The winding up or liquidation of a company refers to the realisation of its assets and the distribution of the proceeds to the persons entitled. In the case of an insolvent liquidation, the persons entitled will usually be the general body of creditors.
In the case of a solvent liquidation, the persons entitled after the payment of external creditors, loan capital and preference shareholders, are the ordinary shareholders. In a solvent liquidation, the assets may be distributed in kind to the members.
The order of entitlement is defined by the constitution of the company and/ or the other instruments which define the rights attaching to the shares on their allotment. Preference shareholders may have rights of payment in priority to other classes. There may be complex capital structures, with multiple layers of preference.
There may be loan creditors who are in effect, investors. They may also hold ordinary and/ or preference shares. Their loans will rank equally to those of other creditors unless they have been formally subordinated. This is different to the principles applicable to loans made to a partnership by the partners.
Winding-up may or may not be linked with insolvency. Voluntary winding-up takes place at the initiation of the directors or shareholders. There are limits on the extent to which directors or shareholders may precipitate in the winding up of the company. A creditors’ voluntary (insolvent) liquidation may be initiated by the company itself by a members’ resolution. In this case, the creditors have the option to take the primary role.
Liquidation may be initiated by a third party, usually a creditor and in some cases a member (when certain conditions apply), against the will of the company and the majority of its shareholders. It may be initiated by a court petition for the winding up of the company.
Reasons for Winding Up I
Where a company is insolvent, the directors must act as if they hold the company’s assets in trust for the creditors. In this context, any disposition of property which prejudices the creditors may be outside the power of the company and may be subject to reversal. A third party who deals with a company in good faith without knowledge of the position is not prejudiced.
The purpose of winding up will depend on the type of winding up involved and on the circumstances. It may be a mechanism for termination of the business. It may arise in the context of the transfer of a business and the reorganisation of corporate entities. It may involve minority shareholders being purchased out. It may be a method of realisation of debts due to a creditor.
A shareholder may seek winding up on the basis that it is just and reasonable. This may be sought as an alternative to a claim based on oppression. It may be a means for the minority shareholders to be purchased out. Issues may arise regarding the valuation of minority shareholding on a purchase out in this context.
Reasons for Winding Up II
Involuntary liquidation of a company, whether initiated by the company itself or by court order is the equivalent of bankruptcy in the case of an individual. Many of the bankruptcy rules apply. However, because a company is an abstract entity rather than a person, there are some significant differences.
The general bankruptcy restrictions on transfers of property by way of fraudulent conveyance and the rules on the reversal of certain transfers made within certain periods before the commencement of insolvency, apply to a corporate insolvency.
As with bankruptcy, it is a fundamental principle that on an insolvent winding up, all unsecured creditors, who do not enjoy preference, are to be paid / proportionately. The position of secured creditors and preferential creditors is similar to that which applies in bankruptcy. Secured creditors may continue to rely on their security. The list of preferential creditors is almost identical.
Types of Winding Up
A members’ voluntary (solvent) winding up requires a special resolution of the members, preceded by a declaration of solvency by the directors. A simplified procedure is available where a company is formed for a specific duration or purpose and that period ends or duration ceases.
The voluntary winding up in accordance with the summary approval procedure may not proceed as such if the company cannot be shown to be solvent. The declaration of solvency must be given, and the company must continue to be solvent.
Where the company is insolvent, an ordinary resolution of the shareholders may initiate a creditors’ voluntary winding up. It usually follows from a decision of the directors, based on an appraisal of the company’s financial position. The members in general meeting resolve that the company be wound up in a creditors’ voluntary winding up on the basis that the company is unable to pay its debts as they fall due.
In a creditors’ voluntary winding up, the creditors may appoint the liquidator. They are entitled to play the predominant role.
The liquidator and others, including creditors, may apply to the court for directions. The court may take account of the creditor’s desires and wishes having regard to the size of its debt and its significance.
There are various grounds for a court ordered winding up. The most commonly relied on ground, is the failure to pay on foot of a statutory demand for a fixed sum debt. The minimum debt required as a basis for a petition is €10,000. A group of two or more creditors who are owed €20,000, may serve a joint demand and make a petition on foot of it.
Conversion of Winding-up
A member’s voluntary winding up may become a creditors’ voluntary winding up, where it emerges that the company is in fact, insolvent. The creditors may then take greater control of the winding up.
A creditor’s meeting is held in circumstances in which a liquidator in the case of a member’s voluntary liquidation, forms the view that the company is unable to pay its debts as they fall due.
The court may make an order upon application by creditors representing at least 20 percent in number or value of the creditors, where the court forms an opinion that it is unlikely that the company will be able to pay its debts in the winding up.
Effect of Winding-Up
On the appointment of a liquidator (but not a provisional liquidator) the powers of the directors are to cease, except in far as the committee of inspection or creditors sanction their continuance. This applies to a court and creditor’s voluntary winding up. The members may sanction the continuance of powers in a members’ voluntary winding up.
Upon the commencement of winding up, the business of the company ceases other than to the extent necessary for the purpose of winding up. The manner of winding up is determined primarily by the liquidator. The court may give direction in relation to particular matters on application made by a liquidator, creditor or member.
The liquidator assumes control of the company. He is entitled to act in the company’s name for the purposes of the winding up. He takes control of all of the company’s assets, to which it is entitled. He may apply to court in order to reverse asset transfers wrongfully undertaken by the company, in order to recoup those assets.
The assets of the company are effectively held in the liquidation, for the persons entitled to the final distribution. However, the persons entitled have no interest, until the assets are actually distributed. The liquidator’s costs have priority, and in many cases, there may be little or no assets available to creditors.
Course of Winding Up I
Notwithstanding the technical commencement of winding upon presentation of a petition, the directors can cause the company to resist the petition and pursue an appeal if it is granted.
The winding up is conducted by the liquidator. Once liquidation commences, the powers of the director’s cease. The liquidator assumes control of the company.
On liquidation, the directors remain subject to the obligations imposed by law, some of which are owed to the liquidator. They must deliver books and records to the liquidator and have other obligations to co-operate.
Directors must deliver a statement of affairs to the liquidator. It must show details of assets, liabilities, debts, creditors and securities. Present and recent directors and officers are obliged to disclose and furnish all the company’s assets which they hold or control.
Course of Winding Up II
Where assets have been transferred, the directors and other officers are obliged to disclose the transfer. It is an offence for such officers to fail to give or give incomplete detail of the company’s affairs or to falsify, hide or destroy records of the company.
The court may summons the company directors to attend meetings. It may summon them directly to be examined on oath in relation to any matter relating to the company’s affairs. The directors may be subject to various court orders, details of which are set out in other sections.
An absconding company officer who is concealing company assets may be arrested and be brought before the court. Assets, properties and books may be seized.
Proceedings in Winding Up
In each year after commencement of a members’ voluntary winding up, the liquidator must hold a general meeting of the members of the company. In a creditors’ voluntary winding up, the liquidator must convene a meeting of the committee of inspection or, if there is none, of the creditors, within three months after the end of the first year and of each successive year.
At least 10 days’ prior notice of the creditors’ meeting must be given to creditors and published in two daily newspapers. A statement of the liquidator’s accounts and activities must be given and filed with the CRO within seven days of the meeting.
At the conclusion of winding up, the liquidator must call meetings of the company’s shareholders and of its creditors. He is to lay an account of the winding up before the meetings. He must disclose how the company’s property and assets were disposed of and provide explanations. 28 days before the meeting, the liquidator must advertise notice of it in two newspapers the liquidator must file accounts and make returns regarding the meetings to the CRO.
When all assets have been realised and the shareholders and creditors’ final meeting have been held, a final account of the winding up is given. This is filed in the CRO, and the company is deemed to be dissolved three months after filing.
Pooling and Contribution Orders
A court may order that a company which is related to the company that is being wound up, contribute to the assets of the company. The court must be satisfied that it is just and equitable to order the related company to pay the whole or part of the debts of the company that is being wound up.
The court has regard to the extent to which the related company took part in the management of the company being wound up, the conduct of the related company towards the creditors of the former and the effect of the order of the creditors of the latter.
There is a provision whereby two or more related companies may be wound up together by court order as if they were the one company. The court may make an order if it is satisfied that it is just and equitable to do so. It may do so on such terms and conditions as it may specify.
Orders outside Liquidation
Some of the Orders that may be made in respect of companies in liquidation may be made in respect of companies which are not in liquidation. This may occur if enforcement of a judgment is unsatisfied or a company is unable to pay its debts and is not being wound up because of the insufficiency of assets.
In the above cases, the following powers apply
- orders for the return of payments;
- orders for contribution by a related company to contribute to the debts of another company;
- restrictions of directors;
- prosecution of companies that are being wound up for failure to maintain books;
- personal liability;
- inspection of books;
- summoning for examination and production of records;
- order for delivery of property;
- arrest, seizure and detention of books and papers;
- reckless and fraudulent trading;
- defrauding creditors
- assessment of damage against officers.
The ODCE may apply for Orders in respect of any of the above provisions. Other persons are entitled to invoke the provisions. A person who has a claim against a company who does not invoke the above provisions may apply for a share of monies recovered by the ODCE.
References and Sources
Companies Act 2014 (Irish Statute Book)
Companies Act 2014: An Annotation (2015) Conroy
Law of Companies 4th Ed. (2016) Ch.26 Courtney
Keane on Company Law 5th Ed. (2016) Ch. 36 Hutchinson
Other Irish Sources
Tables of Origins & Destinations Companies Act 2014 (2016) Bloomsbury
Introduction to Irish Company Law 4th Ed. (2015) Callanan
Bloomsbury’s Guide to the Companies Act 2015 Courtney & Ors
Company Law in Ireland 2nd Ed. (2015) Thuillier
Pre-2014 Legislation Editions
Modern Irish Company Law 2nd Ed. (2001) Ellis
Cases & Materials Company Law 2nd Ed. (1998) Forde
Company Law 4th Ed. (2008) Forde & Kennedy
Corporations & Partnerships in Ireland (2010) Lynch-Fannon & Cuddihy
Companies Acts 1963-2012 (2012) MacCann & Courtney
Constitutional Rights of Companies (2007) O’Neill
Court Applications Under the Companies Act (2013) Samad
Company Law – Nutshell 3rd Ed. (2013) McConville
Questions & Answers on Company Law (2008) McGrath, N & Murphy
Make That Grade Irish Company Law 5th Ed. (2015) Murphy
Company Law BELR Series (2015) O’Mahony
Companies Act 2006 (UK) (Legilsation.gov.uk)
Statute books Blackstone’s statutes on company law (OUP)
Gower Principles of Modern Company Law 10th Ed. (2016) P. and S. Worthington
Company Law in Context 2nd Ed. (2012) D Kershaw
Company Law (9th Ed.) OUP (2016) J Lowry and A Dignam
Cases and Materials in Company law 11th Ed (2016) Sealy and Worthington
UK Practitioners Services
Tolley’s Company Law Handbook
Gore Browne on Companies
Palmer’s Company Law