COURT WINDINGS UP AND THE COMPANIES ACT 2014

Transcription

1 COURT WINDINGS UP AND THE COMPANIES ACT 2014 Paper by Brian Conroy BL delivered on 15 June 2015 THE TRANSITION TO THE NEW REGIME 1. The vast majority of the provisions of the Companies Act 2014 ( the Act ) were commenced on 1 June 2015 on foot of SI 169/ The manner in which the Act s provisions are to take effect in relation to the typical case of a private company limited by shares is somewhat complicated. On the date of commencement of the Act the provisions of the prior Companies Acts were repealed, 1 and from that date forward all existing private companies limited by shares have since then been governed by the law applying to Designated Activity Companies (DACs) as set out in Part 16 of the Act. If no positive steps are taken to convert permanently to DAC status, at the expiry of 18 months from the commencement of the Act (i.e. on 1 December 2016) such companies will automatically convert to new model private company limited by shares (LTD) status and will be subject to the law applying to LTDs as set out in Parts 2 to 14 of the Act. Alternatively, such companies can voluntarily convert to LTD status on any date between the commencement of the Act and the expiry of the transition period by adopting a single-document constitution in the prescribed form. 3. All of the provisions relating to windings up, which appear in Part 11 of the Act (with the exception of one section) 2, apply to both DACs and LTDs. Therefore, to all practical intents and purposes, the new winding up provisions have applied to an existing private company limited by shares since 1 June See Schedule 2, Part 1 2 Section 665, relating to the liability of contributories on the winding up of a company, does not apply to DACs, as some DACs do not have a share capital but are limited by guarantee, meaning that the liability of members on winding up will be limited to the amount of their guarantee.

2 Transitional provisions in the Act 4. Schedule 6 of the Act contains several practically significant provisions relating to the manner in which the insolvency provisions will come into force. Sub-paragraph 8(1) of Schedule 6 states the following general proposition: Any thing commenced under a provision of the prior Companies Acts, before the repeal, by this Act, of that provision, and not completed before that repeal, may be continued and completed under the corresponding provision of this Act. 5. Therefore, for example, a liquidation commenced under the relevant provisions of the old Companies Acts prior to the commencement of the Act may be continued and completed under the relevant provisions of this Act. 6. Sub-paragraph 8(2) elaborates on this proposition in the context of winding up and examinership petitions, providing that: any petition presented for the winding up of a company or the appointment of an examiner to a company before the repeal of the provision concerned of the prior Companies Acts but not disposed of before the commencement of the corresponding provision of this Act may be proceeded with and heard under that corresponding provision and, likewise any subsequent act, application or proceeding in any such matter commenced but not completed before the corresponding provision of this Act is commenced may be so done, proceeded with or heard. 7. Thus, for example, a winding up petition presented on 23 May 2015 and made returnable to 15 June 2015 is be disposed of by the High Court applying the provisions of the Act rather than the old law. 8. The above provisions are qualified to some extent by sub-paragraphs 3 and 4 of Paragraph 8. Sub-paragraph 3 applies such that, for example, in a case where a liquidation has begun under the old law but has not been completed as of the date of commencement of the new Act: 2

3 the court concerned shall, subject to subparagraph (4), have jurisdiction to make whatever order it thinks appropriate for ensuring the smooth transition from the law and procedure under the prior Companies Acts to the law and procedure under this Act (that is to say, this Act and the rules of court as they have been brought into conformity with this Act as mentioned in section 564(4)) and that jurisdiction of the court shall extend, in a case where a liquidator has proceeded to take substantive steps in a winding up ordered by the court before the commencement of the relevant provision of Part 11, to making a direction that the functions of the court officer known as the Examiner that were performable under the rules of the court, before they were so brought into conformity, shall be performable in that winding up. 9. As explained below, the role of the Examiner of the High Court in court liquidations will effectively be abolished under the Act, and the supervisory role of the High Court in such liquidations will be greatly reduced. In the interests of continuity and administrative efficiency, it would appear preferable in ongoing liquidations for the Examiner s role to continue pending the dissolution of the company and for the prior legislation to apply to the completion of the liquidation, as the Court is permitted to direct under subparagraph 3. It is suggested that the proper course in most ongoing court liquidations, particularly where the liquidation is close to completion, will be for the Court to direct that the Examiner s role in the liquidation should continue and for the old law to apply to the liquidation pending the company s dissolution. 10. However, the power of a court to make a direction as set out in subparagraph 3 is expressly made subject to sub-paragraph 4 of paragraph 8, which states: In exercising the jurisdiction referred to in subparagraph (3), the court shall bear in mind the extent to which a power of a liquidator that is exercisable under the relevant provisions of Part 11 and also was exercisable under the relevant provisions of the prior Companies Acts may be exercised without the sanction of the court under the first-mentioned provisions. 3

4 11. It is unclear what effect this provision should have on the exercise of a Court s discretion as to whether to grant a direction under sub-paragraph (3). Since Part 11 of the Act provides for the exercise of the vast majority of a liquidator s powers in court windings up without the leave of the Court, it would appear that the legislative intention here is that judges should lean in favour of not directing that the relevant provisions of the old law should apply so as to require the leave of the court for the future exercise of a liquidator s powers in ongoing liquidations, where the relevant provisions of the new Act do not require the leave of the Court for the exercise of such powers. However, the wording of this paragraph appears not to have been properly thought through by the legislative draftsman and it remains to be seen how it will be applied by the High Court in practice. 12. Significantly, under sub-paragraph 5 of paragraph 8, the new provisions relating to the remuneration of liquidators set out in Part 11 of the Act will not apply to liquidations commenced under the prior legislation. The remuneration of liquidators in ongoing liquidations will continue to be governed by the relevant provisions of the prior Companies Act and applicable Rules of Court. This means that in court liquidations begun prior to the commencement of the Act the sanction of the High Court will continue to be required for the payment out of a liquidator s remuneration. KEY PROVISIONS OF PART 11 OF THE ACT Overview 13. Part 11 of the Act consolidates, modernises and reforms the law relating to the winding up of companies, and spans 166 sections (Sections 559 to 724, inclusive). The chapters are grouped in a sequence which follows, so far as possible, the stages of a winding up from initiation to completion. Many sections re-enact provisions which appeared in the prior legislation, but changes of great practical significance have been introduced in several areas. 14. Part 11 seeks to introduce greater consistency between the provisions governing voluntary windings up (particularly creditors voluntary windings up) 4

5 and those relating to court-ordered windings up. A range of procedures in respect of which different rules applied in voluntary windings up and official liquidations, respectively, under the prior legislation, now apply to both voluntary and court initiated windings up. This means that court-appointed liquidators now have similar freedom of action to that possessed by voluntary liquidators under the former legal regime. There is now relatively little court supervision of court-appointed liquidators. This reform is based on the views of the Company Law Review Group. The Company Law Review Group explained this change as follows: 3 Broadly, the approach has been to place court-ordered windings up as far as possible on the same footing as creditors voluntary windings-up once the order for winding-up is made, reducing the court s supervisory role in favour of greater involvement for creditors. This should in turn reduce the significant costs associated with compulsory liquidations and increase the funds available for distribution among creditors while at the same time affording creditors a more direct influence upon important decisions in the conduct of such liquidations. 15. One by-product of the reduction in the role of the Court in relation to courtappointed liquidators is the deletion of the terms official liquidations and official liquidator from the legislation. The concept of an official liquidator no longer appears to exist under the Act, and a liquidator appointed by the court ought instead to be termed a court-appointed liquidator. 16. As prescribed by Order 74 of the Rules of the Superior Courts 1986, the Office of the Examiner of the High Court had an extremely important administrative and supervisory role in respect of court initiated liquidations. However, as part of the reduction of the court s role in court windings up, the role of the Examiner in court liquidations has now effectively been abolished pursuant to the Act, as the Act directs the. 4 There is no reference to the Examiner at all in the new Rules of Court in relation to official liquidations. The abolition of the Examiner s role arises from the reduction of the High Court s role in official liquidations implemented in Part 11. This change is of 3 Page 58 of the Company Law Review Group s 2007 Report on the General Scheme of the Companies Consolidation and Reform Bill. 4 Section 564(5) 5

6 huge practical significance, as all court applications in respect of official liquidations were processed through the Examiner s Office, and insolvency practitioners dealt with the Examiner on a regular basis. It would appear that court applications in liquidations pursuant to this Act will be processed through the Central Office of the High Court, but it is envisaged that there will henceforth be little court involvement in liquidations after the winding up order is made. As stated above, however, official liquidations initiated prior to the commencement of the Act ( legacy cases ) may continue to be administered through the Examiner s Office where the High Court so directs pursuant to Schedule 6, paragraph 8 of the Act. 17. A large number of procedural rules governing windings up which formerly appeared in Order 74 of the Rules of the Superior Courts 1986 are incorporated into statute by way of this Part. However, the Superior Court Rules Committee was explicitly mandated to amend the relevant rules of court so as to bring them into conformity with this Part as soon as may be after the passing of the Act. 5 New Rules of Court have recently been signed. Winding up petitions 18. Under the prior legislation the minimum debt in respect of which a 21-day demand had to have been served by a creditor petitioning to wind up a company on the basis that it was deemed unable to pay its debts was a sum in excess of 1, The minimum threshold has now been increased to a sum exceeding 10,000. A procedure has also been introduced whereby a group of two or more creditors who are owed amounts aggregating in excess of 20,000 may serve a joint demand and thereafter petition on foot of same The Company Law Review Group had recommended the new procedure whereby groups of creditors owed a sum exceeding 20,000 may jointly demand and petition on the basis that given the costs involved it would enhance the efficacy of the provision for groups of small creditors similarly to be enabled to initiate the same process. Notwithstanding the reference to small creditors in the Company Law Review Group s recommendation, it would appear that groups of creditors may avail of the new procedure 5 Section 564(4). This has not yet happened at the time of writing. 6 Section 570 6

7 irrespective of whether the amount owed to each individual creditor concerned is large or small. It is not entirely clear whether a petition on foot of a joint demand will have to be brought jointly by all creditors identified in the demand. Certainly, it would seem to be the case that such a petition would have to be brought jointly by at least a sufficient number of the demanding creditors to prove that the sum due and owing remained in excess of 20,000 as of the date of the hearing of the petition, as it is difficult to see how a court could be satisfied that a debt owed to a creditor not joining in the petition remained due and owing. 20. A perusal of the forms in respect of winding up petitions and advertisements thereof set out in the new Rules indicates that those forms remain largely unchanged from the prior forms, save that the title should refer to In the Matter of the Companies Act Exercise of liquidator s powers 21. One consequence of the move towards greater consistency between voluntary and official liquidations is a reduction in the role of the court in overseeing the exercise by an official liquidator of his powers. Under Section 231(1) Companies Act 1963 a liquidator appointed by the court required the sanction of the court (or, in the limited cases where a committee of inspection was in place, the committee) to take any of the steps enumerated therein, which included: Bringing or defending any legal proceedings in the name of and on behalf of the company; Carrying on the business of the company; Appointing a solicitor; Paying any class of creditors in full; Compromising claims with purported creditors; Compromising all calls and liabilities to calls. 22. Liquidators in all modes of liquidations, including court liquidations, are now permitted to take the steps listed above 7 without seeking the leave of the 7 Along with a range of other steps as enumerated in the Table to Section

8 court or of the committee of inspection. The principal safeguard is to require notice of the exercise of any of the the powers in respect of which the sanction of the court was formerly required (under s 231(1) CA 1963) to be given to the creditors or committee of inspection (or, in the case of members voluntary windings up, to the members) within 14 days after the date of such exercise. 8 A number of specified parties, including the liquidator, any contributory or creditor of the company or the Director of Corporate Enforcement, are empowered to apply to court to determine any question arising in the winding up of a company, including any question relating to the exercise or proposed exercise of any of the liquidator s powers The prior position in relation to official liquidations was that, as a matter of practice, liquidators would often seek the sanction of the court for the exercise of certain powers exercisable in law without the sanction of the court (for example, the power to sell property of the company). Hence, in Re DR Developments (Youghal) Limited 10 Finlay Geoghegan stated: in practice, by reason of the fact that the exercise of such powers are made expressly subject "to the control of the court" and the right of application given to creditors and contributories in s. 231(3) and the general obligations in relation to achieving the best price, court approval is often sought for significant sales. 24. It is as yet unclear whether in practice liquidators will continue to seek the approval of the Court by applying under s 631 of Part 11 in respect of significant sales and/or the exercise of the powers concerning which the sanction of the Court was formerly required under s 231(1) CA Notably, there is no equivalent in Part 11 to that portion of s 231(3) CA 1963 which expressly made all of the powers of a court-appointed liquidator listed in s 231 subject to the control of the court, an omission which may encourage liquidators to proceed without an application to court unless the exercise of the power in question is viewed as particularly sensitive or controversial. 8 Section 629(1) 9 Section [2012] 1 ILRM 374 8

9 Requirement for insurance 25. Pursuant to s 228(a) CA 1963 the Court was empowered to fix the security to be entered into by a liquidator following his appointment (the requirement for security was invariably dispensed with in practice upon a liquidator satisfying the Court that he had satisfactory professional indemnity insurance). There is now no provision for the court to fix security. Instead all liquidators are now required to hold professional indemnity insurance in a minimum amount prescribed pursuant to regulations made by the Irish Auditing and Accounting Supervisory Authority. 11 Qualification requirements 26. For the first time a requirement is introduced that liquidators (and examiners) be qualified, whether as members of a prescribed accountancy body, practising solicitors, members of other professional bodies recognised by the Irish Accounting and Auditing Supervisory Authority, or other persons with suitable experience. 12 It was partly as a result of the additional safeguards arising from the requirements concerning insurance and qualifications that the Company Law Review Group recommended that the court s role in supervising official liquidations be reduced. Fixing time for and proving claims 27. Under s 241 CA 1963 the Court was required to fix the time within which creditors were required to prove their debts or claims in an official liquidation. Pursuant to Order 74, rules 97 and 98 of the Rules of the Superior Courts 1986, an official liquidator was required to investigate the debts and claims and furnish to the Examiner s Office a list of all debts and claims, distinguishing between those debts and claims properly allowable without further proof (to be identified on affidavit) from those in respect of which proof was required. It was then for the Examiner to adjudicate the claims on the basis of the list supplied. 11 Section Section 633 9

10 28. Liquidators in all liquidations are now empowered to ascertain the debts and liabilities of the company without any intervention from the court. 13 Furthermore, the liquidator is now empowered to fix the time within which creditors are to prove their debts or claims, subject to the entitlement of a creditor to apply to Court on notice to the liquidator to extend the time fixed. 14 Settling list of contributories 29. Pursuant to s 235 CA 1963 it was a matter for the court to settle the list of contributories in an official liquidation, while this role was reserved to the liquidator in voluntary liquidations pursuant to s 276(1)(c) CA The power to settle a list of contributories and the ancillary powers relating thereto are now reserved to the liquidator in all modes of winding up, 15 while the liquidator also has the power to adjust the rights of contributories. 16 Court appointed liquidators also have power to make calls on contributories, a power which was reserved to the court under s 238 CA However, a residual power to apply to court to make calls on contributories remains. 17 Supervision by creditors rather than by Examiner 30. Under Order 74, rules 32 and 48 of the Rules of the Superior Courts 1986, an official liquidator was required to lodge accounts of receipts and payments with the Examiner s Office on a periodic basis as determined by the Court. There is no similar requirement under in the new Rules of Court. Instead, liquidators in both official liquidations and creditors voluntary liquidations are required, if the winding up continues for more than 12 months, to summon a meeting of the creditors or of the committee of inspection on 7 days notice after each anniversary of the date of the commencement of the winding up. 18 The liquidator is required to lay before that meeting an account of his acts and dealings and the conduct of the winding up during the preceding year 13 See the Table to Section 627, paragraph 3, though there remains a residual entitlement to apply to Court for directions in respect of the exercise of this power. 14 Section Section Section Section Section 680(4) 10

11 and within 7 days of such meeting to send a copy of the account to the Registrar of Companies. 19 Fixing a liquidator s remuneration 31. The provisions in relation to fixing a liquidator s remuneration have been radically changed such that the procedure in respect of court liquidations and voluntary windings up is now the same. A two-stage process is now envisaged under which the terms upon which a liquidator is entitled to be remunerated (presumably covering his hourly charge-out rate, the hourly charge-out rates of staff members, the applicable percentage where he proposes to charge on a percentage basis or the overall amount of his fee where he proposes to be remunerated on a fixed fee basis) are agreed or fixed first, 20 and the actual amount to be paid out is agreed or fixed at a later stage The terms upon which a liquidator is entitled to remuneration may be agreed by a committee of creditors (where such exists) or approved by a creditors or members resolution. Before any such approval is given, the liquidator will be required to give particulars in writing to the creditors, the committee of creditors or the members of the terms upon which the liquidator proposes to be remunerated. If the required approval or agreement is not forthcoming on request, the liquidator must apply to court for approval of the terms upon which the liquidator has an entitlement to remuneration. All such steps must be taken as soon as practicable after a liquidator s appointment. 33. Where the terms upon which a liquidator is entitled to remuneration have been agreed or fixed, the actual amount of remuneration to be paid may again be agreed by a committee of creditors (where such exists) or approved by a creditors or members resolution, or may be fixed by the court or such person as the court may designate for that purpose. 22 Any dispute regarding the amount of remuneration to be paid may be referred to arbitration by agreement Section 680(5) 20 Section Section Section Section 648(1) and (2) 11

12 34. The legislation now lists a series of factors as follows to be taken into account in determining the terms of a liquidator s entitlement to remuneration or the amount of his remuneration: 24 (i) (ii) (iii) (iv) (v) the time properly required to be given by the person as liquidator and by his or her assistants in attending to the company s affairs; the complexity (or otherwise) of the case; any respects in which, in connection with the company s affairs, there falls on the liquidator any responsibility of an exceptional kind or degree; the effectiveness with which the liquidator appears to be carrying out, or to have carried out, his or her duties; and the value and nature of the property with which the liquidator has to deal. Priority of costs, expenses in liquidations 35. The position with respect to the priority of payments of costs, expenses, etc., in an official liquidation had formerly been set out in Order 74, rule 128(1), Rules of the Superior Courts 1986, whereas s 281 Companies Act 1963 had previously provided for the priority of costs in a voluntary winding up. 36. Those two provisions have now effectively been merged in a provision based on Order 74, rule 128(1), which provides that all costs properly incurred in the winding up of the company, including the remuneration of the liquidator, remaining after payment of the costs incurred in preserving, realising and getting in the assets, and, where the company had previously commenced voluntary winding up, the expenses allowed by the court in respect of that process, are to be payable out of the property of the company in priority to all other claims. 25 The order of priority of payment of costs and expenses is the same as was previously set out in Order 74, rule 128, with the insertion of a new provision listing as second in the order of priority any costs and expenses necessarily incurred in connection with the summoning, advertisement and holding of a creditors meeting in a voluntary liquidation under section Section 648(9) 25 Section 617(1) 26 Section 617(2) 12

13 Where third party has provided funding for liquidation costs 37. New provisions in Part 11 state that a person who has provided funds to discharge costs in a liquidation (except those relating to the initial creditors meeting and the statement of affairs) shall be entitled to be reimbursed to the extent of the funds provided in the same order of priority as to payment out of the property of the company as would otherwise have applied had those costs not been discharged by such person. 27 The Company Law Review Group had considered this issue in the context of how liquidations might be funded in cases where it is clear that there are insufficient assets to cover the costs of liquidation. Having stated that [o]ne possible approach would be to improve the position of a creditor who was willing to assume the risk of funding the liquidator s work in advance, the Group ultimately recommended that a creditor who, with the liquidator s consent, provides funds to discharge fees, costs or expenses incurred by the liquidator should be entitled to reimbursement of those funds from the assets of the company in the same priority as currently attaches to the category of outlay for which the funds are provided Any such arrangement whereby some or all of an official liquidator s costs were defrayed by another party interested in the liquidation required disclosure to and the sanction of the High Court under the previous legislation due to the potential conflict of interest arising (Re DR Developments (Youghal) Ltd). It may be that that leave will still be required to enter an arrangement of this nature because, while there is no such requirement under Part 11, any such arrangement might otherwise be held to fall foul of Order 74, Rule 36 of the new Rules, which continues to provide as follows: A liquidator, or any member of the committee of inspection of a company, or any other person employed in or in connection with the winding up of the company shall not under any circumstances whatever accept from or arrange to accept from any solicitor, auctioneer or other person connected with the company any gift, gratuity, remuneration, emolument, or pecuniary or other consideration or benefit whatever in addition to or apart from such remuneration as he may properly be entitled to under the provisions of the 27 Section 617(3) and (4) 28 Para , 2 nd Report 13

14 Act or this Order; nor shall any such person so employed as aforesaid give up or arrange to give up to any such solicitor, auctioneer or other person any portion of his proper remuneration. Dissolution of company 39. Under s 249 CA 1963, in official liquidations the Court was empowered to order the dissolution of a company on an application brought by a liquidator in that behalf where the affairs of that company had been completely wound up. In a court liquidation the Court can now require a final orders application to be made to the Court by the liquidator at such time as it appears to him that the affairs of the company have been completely wound up. 29 If no order requiring such an application is made, liquidators in both official liquidations and creditors voluntary windings up are required to prepare a final account and present same to a general meeting of the company and a meeting of the creditors, giving 28 days notice of same. The account and a return of the meetings are to be lodged with the Registrar of Companies within 7 days after the meetings. The company is to be deemed to be dissolved on the expiration of 3 months after the date of registration of the account and return. Accordingly, in the absence of a court order requiring a final orders application to be made, the court will have no involvement in the dissolution of the company, irrespective of the mode of liquidation at issue. Leave of court required to commence proceedings against company in liquidation 40. Pursuant to section 222 of the Companies Act 1963, no actions or proceedings could be brought against a company which had entered official liquidation or in respect of which a provisional liquidator had been appointed except by leave of the court, but no such leave was required in order to proceed against companies in voluntary liquidation. Under this Part leave of the court is required to proceed against any company in liquidation, whether official or voluntary. 30 This is in keeping with the general move towards harmonising the law applying to the different modes of winding up, although it differs from many of the other provisions of Part 11 of the Act in requiring more, rather than less, court supervision. 29 Section Section

15 Notice of creditors meeting in voluntary liquidation 41. There are new provisions in the Act applying to the contents of the notice to be sent to creditors 10 days in advance of the creditors meeting in a creditors voluntary liquidation. 31 The core additions to the existing practice is that the notice must state the name and address of the persion proposed for appointment as liquidator and either attach a list of the creditors of the company or notify the recipient of his or her right to inspect or obtain a copy of the list of creditors upon written request. The introduction of a requirement to include the name and address of the persion proposed for appointment as liquidator and a list of the creditors with the notice was recommended by the Company Law Review Group in order to give more information to creditors in the case of a creditors voluntary liquidation. 32 Effect of appointment of Provisional Liquidator 42. Section 626 sets out the powers of provisional liquidators and replaces section 226(2) of the Companies Act 1963, which had empowered the Court to limit and restrict his powers by the order appointing him. While a strict literal intepretation of s 226(2) had appeared to grant a provisional liquidator all the powers of a liquidator subject to the restrictions placed on same by the court, the view in practice was that the provisional liquidator only had the powers granted him by the court. Section 626 confirms that a provisional liquidator only has the powers granted him by the court. In case of doubt as to the scope of his powers, a provisional liquidator can apply to the court for directions under s 631(1) of this Act. 43. Section 626(2) is a new provision. The Companies Acts were previously silent as to the effect on directors powers of the appointment of a liquidator by the court (whether provisional or not). However, it had been understood on foot of UK authority that, in the absence of contrary orders, the appointment of a provisional liquidator operated to suspend the powers of the directors such that they became functus officio and their powers were assumed by the provisional liquidator. 33 The court is now empowered to tailor the extent to which a provisional liquidator s appointment interferes with the 31 Section See para , Second Report 33 Re Mawcon Ltd [1969] 1 WLR 78 15

16 continuing powers of company officers pending the making of a winding up order. 44. The Company Law Review Group recommended the inclusion of this subsection on the basis that it was intended to facilitate the continuation of the running of a respondent company a normally as possible while securing or preserving its assets. 34 Arising from this provision, it is important that a court order appointing a provisional liquidator should now specifically deal with the effect of the appointment on the powers of company officers. In the absence of restrictions being placed on the powers of company officers the provision seems to imply that officers will retain their original powers. 35 ************************************************************************************************ 34 See the Company Law Review Group s commentary to Part A11, Head 62 of the General Scheme of the Companies Bill published in See also s 677(3), which specifically excludes the case of the appointment of a provisional liquidator from the provision ceasing the powers of directors upon the appointment of a liquidator. 16