A Quick Guide to Types of Liquidation & Insolvency Appointments

 

Creditors Voluntary Liquidation
 
This type of liquidation arises when a company is insolvent. There are two tests for Insolvency :
1) Negative Net Assets on the Balance Sheet (not a conclusive test in the present trading environment) and 
2) The ability of a company to pay its debts as they fall due (the critical test). 
 
When this is the situation with no realistic prospect of recovery, the directors of a company have a legal duty to take professional advice and organise an orderly winding up of the company. In effect, the insolvent nature of the company, means that the directors now have fiduciary duties to the creditors and not the shareholders. In this regard, the directors will ‘voluntarily’ organise an orderly windup of the company as opposed to, say, a third party creditor initiating a Court Liquidation. Creditors Voluntary Liquidations account for approximately 90% of the insolvency appointments year on year. 
 
 
Members Voluntary Liquidation
 
This type of liquidation occurs when a company is solvent but is being wound up as the company’s trading business has reached the end of its useful life or the directors/ shareholders have decided to orgainse a tax efficient cash extraction of funds from the business. In this scenario, the directors prepare a Declaration of Solvency which is a sworn document witnessed by a solicitor, attesting that the company has surplus funds to cover its debts and that the company can be wound up within 1 year. This type of liquidation is often availed of as a means of efficient tax planning. The appointed liquidator on winding up the company, and administering any payments due to creditors, will distribute the surplus funds to the shareholders 'in specie'. The net effect is that the shareholders receive the funds from the company as a capital distribution at the CGT rate (currently at 30%) as opposed to marginal rates of Income Tax (up to 55% for high inome earners).
 
 
Court/Official Liquidation 
 
This type of liquidation is initiated by a Court Order on behalf of a creditor who makes a petition to the High Court to wind up the company on foot of an unpaid debt. Following a successful Petition hearing, the Court will make an order to appoint a nominated Liquidator as an Official Liquidator. This type of liquidation is similiar in many aspects to a CVL but because of the High Court involvement is a much more onerous engagement. It is noteworthy that the petitionning creditor (altthough  he may recoup the costs of petition) does not realise any greater priority in payment ahead of the other creditors of the company and the Liquidator will follow the claims in order of priority in accordance with the Companies Acts. In the current times, many of the Court/Official Liquidation appointments are instigated by the Office of the Revenue Commissioners in relaton to delinquent or defaulting companies.
 
Receivership
 
This apppointment occurs when a borrower has defaulted on a loan and is a process by which a charge holder (usually a bank or financial institution) will appoint a receiver to attempt to recover the outstanding borrowings. A Receiver has a duty to secure the assets over which he is charged, realise these assets as best he can (disposals on the market), and in the case of a ‘Receiver and Manager’ appointment, will continue the business trade with a view to maximising the return to the charge holder. The Receiver only has jurisdiction over the assets in the mortgage charge, and is not generally obliged to deal with the claims of unsecured creditors. When a Receiver has realised the disposal of assets on which he is charged, he will exit the scene, usually within 1-2 years. At this stage, if not beforehand, the directors will usually have organised the winding up of the company, or it could be the case that third party creditors have appointed a Court appointed Liquidator.
 
 
Examinership is similiar to the ‘Chapter 11’ US legislation for distressed companies and more similiar again to the UK ‘Admininstration’ legislation on which the Irish framework is based. The legislation was enacted in 1990 in response to the need to protect the Goodman group and related indusrries which were viewed as integral to the economy. Basically, on successful petition to the High Court, a company can obtain protection from its creditors for a period of 70 days, usually extended up to 100 days. During this time, an Examiner will assist in preparing a Scheme of Arrangement which is presented to the creditors for approval. With the support of creditors (who will obtain a higher percentage of debt than a liquidation scenario) and usually with 'new monies' from an investor, a company can write off some of its legacy debt and with the newly restructured business, can look to trade out of difficulties. Examinership is an expensive option however, given the nature of the High Court process involved. The company also has to make a valid case to the Court that it has a ‘reasonable prospect of survival’. In recent years there is a higher barrier of entry to this process, given that the Courts have begun a more interrogative analysis of the Independent Accountant’s Report (which supports the petition) and whether the applicant company realistically has a viable trading future. 
 
 
McCarthy & Co. are Insolvency appointment takers and have a particular specialisation in Creditors Voluntary Liquidations having acted as Liquidator for numerous Dublin Liquidations and for companies in the wider Leinster region. 
 
For further information, call 01- 444 5260 to arrange a meeting at our offices in 51 Fitzwilliam Square West, where we can advise you on your options in confidence.