Option One: Liquidation

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Option One: Liquidation
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A company’s legal existence can be terminated by liquidating the company. When a company is unable to pay it’s debts as they fall due it is deemed insolvent (it is not a question of whether its assets exceeds it’s liabilities) and a decision may be taken at that point to wind up the company where there is no prospect of survival.

In the latter stages of 2008 the full extent of the downturn became clear with the figure for insolvencies almost doubling.

As well as substantial changes in the number of insolvencies, there have been significant changes in how the market is serviced.

Process of liquidation

When a company is insolvent it is, in many cases, prudent to initiate the winding up process of the company. Where a company is being wound up for reasons of insolvency the assets of the company are collected by an Officer, known as a Liquidator, and are distributed among the creditors in accordance with well established rules. In such a context the court may be called up to investigate the conduct of the company by the Directors and to decide whether any such officer should be fixed with personal liability in respect of any of the company’s debts.

Directors duties on Insolvency

Directors have a duty to initiate the winding up of the company if they are of the view that the company is insolvent.

When a company is insolvent certain Directors’ statutory duties arise.

Possible ramifications of Insolvency for Directors

• Restriction
  
  
• Disqualification

Those who enforce these duties / ramifications

1. The Director of Corporate Enforcement

The establishment of this administrative agency, designed to ensure compliance with numerous aspects of company law, has been a key catalyst for the improvement in the behaviour of Directors in recent years.

The Director can bring proceedings for non-compliance with the Companies Act and in a number of cases the Director may refer matters to the DPP.

The Director also forces an important discipline on Liquidators to prepare a comprehensive report on the behaviour of a Director in a court or creditors voluntary liquidation and bring Restriction proceedings.

2. The Registrar of Companies

The Registrar is appointed by the minister of Enterprise, Trade and Employment and administers the Registry of Companies. Along with the Director of Corporate Enforcement the Registrar of Companies can bring proceedings for non-compliance with the Companies Act.

3. Court

The court may summon before it any officer or person suspected to have any property of the company or supposed to be indebted to the company or any person whom the court feels could give useful information relating to the affairs of the company.

4. Liquidator

Liquidators are obliged to bring restriction proceedings against Directors of an Insolvent company. This was to prevent liquidators sympathetic to the directors’ plight.

It is however a controversial obligation as is the fact that the burden of proof is shifted so that an order will not be made only if the director proves to the court that he/she acted ‘honestly and responsibly’.

The court has held that it will attach considerable weight to the views of the liquidator where the liquidator applied to examine officers of the company in liquidation.

5. Creditor

A creditor can apply in a voluntary liquidation to have a certain persons examined under oath but the creditor has to establish that the examination will benefit him.

Types of liquidation

1. Members’ voluntary winding up

2. Creditors’ voluntary winding up

3. Official Court ordered winding up

The essential difference between the first two types of winding up is that with a creditor’s voluntary winding up the company is being wound up for reasons of insolvency. Furthermore, in a creditors’ voluntary winding up the creditors ultimately have control over the winding up process.

(1)Members Voluntary Liquidation

A member’s voluntary liquidation is not actually a form of insolvency. It is a process by which a solvent company’s affairs are wound down after the members of the company resolve, by special resolution, to wind up the company. We can, prepare the documentation necessary to place the company into liquidation and advise on any legal issues that may affect the progress of liquidation.

Process

1. Statutory Declaration of Solvency
   Directors are obliged to swear to a Statutory Declaration of Solvency if they wish to place the company into a members Voluntary Liquidation. The declaration shows the companies assets and liabilities and a statement that the company is able to pay off all debts in 12months of the commencement of the Liquidation, this must be accurate, any false information will inflict serious consequences for the directors. Further this must be approved by an ‘independent person’.

2. Notice & Vote by Shareholders
   A copy of declaration must then be sent to all shareholders, together with a notice of the shareholders meeting, during the meeting a vote of 75% of the shareholders must vote in favour for the resolution to wind up the company and to appoint a Liquidator.
   

3. Once the Liquidator has been appointed the company will cease to carry on its business apart from business that may be required for the beneficial winding up of the company. The corporate powers of the company will continue until the company is dissolved after the completion of the liquidation.

When is a members’ voluntary liquidation appropriate?

A members’ voluntary liquidation is suitable for a solvent company that has sufficient funds to pay its liabilities within 12 months of the commencement of the winding up process. It is generally used:

• By shareholders wishing to unlock their capital in a tax efficient manner.

• To secure the orderly wind down of a trading or dormant company.

• To dispose of a company that has ceased trading.

• To close down a subsidiary, within a group of companies, that has outlived its usefulness.

• To wind down financial services companies and/or special purpose investment vehicles.

• As an alternative to a strike off.

(2) Creditors Voluntary Liquidation

The company director usually initiates proceedings for liquidation of their company if their company is insolvent. Before deciding whether or not to place their company into liquidation directors should seek legal advice. Directors who ignore the warning signs of their company’s insolvency can find themselves trading while insolvent, in such a scenario the director could be found personally liable for the debts of the company. See above for Directors duties on Insolvency.

Certain companies may be able to trade out of their difficulties through schemes like Examinations (see below) or Turnaround Reconstructions. We can advise as to the best solution. However, in this section we deal with companies that have no chance of survival and must be placed into liquidation. The Creditors’ Voluntary Liquidation process is the most common form of insolvency in Ireland and is used predominantly where the financial position of the company’s creditors will be worsened by the company’s continued trading.

Process

1. Directors Meeting & Notice given
   Before liquidation can proceed all board of directors will hold a meeting to discuss and agree on liquidation of the company with notices being sent to all shareholders and creditors. A notice should be sent to all members and creditors ten days before calling the creditors’ meeting; the notice should also include by a general proxy and special proxy in the prescribed format. (i.e. voting papers. A general proxy authorizes the person to whom it is entrusted to exercise a general discretion throughout the matter in hand, while a special proxy limits the authority to some special proposal or resolution).

2. The company should consider utilizing the services of a specialist insolvency solicitor to advise them during the period prior to the holding of the creditors’ meeting. The company must also work with their financial advisor to prepare the company’s Statement of Affairs which will outline the financial position of the company at the date of the meeting.

3. Second Directors Meeting
   A second meeting of the Directors must be held in accordance with the company’s Articles of Association to appoint one of the directors as chairperson at the respective meetings of the creditors and shareholders and to approve the statement of affairs of the company etc.

4. Shareholders Meeting
   A meeting of the shareholders must take place prior to the creditors’ meeting where the members resolve that the company is insolvent and the company is to be placed into liquidation. A liquidator will be appointed by the passing of an ordinary resolution.

5. Creditors Meeting
   The Creditors’ meeting usually involves two key aspects; to present a statement of affairs to the creditors, which generally shows the value of the companies assets together of realisable value, with a list of creditors and amount owed to each of them give the creditors an opportunity to nominate an alternative liquidator and to give the creditors opportunity to appoint a committee of inspection.

In the event that there is an alternative nominee liquidator put forward by the creditors the nominee with the majority vote of creditors is appointed.

6. A creditors’ liquidator will be appointed, the company’s affairs investigated, its assets realised and the creditors paid in strict legal preference. Ultimately the company will be legally dissolved.

When is a creditors’ voluntary liquidation appropriate?

The creditor’s voluntary liquidation process is the most common form of insolvency in Ireland and is predominantly used in the following circumstances:

• The company is no longer in a position to pay its debts as they fall due.

• The company financial position and/or asset position is likely to deteriorate further.

• The financial position of the company’s creditors (individually or as a whole) will be worsened by the company’s continued trading.

• The company’s business is no longer viable.

• A restructuring of debt is not possible.

• A Receivership has ended and the company’s affairs are to be closed off and the company legally dissolved.

Compulsory liquidation

This relates to the winding up of a company by the court. The 1963 Act provides that in certain circumstances the court may order the winding up of the company on the petition of a person or body entitled to make such an application. Such petitions are most commonly presented by the creditors of the company.

The grounds upon which the company may be wound up by the court are set out in s.213 of the 1963 Act, including where the company is unable to pay its debts (s.213 (e)). This occurs where a creditor of a company has not been paid debts owing to it and suspects that the reason for the non-payment is the insolvency of the company. The creditor will be concerned that if the company continues to trade this will further undermine the company’s ability to pay the debt which is due and owing.

Process?

1. The Creditors petition; Proving insolvency of the company
   A creditor issues a 21day letter of demand to the company. Should the debtor company fail to discharge the debt within this time frame this is accepted as prima facie evidence of the debtor company’s insolvency. Alternatively non-payment of their debt may suffice.
   
   The Directors/ Shareholders petition:
   A court liquidation here is initiated by the passing of a resolution of the Board. The Directors must submit a statement of affairs to the High Court.
2. Drafting petition papers
   Carried out by a solicitor with appropriate insolvency expertise and my take a number of days to complete.
   
   The petition papers should outline a brief history of the company and its function, a brief analysis of the company’s financial performance over the past 3-5 years, a description of the problems being faced by the company followed by a conclusion as to why the company should be granted an order from the company to be wound up.
   
   Relevant exhibits and affidavits will be submitted with the petition.
3. Bringing a petition under s.214 CA 1963
   Following submission of the petition the case is listed on the Chancery listing of the High Court. The papers are reviewed by the sitting judge who will then make the decision on whether to appoint a provisional or official liquidator.

Provisional Liquidator

If a provisional liquidator is appointed, it is normal for the judge to grant a return date in approximately two to three weeks time at which stage the provisional liquidator I required to submit a report to the High Court.

Official Liquidator

At this hearing, and following a review of the provisional liquidators report, the Judge may grant the appointment of an official Liquidator if the company has failed to address the issues outlined in the petition papers.

Role of the High Court Examiner

On the appointment of the official liquidator the case is then listed for its first consideration hearing in the Examiners Court, which is generally 3-6weeks after the official liquidator’s appointment. The official liquidator is required to issue a report to the High Court at this hearing updating the court on all matters relating to the case.

The High Court examiner acts as an intermediary between an official liquidator and the judge. The examiner will help the Liquidator with the liquidation process.

Proving Insolvency

S.214 of the 1963 Act assists creditors in establishing proofs that a company is unable to pay its debts. The three circumstances in which a company would be deemed unable to pay its debts are:

• If a creditor is owed an amount in excess of €1,269.74 and has served a “21 day letter” at the company’s registered office demanding that the company pay the sum due within twenty one days.
• where a judgment against the company remains unsatisfied
• where it is proved otherwise to the satisfaction of the court that the company is unable to pay its debts

When is a court liquidation appropriate?

A court liquidation differs from a creditors’ voluntary liquidation in that there is no meeting of creditors to wind up the company; there is no need to give the statutory 10 days notice and a delay in the appointment of a liquidator can be avoided by the appointment of a provisional liquidator.

A petition to wind up a company and have a provisional liquidator appointed is a valuable tool in circumstances where there is a risk that the business or assets of the company may be substantially devalued due to the issuing of notices to creditors (advertising that you are in difficulties people will exploit this knowledge when purchasing the company’s assets) and/or the cessation of the company’s trade during the 10 day notice period.

A petition to the court for the winding up the company can be made by the directors, shareholders or the creditors.

Relief’s for the company where petition made;

Abuse of process

We can advise you where creditors are attempting to use the compulsory winding up procedures as a means of taking advantage in a dispute they may have with the company in relation to alleged debts owed.

Where your company in good faith and on substantial grounds disputes any liability in respect of the alleged debt we can present such to Court who will, if satisfied the debt is bona fide disputed, dismiss the petition.

Interlocutory injunctions to restrain the petition

A petition to wind up the company can pose a serious threat particularly if it creates panic amongst other creditors of the company. If other creditors become nervous and all demand to have their monies repaid immediately this can be disastrous for the company’s cash flow and could result in the collapse of the company.

In those circumstances the company may wish to prevent a creditor from presenting the petition in the first place. This will occur for example where the company receives a 21 day letter and you decide to seek an injunction from the High Court preventing the presentation of the petition.

In order to obtain this it is necessary to establish at least a prima facie case that the presentation would constitute an abuse of process. In this regard the High Court has distinguished between two situations:

• Where the company denies all liability to the creditor

• Where the company admits that it is indebted to the creditor but not to the extent which the creditor is claiming.

In the former position only would the creditor be restrained from bringing the application to wind up the company.

Proving non-payment is bona fide

Lodging the alleged monies owed with the court while seeking an interlocutory injunction would be one way of demonstrating that the reason for the non-payment of the monies is based on the company’s view that the monies were not owed rather than on any question over the company’s insolvency.

What is the liquidator’s role & function?

1. Take possession & list of all the Company’s assets at date of appointment.

2. Collate a list of people creditors and how mush they are owed.

3. Liaise with employees to finalise any claim they may have against the company.

4. Verify the validity of charges.

5. Verify the validity of prior insolvency appointment i.e. a Receivers appointment or the review of any Examinerhip.

6. Disclaim unprofitable contracts.

7. Pay the company’s debts in the fixed order laid down by statute.

8. Investigate the company’s affairs. Report any suspected criminal offence.

9. Apply to the High Court.

10. Write a report on the winding up.

11. Convene a meeting of members and a meeting of creditors at the end of the first year of the winding up and at the end of every subsequent year after that.

12. Deliver a final statement of the receipt and payments to the Company’s Registration Office.

Effect of Liquidation

The company is analogous to a trustee of its assets. Once the liquidator has realised all the assets of the company and distributed those assets in accordance with the Companies Act the company is effectively dissolved and the separate legal personality of the company only disappears when the Registrar of Companies removes the company from the registrar of companies