Corporate Insolvency In Ireland

Author:Mr Etain De Valera
Profession:Dillon Eustace
 
FREE EXCERPT
  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

    company's inability to pay its debts when due. A company is

    deemed to be unable to pay its 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;

    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 its 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 windingup 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 newspapers. 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) Creditors' Voluntary Winding-Up

    In the case of a creditors' voluntary winding-up the process

    is again initiated by a creditor. A creditors' 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

    creditors' 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 to 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 the one which

    was 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 third

    party creditors the right to control the process.

    (iii) Members' Voluntary Winding-Up

    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 (qualified to

    act as auditor of the company) 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 the

    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 one part and disclaim another part. The disclaimer

    terminates the rights, interests and liabilities of the company in

    the contract or the property as and from the date of the disclaimer

    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.

    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:-

    liquidator's fees and expenses;

    preferential creditors claims (which comprises of certain

    statutory tax and employee benefit liabilities);

    claims of the holder of floating charges which have not

    crystallised prior to the winding up;

    unsecured creditors claims;

    deferred debts ranking pari passu; and

    members of contributories to the Company.

    Further, Section 288 of the Principal Act...

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