INSOLVENCY LAW, POLICY AND PROCEDURE
i Statutory framework and substantive law
Ireland is a sovereign state in Europe and a member of the European Union since 1973. The legal system in Ireland is a combination of statute and common law in which a large emphasis is placed on precedent.
The principal statutes governing insolvency law in Ireland are as follows:
a the Companies Acts 1963–2013 (the Companies Acts) (the main point of reference for all Irish insolvency processes); the new Companies Bill, which is expected to be passed in late 2014 or early 2015, will consolidate and replace the previous Acts;
b Council Regulation (EC) No. 1346/2000 (referred to when a debtor has its centre of main interests (COMI) in an EU Member State) (the Insolvency Regulation);
c the National Asset Management Agency Act 2009 (relevant from the perspective of statutory receivers appointed by the National Asset Management Agency); and
d the Irish Bank Resolution Corporation Act 2013 (which introduced the concept of Special Liquidation) (the IBRC Act).
Remedies in the area of insolvency and bankruptcy have traditionally involved enforcement of security, realisation of a debtor's assets and the penalisation of resisting debtors. In recent years, however, there has been a subtle shift towards a 'rescue culture' in respect of certain companies. This has been motivated by a desire to achieve value for all stakeholders.
For those businesses that are in difficulty but can demonstrate that they have a reasonable prospect of survival2 examinership remains an attractive model for formal corporate restructuring and recovery. Examinership is a rehabilitative procedure that, broadly speaking, is a hybrid of Chapter 11 in the United States and administration in England and Wales.
Many businesses in Ireland borrowed significantly from 2000 to 2008 and much of that borrowing was used to fund property acquisitions. At present, there is a prevailing policy of enforcement by the lending institutions in respect of businesses and individuals who have breached covenants in their agreements. The lending institutions are taking enforcement steps in two ways: by the appointment of receivers to secured property or by issuing proceedings in the Irish courts to obtain judgments against defaulting debtors (or both).
iii Insolvency procedures
The formal insolvency and rescue procedures available in Ireland to wind up or rescue companies are:
a creditors' voluntary liquidation;
b compulsory or court liquidation;
c examinership; and
d statutory scheme of arrangement.
Receivership is a distinct enforcement remedy available to secured creditors only and does not involve the commencement of insolvency proceedings. The Companies Acts recognise and protect the rights of secured creditors to enforce their security in accordance with its terms, and secured creditors can, as a general rule, enforce or realise their security outside an Irish winding-up process.3
Creditors' voluntary liquidation
To commence a creditors' voluntary liquidation (CVL), the company, acting through its members (in general meeting), resolves that it cannot, because of its liabilities, continue in business and that it should be wound up voluntarily.4
The members' meeting at which the winding-up resolution is passed must be held on the same day or the day before a meeting of the company's creditors.5 The winding up commences once the members' resolution has been passed and, thereafter, the company must cease to carry on its business except insofar as is necessary to facilitate the liquidation.
The creditors almost entirely control the CVL process, although any interested party can apply to the Irish High Court (the High Court) for directions to determine any question arising during the course of the winding up.6
Once appointed, the function of the liquidator is to realise all of the assets of the company and to distribute the proceeds of sale of those assets to creditors in accordance with the priorities prescribed by the Companies Acts and the Rules of the Superior Courts.
The liquidator conducts the liquidation independently and reports on the conduct of the liquidation to meetings of the members and creditors at the end of each year. The liquidator is also obliged to submit a report to the Office of the Director of Corporate Enforcement following his investigation into the affairs of the company.7
A High Court or compulsory liquidation is commenced by the presentation of a petition for the winding up of a company, which can be presented by:
a the company itself;8
b a creditor of the company;9
c a member or contributory of the company;10
d the Director of Corporate Enforcement;11 or
e the Registrar of Companies.12
A court-appointed liquidator (the official liquidator) is subject to the supervision of the High Court and, for the most part, the official liquidator's powers are exercisable only with the sanction of the High Court. An official liquidator is an officer of the court and must conduct the liquidation in accordance with the provisions of the Rules of the Superior Courts and the Companies Acts.
Where the company in question is insolvent, it is typically a creditor who applies to have it wound up compulsorily on the grounds that the company is unable to pay its debts as they fall due for payment. It may, however, also be the company's directors or the company itself that presents a petition before the court.
The powers of the directors will cease once an order has been made to wind up the company, but the official liquidator may request their assistance and any necessary information from them. The shareholders retain their residual powers and have a proprietary interest in the liquidation of the company.
When the official liquidator has carried out all of his functions, he or she is required to apply to the High Court for final orders that will include an order discharging him or her as liquidator. Discharge occurs only once the liquidator has made all required payments pursuant to the final orders.
The High Court may, if satisfied that the urgency of the situation warrants it, appoint a provisional liquidator pending the hearing of the winding-up petition, for the purpose of continuing the company's business or preserving its assets or where an immediate investigation into the affairs of the company is necessary.13
Transaction avoidance in creditors' voluntary liquidations and compulsory liquidations
A transfer of property by an insolvent company to a creditor within six months of the commencement of the winding-up of that company, if made with a view to giving such creditor a preference over other creditors, may be deemed a 'fraudulent preference' and therefore invalid.14 The relevant provision is only applicable if, at the time of the transfer, the company was unable to pay its debts as they fell due. Essentially, for the transaction to amount to a fraudulent preference, the company must positively intend to improve the position of the beneficiary creditor in the event of the company's liquidation. Case law in this area indicates that it must have been the 'dominant intention' of the company to prefer the creditor in question.
Where the preferential transaction is made in favour of a 'connected person',15 the transaction will be invalidated where made within two years of the commencement of the winding up; a 'connected person' includes a related company. In addition, unless the contrary is shown, the preferential transaction in favour of a connected person is deemed to have been made with a view to giving such person a preference over other creditors, and to be a fraudulent preference. Consequently, the burden of proof is on the connected person to show that the transaction was not fraudulent.
Further, where property of a company has been fraudulently disposed of, the High Court may order the return of the property to the company on the application of a liquidator, creditor or contributory of the company.16 To apply for such an order, it must be shown to the satisfaction of the court that the effect of such disposal was to perpetrate a fraud on the company, its creditors or members. Unlike the fraudulent preference provision, there is no operative time limit for the making of the fraudulent disposition. There is also no requirement that, at the time of the disposition, the company was unable to pay its debts as they fell due – all that is required is a disposal of property where the effect of such disposal is to perpetrate a fraud on the company, its creditors or members.
A floating charge on the undertaking or property of a company created in the 12 months before the commencement of its winding up may be rendered invalid (except to the extent of monies actually advanced or paid, or the actual price or value of the goods or services sold or supplied to the company at the time of or subsequent to the creation of, and in consideration for, the charge) unless it is proved that the company was solvent immediately after the creation of the charge.17 Where the floating charge is created in favour of a 'connected person', the period of 12 months is extended to two years.
Where a company is being wound up by the High Court, any disposition of the property of the company (including things in action) and any transfer of shares or alteration in the status of the members of the company, made after the commencement of the winding up, shall, unless the court otherwise orders, be void.
In certain circumstances, a liquidator may be entitled to disclaim onerous covenants, unprofitable contracts or any other property that is unsaleable or not readily saleable.18 The liquidator must apply to the High Court within 12 months of the commencement of the winding up, seeking the court's leave to disclaim. Any person suffering loss or damage as a result of a disclaimer will be deemed a creditor of the company in the amount of such loss or damage and may prove for that amount as a debt in the winding up.
To view the full review click here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.