Q. My wife and I are owners and directors of a trading company. The company has been badly hit by current economic conditions and we do not envisage our trade recovering. The company’s balance sheet position has deteriorated rapidly and assets only slightly exceed liabilities. Our main asset is the premises from which the company trades but which is owned by us personally. This is subject to a large mortgage which we are struggling to pay and we are currently in default. If we continue trading it is unlikely that we will be able to meet our liabilities. I was told that our creditors or the bank could liquidate the company. Is this true? If so what are our options and what does the liquidator do?
A. I strongly recommend that you seek professional advice before taking any course of action. I have summarised the major issues you should be aware of. More detailed information is available on the ODCE website www.odce.ie In particular Information Book 7 examines this whole area.
Most debentures (written loan agreements ) created in favour of an institutional lender provide that the bank is entitled to take possession of a property where a default occurs. The bank can take control of the asset that has been mortgaged and sell it and use the proceeds to discharge the debt. As you have already defaulted on your payments, it is likely that your bank could take control of your premises and arrange its sale.
When selling assets, the bank should generally exercise all reasonable care to obtain the best price for the property. Any surplus made on the sale must be paid back to you, but if there is a deficit, the debt remaining is a personal liability for you.
If the company can’t continue as a viable trading venture, your best alternative is for it to go into liquidation. Liquidation is where the company is legally dissolved. It involves ceasing the activities, realising the assets, paying creditors to the extent possible, and distributing any surplus funds to members. However, your company going into liquidation is probably a breach of your loan agreement thereby permitting the bank to take possession of your property.
Types of Liquidation
There are two types of liquidation voluntary and compulsory. Voluntary liquidations are either members’ voluntary liquidations or creditors’ voluntary liquidations. From the information provided, your company is currently solvent but is unlikely to remain so. If your company is solvent, you could choose to have it liquidated as a members’ voluntary liquidation.
A members’ voluntary liquidation occurs where the members of a solvent company decide to end its existence. The process begins by passing a special resolution at a general meeting and by appointing a liquidator.
As director’s you and your wife would be required to make a “Declaration of Solvency”, this states that the company will be able to pay its debt within 12 months of commencing the winding up. Where a company is actually insolvent, as directors you can be made personally liable for some or all of the debts.
Where the company is not able to pay its debts within 12 months of the winding up, a members’ voluntary liquidation is converted into a creditors’ voluntary liquidation. Alternatively where the company is unable to pay its debts the shareholders can opt to have the company wound up as a creditors’ voluntary liquidation, from the beginning.
Where there is a creditor’s voluntary liquidation, a liquidator is appointed and the company calls a meeting of its creditors. The meeting should be advertised with at least 10 days notice in two or more daily newspapers.
The directors must prepare a ‘Statement of Affairs’ to present to the creditors detailing the financial position and listing all creditors and their claims. At the meeting, the creditors can replace the nominated liquidator with their own liquidator where a majority in value wishes to do so. The creditors will also consider whether to appoint a Committee of Inspection.
The final type of liquidation is a compulsory (official ) liquidation, ordered by the High Court. The company, its members, or its creditors can make a petition to liquidate the company. If you are unable to pay your debts, your creditors (particularly those to whom the company owes sizeable sums ) can instigate proceedings through the High Court to have the company liquidated. It would be more beneficial to you, if you were to take a proactive stance and initiate the liquidation yourself.
Once a liquidation commences, the company must cease to carry on its business and the directors’ powers will cease.
The liquidator must distribute the proceeds from the disposal of the company’s assets in the following order: secured creditors, costs and expenses of liquidation, preferential creditors, floating charges, unsecured creditors and company shareholders.
Alternatives if the business has a reasonable prospect of survival —
Companies facing insolvency can apply to the High Court to appoint an Examiner. Where an Examiner is appointed, the company is placed under the protection of the court, meaning its creditors are prevented from instigating proceedings against it. For a company to be placed under examinership, the court must be satisfied that there is a reasonable prospect of survival. This is a costly process and for that reason alone it is unlikely that your company could successfully apply to be put into examinership.
It may also be possible to negotiate a scheme of arrangement; this is where you agree with creditors that you will pay a percentage of your debt rather then the whole amount. This type of agreement is made binding by the High Court. Seven per cent of your creditors in value must agree to it.
Your final option is to put in place an informal arrangement. This is where you independently approach your creditors and outline a proposal of how you can deal with either part or all of their debt eg extending the timeframe for payment. There is however the risk that a creditor who does not agree to your informal arrangement could instead instigate liquidation proceedings.
Both a liquidator and indeed a receiver can bring proceedings against directors or other persons, for fraudulent or reckless trading, thereby making them responsible for the company’s debts. Criminal liability can also be imposed. An individual is deemed to be guilty of reckless trading where he was carrying on the business and knew or should have known that continuing trading would cause loss to the creditors or where when contracting a debt by the company he didn’t honestly believe that the company would be able to pay the debt when it fell due.
You said that your assets currently exceed your liabilities but you do not expect them to do so in the future. You could be guilty of reckless trading if you continue to trade in the knowledge that the company may be unable to satisfy its debts.