Corporate Insolvency Options – Part 1: Liquidation

This is the first of a four part series of articles considering various corporate insolvency and restructuring options.

Part 1: Liquidation – of which there are three types – Members Voluntary Liquidation, Creditors Voluntary Liquidation and Compulsory Liquidation
Part 2: Schemes of Arrangement and Compromise
Part 3: Examinership
Part 4: Receivership

If you are a business owner, director, creditor, there are certain scenarios you will have to consider or that you may face if the present economic conditions persist.

It is a not a case of one size fits all. Each has to be considered according to the circumstances and facts as they present themselves.

PART 1: LIQUIDATIONS

Liquidation is the process of bringing a company to an end.

Liquidations arise in three scenarios: (i) members voluntary liquidation, (ii), creditors voluntary liquidation and (iii) compulsory liquidation.

Members Voluntary Liquidation

• The company is solvent;
• The members of the company resolve to wind up the company’s affairs and bring the company to an end;
• There may be a variety of reasons for this including the retirement of the directors or that the company has fulfilled the purpose for which it was incorporated and there are no future plans to trade;
• The procedure to wind up is pursuant to the Summary Approval Procedure in accordance with the Companies Act 2014 or as provided for in the constitution of the company (fixed duration company or occurrence of specific event);
• A members voluntary liquidation can become a creditors voluntary liquidation in certain circumstances (details below).

Creditors’ Voluntary Liquidation

• The company is insolvent;
• A company is deemed insolvent if it is unable to pay its debts as they fall due;
• A creditors voluntary liquidation is initiated:-

– by the company resolving at general meeting that it cannot by reason of its liabilities continue its business, this is usually at the recommendation of the directors; or
– where a liquidator appointed to a members voluntary liquidation considers that the company is not in fact able to pay or discharge its debts or other liabilities as they fall due within the 12 months after the commencing of the members voluntary liquidation; or
– by court order where one fifth of the creditors of the company at least in number or value are of the opinion that the company is unable to pay it debts as they fall due; or
– on deployment of the Summary Approval Procedure in accordance with the Companies Act 2014 or the adoption of a resolution general meeting (in the case of a company incorporated for a fixed purpose or fixed duration) approving a members voluntary liquidation where the relevant declarations are not made in accordance with the provisions of the Companies Act 2014.

• A creditors meeting is held;
• A statement of affairs is presented to the creditors meeting by the directors;
• A list of creditors names, addresses and the amount of their claims is also presented;
• Creditors have an opportunity consider nominating an alternative liquidator.

Compulsory Liquidation

• Applied for by way of petition to the High Court to wind up the company;
• Typically the company is insolvent but court ordered liquidation could also arise where the company is solvent;
• The petition can be brought by the company, a creditor or contributory or the Director of Corporate Enforcement;
• There are various grounds upon which a court may make an order to wind up a company; the most common being, the company is unable to meet its debts as they fall due or it is just and equitable for the court to do so.
• In some instances, if the company is shown to be solvent, it may be appropriate for the court to order that the liquidation proceed by way of a members voluntary liquidation.

We have already witnessed an increase in the number of liquidations in many sectors but in particular the retail sector in recent months.

When the various subsidies and schemes which the government have put in place can no longer be supported, the true gravity of the effect of Covid-19 on the Irish economy will become apparent and tough decisions will need to be made.

For further information contact Elaine McGrath emcgrath@reddycharlton.ie