Examinership, Liquidation and Receivership are the three main insolvency schemes in Ireland; they are provided for in Part VII and Part VIII of the Companies Act 1963 as amended in 1990.
The main differences between examinerships, liquidations and receivership are outline below; Examinership Examinership is a process where a Company that is insolvent or likely to become insolvent may be placed under the protection of the Court for a period of up to 100 days so as to enable the Examiner to formulate a settlement with creditors which is then presented to the Court for approval.During the protection period, no action may e taken by creditors to enforce their debts or their security against the Company in general terms. No Liquidator or Receiver may be appointed. There may be no attachment or execution of Judgements during this period. There may be no action to realise security or repossess goods other than goods held by way of retention of title.Essentially, there is a freeze on most creditor remedies against the company so that the company is given a breathing space during which the Examiner may formulate a potential rescue plan which hopefully may be of benefit not only to the company but to its entire body of creditors. It is usually the directors of the company who apply to the Court to put the Company into Examinership.
However, the company itself or shareholders holding not less than 10% of the issued share capital or any creditor may also apply. l An application to appoint an examiner to a company should be commenced by way of petition in the High court.Every petition for the appointment of an examiner must be verified by an affidavit which in most cases is sworn in by the petitioner. Section 3(9) of the companies (Amendment) Act 1990 says that the High Court may on the making of such interim orders or such other orders as the court ay think fit, remit the matter to the circuit Court where the liabilities of the company do not exceed ?‚¬317500. 2 According to Sinead McGrath the presentation of the petition must be based on principle of uberrima fides which requires that the utmost good faith on part of the petitioner. Liquidation Liquidation as opposed to Examinership is the process of winding up a company so that it no longer exists by using its assets to pay its debts. Michael Forde quotes B.
H McPherson who defines liquidation as the process of whereby the assets of the company are collected and realised, the resulting proceeds are applied in ischarging all its debts and liabilities and any balance that remains after paying costs and expenses of winding is distributed among the members according to their and interest or other ways according to the constitution of the company. The liquidation options available to a company depend on whether it’s solvent or insolvent and whether it enters it voluntarily or not. The two principal forms of liquidation are Voluntary liquidation and Compulsory liquidation. Voluntary Liquidation can take two forms members voluntary liquidation or Creditors voluntary liquidation. In the case of a Members Voluntary Liquidation, the company must be solvent and any debts to creditors must be paid in full.In a Creditors Voluntary Llqulaatlon, tne Dlrectors ana Memoers 0T a company aec10e to place tne company in Liquidation due to the fact that it is insolvent and is incapable of discharging its debts.
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Compulsory Liquidation is usually instigated when a Creditor petitions the Irish Court for a winding-up order. If the Creditor makes out a case to the Court, the company will be placed in Compulsory Liquidation. Section 213 and 205 of the 1963 Act set out grounds under which court may decide to appoint a receiver.Receivership In contrast to the above two Receivership is an insolvency scheme initiated by secured creditors usually a bank, seeking to recover unpaid loans.
A Receiver is appointed, pursuant to the terms of the original loan agreement, for the purpose of recovering the money owed to the creditor. The principal task of the receiver is to realise those assets and distribute the proceeds to the debenture holder in accordance with the provision of the Companies Acts.Receivership is used as a means of reimbursing creditor but more as to salvage their viable parts for the benefit of those involved. The appointment ofa receiver crystallises floating charges to become fixed charges and prevents company directors form dealing with company assets covered by the receivership without the consent of the receiver.
6 JOG and POG as PETZ Ltd directors have an overall responsibility of ensuring that the company is in compliance with company legislations.It is important to note that the two directors may be possibly in breach of different forms of company laws as noted below: Proper keeping of books of Accounts First it is worth noting that there may have been a breach of section 202 to 204 of the Companies Act 1990 which replaced the section 147 Of the 1963 Act. These sections of the Act require all companies to keep proper books of Accounts, which books must give a true and fair view of the state of the affairs of the company and explain its transaction. Section 203 provides that if in the event of winding-up a company is unable to pay its debts and it is discovered that it has contravened section 202 , and if court considers that such contravention has contributed to the company’s inability to pay all of its debts or has resulted in substantial uncertainty as to the assets and iabilities of the company or has substantially impeded the orderly winding up thereof, every officer of the company who is in default shall be guilty of an offence and liable. JOG and POG in this scenario as company directors failed to comply with the above section and may be guilty of an offence under section 202(1) of the Companies Act 1990. They will need to prove if taken to court that they had reasonable grounds for believing that a competent and reliable person was in charge with the duty of ensuring that those requirements were observed, which is not the ase in this situation because their financial Controller had departed in the recent months.Reckless Trading Secondly there is a possible breach of section 297A (a), (b) of the companies (Amendment) Act 1990 by the directors of PETZ.
The section allows officers of companies such as JOG and POG to be held personally liable without limitation for the debts of the company where they either: knowingly carried on business of the company in a reckless manner or knowingly carried on any business fraudulently wltn an Intentlon to aeTraua crealtors. y I ne autnorlty In tnls sectlon can arise nytime in solvent or insolvent companies imposing criminal liability on persons found guilty of reckless trading.However, Court in this situation will take into account whether PETZ creditors such as Rainbow Ltd were aware of PETZ financial state of affairs at that time of supplying goods or not. In addition the question of whether reckless trading was objective or subjective will have to be determined if JOG and POG are taken to court.
The test of what is considered as subjective was laid down in Re Hefferon Kearns Ltd [1992] l. L. R. M 5110, Lynch J. explain the intent and meaning f the word Knowingly as it is used in section 297A of the Act.
He referred to the case of Shawinigan v Vodkins (1961) 1 W. L. R. 116511, where reckless was defined to mean gross carelessness and doing something which in fact involves a risk whether the doer realises it or not. On the other hand the objective test was given in the same case in Re Hefferon Kearns ltd [1992], Lynch J. lamented that “the objective nature of the test of recklessness is emphasised by subsection (6) of Section 297A which presupposes that a director may be reckless, although he acted honestly and responsibly.
That it is to be assumed on the basis of what they ought to have known and not merely on what they in fact knew. Merely continuing with the business when that fact involves unjustifiable risk and causes loss to creditor is enough. “12 Basing on the fact of this scenario both JOG and POG ought to have known that their company was in financial distress for some time and the test above may be applied to them and probably the could be guilty of reckless trading.
In addition the undervaluing of the company assets the proposed sale of the company van worth ?‚¬30,000 to Dodgy Ltd which offering ?‚¬5,000 may as well constitute a breach of iduciary duty if the directors go ahead and accept the offer from Doggy Ltd. Actions which may be taken by the official liquidator against the JOG and POG The official liquidator is one that is appointed by court in a compulsory winding up. 13 If the official liquidator in this case is satisfied that PETZ Ltd is insolvent due the breaches of law by its directors is obliged to bring an application under Section 150(1) of the Companies Act 1990.A restriction under Section 150 of the Companies Act 1990 will prevent a director of a company from becoming directors, secretaries or promoters for five years from the wind up. 4 Restriction orders can be made in respect of directors of insolvent companies in winding up because of an inability to pay their debts, who are directors at the date of winding up or who were directors within 12 months of the commencement of winding up.In Re Gasco Ltd 1 5the court held that, “the aim of Section 150 is to deal with directors who behaved irresponsibly of dishonestly during the 12 months prior to winding up. The directors. ” behaviour will be assessed to as it was in Re Squash (Ireland) Ltd.
the Supreme Court held that the director’s behaviour throughout his tenure would be assessed. 6 The defences to a Section 150 application are provided by Section 150(2), acting honestly and responsibly in relation to the company’s affairs and there is no reason that it is Just and equitable that he should be restricted as a director.The person was only a director by appointment of a financial institution and there was no personal guarantee from that director. And the director was appointed by a venture capital company in connection with the purchase of shares. According to Sinead McGrath the liquidator may apply to court for an orders directing that the directors be held ersonally llaDle to contrlDute to tne assets 0T tne company tnat Is In llqulaatlon.
/ The liquidator will to show that JOG and POG breached their fiduciary obligations, breached the duty to maintain proper books of accounts under section 202 of the 1963 Act and fraudulent or reckless carried on business contrary to section 297A Of the Companies Act 1963. Disqualification Order Under Section 90 and 160(4) of the Companies Act 1990 the liquidator may apply to Court to disqualify individuals from acting as company Directors for a period of five years.The Disqualification Order is automatic where a person is convicted of an ndictable offence in relation to a company, or any offence involving fraud or dishonesty. Where the Court is considering imposing a Disqualification Order the criteria to be applied was stated in Re Readymix Limited (2002) as follows “The primary purpose of the section is not to punish the individual but to protect the public against the future conduct of companies by persons whose past records as directors of insolvent companies have shown them to be a danger to creditors and others.Ordinary commercial mis-Judgment is in itself not sufficient to Justify disqualification. In the normal case, the conduct complained of must display a lack of ommercial probity, although I have no doubt that in an extreme case of gross negligence or total incompetence disqualification could be appropriate.
“18 In this case the liquidator may apply to court to have the directors of PETZ Ltd disqualified form acting as company directors or secretaries.Actions a liquidator could take against the directors if the Rainbows Limited debt is discharged in full. The whole purpose of winding up a company is to pay off the creditors, according to their priorities, and to distribute what remains among the investors according to their rights to repayment of capital and participation in any surplus.After the holders of a fixed charge have been paid the order of payments to be made by the liquidator is as follows; liquidator’s fees and expenses, preferential creditors’ claims among which are 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 of equal footing and members or contributories to the Company.
The liquidator will have to take action to recover all the sum paid to Rainbow Ltd as credit settlement because, according to the law and he information given Rainbow Ltd does not seem to be a secured creditor who deserves to paid first before all other creditors such as the Revenue Commission. The liquidator should also know that he has certain obligations under Company Law to report to the Office of the Director of Corporate Enforcement on how the affairs of the company were conducted by the directors.In some instances this can result in individuals being restricted or disqualified from acting as company directors in future. In extreme cases directors may be made personally liable for some of the debts of the company. Section 231 (d) of the 1963 Act gives the liquidator power to pay any classes of creditors in full. 19 He could bring action against the directors of for discharging the debt in full yet in fact according the law they were not supposed to so because they fairly knew that their company was insolvent.Actions a liquidator could take against the directors if they sell the van to Dodgy Ltd One primary role played by the liquidator in both voluntary and involuntary liquidation is the investigation of the affairs of the company before and after the commencement of tne wln01ng up In order to reallse tne true assets 0T tne company.
I nls Is Decause It is the duty of the liquidator to maximise the company Assets available for the distribution to creditors, contributories and members. 0 If a liquidator discovers questionable and at times unscrupulous company transactions, for example in this case if the sale of one the company vans worth ?‚¬30,000 for ?‚¬5000 takes place, the Liquidator has powers under section 286 of the companies Act 1963 (as amended by section 135 of the 1990 Act) to apply to court for an order declaring the sale void as a fraudulent preference and seeking the return of the company property, However this ay not affect the rights of Dodgy Ltd if they can prove that they are bon fide purchasers who did not notice any fraudulent preference.The liquidator will have to prove to court that among other reasons that the company was insolvent at the time of the transaction and the transaction occurred within six months of the winding up of the company in order for the court to declare the sale void and order the return of the van if it is sold to Dodgy Ltd. Breach of Fiduciary Duty In addition the liquidator may as well bring action against the directors for breach of Fiduciary Duty for not only selling company Van below market value but also below the net book value.It would be very difficult for the directors of PETZ Ltd to argue that they acted in accordance with their fiduciary duty to the company. If an action is to taken against them subsequent to such a disposal of property it could be argued by the liquidator that as the directors acted in breach of their fiduciary duty and they should be personally accountable to the company for such a difference in the actual value of the Van and the sum realised after the sale to Dodgy Ltd. Advise to RainbowsLimited on the options available to it and the steps that must be taken if it wishes to place PETZ into liquidation; In reference to Section 214 of the 1963 Companies Act,21 the first option Rainbow Ltd has is to issue a “21 Day’ letter to PETZ Ltd.
PETZ Ltd will have three weeks to pay any such sum demanded, otherwise the company will be deemed to be insolvent. It must be noted however that if a petition is to be issued pursuant to Section 214 of the Companies Act 1963,22 Rainbow Ltd will have to prove the debt is undisputed or else the petition may be struck out by the court.If Rainbow Ltd does not receive an adequate response to their letter, they might immediately proceed with a High Court Petition under section 215 of the 1963 Act to wind up the company, and in relation according to the law if the directors of PETZ Ltd continue trading without honouring demands of a 21 days letter may amount to reckless trading.
Secondly Rainbow Ltd May initiate a Creditor’s Voluntary winding up. In a creditors’ winding up PETZ Ltd will be obliged to summon a meeting of the creditors.A creditors’ voluntary winding up arises in two circumstances; where the company is nsolvent and an ordinary resolution is passed under section 256(1) (c) or where the members winding up is converted to creditors’ winding up.
The creditors must receive at least ten days’ notice and their meeting must be held on the same day or the day after the meeting of the members at which the resolution for voluntary winding up is to be proposed. 23 The steps that must be taken if Rainbow Ltd wishes to place PETZ into liquidation; The procedure is provided for under sections 214-250 of the 1963 Act (as Amended), and under the Winding up of Companies S. 121 of 2012. 4 The general procedure consists of the service of a demand for payment on the company followed by an application to the High Court for the appointment of a llqulaator IT tne aemana Is not pal a. Inls aemana Is Known as a sectlon 214 letter.
PETZ Ltd will have twenty one days to pay the liability set out in the Section 214 letter, failing which, Rainbow Ltd can apply to the High Court for appointment of a Liquidator or provisional Liquidator. If court finds it fit to issue a winding up order, then Rainbow Ltd must deliver a copy of the order to the registered office of PETZ Ltd.On Being Appointed the liquidator publish that fact in the Irish Oifigiuil and also deliver a copy of the order to the registrar companies. A statement of PETZ Ltd affairs that has been verified by one or more of the company members must be filed in court, Rainbow Ltd is entitled to inspect this statement.
At this stage Rainbow limited may live the affairs of PETZ Ltd to be conducted by the Liquidator; however as creditors of the company being wound up they will need to prove their debt to court in order to be considered for payment.On application of the liquidator and provided hat the winding up is complete, court will order that PETZ Ltd be dissolved and will direct how the company books and papers will be disposed of. 25 In summary examinerships, liquidations and receiverships are the main schemes are the three main insolvency schemes in Ireland. Directors of PETZ Ltd may be found liable of many companies Law offence including Reckless trading, improper book keeping, breach of fiduciary duty among others and may be disqualified and restricted from acting as company directors for a period of five years if found guilty of the above.
REFERENCES: Bibliography; Michael Forde Company Law 3rd edn Round Hall Sweat & Maxwell Dublin Sinead McGrath Company Law Dublin Thomson Round Hall 2003. Case Law; Re Gasco Ltd unrep High Court Feb 5 (2001) Re Hefferon Kearns Ltd [1992] l. L. R. M 51 Re Readymix Limited (2002) Re squash (Ireland) Ltd [2008] 2 ILRM 420 Shawtntgan v vodktns (1961) 1 W. L.
R. 1165 Acts and Statutory Instruments; The Companies (Amendment) Act 1990 The Companies Act 1963 Winding up of Companies S. ‘ 121 of 2012 Online Websites; http://www. dillonkellycregan. ie/docs/ Examinerships_Receiverships_Liquidations_Legal_Taxation_Aspects_September_200 9.
