1 Issues Arising When a Company is in Financial Difficulties

How does a creditor take security over assets in Ireland?

Under Irish law and practice, security is normally taken over assets by means of a contract between a creditor and a debtor that certain or all of the assets of the debtor may be appropriated by the creditor towards the satisfaction of a debt in the event of default by the debtor of its obligations under a loan or other agreement. The following is a summary of the most common forms of security created by companies in Ireland:

(a) Fixed Charge: An Irish company may agree to provide a creditor with fixed charge over a specific asset to secure compliance by the creditor with its obligations under a loan agreement with a creditor. In order for a company to create a fixed charge, the charged property must be specifically identifiable. A fixed charge does not involve a legal or beneficial transfer of ownership of the secured to the creditor.

(b) Mortgage: A mortgage involves the transfer (or conveyance or assignment) of the legal title to property from a debtor to a creditor by way of security, subject to an express or implied term that the property will be transferred back to the debtor when he has fulfilled his obligations (usually the repayment of the capital and interest).

(c) Floating Charge: A floating charge is an equitable charge which hovers over the assets, or over a class of assets, of a creditor until the occurrence of an event of default, whereupon the floating charge will crystallise. Upon crystallisation, the charge fastens onto the charged property or class of property and becomes a quasi-fixed charge.

(d) Pledge: A pledge is a transaction under which a debtor delivers possession of goods to a creditor to be retained by the creditor as security and for as long as the debtor has unsatisfied obligations to the creditor. A pledge confers a power of sale upon a creditor in the event of the debtor defaulting.

(e) Lien: A lien is a right given to a person, under a contract for the provision of services, to retain possession of goods belonging to another until being paid for his services. Liens may arise in a number of ways but in all circumstances it is the possession and delivery of goods which is crucial in determining the existence of a lien.

1.2 In what circumstances might transactions entered into whilst the company is in financial difficulties be vulnerable to attack?

Transactions entered into by Irish companies that are insolvent, or that are likely to become insolvent, can be subsequently challenged in the following circumstances:

(a) Fraudulent preference: Section 286(1) of the Companies Act, 1963 seeks to prevent a preference of one creditor over another by a company. A preference arises where an insolvent company enters into a transaction which puts a creditor in a better position than that creditor would have been in if the transaction had not taken place. Preferences within six months prior to the company's liquidation can be overturned. This time limit is extended to two years where the disposal was in favour of a connected party.

(b) Disposals having a fraudulent effect: Section 139 of the Companies Act, 1963 provides that where a disposition by a company that is in the process of being wound up has had the effect of perpetrating a fraud on the company its creditors or members, the High Court may "if it deems it just and equitable to do so", order the return of the property to the liquidator, examiner or receiver on such terms or conditions as the Court sees fit. There is no requirement to prove fraud on the part of the transferor or the transferee, merely that the effect of the disposition was to perpetrate a fraud.

(c) Disposals with fraudulent intent: Section 74(3) of the Land and Conveyancing Reform Act 2009 provides that any conveyance of property made with the intention of defrauding a creditor or other person is voidable by any person thereby prejudiced. It is not a prerequisite to an action under Section 74(3) of the Land and Conveyancing Reform Act 2009 for it to be shown that the transferor company was insolvent at the time of the disposition.

(d) Invalidation of floating charges: Section 288(1) of the Companies Act, 1963 provides that floating charges created in the twelve months prior to the commencement of a winding up shall, unless it is proved that the company was solvent immediately after the creation of the charge, be invalid except as to fresh monies advanced.

(e) Incapacity of the directors: In the decision of the Irish Supreme Court in Re Frederick Inns, the Court held that where the directors of an insolvent company are aware or ought to have known of its insolvency, they hold the assets of that company in trust for the benefit of the company's creditors. Any disposition can give rise therefore to an obligation to return the property received in circumstances for instance where the recipient was aware of the insolvency of the transferor.

1.3 What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in Ireland?

(a) Potential civil liability of directors:

Under Irish law, directors (which term includes non-executive, de facto and shadow directors (including bodies corporate)) can, under certain circumstances, be held personally liable to contribute to, or for all of the debts of, insolvent Irish companies. Those circumstances include the following:

(i) Fraudulent or reckless trading: Any officer of a company can be made personally liable, without limitation, for all or any part of the debts or other liabilities of the company where the Court is satisfied that, while an officer of the company, that person was knowingly a party to the carrying on of any business of the company in a reckless manner or was knowingly a party to the carrying on of any business of the company with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose.

(ii) Declaring a company to be solvent without reasonable grounds: Where the members of a company have resolved to windup a company on the foot of a statutory declaration by the directors that the company is solvent, but it subsequently emerges that the company was insolvent at the time of that declaration, and the Court is satisfied that the directors did not have reasonable grounds for believing the company to be solvent at the time of the declaration, the Court can, if it thinks it proper to do so, declare any director who was made the declaration of solvency to be personally liable for all or any of the debts or other liabilities of the company as the Court may direct.

(iii) Misfeasance or breach of duty: Where a company is being wound up and any officer of the company (or any person who has taken part in the formation or promotion of the company) has been guilty of any misfeasance or other breach of statutory duty, fiduciary duty or trust in relation to the company, the Court may compel restoration of any funds misapplied or retained or may require a contribution from that person by way of compensation.

(iv) Failure to keep proper books: In an insolvent liquidation where there is a failure to keep proper books of account for a company, any officer of the company may be held personally responsible, without limitation of liability, for the debts or other liabilities of the company where the Court considers that such a failure contributed to the company's inability to pay its debts or has resulted in substantial uncertainty as to the assets and liabilities of the company or has substantially impeded its orderly winding up.

(b) Potential criminal liability of directors: A director (which term includes non-executive, de facto and shadow directors (including bodies corporate)) of an insolvent Irish company can, under certain circumstances, be subject to criminal sanction. Those circumstances include:

(i) Fraudulent trading: Any person (including a director) who is knowingly a party to the carrying on of the business of a company with the intent to defraud creditors of the company or any other person or for any fraudulent purpose is guilty of a criminal offence under Irish law.

(ii) Failure to keep proper books and records: A director shall be guilty of a criminal offence if he or she is shown to have (A) failed to disclose information or to have withheld books, records or information from a liquidator of a company, (B) falsified any such information, or (C) failed to keep proper books and records of a company.

(c) Potential restriction / disqualification:

(i) Restriction of directors: Section 56 of the Company Law Enforcement Act, 2001 provides that the liquidator of a company must make a report on the conduct of the directors (which term includes non-executive, de facto and shadow directors (including bodies corporate)) to the Director of Corporate Enforcement within 6 months of his appointment. Once such a report is made, the liquidator must bring an application under Section 150 unless the Director has relieved the liquidator of the obligation to do so. Where a director is restricted by the Court, for a period of five years he may not be appointed or act in any way directly or indirectly as a director or secretary of any company unless it, inter alia, meets certain minimum capital requirements. It is a good defence to any such an application for the director to show that he or she acted honestly and responsibly in relation to the conduct of the affairs of the company or that the person was a director solely by reason of his nomination by a financial institution or by a venture capital company.

(ii) Disqualification of directors: A disqualification order provides that the person shall not be appointed or act as an auditor, examiner, liquidator, receiver, director or other officer or be in any way directly or indirectly concerned in the promotion, formation or management of any company for a period of five years. Disqualification applications are usually brought at the same time as restriction applications but can also come about after the person is convicted of an indictable offence in relation to a company or one involving fraud or dishonesty.

2 Formal Procedures

2.1 What are the main types of formal procedures available for companies in financial difficulties in Ireland?

The principal corporate insolvency proceedings available under Irish law can be summarised as follows:

(a) Liquidation: Liquidation (or winding-up) is the formal procedure for dissolution of companies under Irish law. It involves the appointment of a liquidator whose function is to take control of all the property vested in the company, to realise the assets and if possible to pay the creditors. In fulfilling these obligations, the liquidator is subject to a varying degree of supervision by the Court, creditors, shareholders and the Director of Corporate Enforcement depending on the type of liquidation. At the end of the process of liquidation, the company is dissolved.

There are three different types of liquidation under Irish law: (i) compulsory liquidation by the Court - this type of liquidation is typically commenced by a creditor of an insolvent company by way of a petition to the High Court; (ii) creditors' voluntary liquidation - this form of liquidation is started by the directors of the company deciding that the company cannot, by reason of its liabilities, continue to trade; and (iii) members' voluntary liquidation - this is a winding-up by a liquidator initiated by the members of a company where the directors believe the company to be solvent, however, if, during the process, the liquidator forms the view that the company is in fact insolvent, the process will convert into a creditors' voluntary liquidation.

(b) Examination: This procedure involves a petition, by or on behalf of an insolvent company, to seek a form of Court protection, known as examination. A petition for the appointment of an examiner (a professional insolvency practitioner) can be brought by the insolvent company itself, by its directors, by any creditor or by certain shareholders, provided that (i) no members' resolution subsists, or order has been made, for its winding-up of the company, and (ii) a receiver has not been appointed over the assets of the company for more than three days. From the date of presentation of the petition, the company is effectively protected from any action which may be taken by its creditors including the commencement of winding-up proceedings, the appointment of a receiver, the attachment of assets, the repossession of goods under hire purchase or retention of title arrangements and generally, any action to realise security, except where the consent of the examiner is obtained.

The examiner's role is to bring forward proposals for a scheme of arrangement. The scheme of arrangement is formed following discussions with potential investors and usually has three components, new investment, a write-down of creditors' claims and/or a transfer of the entire issued share capital to the new investor. The proposals are then put to the different classes of creditors and are deemed to be accepted by that class of creditors if passed by a majority in value and number of that class of creditors. This period of protection is for an initial period of seventy days that can be extended by a further period of thirty days and the Court can further extend the period to allow it to arrive at a decision on the examiner's proposals. The Court can "cram down" or render the scheme binding on the company, its members and creditors if at least one class of creditors whose rights are affected has voted in favour of the scheme of arrangement. However the Court must be satisfied that the scheme is "fair and equitable" and not "unfairly prejudicial" to any objecting creditor. The general rule of thumb is that a creditor should not get less from the examination than it would from a liquidation. If the examiner cannot find new investment or otherwise brings forward proposals for a scheme of arrangement, he is under a duty to apply to Court to have the Court's protection lifted and the company will then either go into receivership or liquidation.

(c) Receivership: Receivership is a method of enforcing security. In general terms a receiver is appointed pursuant to a debenture/charge under which the secured creditor is entitled to appoint its own receiver for the purposes of realising the assets secured by the debenture where the company has defaulted in the repayments of the loan secured. A receiver can be appointed only over assets which have been charged. The appointment of the receiver does not change the status of the company and although the directors cease to control the charged assets, their normal powers and duties continue in respect of the other assets and liabilities of the company. The receiver's principal task is to realise the secured assets to discharge the debt owed to the secured creditor.

(d) Schemes of Arrangement: Sections 201-203 of the Companies Act, 1963 (as amended) allows a company to formulate proposals to compromise the rights of either members or creditors or any class of them and to petition the Court for an order approving any such scheme of arrangement. The Court is empowered to order the convening and holding of meetings of members or creditors or any class of them and to approve a scheme where a majority representing 75% in value of each class of creditors approve of the scheme. Such a scheme would be binding even on dissenting, absent or untraceable creditors. Schemes of arrangement are rarely used in insolvency scenarios because of the higher threshold that must be met for the scheme to be binding on dissenting creditors than in an examination. In an examination only one class of creditors whose rights are affected need vote in favour whereas in a section 201 scheme all classes must vote in favour.

2.2 What are the tests for insolvency in Ireland?

In Ireland, a company is deemed to be insolvent where it is unable to pay its debts as they fall due. Section 214 of the Companies Act, 1963 provides that a company shall be deemed to be unable to pay its debts where (a) a creditor can prove that the company is indebted in a sum of €1,269.74, (b) execution or another process issued on a judgment, decree of any Court in favour of the creditor of the company is returned unsatisfied in whole or in part or (c) it is provided to the satisfaction of the Court that the company is unable to pay its debts, and in determining whether a company is unable to pay its debts, the Court must take into account the contingent and prospective liabilities of that company.

Another insolvency test applies for the purposes of determining whether a company is insolvent and therefore whether a party with standing is entitled to petition for the appointment of an examiner, which is whether the value of the assets of the company is less than the amount of its liabilities, taking into account is contingent and prospective liabilities.

2.3 On what grounds can the company be placed into each procedure?

The grounds for the commencement of the principal corporate insolvency proceedings under Irish law can be summarised as follows:

(a) Compulsory (Court) liquidation: In a compulsory liquidation, a petition may be presented to the High Court on the grounds that the company is unable to pay its debts and this can be established where (i) a creditor can prove that the company is indebted in a sum of €1,269.74, (ii) execution or another process issued on a judgment, decree of any Court in favour of the creditor of the company is returned unsatisfied in whole or in part, or (iii) it is provided to the satisfaction of the Court that the company is unable to pay its debts, and in determining whether a company is unable to pay its debts, the Court must take into account the contingent and prospective liabilities of that company.

(b) Creditors' voluntary liquidation: In a creditors' voluntary liquidation, once the directors are of the opinion that the company is insolvent and unable to pay its debts as they fall due, the board of directors calls a meeting of the members to place the company in liquidation. The process commences by a resolution by the members that the company be wound up voluntarily.

(c) Examination: The Court will not make an order for the appointment of an examiner to a company unless it is satisfied that: (a) the company is unable to pay its debts as they fall due (i.e., insolvent) or is likely to become unable to pay its debts as the fall due; and (b) there is a reasonable prospect of survival of the company and the whole or any part of its undertaking as a going concern. To assist the Court in deciding whether a reasonable prospect of survival exists, the petition for the appointment of an examiner must, except in certain defined circumstances, be accompanied by a pre-petition report compiled by an "independent accountant" being the auditor of the company or someone qualified to be appointed as examiner of the company.

(d) Receivership: The tests to be satisfied in order for a creditor to be able to appoint a receiver over the secured assets of a debtor company will be principally determined and governed by the security documents concerned (e.g. whether a demand for repayment has been made but not met).

(e) Schemes of Arrangement: A scheme of arrangement may be formulated by a company whether or not it is solvent or insolvent, and there is no requirement for it to show that the company has a reasonable prospect of survival. However, the confirmation of a Scheme is at the discretion of the Court which must be satisfied as to the fairness and equity of the Scheme.

2.4 Please describe briefly how the company is placed into each procedure.

The procedures for the commencement of each of the principal corporate insolvency proceedings under Irish law can be summarised as follows:

(a) Compulsory (Court) liquidation: Compulsory liquidation is typically initiated by a creditor of an insolvent company but can also be sought by the company itself, a creditor of a company, a contributory, the Director of Corporate Enforcement or the Registrar of Companies. The application to wind-up an insolvent company is made by way of a petition to the Irish High Court. The petition is usually given a hearing date approximately three weeks after the date of issue of the petition and on that date the Court may accept the petition, reject it or adjourn it.

(b) Creditors' voluntary liquidation: A creditors' voluntary liquidation is initiated by the directors of the company deciding that the company cannot, by reason of its liabilities, continue to trade.

(c) Examination: An examiner is appointed by an order of the Irish High Court following the presentation of a petition by either: (i) the company; (ii) the directors of the company; (iii) a creditor, including a contingent or prospective creditor (including an employee) of the company; or (iv) shareholders of the company holding not less than one-tenth of shares carrying the power to vote at the general meeting at the time of the presentation of the petition.

(d) Receivership: A receiver is usually appointed by the holders of a debenture that constitutes a charge over the undertaking and assets of a company. A receiver is appointed pursuant to a deed of appointment entered into between the secured creditor and the receiver.

(e) Schemes of Arrangement: A scheme of arrangement can be formulated by the company itself, or where the company has been put into liquidation by the liquidator of the company, or by any creditor or member of the company. The scheme cannot proceed unless it is supported by the company, and the scheme must not be contrary to law or ultra vires.

2.5 What notifications, meetings and publications are required after the company has been placed into each procedure?

(a) Compulsory (Court) liquidation: The petitioner for the winding-up of a company must serve a copy of the petition on the company by ordinary post within not less than seven clear days of the date upon which the petition is to be heard. The Registrar of the High Court will direct the petitioner to advertise the petition (normally the petition must be advertised in the official gazette of the Irish State (Iris Ofigiúil) plus two national newspapers). The advertisements must appear at least seven clear days prior to the date on which the petition is to be heard.

Once a liquidator has been appointed, he or she must forthwith deliver a copy of the winding up order to the Companies Registration Office. Within 21 days, the liquidator must publish a notice of his or her appointment in Iris Ofigiúil and file a copy of the order appointing him or her with the Companies Registration Office (if different to the winding-up order).

Within the 12 days of the winding-up order, the petitioner should (i) advertise the winding-up order in the same publications as the petition was advertised (unless the liquidator has already done so), (ii) lodge a copy of the winding-up order and a notice to proceed and other related documents with Examiner's Office, (iii) serve a copy of winding-up order on the company (unless it was the petitioner), (iv) serve a copy of the notice to proceed on the company and each notice party to the hearing of the petition, and (v) give notice of the winding-up order to the Sheriff.

There is no requirement for a meeting of the creditors or shareholders of the company in liquidation to be convened unless the Court so directs.

(b) Creditors' voluntary liquidation: In order for a creditors' voluntary liquidation to proceed, the company must convene (a) a shareholders' meeting, and (b) a creditors' meeting. The company must send, to the creditors, notice of the creditors' meeting and advertise the meeting in two daily newspapers circulating in the district where either the registered office or the company's principal place of business is situated. Ten days' notice of the creditors' meeting (exclusive of the day of the meeting) must be given and this meeting must take place on the day of or the day following the shareholders' meeting.

Notice of any shareholders' resolution to appoint a liquidator must be filed with the Companies Registration Office within 14 days. If the winding-up continues for more than one year, the liquidator must convene a shareholders' and creditors' meeting each year in order to give an account of his acts and dealings and of the conduct of the winding-up and within seven days of such meeting, file a copy of that account with the Companies Registration Office. When the company's affairs have been wound-up, the liquidator must convene a shareholders' and creditors' meeting in order to give an account of his acts and dealings and of the conduct of the winding-up and within seven days of such meeting, file a copy of that account with the Companies Registration Office. Notice of each such meeting must be advertised in two daily national newspapers and the creditors and members must be given 28 days' notice of the meetings.

(c) Examination: Once a petition has been presented for the appointment of an examiner, the petitioner must apply to the Court for directions as to the service and advertisement of the petition and the fixing of a date for a hearing of the petition. The Court will usually direct that the petition be served on the Irish Revenue Commissioners and on the other largest creditors of the company and then advertised in at least two national newspapers and Iris Ofigiúil. In addition, the petitioner must deliver notice to the petition to the Companies Registration Office within 3 days of its presentation.

Once an examiner is appointed, notice thereof must be published within 21 days in the Companies Registration Office Gazette and at least two daily newspapers circulating in the district in which the registered office or principal place of business of the company is situate. The examiner must also deliver a copy of the order appointing him to the Companies Registration Office within 3 days. The examiner must convene and preside at meetings of the members and creditors of the company within 35 days of his appointment (unless the Court allows a longer period) for the purposes of presenting his report and his proposals for a scheme of arrangement in respect of the company.

(d) Receivership: A receiver is appointed by a debenture holder and is not required to convene any creditors' or members' meetings. A receiver is, however, required within seven days of his/her appointment to publish a notice thereof in Iris Ofigiúil and at least one daily newspaper circulating in the district where the registered office is situated. Notice of a receiver's appointment must also be given to the Companies Registration Office (which is in turn required to notify the Director of Corporate Enforcement). In addition, a receiver is obliged to furnish to the Companies Registration Office, within 6 months of his/her appointment, and thereafter at six-monthly intervals, an abstract showing details of the assets of the company, their estimated value, the proceeds of sale and details of all receipts and payments during the period concerned.

(e) Schemes of Arrangement: When the application is made to the Irish High Court, the Court will make an order that a meeting of the creditors / class of creditors / members / class of members of the company should be convened. The applicant will at the same time also seek directions as to the date of meeting, the chairman of meeting, the place of meeting, the date for posting the scheme and information circulars to creditors and members and the date for advertising the meeting. In order for any scheme approved by the Court to be effective, a copy of the Court order approving the scheme must be filed with the Companies Registration Office and a copy of the scheme must be annexed to every copy of the memorandum of association of the company issued after the date of the Court order.

3 Creditors

3.1 Are unsecured creditors free to enforce their rights in each procedure?

(a) Liquidation: In a compulsory liquidation, no action or proceedings can be proceeded with or commenced against the company except by leave of the High Court and subject to such terms as the High Court may agree. In a compulsory liquidation or a creditors' voluntary liquidation, no further execution may be enforced against the assets of the company.

(b) Examination: During the examination period (which usually lasts for a period of 70-100 days or longer where the Court allows) the company's creditors are effectively prevented from exercising any of their rights, including the enforcement of security.

(c) Receivership: There is no protection against creditors. It is to be borne in mind, however, that all assets over which the receiver has been appointed under the debenture no longer form part of the assets of the company and therefore no enforcement can be levied against those assets by creditors of the company.

(d) Schemes of Arrangement: The Court has discretion to stay any proceedings against the company on such terms and for such period as it thinks appropriate.

3.2 Can secured creditors enforce their security in each procedure?

(a) Compulsory (Court) liquidation: As above at question 3.1(a).

(b) Creditors' voluntary liquidation: As above at question 3.1(a).

(c) Examination: As above at question 3.1(b).

(d) Receivership: As above at question 3.1(c).

(e) Schemes of Arrangement: As above at question 3.1(d).

3.3 Can creditors set off sums owed by them to the company against amounts owed by the company to them in each procedure?

Under Irish law, set-off is permitted, rather than mandatory, and accordingly, in the absence of any contrary agreement, when a company (which has its centre of main interests in Ireland) goes into liquidation (whether by Court order or by means of a voluntary creditors liquidation), a creditor is generally entitled (but is not required) to exercise a pre-existing right of set-off provided that the debts being set-off against one another are mutual.

However, where a contractual right set off itself is created by an insolvent company in favour of a creditor within 6 months of its winding-up, there is a risk that the creation of the right of set-off could constitute a fraudulent preference of the creditor concerned.

4 Continuing the Business

4.1 Who controls the company in each procedure? In particular, please describe briefly the effect of the procedures on directors and shareholders.

(a) Liquidation: In both a compulsory (Court) liquidation and a voluntary creditors' liquidation, the liquidator assumes the functions of the directors and the directors' powers cease in respect of the company. In a compulsory liquidation, all employees are dismissed once the High Court makes an order for the winding up if the company and the company then usually ceases to trade. In an insolvent liquidation, the shares are effectively worthless and, given that all directors' powers vest in the liquidator, as a practical matter the shareholders no longer have any role in the business of the company concerned. In a Court liquidation, share transfers or changes to the share capital ownership of the company are prohibited unless permitted by the Court.

(b) Examination: Supervision of the process lies with the Irish High Court. An examiner is an officer of the Court and owes his duties to the Court. The directors' powers survive the appointment of an examiner and as such the directors remain responsible for the day-today management of the company. The company continues to trade during the protection period and the directors continue to run the company. If a scheme of arrangement is not successfully implemented, the protection of the Court is withdrawn and liquidation or receivership inevitably follows. In an examinership, the shareholders retain their shares in the company and their powers are technically unaffected, however, because of the insolvency of the company the shares are effectively worthless and no action can be brought against the company, or for any alleged minority shareholder oppression, during the period of court protection without the consent of the Court. The examiner's scheme of arrangement can, and often will, provide for the compulsory transfer of all issued shares to an investor without any requirement for shareholder consent.

(c) Receivership: Once appointed, the receiver takes control of the assets over which he has been appointed. Where the charging documents so provide, the receiver is entitled to manage the business of the company. The receiver is an independent office holder and must act in the interests of the secured charge holder and the company. While the appointment of a receiver operates such that the directors cease to have control over the assets over which the receiver has been appointed, the directors' normal powers and duties continue in respect of any other assets and liabilities of the company and in respect of the corporate entity. Shareholder rights and powers are unaffected by a receivership, save that the shareholders have no ability to interfere with those assets of the company that are under the control of the receiver.

(d) Schemes of Arrangement: The procedure is controlled by the company and the creditors themselves with whom they negotiate the terms of the scheme. The process does not affect the control or operation of the company or the powers of the directors or shareholders of the company, save to the extent that the Court has, at its discretion, granted a stay any proceedings against the company.

4.2 How does the company finance these procedures?

(a) Liquidation: The costs and expenses of the winding-up are paid from the proceeds of the realisation of assets in priority to all unsecured creditors (including preferential creditors). Mortgage or fixed chargeholders are entitled to receive, in priority to the costs of the winding-up, all amounts realised from the assets covered by the security (net of the costs of realising the relevant asset(s)). Any surplus can be claimed by the chargeholder as an unsecured creditor.

(b) Examination: The costs and expenses of an examinership are usually paid from any new funds invested under the Examiner's scheme of arrangement or from cash resources within the company and these rank in priority to all creditors (including secured and preferential creditors).

(c) Receivership: The costs and expenses of a receivership are discharged from the proceeds of the sale of the charged assets, or by agreement with the debenture holder.

(d) Schemes of Arrangement: The manner in which the costs incurred by a company in formulating a scheme of arrangement will depend upon the terms of the scheme.

4.3 What is the effect of each procedure on employees?

(a) Compulsory (Court) Liquidation: In a compulsory liquidation, all employees are immediately dismissed by reason of redundancy once the High Court makes an order for the winding-up if the company.

(b) Creditor's voluntary liquidation: In the circumstances of a creditors' voluntary liquidation, the employees are not automatically made redundant, unless the liquidator elects to cease trading and dismiss all employees.

(c) Examination: The appointment of an examiner does not have any impact on the rights or entitlements of employees, save that all proceedings brought by employees against the Company are stayed during the period of Court protection and amounts owing to employees may be compromised in any Scheme approved by the Court.

(d) Receivership: A receivership does not have any impact on employees' rights or entitlements, per se. However, the appointment of a receiver may, as a practical matter, result in the dismissal of employees where the receiver elects not to trade the business of the company.

(e) Schemes of Arrangement: Schemes of arrangement do not have any impact on the employees of the company concerned, save to the extent that the Court has stayed any proceedings against the company and to the extent that amounts owing to employees may be compromised in any scheme approved by the creditors.

4.4 What effect does the commencement of any procedure have on contracts with the company and can the company terminate contracts during each procedure?

(a) Liquidation: A liquidator may, within 12 months of the winding-up of the company, and with the sanction of the Irish High Court, disclaim certain onerous or unprofitable contracts of the company. However, a contract for the sale of property cannot be disclaimed and it is possible to obtain an order for specific performance of such a contract if a liquidator refuses to complete.

(b) Examination: A company in examinership is permitted, with the approval of the Court, to affirm or repudiate any contract under which some element of performance (other than payment) remains to be rendered by both the company and the other contracting party or parties where proposals for a compromise or scheme of arrangement are being brought forward. Such repudiation is most commonly used by companies in examination to repudiate leases. Following such repudiation, the landlord is left with a claim for damages against the tenant company which damages can then be written down in the scheme of arrangement.

(c) Receivership: A receiver does not have the power to repudiate contracts, however, as a practical matter, receivers (who are generally agents of the borrower company) often refuse to perform contracts and in such circumstances the only remedy of a counterparty will be to sue an insolvent company for breach.

5 Claims

5.1 Broadly, how do creditors claim amounts owed to them in each procedure?

(a) Liquidation: Creditors will write to a liquidator with details of their claims, and a liquidator may require creditors to prove their debts.

(b) Examination: Creditors will write to an examiner with details of their claims, and an examiner may require creditors to prove their debts.

(c) Receivership: A receiver is not generally concerned as to the claims of unsecured creditors. However, where a receiver is appointed over assets that are the subject of a floating charge, he must discharge preferential creditors (e.g. rates and taxes, wages and salaries) from the proceeds of the sale of those assets.

5.2 What is the ranking of claims in each procedure? In particular, do any specific types of claim have preferential status?

In an Irish corporate insolvency, funds are distributed in the following order:

(a) fees, costs and expenses of an Examiner (where applicable);

(b) mortgage or fixed chargeholders - up to the amount realised from the assets covered by the security (net of the costs of realising the relevant asset(s)). Any surplus can be claimed by the chargeholder as an unsecured creditor;

(c) amounts certified by an Examiner under Section 10 of the Companies (Amendment) Act, 1990;

(d) costs and expenses of the winding-up (which costs are subject to their own rules in relation to priority);

(e) certain social insurance deductions (known as "superpreferential" creditors);

(f) preferential debts, e.g. rates and taxes, wages and salaries;

(g) floating chargeholders - up to the amount realised from the assets covered by the floating charge;

(h) unsecured debts ranking pari passu with each other;

(i) deferred debts ranking pari passu with each other; and (j) debts due to shareholders.

Within each ranking, all claims in one category receive full payment before the remaining proceeds are distributed to the creditors in the following category. When proceeds are insufficient to meet the claims of the one category in full, payments for that category are pro-rated.

5.3 Are tax liabilities incurred during each procedure?

Insolvent companies (regardless of whether any formal insolvency procedure has commenced) can continue to incur, and are obliged to pay, tax liabilities in the normal way. Tax liabilities incurred during an insolvency procedure rank as preferred creditors in the manner outlined in question 5.2 above.

6 Ending the Formal Procedure

6.1 Is there a process for "cramming down" creditors who do not approve proposals put forward in these procedures?

(a) Liquidation: Following a realisation of the assets of the company in liquidation, a dividend is paid to creditors in accordance with the priority given to them in paid in the manner outlined in question 5.2 above.

(b) Examination: The Court can "cram down" or render a scheme of arrangement proposed by an examiner binding on the company, its members and creditors if at least one class of creditors whose rights are affected has voted in favour of the scheme of arrangement. The Court must be satisfied that the scheme is "fair and equitable" and not "unfairly prejudicial" to any objecting creditor. The general rule of thumb is that a creditor should not get less from the examination than it would on a liquidation.

(c) Receivership: A receiver is not able to "cram down" creditors or generally able to propose schemes of compromise or arrangement with respect to creditors.

(d) Scheme of Arrangement: A scheme that is approved by a majority representing 75% in value of each class of creditors will be binding on all creditors, including dissenting, absent or untraceable creditors.

6.2 What happens at the end of each procedure?

(a) Liquidation: Once all of the assets have been realised and a dividend has been paid to creditors, the company is eventually dissolved and removed from the Register of Companies.

(b) Examination: If the scheme is approved by the Court, it will come into effect on an appointed day and the company will emerge from Court protection and trade in the normal way. If the scheme is not approved, or if an examiner decides that he cannot devise a scheme or does not believe that there is a reasonable prospect of the survival of the business, the period of Court protection will cease and the company will immediately thereafter enter into receivership and/or compulsory Court liquidation.

(c) Receivership: Following the discharge of a receiver, the company may continue to trade as normal if solvent. However, it is common for the discharge of a receiver to be closely followed by the appointment of a liquidator.

(d) Scheme of Arrangement: If the scheme is approved by the requisite number of creditors, the scheme will come into effect and the company will emerge from any Court protection that has been granted and trade in the normal way.

7 Alternative Forms of Restructuring

7.1 Is it common to achieve a restructuring outside a formal procedure in Ireland? In what circumstances might this be possible?

Corporate and debt restructuring through informal procedures is becoming increasingly common in Ireland. In circumstances where the principal obligor has its centre of main interests in Ireland, debt restructuring through an informal process will require unanimous agreement amongst affected creditors and amongst a majority of shareholders.

7.2 Is it possible to reorganise a debtor rather than realise its assets and business?

Yes, provided that there is unanimous agreement amongst affected creditors and amongst a majority of shareholders. The elements of such reorganisations often include:

(a) Debt reduction: Debt reduction by means of: (i) debt writeoff by creditors; (ii) debt for equity swap; and/or (iii) using the proceeds of a rights issue (or other capital issue) or disposal to reduce debt.

(b) Debt rescheduling: Extension of repayment dates or the deferral or accrual of interest payment obligations.

(c) Disposal programmes: As part of a restructuring agreement, a timetable may be agreed for debt reduction through the disposal of specific assets.

(d) Stapled debt packages: Where the creditors pre-arrange acquisition finance for a purchaser of all or part of the business of a borrower to counteract illiquidity in the market.

7.3 Is it possible to achieve an expedited restructuring of the debtor by means of a pre-packaged sale? How is such a sale effected?

"Pre-packs" are not generally a feature of the Irish market. However, where similar disposals have been achieved, the transaction is generally implemented through the appointment of a receiver over the target assets. If there has been a competitive bidding process for the target assets in advance of the appointment of the receiver, or if there is a robust independent valuation available, receivers may be willing to sell to a preferred bidder provided that he/she is satisfied that the best possible price is being achieved in the circumstances.

8 International

8.1 What would be the approach in Ireland to recognising a procedure started in another jurisdiction?

EC Regulation No. 1346 of 2000 on insolvency proceedings (the "Insolvency Regulation") forms part of Irish law. Where a judgment specific to insolvency proceedings is obtained in an EU Member State other than Denmark, such as the opening of insolvency proceedings, Ireland must recognise that judgment with no further formalities and give effect to it under the Insolvency Regulation. The Insolvency Regulation mandates that such a judgment will produce the same effects in any other EU Member State as under the law of the state opening proceedings.

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.