Insolvency FAQ's

Frequently Asked Questions And Answers – a quick summary

Q What is the effect of liquidation on my company?

A Liquidation is the death of a company. It’s assets will be realised and distributed to its creditors. The liquidator will apply to have the company removed from the Companies Office Register.

Q What is the difference between a Receiver and a Liquidator?

A A Receiver principally works for a Debenture Holder (secured party) and can trade the company on. A Liquidator works for all creditors. A Liquidator is appointed by the court or by the shareholders by way of Special Resolution.

Q Are there any options available other than liquidation?

A Yes. A creditor compromise as described in Part XIV of Companies Act 1998 and soon to be introduced a new business rehabilitation regime.

Q What are my obligations as a Director once the company has been liquidated?

A A Director must cooperate fully with a Liquidator. A Director remains in office but has no powers.

Q Are my personal assets seized by the Liquidator?

A No. A Directors personal assets are separate to the company assets.

Q Am I allowed to be involved in another company?

A Yes, so long as you are not prohibited from being a director.

Q What is a Shareholders Current Account? What does it mean when it is overdrawn?

A A Shareholders Current Account records the advances and drawings made by or to the Shareholder. If the drawings exceed the advances then the account is overdrawn and can be collected by the Liquidator as an asset of the company.

Q I am a staff member and owed outstanding wages, will I get paid?

A Only if there is sufficient funds available from the sale of assets. Wages, are a preferred claim under the 7^th schedule of the Companies Act 1993 so they are paid prior to the unsecured creditors of the company.

Q What is a Preferential Creditor?

A A Creditor whose claim is described in the 7^th schedule of the Companies Act. The claim will rank above unsecured claims.

Q What is a Liquidation Committee?

A A Committee appointed by the creditors at a creditors meeting. A Committee may meet with and assist the Liquidator during liquidation. Members of the committee may also raise the views of the creditors with the Liquidator.

Q As a Director can I be held responsible for any debts of the company?

A Yes, if you have breached your directors duties outlined by the Companies Act 1993.

Q How Does Someone Wind Up A Company?

A. Court Appointed Liquidation

This process is started when a creditor of a company issues a demand on a company for the debt owed to it. Demand is made under Section 289 of the Companies Act and will give the Debtor 5 working days with which to satisfy the creditor by either paying the debt, providing a charge over property to secure payment or compounding the debt or entering into a Part XIV compromise.

If the creditor is not satisfied within the timeframe it may then go on to issue court proceedings on the assumption that failure to comply with statutory demand means that the company is unable to pay its debts and is therefore insolvent.

Liquidation proceedings are commenced by filing a notice of proceeding, a statement of claim and a verifying affidavit in the High Court. It is important to ensure the Statement of Claim is correct. Refer to the High Court rules and terms for further guidance. All the above documents must then be served on the company.

Notice of the Liquidators proceedings must also be advertised. There are strict requirements for advertising this notice. Again refer to the High Court rules for further information.

If the debtor has still not repaid the debt or compromised with the creditor then the proceedings will be heard in court.

If the High Court Master is satisfied that the debt remains unpaid and the debtor has not offered any argument to the court then the master make an order winding the company up. If the creditor has provided the court with the consent of a private practitioner to act as Liquidator then that Liquidator will be appointed. In all other cases the High Court will appoint the Official Assignee as Liquidator.

Once appointed a Liquidator will contact all parties that have had a relationship with the company. These include the Directors/Shareholders, Company Accountant and Solicitor with the intention of collecting all the available records and also to build a picture of the trading history of the company and identify assets that will need to be seized and sold for the benefit of the Creditors.

OR Voluntary Liquidations

A company may be wound up voluntarily by the passing of a resolution by the shareholders of the company. This resolution places the company into liquidation under Section 241(2)(a) of the Companies Act 1993. The liquidator will consent to be appointed and begin the administration process.

OR Receiverships

The appointment of Receivers represents the most common method by which secured creditors recover monies owed to them, if the monies are secured by way of a charge over the assets and undertaking of the company.

Therefore a Receiver is working principally for the secured creditor who appointed them.

Appointments of receivers are governed by the provisions provided in the security document generally called a debenture. The provisions will define the defaults which when occur allow the appointment procedure to begin.

Debentures generally require the debenture holder to make demand on the debtor before appointing a Receiver. The demand must be served on the registered office of the debtor company, or an officer of the company, or an authorised person of the company.

(Note: under the new PPSA regime an individual person can now give a debenture – like security over their present and future assets. Prior to this commencement of the PPSA only a company could give this type of security, therefore a Receiver could now be appointed over the assets of an individual).

If the demand is not acted on in the given timeframe, the debenture holder could appoint a Receiver. Even though the Receiver is working for the debenture holder, a receiver will try and determine whether or not they are dealing with a saleable or profitable business. The best return to the secured party will be by selling the business as a going concern or trading the business on with better controls over paying the debenture debts off in full over time.

A Receiver is able to manage the company under the powers bestowed on them under Section 14 of the Receiverships Act 1993.

A Receiver will also have regard for the interest of the unsecured creditors at the date of their appointment, and will act in good faith to ensure the best result for all concerned.

It is important to note that a Receiver is simply an agent of the company to which they are appointed. Accordingly they are not personally liable for contracts they negotiate on behalf of the company if they decide to trade on. Nor are they liable for decisions made regarding pre-receivership contracts, unless it can be shown that the decision was in the wrong interest for the company and its creditors.

A company can be in Liquidation and Receivership at the same time. A Receiver will continue their work for the debenture holder and once completed the Liquidator will finish off the final work to have the company struck off. If the company is not in liquidation at the time the Receiver completes their work, then the company is not struck off the register, which allows unsecured creditors to continue pursuing the company for debts owed if they so wish. However, there is generally very little left for a Liquidator to seize and creditors need to be aware that they will invariably receive no payments from the Liquidator.