The Why and the What of Liquidation
In our ever growing economy why is it that there are still companies being wound up and going into liquidation…? There are many reasons which are summarized below:
Members’ Voluntary Winding Up
If a company has no further function or its directors want to retire, the directors should decide to wind the company up as a Members’ Voluntary Winding Up (MVL) pursuant to Section 580 of the Companies Act, 2014. MVL is a very tax efficient way for the directors to wind up a company. However at a meeting of the directors, it is most important that the majority of directors must, make a declaration to the effect that they have made a full enquiry into the affairs of the company and that the company would be able to discharge any remaining debts that are outstanding in full.
A company may face severe competition in the market place which can cause it’s demise and leave the directors of the company with no option but to cease trading and place the company in liquidation. The directors may initiate this procedure pursuant to Section 586 of the Companies Act, 2014 at an Extraordinary General Meeting resolving that the company cannot pay its debts and as a result cannot continue to trade, and that it be wound up as a Creditors Voluntary Winding Up.
One of the most common reasons you find is that the directors of a company have been giving unfair preference to creditors and in doing so have not paid other creditors. A simple example is, a company has not paid its taxes therefore, the Revenue Commissioners as a preferential creditor can take action to petition the courts to wind up the company. This can have very serious consequences for the directors of the company and can lead to restriction or disqualification by the High Court. This is commonly known as a hostile liquidation which normally is very unpleasant for all those involved.
Trading While Insolvent
A company is insolvent when its liabilities exceeds its assets, therefore, when a company continues to trade under these circumstance, it is trading illegally and recklessly. If the Directors of the company are knowingly a party to carrying on the business of the company in a reckless manner with the intent to defraud creditors then pursuant to Section 610 of the Companies Act, 2014 the directors can be held personally liable for the debts of the company.
Who should carry out the liquidation ?
It is always important to remember the golden rule, don’t wait until it’s too late, seek early professional financial advice. Your accountant or financial advisor should be able to advise you as to the process involved in placing the company in voluntary liquidation. Most importantly, the company must, only be liquidated if absolutely necessary. Should there be no alternative, ensure that there are no uncertainties regarding the action to be taken and any possible consequences. It is very important and actually crucial that the person nominated to be liquidator should be a specialist in the insolvency field. He or she should be a registered Insolvency Practitioner with the Irish Auditing and Accounting Supervisory Authority (IAASA).
Are there alternatives…? Deciding to put a company into liquidation can be a very stressful time for the directors, therefore the alternatives are:
An alternative to liquidation is to place the company in examinership to give breathing space of one hundred days. This will provide a lifeline to the company which can now refocus its activities and get its house in order while continuing to trade. Examinership normally deals with the debt incurred which helps the refocusing process.
This also allows the company to make an offer to creditors of the company, through the Examiner, without committing an act of insolvency, the company will be given a chance of survival by entering into an arrangement and/or compromise with creditors. If the company successfully exits examinership then it will be able to trade normally.
- Debt Restructuring
Debt restructuring can also be an alternative based on the company’s liquidity. Debt restructuring is a process which allows companies facing cash flow problems and financial distress to reduce and renegotiate its delinquent debts in order to improve or restore liquidity and rehabilitate so that it can continue to trade.
The Companies Act, 2014
The companies Act, 2014 which replaces the Companies Acts, 1963 to 2013 was signed into law by the president on 23rd December 2014 and came into effect on 1st June 2015. The new act is far more powerful than the Companies Acts of 1963 to 2013. It also restates, reforms, simplifies and realises Company law in Ireland.