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We’re coming in! Don’t shoot!

The credit crunch is causing an increase in company liquidations. The Office of Director of Corporate Enforcement has noted, in its latest Press release, the occurrence of 40 company insolvencies in April 2008 compared with 30 per month in late 2007.

Insolvency is the condition of being unable to pay debts as they fall due (“the cash flow testâ€?). This condition can hold even though the company assets exceed its liabilities. (The assets may be “lumpyâ€?, like land or buildings, leaving the company cash-poor).

Liquidations may be voluntary or compulsory (under court management following petition to the court). Voluntary liquidations may be a members’ liquidation or a creditors’ liquidation. The former implies solvency, the latter implies insolvency.

It is often in the interests of the directors that an insolvent company be liquidated. Not to do so can result in acts of reckless trading or fraudulent trading leading to successful applications for restriction or disqualification of the directors under Sections 150 and 160 of the Companies Act 1990. The directors of an insolvent company have a duty to act in the interests of the company’s creditors. This will, at a minimum imply that no further credit be taken and that the assets of the company not be reduced pending the decision to call a creditor’s meeting to seek a resolution to wind up the company.

There can be struggles between the directors and creditors or a creditor. In Hayes Homes Limited [2004] IEHC the Revenue Commissioners were the principal debtor. They applied to court for an order to compulsorily wind up the company. The directors had convened a meeting of creditors and declined to recognize the proxy of the Revenue representative at the meeting. The successful application to court was, effectively, for the purpose of displacing the liquidator appointed at the creditors’ meeting with one appointed by the court.

The High Court took an opposite point of view in Permanent Formwork Systems Limited [2007] IEHC Here, the creditors meeting appointed a liquidator on the very morning of the hearing of the petition in the High Court. The petition had been presented before the directors took steps to call the creditors’ meeting. The court dismissed the petition, taking the view that the “creditorsâ€? liquidator was independent and that process would be cheaper than the court directed liquidation.

The stress and pressure of events leading to a liquidation can be extreme. In Compuserve Limited [2005] IEHC a prominent firm of solicitors was consulted by the directors immediately before the liquidation. The solicitors were pleading they fell within the provisions of Section 281 of the Companies Act 1963:-

All costs, charges and expenses properly incurred in the winding up, including the remuneration of the liquidator, shall be payable out of the assets of the company in priority to all other claims.�

The solicitors failed to get payment before the liquidation and lodged a claim asserting a right to be paid out of the costs of the liquidation. The court declined to order this. Their fees had been incurred before the liquidation not “..incurred in the winding up..â€?

An issue similar to this featured in USIT World plc [2003] IEHC. The court recorded;

A sum of €250,000 was transferred to the companies’ solicitors, Reddy, Charlton & McKnight, from subsidiaries of Usit World which were debtors of Usit Limited, and that this was done in the certain knowledge that a winding up petition was imminent, and where the effect was to deprive the company of this sum. This sum was transferred one day before the appointment of the provisional liquidator. That firm of solicitors had acted for the Usit Group. The liquidator states that when asked about this, Mr Colleary has stated that these solicitors had asked for an advance of fees in relation to all the work done in relation to the work being done regarding the Solgun deal (this was the transaction by which the company was bought by STA). Mr Colleary had stated to him that the money was sought from all the subsidiaries but that payment was actually made by the subsidiaries in Portugal, Spain and Belgium, directly into the account of Reddy Charlton McKnight. The reason given for this method of payment is given by Mr Colleary in a memo to the liquidator, that the Group had no access to money in Ireland because of the issue that had arisen with National Irish Bank and it was unable to write a cheque in Ireland. The liquidator is of the view that this payment had the effect of depriving Usit Limited of €250,000 of receivables in a context where the directors must have known that a winding up petition was imminent. The liquidator has also made reference to a further payment to that form of solicitors of €70,000 in January 2002 and has not discovered where that money came from.”

The liquidator suggested to the court that this payment was a preferential payment. The court stated;

His [Mr. Colleary] concerns, and rightly so, are for the creditors. However, large and all as this payment to the solicitors is, it is small relative to the scale of the company’s enterprise and to the overall losses to creditors. That is relevant to the extent that one can consider an imaginary situation where the payment was not made, and form a judgment as to whether in such a scenario any meaningful difference for the better would have accrued to any one creditor if the payment was not made. This answer is in my view obvious. I do not consider this payment to have been irresponsible in the light of what has been averred to, and the extent of the problems looming ahead for all concerned.”