Insolvency

Whereas CVLs (creditors voluntary liquidation) deal with insolvent companies, MVL (members voluntary liquidation) winding ups are in relation to the winding up of solvent companies. Some of the regular queries we receive are as follows:

Does a solicitor have to be involved in the winding up process?

No, since the Companies Act 2014, the winding up can be effected by Summary Approval Procedure, a more streamlined process (S579). In practice, the directors will sign the Declaration via the summary approval procedure vouching the company solvency.

What entities may use the E1-SAP?

The winding up process via E1-SAP may be used by LTD, DAC, ULC and PLC entities.

What is contained in the E1-SAP?

The document contains a summary of the assets and liabilities of the company (up to date within 3 months of the winding up date) and a declaration by a majority / all of the directors to the effect that the company will be able to pay or discharge its debts and other liabilities within 12 months after the commencement of the winding up.

Is the Liquidator the only professional required in the process?

No, the E1-SAP also requires an ‘Independent Persons Report’ (S208 Report) to state that the Declaration by the directors ‘is not unreasonable’. The independent Person must be a qualified statutory auditor when signing. Practically speaking, this means a statutory auditor with a current audit practicing certificate.

Can an accountant act for their own client?

Section 635 of the Companies Act 2014 prohibits an officer of the company from acting as a liquidator when they are or have been in the previous twenty-four months prior to the date of commencement of the insolvency appointment, auditor to any client. Furthermore, professional ethics code of the various accountancy bodies in the main outlines that a firm shall not take an insolvency appointment where audit related work was completed within the previous three years. 

Will the process require the participation of shareholders and directors?

Yes, while the directors will call the agenda and winding up meetings, and vouch the company solvency in the Declaration, it is the company members /shareholders who pass the majority 75% special resolution to wind up the company, and appoint the nominated liquidator – via unanimous written resolutions (S193) or majority resolution at an EGM (S194). The Form G1 signed by the director contains the said members’ resolution to be filed in the CRO.

Can the winding up be completed in one day?

It is often most practical and efficient to effect the winding up process in one day, in which case care must be afforded to ensure the winding up resolution is signed after the Declaration. The signatures will be date stamped to ensure the timeframe and order of the process in these cases.

Why is the liquidator requiring the shareholders to sign an Indemnity?

A signed indemnity expedites the process of shareholders receiving distributions. By indemnifying the liquidator for potential claims and costs arising in the liquidation, the liquidator can make a substantial First Distribution – rather than awaiting a number of months.

What forms are filed in the Companies Registration Office when the liquidator is appointed?

The liquidator will file the E1-SAP Declaration, G1 special resolution winding up forms and the Form E2 confirming their appointment. The liquidator’s office will also file a B2 change of registered address of the company.

Regarding CRO filing timeframe requirements:

Form 2                                     14 days

G1 Resolution                         15 days

E1-SAP Declaration               21 days

What is the Liquidators role and duties on appointment?

The various duties include:

-        Filing of notice of the MVL appointment in Iris Oifigiuil, and call in all creditors claims (to be filed within 14 days of appointment).

-        Take command of the company assets and realisations, and make an initial distribution to members.

-        Register for VAT if continuing a trade or if they have disposable assets.

-        Execute legal documentation regarding transfer of assets in specie.

-        Liaise with Revenue Commissioners, ensure all pre-liquidation returns are filed and obtain clearance that the company is not being subject to Revenue audit or queries.

-        Call Annual Meetings in circumstances where the liquidation is prolonged due to matters and file respective Forms to the CRO with reports (E3/E4s)

-        Make Final Distribution of realised funds to the members

-        Call the Final Meeting

-        Lodge details of Statement of Account (E5) and Final Meeting (E6) to CRO

Do all pre-liquidation returns have to be filed by the directors / company accountant in the lead up to the MVL winding up?

Late CRO returns do not have to be filed. Indeed, MVL is often a practical and cost effective solution of late filing companies who wish to be wound up, rather than undergoing statutory audits and VSO (voluntary strike off).

Revenue Returns (PAYE/VAT/CT) should be brought up to date, and this will have to be the case before the liquidator obtains clearance from the Revenue Commissioners (to wind up the liquidation).

In effect, the company accountant will have to prepare management (non-statutory financial statements up to a date of 3 months of the winding up – to form the basis for the figures therein, and to file Revenue returns up to the date of cessation of trading.

Can the company trade up to the winding up date?

Company directors will take the advice of their accountant or tax advisor in relation to the various CGT reliefs for disposing of company shares (Retirement Relief/ Entrepreneurial Relief). Some of these tax relief reliefs may require trade up to a recent date prior to the liquidation. It is important for the director/shareholders to obtain independent taxation advice as this is not the role of the liquidator who is impartial and cannot have conflicts of interest on appointment.

What are distributions in specie?

A distribution in specie refers to the distribution of an asset in its current form, rather then first liquidating and distributing the proceeds. It is a practice often used in the MVL process. For example, freehold property can form part of a distribution, and in such a transfer is exempt from stamp duty.

How long is the MVL process?

This depends on the matters and complexities of the liquidation, but for straightforward cases with only bank funds the process can be a matter of some months, after Revenue clearance is obtained, the Final distribution of funds are made, and the liquidator calls the Final Members Meeting (with 28 days notice) to close the liquidation.

When is the liquidation finalised?

After the Final Members Meeting, the liquidator will file the forms E6/E7 in the Companies Registration Office in accordance with Section 705 of the Companies Act 2014. The Registrar of the CRO will dissolve the company within a matter of months.

Can a wound up company ever be re-instated?

For a company dissolved following Liquidation, a court order is necessary to restore the company. The restoration application can be made under section 708 of the Companies 2014 within two years of the dissolution. This would have the effect of voiding the dissolution of the company and restoring it to a status of Liquidation.

For how long is the liquidator required to retain the company books and records?

Per Section 707, the books and records ‘shall be retained by the liquidator for a period of at least 6 years after the date of the dissolution of the company’.

This article is of a general nature in relation to Members Voluntary Liquidations. For professional advice, please contact our restructuring team at McCarthy Walsh on 01 444 4260 for trusted advice in confidence.

Directors Duties when a company is facing Insolvency

1)     Introduction

The definition of insolvency has two elements, negative net assets and the ability to pay debts as they fall due. Given the fact that many viable companies may have, and for various reasons, negative net assets, the true test is more often the liquidity or cashflow test – with common indicators being a judgment action / a creditor statutory demand or sheriff notice. In these circumstances directors have a duty to assess the business outlook and carefully consider next steps.

In the normal course of business, the directors in their capacity as stewards of the company, owe a certain amount of duties, and paramount among those are the fiduciary duties owed to the members/shareholders. However, when a company is deemed insolvent, the directors’ duties switch to act in good faith in relation to the creditors.

2)     Fiduciary duties

The Companies Act 2014 set on a statutory footing the fiduciary duties of company directors which were previously recognised only in common law.  Section 228 sets out the following duties of directors (6 of which are derived from common law and 2 of which were previously included in company law): https://www.irishstatutebook.ie/eli/2014/act/38/section/228/enacted/en/html

1.     To act in good faith in what the director considers to be the interests of the company;

2.     To act honestly and responsibly in relation to the conduct of the affairs of the company  (this duty was previously set out in law under section 150/628 of the Companies Act 1990);

3.     To act in accordance with the company's constitution and exercise his or her powers only for the purposes allowed by law;

4.     Not to use the company's property, information or opportunities for his or her own or anyone else's benefit (unless in specific allowed circumstances);

5.     Not to agree to a restriction of his/her exercise of independent judgement (unless in specific allowed circumstances);

6.     To avoid any conflict of interest between the director’s duties to the company and his/her own interests (unless in specified allowed circumstances);

7.     To exercise the care, skill and diligence which would be exercised in the same circumstances by a reasonable person;

8.     To have regard to the interests of the members of the company, in addition to the duty under section 224 to have regard to the interests of the company’s employees in general (this duty was previously set out in law under section 52 of the Companies Act 1990).

3)     Case Law

There has long been a deference to the interests of creditors in case law, in instances where the company is insolvent. In Re Frederick Inns (1993), subsequently endorsed by Swanpool (2006), the matter of director duties and the safeguarding of company assets on behalf of creditors were deemed paramount. Once a company is facing insolvency, it is imperative for the assets of the company to be dealt with in a manner designed to ensure the proper distribution of those assets in accordance with insolvency law.

In a seminal case in respect of directors of a liquidated company La Moselle Clothing (1998), approved by the Supreme Court in Re Squash Ireland (2001), the following tests were outlined with a view to assessing director conduct and whether they have acted responsibly:

(a)  The extent to which the director has or has not complied with any obligation imposed on him by the Companies Acts.

(b) The extent to which his conduct could be regarded as so incompetent as to amount to irresponsibility.

(c) The extent of the director’s responsibility for the insolvency of the company.

(d) The extent of the director’s responsibility for the net deficiency in the assets of the company disclosed at the date of the winding up or thereafter.

(e) The extent to which the director, in his conduct of the affairs of the company, has displayed a lack of commercial probity or want of proper standards.

4)     Liquidator Section 682 Report

A liquidator is prescribed to carry out an investigation into a liquidation and the antecedent causes for the company collapse, and the directors’ conduct. The report based on the investigation, will cover all persons who acted as director or de facto directors in the12 months up to the liquidation date.

The liquidator is obliged to file the Section 682 Report with the Corporate Enforcement Authority (CEA), and to set out the grounds for relief from the obligation to take Section 819 restriction proceedings to restrict the directors from acting as directors (or in more serious director derelictions of duty, disqualification proceedings).

One of the most important questions in the prescribed format of the Section 682 report is section 22 (f):

Has the Person demonstrated to you that s/he has acted honestly and responsibly in relation to the conduct of the Company’s affairs?
 
 The basis of the reply to this question will be borne out by the liquidator’s report and will include mention of a range of factors including the following conclusions from the liquidator’s investigation:

-        The causes of the liquidation

-        The date of insolvency of the company

-        Whether the company continued to trade, and the resultant deficit in assets

-        Whether the directors maintained proper books and records and management accounts

-        Whether the company was up to date with returns and compliance

-        Whether the directors sought professional advice

5)     Other relevant matters for liquidator Investigation:

Unfair Preference: further to Section 604 of the Companies Act, a liquidator will investigate preferential payments to creditors in the six months preceding the liquidation date (two years look back for transfers to connected parties)

Misappropriation of Assets / Phoenix Company: a liquidator will investigate any diminution of assets from a review of company records, including Phoenix company instances whereby tangible or intangible assets are sequestered away to a new company.

Books and Records: a liquidator will investigate whether the company has maintained proper books and records further to Section 282, and whether this contributed to the insolvency of the company, in which case the directors may be held personally liable.

6)     Director duties – new statutory duties

The CEA have recently published an Information Note 2023/1 (here) which set out the newly codified director duties for companies facing insolvency. The guidance is in response to The European Union (Preventive Restructuring) Regulations 2022 which transposes a recent EU directive concerning insolvent companies into Irish law.

Notably, the new directive highlights the interests of creditors in such circumstances, which are now placed on a statutory footing:

 “A director of a company who believes, or has reasonable cause to believe, that the company is, or is likely to be, unable to pay its debts, within the meaning of section 509(3), shall have regard to:

a) the interests of the creditors,

b) the need to take steps to avoid insolvency, and

c) the need to avoid deliberate or grossly negligent conduct that threatens the viability of the business of the company”

7)      Directors – a proactive approach

As detailed in the CEA publication, directors of insolvent companies have certain duties and obligations, and the interests of creditors are at the forefront. In this regard, there are various steps for directors to follow to ensure that in their stewardship of the company, they have acted honestly and responsibly. These measures, as referenced, include:

-        The maintenance of adequate books and records to appraise to true trading position of the company

-        Management accounts are prepared, being ‘‘Early Warning Tools’’ to decide on a course of action, and whether to continue or to cease to trade

-        The maintenance of budgets and cash flow projections

As well as the measures referenced in the guidance, it is imperative that directors convene regular Board meetings and to retain documentary evidence of the decisions and courses of action. To this end, directors will go a long way towards defending their decision making in light of subsequent insolvency investigations.

The CEA Information Note 2023/1 also highlights a number of restructuring mechanisms for companies in financial difficulties. ‘‘The earlier that a company can detect its financial difficulties and take appropriate action in response, the higher the probability of avoiding an impending insolvency or, in the case of a business the viability of which is permanently impaired, the more orderly and efficient the liquidation process is likely to be.’’

The restructuring mechanisms as referenced in the Information Note are:

Examinership: more details here -  www.mccarthywalsh.ie/services/insolvency

SCARP: more details here - www.mccarthywalsh.ie/scarp

Informal restructuring arrangements: Private restructuring arrangements are sometimes negotiated between a debtor and some, or all, of its creditors. These flexible and informal restructurings are not a matter of public record.

Schemes of arrangement:  Under Chapter 1 of Part 9 of the 2014 Act it may be possible for a company to enter a scheme of arrangement with its creditors. This allows a company to reach an arrangement with its members or creditors or any class of them.

The CEA Information Note places a certain emphasis on professional advice, and that directors of companies in financial distress should seek advice at the earliest opportunity. In this regard, the directors will be able to assess whether there is a potential rescue mechanism for the company, or whether the company should be wound up in an orderly manner. In addition, by following the director code and responsibilities, directors will go some way too to protect themselves from potential restriction proceedings.

This article is of a general nature in relation to directors’ duties in insolvent companies. For professional advice call our team at McCarthy Walsh are available on our confidential line 01 444 5260 for queries and advice.

The creditors meeting takes place at a place and time as advertised in the statutory notices (10 days notice by post to creditors and advertised in 2 daily newspapers) and is chaired by one of the directors who may be assisted by an accountant or legal advisor.
 
The purpose of the meeting is:
·       To lay before the meeting a Statement of Affairs of the company.
·       To ratify the nominated liquidator or to give the creditors an opportunity to appoint their own preferred choice of liquidator (outcome dictated by monetary claim of creditors ‘votes’ or proxies).
·       To give the creditors an opportunity to appoint a Committee of Inspection.
 

Why should a Creditor attend a Creditors’ Meeting?

·       To receive a Statement of Affairs and assess the likelihood of receiving a dividend from the Liquidator.
·       To ascertain if any stock left in company which may be recoverable under ‘Retention of Title’ clauses.
·       To nominate your own choice of Liquidator who will be independent and maximise your chances of recovery
·       To nominate yourself on the Committee of Inspection to whom the Liquidator has reporting duties, thereby keeping you informed of the status of the liquidation
·       To assess whether the directors have engaged in reckless trading, and whether there will be an action taken by the Liquidator personally against the directors, which would maximise your recovery.
·       To assess what other customers are hit by the company wind up, which can be useful commercial knowledge in a particular industry (i.e. risk of domino effect of bad debts)
It is in your interests that a competent Insolvency Practitioner attend the meeting on your behalf. A General Proxy form (or vote) is issued to creditors by post. This form must be returned to the company’s registered address by 4pm on the day prior to the meeting. It is important to receive advice on how to complete this form correctly.
 
Typical Questions to ask at a Creditors Meeting:

·       Who prepared the Statement of Affairs? (If the nominated liquidator has assisted with this, his independence is in question)
·       When did the company cease trading? (was there an orderly winding up?)
·       When did the directors realise the company was insolvent? (there may be an issue of reckless trading)
·       When were the last set of accounts filed at the CRO? (were proper books maintained?)
·       Were there Personal Guarantees in place re company loans? (this brings in the issue of preferential payments in the insolvency period)
·       Will the directors continue the business through another company? (this brings in the issue of the Phoenix Company syndrome and what assets are at stake which if purchased by the directors, must be an arm’s length transaction at market value.

For advice or respresentation at creditors meetings, please contact our restructuring team.

McCarthy Walsh

Chartered Certified Accountants

01 444 5260 

When a company is facing insolvency, it can be a difficult and stressful time for directors. Nonetheless, it is important that the directors seek professional advice to ensure that they meet their legal obligations and organise an orderly windup.