are also obliged, unless relieved by the Director of Corporate Enforcement, to bring a Restriction application against the Directors of the company.

The Liquidator, in their report, must comment in particular in the following areas:

1. The reasons for the liquidation of the business

2. The extent of the deficiency in the payment and filing of taxes

3. The identity of the controlling interest/directors of the company

4. The honesty of the company’s directors

5. The responsibility of the company’s directors

6. The identity of any related companies and review of related trading

7. The accuracy of the statement of affairs

8. Material transfer of assets

9. Any litigation against the company

Restriction Applications

Section 150 provides that where restriction proceedings have been issued against a Director, unless the Director can demonstrate to the court that he acted honestly and responsibly in relation to the conduct of the affairs of the company and there is no other reason why it would be just and equitable that he should be restricted, the court will impose a restriction order.

As mentioned earlier in this chapter, the Liquidator should report to the ODCE within six months of his appointment. In general after three to four months from the receipt of this report the ODCE will let the liquidator know whether Restriction proceedings are required against the Director of the company. If the liquidator is required to make a restriction application they must do so no later than five months after the date of submission of their report.

The High Court has down the five criteria for determining honesty and responsibility, or a lack thereof.

1. The extent of the Directors compliance with the Companies Act 1963-2001.

2. The extent to which his conduct could be regarded as so incompetent as to amount to irresponsibility.

3. The extent of the Directors responsibility for the insolvency of the company.

4. The extent of the Directors responsibility for the net deficiency in the assets of the company disclosed at the date of the winding up or thereafter.

5. The extent to which the Director, in his conduct of the affairs of the company, has displayed a lack of commercial probity or want of proper standards.

The burden of proof rests on the Director that he acted honestly and responsibly. However, directors that are appointed solely by reason of their nomination as such by a financial institution in connection with the giving of credit facilities to the company, or by reason of their nomination by a venture capital company in connection with the purchase of shares by it in the company, are excepted from this shift of the burden of proof.

Implications of a Restriction order

The main implications for the restricted Director are as follows:

• He/she will be restricted from acting as a Director of a company for five years unless the nominal value of the allotted share capital of the company is €317,500 in the case of a PLC or €63,500 in the case of any other company, and fully paid up.

• If a restricted acts in breach of s.150 order he/she may be personally liable for the debts of the subsequent company if it goes into insolvent liquidation. Criminal sanctions may also apply.

• A person who has been restricted under s.150 can within 12months of the order apply to the High Court for relief, in whole or in part, against the Restriction order.

 Disqualification

In addition to s.150 of the Companies Act 1990 s.160 allows an application to the High Court for the disqualification of any person from acting as a Director, Auditor, Receiver. Liquidator, Examiner or other officer, or be concerned in any way, directly or indirectly in the promotion, formation or management of any company.

Section160 gives the court discretion to disqualify a person in a number of circumstances, generally involving conduct of a more serious nature than that required in order for a Restriction order to be made. Section 160 applies where a person is convicted of an indictable offence in relation to a company or involving fraud or dishonesty.

There are many other specific incidences which may trigger an application for a disqualification order. These essentially involve allegations of serious wrongdoing by a Director that would render him unfit to be involved in the management of a company.

If a court decides to disqualify a Director it will have to consider the appropriate duration of the disqualification and submissions will be heard from legal counsel for both the directors and the liquidator.

Fraudulent & Reckless Trading & personal liability

A Liquidator may institute proceedings against directors for fraudulent or reckless trading seeking to make such persons personally responsible for all or part of the company debts. Criminal liability can also be imposed on a person found guilty of fraudulent trading.

Reckless?

An officer of the company can be held personally liable where it appears that, while he or she was an officer of the company he/she was knowingly a party to the carrying on of the business of the company in a reckless manner.

An officer is deemed to be knowingly a party to reckless trading where he or she was party to the carrying on of the business and ought to have known that his/her actions would cause loss to the creditors.

An officer is also deemed to be knowingly a party to reckless trading where he or she was a party to the contracting of a debt by the company and did not honestly believe on reasonable grounds that the company would be able to pay the debt when it fell due for payment as well as other debts.

Fraudulent?

Any person, whether an officer of the company or not, can be made personally liable if he/she was knowingly a party to the carrying on of any business of the company with intent to defraud its creditors or for any fraudulent purpose.

Fraudulent preferences?

The structure of Irish insolvency is based on the equitable treatment of creditors and the payment of same in terms of a strict legal preference as follows:

1. Fixed charge / Mortgage holders

2. Super Preferential Claim

3. Preferential Creditors

4. Floating Charge holders

5. Unsecured creditors

Section 286 of the Companies Act 1963 enables an insolvency practioner to invalidate a payment to any creditor outside of the terms of their ranking either during or for a period of six months before the winding up of the company or two years if the payment was to a ‘connected person’. In order to do so each of the following basic matters must be proved by the practitioner:

• there has been a transfer of a company asset/s
• this transfer gave a creditor a preference over similarly ranking creditors
• that the company was unable to pay its debts as they fell due at the time of the transfer
• that the transfer occurred within 6months/2years of the winding up
• there was an intention to prefer

Fraudulent distribution?

Section 139 of the Companies Act 1990 further strengthens the powers under s.286 in that a creditor or contributory can also have a transactions set aside if the Court deems that the effect of the transaction was to perpetrate a fraud on the company, its creditors or contributories.

Conclusion on Investigations and the relevant rights

The above represents the more regularly occurring rights of action of insolvency practitioners in their investigation of a company’s affairs. These however, represent only a small portion of the overall legislation and in any circumstances where a practitioner, company advisor or director believes that breaches of company/criminal law have occurred it is important to source independent legal advice.