An expert comment piece by Richard Maguire – Corporate Recovery & Insolvency Partner, O’Donovan Caulfield Lavin
These are difficult and stressful times for business and particularly so for Directors of Limited Liability Companies which may be insolvent. It is vital that Directors in such a situation take professional advice as it is important that they meet all their legal obligations. They should go to their existing accountants who should be familiar with their business or to an Insolvency Practitioner who will be able to advise on what is involved in organising an orderly winding up.
It is important that proper steps are taken to protect the Directors and the Creditors of the Company.
In normal circumstances the Directors have fiduciary and statutory duties to the Shareholders of the Company. However where a Company may be insolvent this principal changes and they have a duty to act and show the utmost care to Creditors.
A Company does not necessarily have to close down at the first sight of economic difficulty. If the Directors however believe the Company to be insolvent, they have no choice but to recommend placing the Company in liquidation and distributing the assets for the benefit of the Creditors.
If the Directors continue to trade a Limited Company it is possible that they might expose themselves to Personal Liability by not having acted in the best interest of the Creditors.
The situations in respect of which Personal Liability might be imposed:
Fraudulent Trading:
If, in the course of the winding up of a Company or where a Company has been shown to be insolvent but has not been wound up, a Director is found knowingly to be a party to carrying on the Business of the Company, he may be found guilty of intending to defraud its Creditors.
Reckless Trading:
Whilst this is a lesser offence to Fraudulent Trading it exists in Irish Law, to capture situations where there was no actual intent to defraud. If it is found that any Director was knowingly a party to carrying on of the Business in a reckless manner then such person may under the Companies Acts be found personally liable for the debts of the Company. Reckless trading might arise if a Director could reasonably have been expected to have known that their actions would cause loss to Creditors of the Company.
Fraudulent Preference:
It is extremely important that Directors are careful in a situation where a Limited Company may be insolvent. Fraudulent preference is the wrongful favouring of one Creditor over others by a Company unable to pay its debts. Any such payment is invalid and may be set aside.
If an insolvent Company is wound up, then unless the Director of Corporate Enforcement relieves the liquidator from doing so, the liquidator must apply to the High Court for an order restricting each of the Directors of the Company from acting as a Director of a Company for 5 years. The Court will make the order unless the Director can satisfy the Court that he has acted honestly and responsibly in relation to the Company.
Directors therefore need to be especially careful and diligent in conducting the affairs of a Company where it is either already technically insolvent or facing the possibility of insolvency.
Liquidation Steps
In order to organise an orderly winding up of a Company the following steps will need to be undertaken:
1. Agree on the appointment of a Liquidator.
2. Prepare the documentation required for the formal meetings of the Shareholders and the Creditors.
3. Issue notices to all Creditors of the meeting to appoint a Liquidator at least 10 days before the proposed meeting.
4. Advertise the notice of the Creditors meeting in two daily newspapers, at least 10 days before the date of the meeting.
5. Consider making employees redundant.
6. Protect and secure the assets of the Company.
7. Lodge any monies collected from the date the decision is taken in a separate bank account, if the existing bank account is overdrawn.
8. Pay no monies from the Company Bank Accounts other than payments required to safeguard Company Assets.
9. The Directors should prepare a statement which outlines the history of the Company and the reasons for its failure to be presented at the Creditors meeting.
10. The Directors will also need to prepare a full Statement of Affairs together with a list of all Creditors of the Company for presentation at the Creditors meeting.
By observing the above matters the Directors can facilitate an orderly liquidation which will help them meet their legal obligations.
O’Donovan Caulfield Lavin is one of the larger independent audit and accounting practices in the MidWest Region. Set up in 1992, ODCL has established a reputation as a proactive firm providing innovative accounting, business and taxation solutions and advice. The practice has 5 partners, employs 35 people and is based at 1 Mount Kennett Place, Henry Street, Limerick, see www.odcl.ie.
