Winding Up Explained
Published in Business Plus Magazine November 2015
PJ LYNCH of PJ Lynch & Co explains what’s involved when directors decide to terminate their business venture.
There are many reasons why companies are wound up and go into liquidation. If a company has no further function or its directors want to retire, the directors can wind up the company as a Members’Voluntary Winding Up pursuant to Section 580 of the Companies Act 2014. This also can be a tax-efficient way for the directors to wind up a company.
In this process, the directors have a duty to make an accurate declaration of solvency. The declaration must state the total amount of the company’s assets and liabilities (within the last three-month period) and that a full inquiry into the affairs of the company has been carried out by the directors, who have formed the opinion that the company will be able to pay its debts and other liabilities within the next 12-month period.
Another reason for voluntary liquidation is when a company faces severe competition in the marketplace that can cause its demise, leaving the directors with no option but to cease trading and place the company in liquidation.
The directors may initiate the Creditors Voluntary Winding Up procedure pursuant to Section 586 of the Companies Act 2014. The directors must hold a creditors’ meeting and ensure that appropriate information is made available to the creditors. If default is made by the directors of the company in having a full statement of the company’s affairs together with a list of creditors laid before the creditors’ meeting, the directors will be guilty of an offence.
Competition in the marketplace that can cause its demise, leaving the directors with no option but to cease trading and place the company in liquidation.
For companies in financial distress, the golden rule is to seek professional financial advice. Most importantly, the company should 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 crucial that the person nominated to be liquidator should be a specialist in the insolvency field. He or she should be a licensed insolvency practitioner registered with the Irish Auditing and Accounting Supervisory Authority (IAASA).
In a financial distress situation, directors need to be careful about paying creditors. One of the most common reasons directors land in legal trouble is when one creditor is paid off in preference to another.
Where a company has not paid its due taxes, the Revenue Commissioners as a preferential creditor can petition the courts to wind up the company. This can lead to serious consequences for the directors, including restriction or disqualification by the High Court. This is commonly known as hostile liquidation, a process that is unpleasant for all those involved.