Corporate Insolvency in Ireland Dillon Eustace

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1 Corporate Insolvency in Ireland Dillon Eustace Table of Contents Page 1. Mechanisms of Corporate Insolvency 1 2. Liquidation 1 3. Functions of the Liquidator 2 4. Liquidation and Creditors Rights 2 5. Schemes of Arrangement 3 6. Examination 3 7. Effect of Examination 4 8. Examination and Secured Creditors 5 9. Powers of the Examiner Receivership Fraudulent Transactions and Reckless Trading Asset Swelling Measures Company Law Enforcement Act, European Communities (Corporate Insolvency) Regulations 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.

2 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 The principal mechanisms for dealing with insolvent companies are as follows:- (a) (b) (c) Liquidation; Examination; 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) (ii) (iii) (i) court liquidation; creditors voluntary liquidation (where the company is insolvent); members voluntary liquidation (where the company is solvent). 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

3 (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

4 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; 5) deferred debts ranking pari passu; and 6) members of contributories to the Company. 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. Where the floating charge is created in favour of a connected person (includes directors, shadow directors and related companies) the period of 12 months is extended to 2 years. 5. Schemes of Arrangement There is a provision which may be invoked to bring a company back from the finality of liquidation. Pursuant to Section 201 of the Principal Act a liquidator may prepare proposals for the compromise of debts and other obligations. The various classes of creditors and shareholders must approve the proposals which must be confirmed by the Court before becoming effective. Voting requirements for creditors and members are a majority in number representing a majority in value present either in person or by proxy at the appropriate meeting. 6. Examination The process of examination was introduced into Irish law by the Companies (Amendment) Act 1990 (as amended) (the CAA ). The purpose of examination is to avoid liquidation and to facilitate the survival of the company, despite the fact that the company may in fact be insolvent. In short, examination provides a maximum one hundred day period in which the Court appointed examiner seeks to take control of the company and manage it so that the company may continue to trade. Where an Irish company is likely to be unable to pay its debts, an examiner may be appointed on a petition to the Court. In the context of examinership a company is deemed to be unable to pay its debts if:- a) it is unable to meet its debts when due; b) the value of its assets is less than its liabilities, taking into account its contingent and the prospective liabilities; c) failure to pay or secure the reasonable satisfaction of a creditor for a debt exceeding Euro 1,250 within three weeks of a demand in writing being left to the registered office of the company; or d) if execution or the process issued on the foot of a judgment decree or order of any Court in favour of the creditor of the company is returned unsatisfied in whole or in part

5 The CAA further provides that where the Court appoints an examiner to a company it may also make an order appointing an examiner to a related company. The examination process may be initiated by the company, the directors of the company, by a creditor or a prospective creditor or by members of the company holding not less than one tenth of the paid up capital of the company having voting rights. The basis for the petition must be that the company is or is likely to be unable to pay its debts, that no order has been made up for the winding-up of the company and no resolution subsists for the winding-up of the company. A petition to appoint an examiner to a company must be accompanied by a report in relation to the company of an independent accountant being an auditor of the company or a person qualified to be appointed an auditor of the company. The report must contain:- 1) a statement of opinion as to whether the formulation, acceptance and confirmation of proposals for a compromise or scheme of arrangement would offer a reasonable prospect of the survival of the company on the whole or any part of its undertaking as a going concern; 2) a statement of opinion as to whether any attempt to continue as a whole or part of the undertaking would be likely to be more advantageous to members as a whole and creditors as a whole than winding-up of the company; 3) details of the extent of the proposed funding required of the company to continue trading, the period of protection and the sources of that funding; and 4) recommendations as to which liabilities incurred before the presentation of the petition should be paid. The Court will only make an order appointing an examiner if it is satisfied that there is a reasonable prospect of the survival of the company and the whole or any part the undertaking as a going concern. The relevant legislation provides that the Court shall not make an order dismissing a petition or appointing an examiner to a company without having afforded each creditor of the company, who has indicated to the Court his desire to be heard in the matter, an opportunity to be so heard and the independent accountant is obliged to provide any interested party a copy of his report. 7. Effect of Examination On the presentation of a petition for the appointment of an examiner an automatic stay of seventy days comes into effect although it may be extended to a hundred days from the date of presentation of the petition. During this time no proceedings may be commenced against the company and no execution may be made against the companies assets and no secured creditor may enforce its rights under the security. As noted above the examiner s function is to examine the affairs of the company and to formulate proposals for its survival. Management of the company does not automatically vest in the examiner but the examiner does exercise a supervisory role in the conduct of the business by its management. Where an examiner deems it necessary to do so he/she may apply to the Court to assume such management functions where the examiner of the opinion that the company is being mismanaged. As soon as practical, after his/her appointment, the examiner must formulate proposals for a compromise or scheme of arrangement, to facilitate the survival of the relevant body as a going concern. On foot of these proposals, the examiner must convene meetings of the various classes of member and creditors as he/she thinks proper to consider acceptance of his/her proposals and shall report on such proposals to the Court within thirty five days of his/her appointment. There is acceptance by each class of creditors when a majority number of the class representing a majority in the value of the claims represented at that - 4 -

6 meeting vote in favour of the proposals. The proposals must be confirmed by the Court if they are to become effective and the Court can confirm the proposals only if:- a) at least one class of creditors whose interest or claims would be impaired by implementation of the proposals and have accepted them; b) they are fair and equitable in relation to any class or members or creditors that has not accepted them and whose interest and claims would be impaired by implementation; and c) they are not contrary to the interests of any interested party. Once confirmed by the Court, the proposals become binding on all creditors whether secured or unsecured and their rights are accordingly modified. 8. Examination and Secured Creditors The effect is the appointment of an examiner to suspend the rights of secured creditors for the protection period but the appointment does not of itself effect the security or the rights of the secured creditors. However, the secured creditor cannot act in respect of that property except with the consent of the examiner. In an examination the examiner is given certain limited powers to deal with assets subject to a security interest. With the approval of the Court, the examiner may dispose of assets subject to a floating charge if the examiner satisfies the Court that such disposal would facilitate the survival of the company. Further, the examiner may dispose of assets subject to a fixed charge with leave of the Court. The net proceeds of the disposal must then apply to discharging the secured debt. However section 29 of the Companies Amendment Act gives power to the Court to sanction payment of the remuneration costs and expenses (including any borrowings) properly incurred and certified by the examiner which are to be paid before any other claims secured or unsecured under any compromise or scheme of arrangement or in any receivership or winding up. 9. Powers of the Examiner The Court has the power to prevent any receiver or provisional liquidator who has been appointed before the commencement of an examinership from continuing to act as such. Where an examiner becomes aware of any act or proposed act or omission or course of conduct, decision or contract by or on behalf of the company or by any person in relation to the income, assets or liabilities of the company, which in his opinion is or is likely to be to the detriment of the company or certain of the persons, he is given broad powers (subject to the rights of parties requiring an interest and good faith for value in such income, assets or liabilities) to take whatever steps are necessary to halt, prevent or rectify the effects of such act, omission, course of conduct or decision or contract. However an examiner may not repudiate a contract that has been entered into by the company prior to the period during which such company is under the protection of the Court save for negative pledges where the examiner serves notice on the other parties to the agreement that he is of the opinion that such provision were to be enforced they would be likely to prejudice the survival of the company as a whole or the undertaking as going concern. 10. Receivership Receivership arises in the context of secured creditors and provides a framework in which they may act so as to enforce their security interest. The Conveyancing and Law of Property Act, 1881 implies certain statutory powers to a security holder enabling that security holder to appoint a receiver to take control of the assets subject to the security with a view to liquidating such assets and discharging in whole or in part the liabilities owed to the holder of the securities. Section 332(b) of the Principal Act provides that an application of the liquidator of the company that is being wound up (other than by means of a members voluntary winding up) and in respect of which a - 5 -

7 receiver has been appointed whether before or after the commencement of the winding-up) the Court may (a) order that the receiver shall cease to act as such from the dates specified by the Court or prohibit the appointment of any other receiver; or (b) order that the receiver shall, from a date specified by the High Court, act as such only in respect specified by the Court. A receiver of a company or its assets will be personally liable for all contracts entered into by the receiver in performance of his functions unless the contract provides otherwise. If personal liability is excluded claimants in respect of obligations entered into by him may look to the relevant secured property for payment in priority to the secured persons who are entitled to benefit of the security. Further, the receiver has an indemnity out of the secured assets over which he has been appointed in respect of contracts for which he is personally liable and which he is entered into in the course of performance of its functions. 11. Fraudulent Transactions and Reckless Trading (i) Fraudulent Preference The Companies Acts contain certain provisions rendering void or voidable transactions of a fraudulent nature. Section 139 of the Companies Act, 1990 provides that a liquidator, examiner, creditor or contributory of a company may apply to the Court for an order requiring that a person who has the use, control or possession of the company s property or proceeds of a sale thereof could deliver such property to the liquidator, examiner or receiver. However, this relief is limited to those circumstances where it can be shown that there has been a disposition of property the effect of which has been to perpetrate a fraud on the company, its creditors or its members. The Principal Act also contain provisions rendering transactions of the company which have been carried out with an intent to raudently prefer any creditor void. Section 286 of the Principal Act applies solely to liquidations and provides that any conveyance, mortgage delivery of goods, payment, examination or other act relating to property 1) made or done by a company which is unable to pay its debts if they become due; 2) in favour of a creditor or any other person or in trust for any creditor with a view to giving such creditor (or any surety or guarantor of the debt due to such creditor) a preference over the other creditors within 6 months of the commencement of liquidation or in the case of the connected creditor within 2 years of the making or doing the same is a fraudulent preference of its creditors and accordingly void. It is for the liquidator of the company to demonstrate that the company was unable to pay its debts at the time of the disposition and that the disposition was made with the intent to prefer one creditor over another. Where there has been a fraudulent preference in favour of a connected person as referred to previously a Court will presume that there was an intention to prefer a creditor in the course of the transaction. (ii) Fraudulent and Reckless Trading Section 297 of the Companies Act, 1963 provides that if any person is knowingly a party to the carrying on of the business of a company with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose, that person shall be guilty of an offence. In addition, Section 297A of the Companies Act, 1963 (as amended by Section 138 of the Companies Act, 1990) provides that where in the course of winding up of a company, it appears that (a) any person was, whilst an officer of the company, knowingly a party to the carrying on of any business of the company in a reckless manner; or (b) any person 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; such a person may be made personally responsible, without any limitation of liability, for all or any part of the debts or other liabilities of the company. Directors are obliged to cease - 6 -

8 trading where a company is insolvent and to seek either the protection of the Court or liquidation. The test for reckless trading under the Companies Acts is determined objectively while the test for fraudulent trading is determined on a subjective basis. 12. Asset Swelling Measures The Companies Acts also provide for a number of asset swelling measures in respect of companies which are being wound up. (i) Contribution Orders Section 140 of the Companies Act, 1990 provides that a company which is related to a company which is being wound up may be subject to an order of the court to contribute to all or part of the debts due on the winding up where the court considers it just and equitable to do so. Section 140(5) provides that a company shall be related to another company where:- a) the other company is its subsidiary or holding company; or b) more than half the nominal value of the equity share capital of the company is held by the other company and companies related to the other company, directly or indirectly; or c) more than half the nominal value of the equity share capital is held by members of the other directly or indirectly; or d) the other company or companies related to it or the other company together with the companies related to it are entitled to exercise, or control the exercise, of more than one half of the voting power at any general meeting of the company; or e) the business of the companies have been so carried on that separate business of each company or a substantial part thereof is not readily identifiable or there is another company to which both companies are related In considering what is just and equitable a court will normally consider the following:- 1) the extent to which the related company took part in the management of the company; 2) the conduct of the related company towards the creditors of the company; 3) the effect which such an order would be likely to have on the creditors of the related company; and 4) the extent to which the circumstances that gave rise to the winding up of the company are attributable to the actions or omission of the related company. There is a view held by some commentators that a contribution order cannot be made by reason only of the fact that a company is related to another company nor on the basis that one of the creditors had relied on the fact that the companies were related. (ii) Pooling Orders Section 141 of the Companies Act, 1990 provides that where there are two or more related companies which are being wound up the court may order that the companies shall be wound up as if they were one entity, again where the court considers it just and equitable to do so. In deciding what is just and equitable, the court will use slightly different criteria to that described above. The criteria used in this instance are as follows: 1) the extent to which any of the companies took part in the management of the other companies; the conduct of any of the companies towards the creditors of any of the other companies; - 7 -

9 2) the extent to which the circumstances that gave rise to the winding-up of any of the companies are attributable to the actions or omissions of any of the other companies; and 3) the extent to which the business of the companies have been intermingled. It should be noted that Section 141(3) states that nothing in the above section or any court order shall affect the rights of any secured creditor of any of the companies. Similarly, it should be noted that these provisions relate only to those companies which may be wound up under the Companies Acts Accordingly, they do not apply to a situation where the company which is sought to contribute or pool its assets under the winding-up is not a company capable of being wound-up under the Companies Acts However, Section 212 of the Principal Act provides that the High Court has the power to wind-up any company. It appears that it is not restricted to Irish registered companies. There are guidelines applicable in English law as to the requirements to be met before a court may order the winding up of any company:- 1) there must be sufficient connection with the relevant jurisdiction (assets and creditors may be required to be located within the jurisdiction); 2) there must be reasonable possibility that winding-up order may benefit those applying for it; 3) the Court must be able to exercise jurisdiction over one or more person interested in the Company s assets (does this include the company whose shares are owned by the foreign company). 13. Company Law Enforcement Act, 2001 The Company Law Enforcement Act, 2001 (the 2001 Act ) introduced the Office of the Director of Corporate Enforcement. Pursuant to Section 299 of the Companies Act, 1963 liquidators are required to report to the Director of Public Prosecutions any suspected offences by officers or by members of the company which have come to their attention. Section 51 of the 2001 Act now obliges the liquidator to report to the Director of Corporate Enforcement (the Director ). Liquidators are also required to submit within 6 months of his/her appointment a report in prescribed form pursuant to Section 56 of the 2001 Act in respect of the insolvent company. The 2001 Act also requires each of the liquidator in question to apply to the Court to restrict all of the directors of an insolvent company unless exempted from doing so by the Director. Section 57 of the 2001 Act permits the Director to require a liquidator to produce his or her books for examination either in relation to a particular liquidation process or all liquidations undertaken by him or her. A liquidator is also required to answer any questions as to the content of the books and give all reasonable assistance to the Director (Section 53 of the 2001 Act contains similar provisions relating to the books of receivers). The new reporting arrangements provided for under Section 56 of the 2001 Act are intended to address the apparent injustice between voluntary and official liquidations whereby the directors of companies wound-up by the Court were required to account for their conduct before the Court while the directors of a Company being wound-up voluntarily usually escape accountability. 14. European Communities (Corporate Insolvency) Regulations 2002 The above referenced statutory instrument is intended to facilitate the operation of Council Regulation (EC) no 1346/2000 of 29 th May, 2000 in Insolvency Proceedings (the Regulation ) in so far as they concern corporate insolvency. The Regulation relates to proceedings involving the winding-up of insolvent companies or other legal persons. The preamble to the Regulation recognises the impracticability of introducing uniform insolvency measures across the Member States of the EU and enables the main insolvency proceeding in respect of a company to be opened in the Member State where the company has its primary place of business. The Regulation aims to cover all of the company s assets and permits - 8 -

10 secondary proceedings to be opened to run in parallel with the main proceedings such secondary proceedings being opened in the Member State where the company in question has a place of establishment. The Regulation applies to a company with a branch or assets in more than one Member State but does not apply to companies with subsidiaries in other Member States. From an Irish perspective insolvency proceedings covered for the main proceedings are a creditors voluntary liquidation, compulsory winding-up by the Court and examinership. However, secondary territorial proceedings cannot be opened in the context of examinership. Dated: September, 2007 Author: Etain de Valera - 9 -

11 Contact Us If you have any queries or would like further information relating to the matters addressed in this article, please contact the persons listed below: Etain de Valera Financial Services or any of your usual Dillon Eustace contacts at the following locations:- Dublin 33 Sir John Rogerson s Quay, Dublin 2, Ireland. Tel: Fax.: Cork 8 Webworks Cork, Eglinton Street, Cork, Ireland. Tel: Fax: Boston 225 Franklin Street, 26th Floor, Boston, MA 02110, United States of America. Tel: Fax: Tokyo No. 14, 11th Floor, Business Centre Yurakucho, Yurakucho Building, Yurakucho, Chiyoda-ku, Tokyo , Japan. Tel: Fax: website: 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 above matters, please refer to the contacts above or your usual contact in Dillon Eustace. Copyright Notice: 2007 Dillon Eustace. All rights reserved

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