KIERAN Oliver, from Sweeney McGann continues the series of articles provided by the Limerick based firm as he offers us some information on an alternative to liquidation.
“The limited liability company is an entity which has been increasingly used in business in recent times as can be seen by the huge increase in the number of limited liability companies incorporated with the Irish Companies Registration Office in the last number of years.
The attractions of a limited liability company are chiefly the limited liability which is offered to the shareholders of the company with regards to the general liabilities of the company.
While the shareholders can benefit from limited liability, unfortunately due to the current economic climate, the large increase in the number of liquidations has resulted in a situation where an increasing number of creditors, and in particular unsecured creditors, find themselves in a position where upon a liquidation when they are owed often very large sums of money by a company they have very little likelihood of achieving any return for the monies owed, particularly when the company entering into liquidation owes monies to preferential creditors, such as Revenue, or secured creditors, such as a Bank holding a debenture.
Furthermore, even though the limited liability vehicle has attractions for shareholders, in many cases a shareholder will be reluctant to allow a company to go into liquidation but the directors of the company will have certain onerous corporate responsibilities, which prohibit them from continuing to trade when the company is in an insolvent situation. A potential alternative to liquidation, which may be looked at can be found under the provisions of Sections 201 and 202 of the Companies Act 1963.
Often it is the case that a company may have every intention of paying its creditors but it itself is operating in the same market as its creditors and is having the very same problems in obtaining payment for goods or services provided by it. Sections 201 and 202 offer a mechanism whereby a company owed substantial monies beyond what it itself owes its creditors can come to a compromise arrangement with its creditors whereby it agrees to pay an agreed sum of the monies owed to its creditors as and when monies come in to the company.
Sections 201 and 202 operate under Court supervision and following an application to the High Court, meetings of each class of creditor grouping will be ordered by the Court and if each class of creditor group representing 50% in number and 75% in value approve the compromised scheme of arrangement then for the duration of that compromise arrangement, the Court may stay all proceedings or restrain future proceedings against the company for such period as the Court deems fit. The only remedy a creditor would have against the company would lie in a situation where the company was in specific breach of the Court Ordered Compromise Arrangement.
This has the effect of allowing the company some breathing space and produces a situation where a company does not have worry about being wound up other than if it breaches the actual compromise arrangement as approved by the Court.
Liquidation often offers a solution only to a secured creditor and parties in the changing climate which we are in should consider whether Sections 201 and 202 can be utilised to the mutual advantage of the company and the creditors.
