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Corporate Insolvency in Ireland

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Corporate Insolvency in Ireland Corporate Insolvency in Ireland Table of Contents Page 1. Mechanisms of Corporate Insolvency 1 2. Liquidation 1 3. Functions of the Liquidator 3 4. Liquidation and Creditors’ Rights 3 5. Schemes of Arrangement 4 6. Examination 5 7. Effect of Examination 6 8. Examination and Secured Creditors 7 9. Powers of the Examiner 7 10. Receivership 8 11. Fraudulent Transactions and Reckless Trading 8 12. Asset Swelling Measures 10 13. Company Law Enforcement Act, 2001 12 14. European Communities (Corporate Insolvency) Regulations 2002 12 DISCLAIMER: This article is for general information purposes only and does not purport to represent legal advice. If you have any queries or would like further information relating to any of the matters addressed in this article, please refer to the contacts below or your usual contact in Dillon Eustace. Copyright Notice © 2007 Dillon Eustace. All rights reserved. Corporate Insolvency in Ireland 1. Mechanisms of Corporate Insolvency The primary legislation governing the law of corporate insolvency is contained in the Companies Acts, 1963 to 2006 and the Conveyancing and Law of Property Act 1881. The principal mechanisms for dealing with insolvent companies are as follows:- (a) Liquidation; (b) Examination; (c) Receivership. 2. Liquidation Liquidations are governed primarily by the Companies Act, 1963 (the “Principal Act”), Liquidation is a terminal process which sees the liquidation of the assets of the Company, payment of creditors and ultimately the dissolution of the company and its removal from the Company Register. The winding-up of a company under Irish law may be effected by one of the following: (i) Court liquidation; (ii) Creditors voluntary liquidation (where the company is insolvent); (iii) members voluntary liquidation (where the company is solvent). (i) Court Liquidation A court liquidation occurs where a company or more usually one of its creditors petitions to the High Court in Ireland (the “Court”) for an order seeking the winding-up of the company and appointing a liquidator. The principal reason for a court liquidation is the companies inability to pay it’s debts when due. A company is deemed to be unable to pay it’s debts if:- 1. A demand for a sum exceeding Euro 1,250 has been served on the company and such demand has not been met within 3 weeks without the dispute of the debt; - 1 - 2. A Court order in respect of a debt remains unsatisfied after attempted execution; 3. It is proved to the satisfaction of the Court that the company is unable to pay it’s debts. A Court liquidation may also be effected on the basis that it is just and equitable that the company should be wound-up and there are circumstances in which a company which has not been incorporated in the jurisdiction may be wound up by the Court which will be dealt with below. A Court liquidation is deemed to commence at the time of the presentation of the petition for the winding-up of the company. The petition will specify a return date for the hearing of the application as to whether the company should be wound-up and will also direct that the petition be advertised in at least two national news papers. The return date for the hearing of the petition is normally 3 or 4 weeks after the date of issue of the petition. On the date fixed for the hearing of the petition the creditors of the company are entitled to attend the hearing and the Court will listen to any objections usually from the debtor company as to why the company should not be wound-up. On hearing the petition if the Court does decide that the company should be wound- up, the Court will issue such an order and appoint a liquidator for the purpose of effecting the winding-up and realising the assets. In turn the court liquidation is supervised by the Court. (ii) Creditor’s Voluntary Winding-Up In the case of a creditor’s voluntary winding-up the process is again initiated by a creditor. A creditor’s voluntary winding-up usually entails the convening of a meeting of the shareholders by the directors of an insolvent company at which ordinary resolutions are passed resolving (a) to wind-up the company by reason of its insolvency and the inability to continue in business and (b) to appoint a liquidator. This meeting is usually followed by a meeting of the company’s creditors. The creditor’s meeting will be chaired by a director of the insolvent company and the director’s statement of affairs will be considered. The Principal Act which requires that the directors make available a full statement of the position of the company’s affairs together with a list of the creditors of the company and the estimated amount of their claims. The directors will be expected to account the creditors as to the causes of the company’s insolvency. The creditors may also at this meeting appoint an alternative liquidator in place of that which has been appointed by the shareholders of the company in general meeting. It should be noted that unlike a court liquidation the creditor’s voluntary liquidation process does not give a third party creditors the right to control the process. (iii) Members’ Voluntary Winding-Up - 2 - A members’ voluntary winding-up occurs where the company is solvent. The directors of the company must prepare and swear by a majority of directors a declaration of solvency which is to be accompanied by the report of an independent person confirming that (a) the assertion of the directors that the company is solvent is reasonable and (b) a statement of the company’s assets and liabilities attached to the declaration of solvency is also reasonable. The directors declaration of solvency must then be considered at a meeting of the shareholders of the solvent company and must be approved by 75% of more of the votes cast (in person or by proxy) resolving to wind-up the company and appoint a liquidator. In a voluntary liquidation the date of commencement of the winding-up is the date on which the shareholders resolve to wind-up the company. 3. Functions of the Liquidator In both a voluntary winding-up and a Court liquidation a liquidator is appointed to identify the assets of the company, take those assets under control, liquidate those assets, identify creditors and admit the creditors claims in whole or in part. Accordingly, the liquidator may only carry on the business of the company for the purposes of realising the assets. Pursuant to section 290 of the Principal Act a liquidator has the power within 12 months after the commencement of the winding-up or such extended period as may be allowed by the Court to disclaim any onerous contracts entered into by the company. Any person interested in such contracts may require the liquidator to decide whether or not he will disclaim and if the liquidator wishes to disclaim in such circumstances he must give notice within 28 days or such further period as may be allowed by the Court that he intends to apply to Court to disclaim. Where disclaimer is allowed by the Court the company is relieved of continuous and onerous obligations (and any further benefits) but the other party to the contract obtains the right to prove in a liquidation for the losses sustained by it as a result of the disclaimer. A liquidator must disclaim the whole of the property he may not keep part and disclaim part. The disclaimer terminates as and from the date of the disclaimer the rights, interests and liabilities of the company in the contract or the property but the disclaimer does not affect the rights or liabilities of any other person except so far as necessary for the purpose of releasing the company from liability. 4. Liquidation and Creditors’ Rights In both a Court liquidation and in a voluntary liquidation the liquidator will advertise for creditors to prove their claims. Any dispute of a creditors claim will be determined by the Court. - 3 - Secured creditors may rely on their security in a liquidation rather than prove their claims to the liquidator. Where the security is a fixed charge the assets subject to such security are not available to meet any expenses or claims in the liquidation. The holder of a fixed charge will generally appoint a receiver and the receiver will take control of the assets subject to the fixed charge and dispose of same with the view to satisfying either in whole or in part the secured creditors claim. Any surplus must be paid over the insolvent company. Where the security is a floating charge (such as the charge over book debts) and a receiver (see below) has not been appointed by the holder of the security prior to the commencement of winding-up the expenses of a liquidator as well as any preferential creditors must be met out of the proceeds of realisation of the security. Any balance is then available to the secured creditor. In summary after the holders of a fixed charge have been paid the order of payments is as follows:- 1. Liquidator’s fees and expenses; 2. Preferential creditors claims (which comprises of certain statutory tax and employee benefit liabilities); 3. Claims of the holder of floating charges which have not crystallised prior to the winding up. 4. Unsecured creditors claims. Further, Section 288 of the Principal Act invalidates a floating charge on the undertaking or property of a company created within 12 months before the commencement of its winding-up unless it is proved that the company immediately after the creation of the charge was solvent.
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