Background
When a company is insolvent, the directors have a duty to protect creditors interests and to take restructuring advice, and this more often result in the company being wound up via a Creditors voluntary Liquidation (CVL).
One of the primary duties of an appointed liquidator is the realisation of the company assets, and in this regard the maximisation of funds proceeds on behalf of the creditors, for whom there may be a dividend, payable in order of strict legal priority per legislation (Fixed Charge, Super Preferential, Preferential, Unsecured Creditors).
It is imperative in these matters that the Liquidator attains best value on behalf of the creditors.
Some of the related matters which impact on the process are as follows:
Sale of Assets to Connected Parties
The directors of the liquidated company are often well placed to make an offer for the company assets. Save for more egregious cases and wrongdoing (where the directors may be subject to restriction proceedings), the directors are not proscribed from setting up in business again and acting as directors. Irish law recognises that directors have a right to earn a living and set up a company again. In these instances, equipped with certain skillsets and industry expertise, may often be in a position make a best offer to the liquidator for the business assets.
There are certain safeguards in legislation to guard against potential conflicts of interest, and to ensure that a liquidator’s transactions are transparent in the eyes of the creditors. Per Section 629 (3) of the Companies Act 2014, a Liquidator of a company should not sell by private contract a non-cash asset of the requisite value (not less than €500) to a person who is, or who, within three years prior to the date of commencement of winding up has been, an officer of the company - unless the Liquidator has given at least 14 days notice of their intention to do so to all creditors of the company who are known to them. An officer of the company includes a person connected, within the meaning of Section 220 of the Companies Act 2014, with a director.
www.irishstatutebook.ie/eli/2014/act/38/section/629/enacted/en/html#:~:text=(6)%20Subject%20to%20subsection%20(,any%20part%20of%20the%20company's
Phoenix Company
The phrase ‘Phoenix company’ refers to instances of a company arising out of the ashes of the old collapsed entity. The phrase, usually pejorative in tone, alludes to instances whereby delinquent directors may, for example, run down a company and liquidate the entity only to hive off some or all of the assets in a new company to operate forward. Any transactions in this regard would be under scrutiny from an appointed liquidator who would have a duty to investigate the books and records and director actions, and to take the necessary steps to recover the assets or funds. The directors in these scenarios would very likely too be subject to review regarding fit and proper conduct and reviewed in the context of whether they had acted honestly and responsibly in relation to the protection of the company assets on behalf of creditors. This would thereby impact on the S680 statutory report to the Corporate Enforcement Authority (CEA) with the likelihood of Section 819 restriction proceedings, depending on severity of matters in the case.
It should be noted that in the event that the directors have engaged with a Liquidator in good faith and communicated in full with all of the transactions being agreed, transparent and ‘above board’ at best realisable value, these matters regarding a controversial phoenix syndrome can be averted,
Prepack Liquidations
These mechanisms although popular in the UK are not as common in the Irish jurisdiction. A prepack liquidation occurs where a new company (‘'NewCo’') is set up to buy the assets of the old company (‘'OldCo’’) at a pre-arranged price. The OldCo is then liquidated.
It is imperative when utilising this mechanism to obtain an independent professional valuation for the assets being transferred. The assets of the company will include goodwill of the business.
Care needs to be afforded in relation to TUPE considerations (transfer of undertakings of employees). Furthermore, there may be GDPR issues in relation to the transfer of customer databases to the NewCo.
The Prepack option has many advantages – including an efficient and seamless transfer of assets, and less onerous fees than some of the alternative restructuring mechanisms. However there are a range of disadvantages including the forfeiting of trading loss credits, the directors being liable for PGs on overdrawn accounts, and the directors being subject to review in terms of liquidator mandatory report to the CEA. One of the foremost disadvantages has been the perception and optics of the mechanism which can be controversial with suppliers and stakeholders in an operating environment.
Alternative Restructuring Mechanisms
Examinership – This mechanism while perhaps the more costly of all restructuring mechanisms, affords court protection for a limited period of time to allow the examiner to assess the company viability together with a new investment of funds. This mechanism has the advantage of ridding the company of onerous legacy debt and saving the core of the business to trade forward. A major disadvantage from the business owner viewpoint, is that the examiner is bound to put forward to the court the best offer for the future outlook of the company, and this may mean that the current owners lose control of the business.
SCARP – The Small Company Administrative Rescue Process (‘‘SCARP’’) has been introduced to provide a quicker and more affordable restructuring option to small and micro businesses who are facing insolvency. SCARP is based on the key components of the examinership process, but is a more streamlined and quicker process without Court involvement. One of the advantages of the SCARP process, apart from the less onerous costs, is that the directors / business owners are less likely to lose control or be subject to regime change. In this regard, while restructuring the company and its legacy debt, the directors through the process advisor can utilise the mechanism to look to trade further with the assets and the nucleus of the business.
Practicalities of Sale
In liquidation or distressed asset sales, it will be a case of caveat emptor with the buyer purchasing the assets as seen without guarantees or warranties. The purchasing parties will carry out their due diligence in relation to the business and look to make offers to the Liquidator at the negotiation stage. A liquidation auction of business assets will usually be carried out via a sealed bid system and the liquidator reviewing best offers. The sale of liquidation assets / distressed assets may well invite the offers and counter offers, including from competitors in the market looking to increase market share. In all of the negotiations, the Liquidator / Insolvency Practitioner has a duty to obtain the best realisable offer on behalf of the creditors.
Conclusion
In each of these scenarios, we have looked at the aspect of the company directors maintaining the company resources or business assets in a liquidation or insolvency process. Of utmost importance in these scenarios is that the directors pay and are seen to pay best offer for the distressed assets, to guard against the diminution of creditors interests. In practical terms this means that all transactions should be transparent and above board, with notice issued to creditors, and the liquidator / Insolvency practitioner obtaining an independent valuation of the business assets.
As outlined, there are varying levels of control in terms of whether the directors can retain control of the business assets and resources while extricating the company from legacy debt using the different insolvency mechanisms.
This article is of a general nature in relation to buying assets from a liquidation and related mechanisms and related matters. For professional advice call our team at McCarthy Walsh are available on our confidential line 01 444 5260 for queries and advice.