1 Issues Arising When a Company is in Financial Difficulties
How does a creditor take security over assets in Ireland?
Under Irish law and practice, security is normally taken over assets by means of a contract between a creditor and a debtor that certain or all of the assets of the debtor may be appropriated by the creditor towards the satisfaction of a debt in the event of default by the debtor of its obligations under a loan or other agreement. The following is a summary of the most common forms of security created by companies in Ireland:
(a) Fixed Charge: An Irish company may agree to provide a creditor with fixed charge over a specific asset to secure compliance by the creditor with its obligations under a loan agreement with a creditor. In order for a company to create a fixed charge, the charged property must be specifically identifiable. A fixed charge does not involve a legal or beneficial transfer of ownership of the secured to the creditor.
(b) Mortgage: A mortgage involves the transfer (or conveyance or assignment) of the legal title to property from a debtor to a creditor by way of security, subject to an express or implied term that the property will be transferred back to the debtor when he has fulfilled his obligations (usually the repayment of the capital and interest).
(c) Floating Charge: A floating charge is an equitable charge which hovers over the assets, or over a class of assets, of a creditor until the occurrence of an event of default, whereupon the floating charge will crystallise. Upon crystallisation, the charge fastens onto the charged property or class of property and becomes a quasi-fixed charge.
(d) Pledge: A pledge is a transaction under which a debtor delivers possession of goods to a creditor to be retained by the creditor as security and for as long as the debtor has unsatisfied obligations to the creditor. A pledge confers a power of sale upon a creditor in the event of the debtor defaulting.
(e) Lien: A lien is a right given to a person, under a contract for the provision of services, to retain possession of goods belonging to another until being paid for his services. Liens may arise in a number of ways but in all circumstances it is the possession and delivery of goods which is crucial in determining the existence of a lien.
1.2 In what circumstances might transactions entered into whilst the company is in financial difficulties be vulnerable to attack?
Transactions entered into by Irish companies that are insolvent, or that are likely to become insolvent, can be subsequently challenged in the following circumstances:
(a) Fraudulent preference: Section 286(1) of the Companies Act, 1963 seeks to prevent a preference of one creditor over another by a company. A preference arises where an insolvent company enters into a transaction which puts a creditor in a better position than that creditor would have been in if the transaction had not taken place. Preferences within six months prior to the company's liquidation can be overturned. This time limit is extended to two years where the disposal was in favour of a connected party.
(b) Disposals having a fraudulent effect: Section 139 of the Companies Act, 1963 provides that where a disposition by a company that is in the process of being wound up has had the effect of perpetrating a fraud on the company its creditors or members, the High Court may "if it deems it just and equitable to do so", order the return of the property to the liquidator, examiner or receiver on such terms or conditions as the Court sees fit. There is no requirement to prove fraud on the part of the transferor or the transferee, merely that the effect of the disposition was to perpetrate a fraud.
(c) Disposals with fraudulent intent: Section 74(3) of the Land and Conveyancing Reform Act 2009 provides that any conveyance of property made with the intention of defrauding a creditor or other person is voidable by any person thereby prejudiced. It is not a prerequisite to an action under Section 74(3) of the Land and Conveyancing Reform Act 2009 for it to be shown that the transferor company was insolvent at the time of the disposition.
(d) Invalidation of floating charges: Section 288(1) of the Companies Act, 1963 provides that floating charges created in the twelve months prior to the commencement of a winding up shall, unless it is proved that the company was solvent immediately after the creation of the charge, be invalid except as to fresh monies advanced.
(e) Incapacity of the directors: In the decision of the Irish Supreme Court in Re Frederick Inns, the Court held that where the directors of an insolvent company are aware or ought to have known of its insolvency, they hold the assets of that company in trust for the benefit of the company's creditors. Any disposition can give rise therefore to an obligation to return the property received in circumstances for instance where the recipient was aware of the insolvency of the transferor.
1.3 What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in Ireland?
(a) Potential civil liability of directors:
Under Irish law, directors (which term includes non-executive, de facto and shadow directors (including bodies corporate)) can, under certain circumstances, be held personally liable to contribute to, or for all of the debts of, insolvent Irish companies. Those circumstances include the following:
(i) Fraudulent or reckless trading: Any officer of a company can be made personally liable, without limitation, for all or any part of the debts or other liabilities of the company where the Court is satisfied that, while an officer of the company, that person was knowingly a party to the carrying on of any business of the company in a reckless manner or was knowingly a party to the carrying on of any business of the company with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose.
(ii) Declaring a company to be solvent without reasonable grounds: Where the members of a company have resolved to windup a company on the foot of a statutory declaration by the directors that the company is solvent, but it subsequently emerges that the company was insolvent at the time of that declaration, and the Court is satisfied that the directors did not have reasonable grounds for believing the company to be solvent at the time of the declaration, the Court can, if it thinks it proper to do so, declare any director who was made the declaration of solvency to be personally liable for all or any of the debts or other liabilities of the company as the Court may direct.
(iii) Misfeasance or breach of duty: Where a company is being wound up and any officer of the company (or any person who has taken part in the formation or promotion of the company) has been guilty of any misfeasance or other breach of statutory duty, fiduciary duty or trust in relation to the company, the Court may compel restoration of any funds misapplied or retained or may require a contribution from that person by way of compensation.
(iv) Failure to keep proper books: In an insolvent liquidation where there is a failure to keep proper books of account for a company, any officer of the company may be held personally responsible, without limitation of liability, for the debts or other liabilities of the company where the Court considers that such a failure contributed to the company's inability to pay its debts or has resulted in substantial uncertainty as to the assets and liabilities of the company or has substantially impeded its orderly winding up.
(b) Potential criminal liability of directors: A director (which term includes non-executive, de facto and shadow directors (including bodies corporate)) of an insolvent Irish company can, under certain circumstances, be subject to criminal sanction. Those circumstances include:
(i) Fraudulent trading: Any person (including a director) who is knowingly a party to the carrying on of the business of a company with the intent to defraud creditors of the company or any other person or for any fraudulent purpose is guilty of a criminal offence under Irish law.
(ii) Failure to keep proper books and records: A director shall be guilty of a criminal offence if he or she is shown to have (A) failed to disclose information or to have withheld books, records or information from a liquidator of a company, (B) falsified any such information, or (C) failed to keep proper books and records of a company.
(c) Potential restriction / disqualification:
(i) Restriction of directors: Section 56 of the Company Law Enforcement Act, 2001 provides that the liquidator of a company must make a report on the conduct of the directors (which term includes non-executive, de facto and shadow directors (including bodies corporate)) to the Director of Corporate Enforcement within 6 months of his appointment. Once such a report is made, the liquidator must bring an application under Section 150 unless the Director has relieved the liquidator of the obligation to do so. Where a director is restricted by the Court, for a period of five years he may not be appointed or act in any way directly or indirectly as a director or secretary of any company unless it, inter alia, meets certain minimum capital requirements. It is a good defence to any such an application for the director to show that he or she acted honestly and responsibly in relation to the conduct of the affairs of the company or that the person was a director solely by reason of his nomination by a financial institution or by a venture capital company.