Prospering during a period of crisis Crisis –What Crisis? LIES, DAMNED LIES AND STATISTICS WHAT LESSONS CAN WE LEARN FROM COMPANIES THAT HAVE FAILED? The aim of today is to help you •identify early warning signs, •avoid the common pitfalls, •stabilise your business and •prepare for targeted future growth.” THE DIFFERENT INSOLVENCY PROCEDURES

• Companies – Insolvent • Informal Schemes of Arrangement • Section 279 Schemes • Section 201 Schemes • Examinership INSOLVENCY PROCEDURES

• Companies – Insolvent continued • Creditors Voluntary Liquidation • Involuntary or “High Court” Liquidation • Receivership • Personal – Informal Schemes of Arrangement – Bankruptcy DIRECTORS

Personal liability PERSONAL LIABILITY

A director of a bank or company can be held personally liable if he:

• Gives a personal guarantee for the Company’s debts. • Is knowingly a party to any business undertaken by the company in a reckless manner. • Is knowingly a party to any business undertaken by the company with intent to defraud its creditors (or any other person). • For the purposes of the fraudulent trading and reckless trading provisions, the term “director” includes shadow directors • Fails to keep proper books and records LIQUIDATION

• Liquidation, also known as winding up, is the process where a company’s property is distributed to its creditors and members.

• The company is then dissolved, terminating its legal existence. ROLE OF LIQUIDATORS

The role of the Liquidator is to wind up the affairs of the company, to inquire into its affairs, to realise and distribute its assets and to pay its debts MAIN DUTIES OF A LIQUIDATOR

• The main duties of a liquidator are to:

(a) take possession of the company’s property and assets, including its books and records and other documents relevant to its affairs; (b) make a list of the company’s creditors and of the persons (known as contributories) who are obliged to contribute to the assets of the company on its winding up; (c) have any disputed cases adjudicated by the Court; (d) realise the company’s assets; (e) apply the proceeds in payment of the company’s debts and liabilities in proper priority; (f) distribute any surplus amongst the persons obliged to contribute the assets of the company on its winding up. MAIN DUTIES OF A LIQUIDATOR

• The main duties of a liquidator are to:

(g) to provide a report to the Director of Corporate Enforcement on the conduct of Company’s directors

(h) Unless ODCE relieves Liquidator, a liquidator of an insolvent company is obliged to bring an application to the High Court for the restriction of the directors of the company FURTHER POWERS OF LIQUIDATOR

• Examination of Directors • Arrest and Freezing of Assets • Disclaimer of Onerous Contracts • Pooling and Contribution Orders • Fraudulent Preference • Fraudulent and Reckless Trading DISTRIBUTIONS

• When the assets of the company have been gathered in, a liquidator’s function is then to distribute them

• The priority for the distribution of assets is: • fixed charge / mortgage • costs and expenses of the liquidation; • preferential creditors; • floating charges; • unsecured creditors; • members of the company Liquidator’s Section 56 Report to ODCE TIME SCALES

• Time Scales set out in Section 56 of 2001 Act.

• Liquidator has six months to submit Report to ODCE. Extensions of time may be sought

• Liquidator shall, not earlier than three months nor later than five months after the date he has provided his Report to ODCE apply to the Court for a Restriction Order – unless relieved. ODCE TO GRANT RELIEF

• Consultation paper lists various circumstances where liquidator is unlikely to be relieved.

• These include: i. a suspected breach of the Companies Act, including any failure to keep proper books of account; ii. where the director has placed his own interests ahead of that of the company, for example by discharging debts which he had personally guaranteed; iii. where the director has misapplied company property; iv. where the company has continued trading when it was insolvent and the director knew or ought to have known this; v. where there is evidence of “Phoenix syndrome” practices; vi. where the director has failed to co‐operate with the liquidator; ISSUES FOR DIRECTORS

In determining whether to relieve the Liquidator of the company from the obligation to take a Section 150 Application against the Directors of the company, ODCE will assess whether in their opinion the Directors have acted “honestly and responsibly”. In making this assessment the ODCE will consider a number of criteria, which broadly follow the criteria set out in the client case of La Moselle Clothing Limited. This case laid down criteria as follows: – The extent to which each Director has complied with the obligations imposed by the Companies Acts. – The extent in which the Director’s conduct can be regarded as so incompetent as to amount to irresponsibility. – The extent of the Director’s responsibility for the net deficiency in the assets of the company. – The extent to which the Directors displayed “an act of commercial propriety or want of proper standards”. ISSUES FOR DIRECTORS

It can be taken from the above that Directors can take many steps to demonstrate that they have acted “honestly and responsibly”. As accountants who are advising Directors of companies on a daily basis, it is important to emphasise to your clients that during their tenure of office as a Director they ensure the following steps are undertaken:

•The timely filing of tax returns •The timely filing of annual returns to the Companies Registration Office •The maintenance of proper books and records •That they hold regular board meetings and maintain minutes of those meetings. RECEIVERSHIPS RECEIVERSHIPS

At the outset it is most important to note the difference between a fixed charge receiver and floating charge receiver.

A floating charge receiver takes charge of all of the assets (generally belonging to a company) whilst a fixed charge is held over specific, ascertainable assets and ‘attaches’ immediately on creation, meaning that the individual (or company) is no longer free to deal with the assets without the charge‐holder’s authority. RECEIVERSHIPS

• Increasing in numbers –both fixed asset receiverships and trading receiverships

• Auctioneers being appointed directly to fixed asset receiverships

• More banks like to appoint

• Leisure Industry / Hotels etc… a troubled sector in this regard RECEIVERSHIPS

• Different approaches to appointing a receiver are being adopted by different banks (e.g. BOI versus ACC)

• Most banks operating in the Irish market have a centralized credit department or recoveries department for dealing with companies in financial difficulties. RELATIONSHIP ZONES WITH THE BANKS

“Workout Zone” – Facing reality Mutual wish for solution Open honest communication Realism

“Mushroom Zone” ‐ Feeding banks with manure (e.g. misleading accounts) and keeping them in the dark. This leads to Lender anger.

“Knockout Zone” ‐ Lender re‐acts with extreme prejudice. RECEIVERSHIPS EARLY WARNING SIGNS (I.E. WHAT THE BANK SEES)

• Obvious specific sectors: E.g. Construction, hospitality, retail • Decline in sales (widespread!) = Reduced lodgements • Impact of Foreign Exchange movements • Cheque kiting • Cash flow: ‐ No headroom on overdraft ‐ Returned cheques ‐ Requests for bank drafts ‐ No payments to Revenue ‐ Cancellation of direct debit arrangements • Revenue attachment action • Judgements being registered • Directors asking to see a copy of their personal guarantees! • Delays in receiving Audited/Management accounts WHEN TO APPOINT A RECEIVER

• Directors not co‐operating • Directors’ dishonesty • Boardroom/shareholder dispute (Request to change bank mandate) • Sheriff seizing assets • Revenue attaching bank accounts/debtors • Insurance cover not in place • Trading losses eroding floating charge • Revenue debt eroding floating charge • Winding up petition advertised and risk of assets being dissipated •Do you need to crystallise quantum of personal guarantees, particularly where guarantors are being pursued by other creditors? WHEN TO APPOINT A RECEIVER

•The Bank wants to take charge !! APPOINTING A RECEIVER

• Breach or Default

• Charge Documents

• Written demand

• Deed of Appointment FIXED CHARGE RECEIVERSHIPS

Appointment: There are three ways in which a fixed charge receiver may be appointed:

1. Under the “default rules” as outlined in conveyancing legislation 2. By application to the Courts 3. Under the terms of mortgage deed RECEIVERSHIPS

If it is not possible to appoint a Receiver under the rules above, an application can be made to Court to have a Receiver appointed. A key difference is that the Receiver has a duty to and a reporting obligation to the Court.

Generally speaking, though the vast majority of Receivers are appointed under the terms of provisions contained in Mortgage Deeds.

Mortgage property deeds are drafted with the specific power to appoint a receiver without the requirement of the factors required for a statutory default. Furthermore, these deeds will set out in detail what a Receiver can and cannot do in relation to the property.

If dealing with a company’s property‐a receiver must write to the Companies Registration Office seven days in advance giving notice of the intention to appoint a Receiver over a company. The Receiver will generally be appointed by way of deed or a similar written confirmation. Likewise it is possible to terminate their appointment in writing. BEFORE APPOINTING A RECEIVER

• The credit department / recoveries department will review the company’s turnaround plan and in particular consider the extent of their exposure to the company and the security which they hold. (A factor of a lot of the large scale insolvencies in Ireland have been the cross guarantees between group companies).

• The Bank will of course consider the ‘greater’ relationships which the bank have with the company and its promoters.

• A fundamental issue for the bank will be the management of the company and the approach the management have taken with them in dealing with the difficulties to date. It is important that there is ‘trust’ between the parties which will facilitate meaningful discussions. BEFORE APPOINTING A RECEIVER

• The Bank will review the company’s plan. (It would not be unusual for a bank to consider appointing external advisors to assist or advise on the review)

• The Bank officials will be mindful of any suggestions they would have made to the company and will want to see in the plan evidence that the plan is well thought out and takes into account banks proposals (even if ultimately suggesting an alternative route) etc.

• As noted above it is important to consider reconciling different creditor’s priorities and the Bank will want to see that the plan identifies the priorities and status of the bank. WHEN ARE BANK LESS LIKELY TO APPOINT?

• Agricultural land (Development land which has great potential as agricultural land!!)

• Significant ongoing trading losses will be incurred

• Poor PR for bank (employment black hole etc.)

• Brown field site issues and costs DISADVANTAGES OF RECEIVERSHIPS

• If Receiver is imposed on Company (i.e. The Company does not invite the bank to appoint a Receiver) the Company may oppose the appointment.

• A personal guarantor may defend personal guarantee alleging that Receiver was negligent.

• Increased costs: Receivers fees, insurance, security

• More difficult to sell assets (stigma of insolvency)

• Negative Public Relations – particularly in rural areas

• Will NAMA offer a neater solution? RECEIVER

• Possession • Operate business • Sell / Realise Assets • Duty to realise best price • Insure Assets • Notify stakeholders • Correspondence “in Receivership” • File E9 Abstract every 6 months RECEIVER

• Responsible to charge holder • Has legal responsibilities Examinership Is a company suitable for Examinership?

In order for a company to be suitable for Examinership, the High Court has to be satisfied that the company, and the whole or any part of its undertaking, would have a reasonable prospect of survival.

In essence, there must be a business that is either viable, or can be made viable. Examinership Is a company suitable for Examinership?

• Outside Monies available • Assets • Liabilities ‐ secured / unsecured / Revenue • Justify the costs of Examinership Examinership Who may present a petition

A Petition for the appointment of an Examiner may be presented by: • The company; or • The directors of the company; or • A creditor, including a contingent or prospective creditor (including an employee), of the company; or • Shareholders holding not less than one‐tenth of shares carrying the power to vote at general meetings at the time of presentation of the Petition. Examinership The Petition As soon as a Petition for the appointment of an Examiner is presented in the Central Office of the High Court the Company is under Court protection.

The Petition nominates a person to be appointed Examiner. The Petition should be accompanied by the report of an independent accountant. In the absence of an independent accountant’s report, an application to court for protection is necessary.

The Act provides that the independent accountant is somebody who is either the auditor of the company or a person who is qualified to be appointed as an Examiner of the company. Examinership The Petition The Petition itself must state the following: •Name and address of the petitioner; •Capacity of the petitioner; •Date of incorporation of the company in question; •Registered office of the company in question; •Nominal and paid‐up share capital of the company in question; •Objects of the company in question; The Petition must also show that: •The company is or is likely to be unable to pay its debts; •No resolution subsists for the winding up of the company; •No order has been made for the winding up of the company. Examinership The effect of presenting a petition The Act provides that for a period of 70 days from the date of presentation of the Petition, which period may be extended by a further 30 days, the company shall be deemed to be under protection.

In summary, creditors are prevented from taking any action against the company. For example, no winding up proceedings may be commenced, no receiver may be appointed or no judgement may be enforced. Examinership

• Notifications of appointment • Examiner’s powers • Director’s powers Examinership

Restriction on payment of pre‐petition debts • The payment of pre‐petition debts is restricted by the Act, • The are two circumstances where payments in respect of the pre‐ Petition may be made:

1. where the report of the independent accountant recommends that the whole or part of that liability should be discharged or satisfied, and 2. where an application is made by the Examiner or any interested party for an order authorising the payment or discharge of the liability. Examinership ) Is a company suitable for Examinership? ) Who may present a petition ) The petition ) The Independent Accountants Report ) The Petition must be verified by Affidavit ) The effect of presenting a petition ) Notifications of appointment ) Examiner’s powers ) Director’s powers ) Restriction on payment of pre‐petition debts ) Meetings of creditors and members ) Conclusion RECEIVER

• Responsible to charge holder • Has legal responsibilities Early Intervention • A business is more valuable as a going concern than when subject to a forced sale.

• It is also well recognised that the commencement of insolvency procedures in relation to a company almost invariably has an adverse effect on the value of its business.

• Accordingly, when a company is facing financial difficulties, serious consideration must be given to whether the company can be rehabilitated without resort to formal insolvency procedures.

• companies that act early, are able to formulate a greater number of possible options and sustain their success for longer periods

• Each Turnaround is unique, and the action to be taken needs to be tailored to suit the circumstances. Specific Industry Difficulties

Industry: Reasons: General Business Reduced demand, higher interest rates. Less equity in property means less scope for borrowing. Construction: Collapse in demand Hotels: Reduced demand, higher interest costs, high BEP Restaurants : Reduced demand, high BEP Printing: Reduced demand, high BEP Pubs: Drink driving ban Retail: Reduced demand, high rents Garages: Stg£ devaluation, VRT Is the Company Insolvent? I

The first step is to determine whether your Company is insolvent or not.

There are two main tests to determine whether a company is insolvent or not. •“The balance sheet” test for insolvency •“The cash flow test” for insolvency Is the Company Insolvent? I

The balance sheet test If the company’s liabilities are greater than its assets it is deemed insolvent as per the balance sheet test. A crucial matter to consider is whether if the valuations “market” value and “depreciated book” value are significantly different. Furthermore as previously noted, a business and its assets are more valuable as a going concern than when subject to a forced sale

The cash flow test If the company is unable to pay its debts as they fall due –it is deemed insolvent as per the cash flow test. Solicitors acting on behalf of creditors collecting money from debtors will sometimes refer to Section 214 of the 1963 Companies Act. Is the Company a viable business? I It is necessary to determine whether the underlining business of the company is inherently viable or not.

1Consider the following indicators of a viable business: •Does the Company have a profitable order book •Does the Company have adequate production facilities •Does the Company have supplier cooperation •Does the Company have Bank / Shareholder support •Does the Company have customer support •Does the Company have a good product / brand name •Does the Company have an identifiable market position

2. Consider the following indicators of a non viable business: •Industry over capacity •Competitor price cutting •Market collapse •High fixed cost basis •Long term loss making contracts •Old, obsolete plants Is the Company a viable business? I It is necessary to determine whether the underlining business of the company is inherently viable or not.

3. In assessing viability, the profitability of the Company’s existing product lines and customer base should be separately analysed.

If the core underlying business is viable, and the inability to pay debts as they fall due is only temporary, then the directors may be justified in continuing to trade, source finance etc.

4. If the legacy debt is too much to recover from, consider whether the company is suitable for either an Informal Scheme of Arrangement) or Examinership Corporate Recovery Techniques Corporate Recovery Strategies

) Our experience in helping companies in financial difficulties has been that those companies that act early are able to formulate a greater number of possible options and sustain the success for longer periods.

) While each turnaround is unique, there are four basic steps to be taken as follows:

• Identifying the problems • Assessment of business viability • Devising the recovery strategy • Monitoring of recovery strategy implementation. Corporate Recovery Strategies

Identifying the Problems The type of problems identified will determine the turnaround strategies to be employed. The problems that can cause financial difficulties for business can be divided into two major types:

Macro problems Problems arising in the wider market place and in the economy generally where the cause is outside the direct control of the Company.

Micro problems Problems originating within the Company itself where the cause is within the direct control of the Company Corporate Recovery Strategies

Identifying the problems

Some of the issues which may lead a Company into financial difficulty are:

• Ineffective Management

• Boardroom dispute

• Lack of necessary skills in finance, marketing, production

• Inadequate succession planning

• Over reliance on one customer/product/person

• Product obsolescence

• Inadequate financial capital

• Unanticipated events such as litigation, freak accident or terrorism events such 9/11. (Other events, such as bad debts, can be insured against, or events such as interest rates can be hedged against.) Corporate Recovery Strategies

It is important to distinguish between corporate strategies (i.e. doing different things) as opposed to operating strategies (i.e. doing things differently). Corporate Recovery Strategies

CORPORATE STRATEGIES V/S OPERATING STRATEGIES

"DOING DIFFERENT THINGS” “DOING THINGS DIFFERENTLY”

Companies Attempt to Change Involves A Fundamental Change In Their Product/Market the Nature of the Firm’s Operations Stance by Adjusting Strategy to Improve Efficiency Corporate Recovery Strategies

) A useful technique to identify the problems facing a business is to carry out a SWOT analysis.

) Sometimes management may not have the most basic and important skill required – the ability to ask the correct question rather than necessarily knowing the correct answer.

) Focus on the appropriate area: use the “80:20” rule. Corporate Recovery Strategies Corporate Recovery Strategies

Assessing Business Viability ) The next step should be to determine whether the underlining business of the company is inherently viable or not. Indicators of a viable business are as follows:

• Profitable Order Book • Adequate production facilities • Supplier Cooperation • Bank / Shareholder support • Customer support • Good product / brand name • Identifiable market position Corporate Recovery Strategies

Assessing Business Viability ) Indicators of a non‐viable business are as follows:

• Industry over capacity • Competitor price cutting • Market collapse • High fixed cost basis • Long term loss making contracts • Old, obsolete plants

) In assessing viability, the profitability of the Company’s existing product lines and customer base should be separately analysed Corporate Recovery Strategies

PROF ITAB IL IT Y ANAL YS IS : PROD UCTS OR SERVICES ANNUAL ISED GR OSS MARG IN FROM THIS PRODU CT OR SERVICE € LESS TRADE DISCOUN TS, REBATES, BROK ERS FEES, AND SO ON € LESS DIRE CT PROM OTION COSTS: COUP ONS, AD VE RTISING, PUBLIC RE LATIONS , AN D SO ON € DIRECT PROF IT € OTHER SE LLING COS TS RE TURNS AN D AL LOWANC ES STOCK/ DE BTOR FINANC ING RES EARCH AND DEVEL OPMENT COM PLEXITY OF OR DE R ENTRY SH IPPI NG COMPLEXITY BILLING C OMPLEXITY SENIOR M ANAGE MENT TIME REQU IRED OT HE R COS TS OR CONS IDERATIONS BAS ED ON THE ABOVE , IS THE PRODU CT/SERVICE PROFI TABLE? Corporate Recovery Strategies

PROFITABILITY ANALYSIS: CUS TOMERS

ANNUAL PROFIT FROM CUSTOMERS OR CUSTOMER GROUP - NET REVENUES € LESS DIRECT COSTS (BE EXHAUSTIVE: INCLUDE COMMISSIONS, BROKERAGE FEES AND SO ON) €

LESS COST OF GOODS SOLD € PROFIT FROM CUSTOMER € ARE THERE UNUSUAL COSTS ASSO CIATED WITH THIS CUSTOMER? UNUSUAL FIXED-CAPITAL COSTS DEBTOR FINANCING COMPLEXITY OF ORDER ENTRY RETURNS AND A LLOWANCES BILLING COMPLEXITY COMPLEXITY OF ORDER ENTRY DISTRIBUTION COMPLEXITY CUSTOMER SERVICE COMPLEXITY SENIOR MANAGEMENT TIME REQUIRED OTHER CO STS OR CON SIDERATIONS BASED ON THE ABOVE, IS THIS A PROFITABLE CUSTOMER? Corporate Recovery Strategies

Devising a Recovery Strategy ) If it can be determined that there is a business worth saving, the next step is devise an appropriate recovery strategy. A recovery strategy may include the following:

• Approaching the bank, alert them to the difficulties and enlist their support and assistance • Organisational change • Financial Controls • Products/Market reorientation • Improved marketing • Selling Function • Review of pricing • Asset reduction (i.e. selling of surplus assets) • Cost reduction • Mergers/Strategic Alliances • Investment Bankers Bereavement Cycle

) Denial ‐ couldn't possibly be a bad loan? ) Anger ‐ blame the auditors etc. ) Depression ‐ know any good receivers? ) Acceptance ‐ support the development of a recovery plan Product/Market Re‐orientation

)Entry into a new market )Withdrawal from a new market )Adding or deleting particular products )adding or deleting particular customers )Changing the mix of products made )Changing the mix of customers Marketing Strategy

) Product range ) Pricing ) Customers ) Advertising ) Selling ) Distribution channels ) Warranty ) Service Blending The Strategies

) The company cost/price structure ) The cause of the decline ) The severity of the crisis ) The attitude of the stakeholders ) The company's historical strategy ) The characteristics of the market place Product Pricing

) Existing Margins ) Availability of Substitutes ) Branded Product ) Customer "Need" Vs Customer "Luxury" ) Warranty ) Service ) Sale Or Return Corporate Recovery Strategies

Characteristics of a successful recovery strategy ) Asset reduction and new management are the most common strategies closely followed by improved financial control and cost reduction.

) A new chief executive/managing director may be required

) Cash generating asset reduction and refinancing are usually part of a successful strategy

) Improved marketing effort appears to be successful only when combined with product reorientation in the market and growth through acquisition

) The most successful recoveries include major organisational change

) The successful turnaround uses on average twice as many strategies as the unsuccessful ones. Corporate Recovery Strategies

If a company has been in financial difficulty for some time then it is likely that some form of financial restructuring will be required. Such restructuring is a major topic in itself but a brief summary of the key issues are given below:

Reconciling creditor rivalries • Secured Vs Unsecured lenders • Committed Vs Uncommitted lenders • Working Capital Vs Term debt • New money Vs Old money • Senior Vs Subordinated debt • Debts Vs Equity • Preferential Vs Ordinary shareholders

Repayments • Deferment • Debt to equity

Security Package • Cross guarantees • Fixed and floating charges Corporate Recovery Strategies

Monitoring

Once a recovery strategy has been agreed upon, it needs to be continuously monitored. One of the mistakes sometimes made in developing a strategy is to assume that competitors will "standstill". However, in the real world, competitors will react to any changes in the market place and these reactions need to be monitored so that the company's recovery strategy can be fine tuned. Corporate Recovery Strategies

"Winning Approach

• Simplify your company’s organisational structure, products and processes

• Reduce your “back office” – Streamline general and administrative work.

• Aggressively manage costs and Cash Flow –be aware of cash and liquidity positions

• Increase revenues and margins

• Price not just for the present but also for the future

• Acquisitions in recessionary times can strengthen your business Issues for Directors In determining whether to relieve the Liquidator of the company from the obligation to take a Section 150 Application against the Directors of the company, ODCE will assess whether in their opinion the Directors have acted “honestly and responsibly”. In making this assessment the ODCE will consider a number of criteria, which broadly follow the criteria set out in the client case of La Moselle Clothing Limited. This case laid down criteria as follows: – The extent to which each Director has complied with the obligations imposed by the Companies Acts. – The extent in which the Director’s conduct can be regarded as so incompetent as to amount to irresponsibility. – The extent of the Director’s responsibility for the net deficiency in the assets of the company. – The extent to which the Directors displayed “an act of commercial propriety or want of proper standards”. Issues for Directors It can be taken from the above that Directors can take many steps to demonstrate that they have acted “honestly and responsibly”. As accountants who are advising Directors of companies on a daily basis, it is important to emphasise to your clients that during their tenure of office as a Director they ensure the following steps are undertaken:

•The timely filing of tax returns •The timely filing of annual returns to the Companies Registration Office •The maintenance of proper books and records •That they hold regular board meetings and maintain minutes of those meetings. Issues for Directors When the company has been placed into liquidation it is important that the Directors: •Co‐operate with the Liquidator. •Refute any allegations/insinuations. •Clarify areas that are open to misinterpretation. •Maintain written notes of telephone calls and meetings. •Write to the Liquidator asking him what is he reporting to the ODCE. •The Directors should make a detailed report to the Liquidator outlining the areas where he has acted honestly and responsibly. Directors behaviour in Pre Liquidation Period Dealing with Company assets: It is important to stress that the actions of Directors in dealing with assets of the Company in the pre liquidation period are crucial in determining whether a Liquidator will determine that they have acted both honestly and responsibly.

Central to a Liquidator determining his view in this regard, is the judgment given in a Supreme Court case, Re Frederic inns Limited, determined that where a company had not yet been formally wound up, but where its assets and liabilities where in such a state that would enable a creditor to present a petition to wind up a company on the basis that the company was insolvent, the director had a primary duty to “preserve the assets so as to enable them to be applied pro tanto in discharge of the companies liabilities”.

In other words directors have a fiduciary duty to protect the assets so that the may be realized and discharged to the creditors in the proper manner With this in mind, two areas of concern may be the areas of fraudulent & reckless trading, and the preferential payment of certain creditors. Directors behaviour in Pre Liquidation Period Section 286 Companies Act 1963: Fraudulent preference. Where a company, which is unable to pay its debts as they become due, enters into a transaction in favour of any creditor, or of any person on trust for any creditor, with a view to giving such creditor a preference over the other creditors, it shall, be deemed a fraudulent preference of its remaining creditors and be deemed invalid if a winding‐ up of the company commences within 6 months of the transaction.

In this regard, a Liquidator can apply to the HIGH COURT to have the creditor deliver the property or pay a sum in respect of that property to the Liquidator The classic example of a preferential payment is where the Directors have given a personal guarantee to a bank and pay off the banks lending in the pre liquidation period.

The deliberate making of a fraudulent preferential payment, is abreach of the Companies Acts, and would be a serious issue for the Liquidator to consider when considering whether the Director’s acted “honestly and responsibly”. Directors behaviour in Pre Liquidation Period Reckless Trading: Section 297 Companies Act 1963‐ Responsibility of persons concerned for fraudulent trading of company.

Section 297A Companies Act 1963 provides as follows: 1. If in the course of winding up of a company or in the course of proceedings under the Companies (Amendment) Act 1990, it appears that— (a) any person was, while an officer of the company, knowingly party to the carrying on of any business of the company in a reckless manner;… the court, on the application of the … liquidator …of the company, may, if it thinks it proper to do so, declare that such person shall be personally responsible, without any limitation of liability, for all or any part of the debts or other liabilities of the company as the court may direct. Directors behaviour in Pre Liquidation Period Reckless Trading: Section 297 Companies Act 1963‐ Responsibility of persons concerned for fraudulent trading of company. Section 297A Companies Act 1963 provides as follows: 2. Without prejudice to the generality of subsection (1) (a), an officer of a company shall be deemed to have been knowingly a party to the carrying on of any business of the company in a reckless manner if— (a) he was a party to the carrying on of such business and, having regard to the general knowledge, skill and experience that may reasonably be expected of a person in his position, he ought to have known that his actions or those of the company would cause loss to the creditors of the company, or any of them, or (b) he 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 all its other debts (taking into account the contingent and prospective liabilities). Directors behaviour in Pre Liquidation Period Reckless Trading: Section 297 Companies Act 1963‐ Responsibility of persons concerned for fraudulent trading of company. Although the Section refers to the possibility of unlimited liability on the part of any officer against whom a declaration of reckless trading is made, the nature of the remedy is, in practice, restricted having regard to the principles laid down by the Supreme Court in O’Keefe v Ferris and supplemented in a number of cases under section 204 of the 1990 Act, most importantly in the judgment in Mehigan v Duignan.

In the O’Keefe case it was noted that any sanction imposed “should be proportionate to the wrongdoing that has been made out.”

This theme was taken up in the Mehigan case cited above, which involved potentially unlimited liability under section 204 of the Companies Act 1990. The court found that the discretion conferred by section 204 must be exercised in a responsible but also in a constitutional fashion. In assessing liability, the court should have regard to the extent to which the officer’s involvement in the contravention in question resulted in financial loss to the company, and if it did, whether such loss was reasonably foreseeable by the officer as being the result of such contravention. Directors behaviour in Pre Liquidation Period Reckless Trading: Section 297 Companies Act 1963‐ Responsibility of persons concerned for fraudulent trading of company.

It follows from these cases that the quantum in any reckless trading case is the recovery of loss inflicted on the company or its creditors by the reckless continuation of trade; it is not, therefore, the recovery of the entire deficit of the Company.

The leading judgment on reckless trading is the judgment in Re Hefferon Kearns Ltd. In this case, the Court found that the inclusion of the word “knowingly” meant that for an officer to be held liable he must have been party to the carrying on of the business in a manner which he knew well involved a serious and obvious risk of loss or damage to others and yet ignored that risk because he did not really care whether such others suffered loss or damage or because a selfish desire to keep his own company alive. Thank You

Tom Murray

Friel Stafford Corporate Recovery 44Thank Fitzwilliam You Place, Dublin 2

Tel: + 353 1 661 4066 Fax: + 353 1 661 4145

Email: [email protected] www.liquidation.ie