Article on Liquidation
Becoming a director of an Irish company means taking on a number of duties. These duties are amplified where that company experiences financial difficulties. In this note we look at what directors should bear in mind where their company is at risk of insolvency and what options may be available for those directors.
Under Irish company law, directors have a number of duties including the duty to act in good faith and the duty to act in the best interests of the company. These duties extend to a company’s creditors where the company is nearing insolvency.
The test for what is “good faith” is subjective, therefore if the directors genuinely believe that what they are doing is in the interests of the company as a whole, the courts will not interfere with their decisions (so long as the decisions were reasonable).
Where in the course of Liquidation, it appears that an officer (director or secretary) has traded recklessly or with a view to defraud creditors, then the courts may place personal liability on that officer for the relevant debts, pursuant to s.610 of the Companies Act 2014.
Reckless trading may be established where officers act with a high level of carelessness, having regard to the general knowledge, skill and experience that might reasonably be expected of them. A further factor would be where the officer proceeded to trade where there was no reasonable prospect for improvement by the company.
Where any person (not just an officer) is held to have acted with the intention of defrauding the creditors of the company then they can be personally liable for the company’s debts. Where a company proceeds to liquidation and the directors were shown to make a transaction in the previous six months which improperly favoured a creditor then the courts may set such transactions aside. This timeframe can be extended up to two years where the creditor involved is connected to a director of the company.
With these duties and risks in mind it is important that company directors are aware of their options, particularly where the company is at risk of becoming unable to pay its debts as they fall due.
Where a company is part of a group it may be worth avoiding the commercial and legal implications of liquidation by merging with another member of the group. This could help save the public image of the company, but it means the acquiring company will also acquire the liabilities.
- Scheme of Arrangement
Companies may also negotiate with their creditors to ensure they have time to earn the money required to repay their debts. For example, a scheme of arrangement could be agreed whereby a company is given a credit or time extension or where some of the debt is written off by a number of creditors so that their chances of recovery overall are increased. This can be achieved informally or by court order.
Where a company is or is likely to become insolvent, an application could be made to court seeking protection from debt enforcement actions for between 70 and 100 days. While protected, an appointed Examiner assesses the company’s survival prospects and works to construct proposals for a scheme of arrangement or compromise between the company, its creditors and members. For this to work, the court must be convinced that the company has a ‘reasonable prospect of survival as a going concern’.
This poses a substantial risk to the directors because control is handed over to the Examiner who can sell the company’s assets as part of the scheme of arrangement but only in so far as this will facilitate the survival of the company. Furthermore, secured creditors might apprehend a risk of Examinership and could try to appoint a Receiver (discussed below).
The appointment of a Receiver is the main method by which a secured creditor will enforce its security. Receivers’ powers are set out in security documents such as mortgages or debentures. In general, the Receiver will have the power to sell company assets (which are listed in agreed security documents) for the benefit of secured creditors.
A Members’ Voluntary Liquidation may occur where a company is solvent and the members of that company pass a special resolution in favour of liquidation. In order to qualify for this option, the company must be able to pay its debts within one year from the commencement of the liquidation process. This process involves a Liquidator being appointed to realise the company’s assets, pay the creditors and distribute the remaining value.
A Creditors Voluntary Liquidation occurs where a company becomes insolvent and so the board of directors must convene a shareholder meeting to hold a vote on a special resolution to say that the company cannot pay its debts as they fall due. Once the resolution has passed the company’s creditors should be notified so that a creditors meeting can be called, and a Liquidator appointed.
Once appointed, the Liquidator will take control of the company and proceed to wind up the business and realise what value remains in favour of the creditors. Creditors will be repaid in accordance with the order of priority, i.e. secured creditors get paid first and the balance (if any) is split among unsecured creditors.
A Compulsory Liquidation occurs where The High Court appoints a Liquidator to a company which has failed, refused or neglected to pay its debts. Creditors who are owed more than €10,000 and who serve a valid 21-day warning notice may thereafter bring an application to The High Court to have that company wound up.
Companies regularly financial issues for a plethora of reasons and so it is vital that directors are informed of their options and obligations in each circumstance. For any advice in relation to corporate insolvency, please do not hesitate to contact Brendan Dillon or Conor White on 01-2960666.