Moratorium on Legal Proceedings I
In the case of a court-ordered liquidation, the liquidation is deemed to commence on the date on which the petition is presented, rather than the date on which the winding–up order is made. Presentation of the petition is the initiation of the proceedings in the High Court Central Office. This is the case, irrespective of whether the petition is ultimately granted or not.In the case of voluntary members’ and voluntary creditors’ liquidation, the liquidation commences upon the passing of the relevant resolution.
On the commencement of court liquidation, there is automatic stay on proceedings against the company. No action or proceeding shall be proceeded with or commenced against the company without the leave of court, once
- a winding up order has been made;
- a provisional liquidator has been appointed, or
- a resolution for voluntary winding up has been passed.
Moratorium on Legal Procedings II
In a non-court winding up, the stay is not automatic. The liquidator may apply for a stay.
The consent of court is required for proceedings to commence or continue. The court may grant leave subject to such terms as it may impose. The moratorium does not apply to criminal prosecutions and other regulatory investigations. It does not apply to certain proceedings before the Workplace Relations Commission.
A court may give leave to take proceedings if the question is not one which may be dealt with in the liquidation itself. Litigation may be required in order to resolve particular questions. Leave will be given where it is fairly required to resolve the dispute or assert the rights concerned.
A disposition of the property, transfer of shares or an alteration in the status of the members of the company, is invalid after the commencement of winding up unless done with the consent of the liquidator, directors who retain the power to do so (as sanctioned by the court) or it is sanctioned by the court.
A person who took steps which were void is not thereby liable unless he had actual knowledge that the company was being wound up. Where a transaction is invalidated, principles of restitution may apply. However, in many cases, the loss may fall arbitrarily.
If a company being wound up makes a request of a person to do an act which is affected by the commencement of insolvency proceedings and does not inform the person that it is being wound up, the company and any officer in default are guilty of an offence.
After the liquidation is commenced, the shareholders of an unlimited liability company may not transfer their shares, without court consent. Such shareholders may have to contribute to the shortfall on the ultimate realisation of the assets.
In the case of limited liability companies, where there is partly paid up share capital, the shareholders are obliged to pay the balance due on their shares, which may be called to meet the claims of creditors.
Validation of Transfers
It is possible to apply to the court to confirm a transaction or disposition of property, which would otherwise be invalidated or restricted by the commencement of insolvency. The order may be limited to the period between the presentation of the petition and the order for winding up. The court may validate a transaction which brings a tangible benefit to the company, which would be otherwise not available.
The application may be made before or after the winding up order is made. It may be granted to validate a disposition which is in the interests of the creditors as a whole. This may be necessary in the case of necessary supplies which are required to keep the business trading through a critical period. However, the court will seek to maintain the principle that creditors are paid rateably.
Where a disposition or transaction is made in good faith, without knowledge of the liquidation, the court will be more likely to validate it. It will require less evidence that it brings tangible benefit to the company. Where the outsider has knowledge of the liquidation, less indulgence will be shown.
Effect on Contracts
The effect of liquidation may be to terminate a contract, either in accordance with its terms (providing for liquidation), frustration or breach. The particular effect depends on the nature of the contract.
The commencement of winding-up may be a ground for forfeiture of a commercial (market rent) lease. Such a clause is invalidated by law. In the case of a lease, there is provision by which the tenant may apply to the court for relief against forfeiture. Rent up to the liquidation is unsecured debt.
Rent incurred after liquidation may be an expense of the winding up and thereby have priority.Prior agreements, by which assets are automatically transferred on winding up, are invalid as inconsistent with the scheme of insolvency law.
A trust which is made when the company is solvent, may create interests and rights which terminate on winding-up.
Moratorium on Enforcement I
Where a company is being wound up, any enforcement whether by attachment, sequestration, distress, or execution, against the assets of the company is void, unless the court otherwise orders
Enforcement action may not be taken against the company without the consent of the court. Completed execution is unaffected. The rules in relation to the completion of execution are the same as those in bankruptcy. Where, however, the enforcement is in progress, it may be halted. There are different rules in respect of each type of asset.
In the case of the seizure of goods by sheriffs and County Registrars, complete execution requires seizure and sale. Where the execution is uncompleted, the liquidator may require that he is paid the proceeds of the execution. The court has the discretion to permit a preferential creditor to retain the benefit of the execution.
Once the sheriff is notified of the winding up, the goods (or proceeds) must be delivered to the liquidator. Where goods are sold, or monies are paid to the sheriff in order to avoid a sale, he must retain them for 14 days. During this period, the liquidator may claim the proceeds, if winding up commences.
Where debts owed to the company are attached by a creditor, an incomplete execution and attachment may be lost to the creditor unless the court otherwise permits.
Moratorium on Enforcement II
A judgment mortgage which is not registered at least three months before commencement of winding up is ineffective against an unsecured creditor who is owed a simple contract debt. As a judgment mortgage is treated as a means of execution, it appears that the normal rules on staying enforcement apply.
If the judgment mortgagee has not proceeded to sale or the appointment of a court receiver, then the means of enforcement or execution do not appear to be available and accordingly may cease in liquidation. As with other methods, the court may vary the rule in favour of the creditor on the application.
Landlords’ distress may not be undertaken once winding up commences.
Mortgages / Charges I
The appointment of a liquidator does not prevent a mortgagee from enforcing and relying on its remedies. A receiver may be appointed. Where a receiver stands appointed, the liquidation may end the receiver’s general agency on behalf of the company. However, this does not affect the realisation by the receiver of the secured assets.
There are a number of provisions, which invalidate security given on the eve of insolvency, in particular, that given to an existing unsecured creditor, unless the company is proved to have been solvent at the relevant time. In this context, insolvency is said to be the ability to pay debts as they fall due, although this is arguably too narrow. Any transfer or security granted at any time with the intention to avoid creditors may be set aside.
A fixed charge made within 6 months of the commencement of insolvency with the intention to prefer the creditor may be set aside. Charges granted within certain periods before the commencement of insolvency without good consideration may be set aside, unless the company is shown to be solvent at the relevant time.
Mortgages / Charges II
A floating charge given by an insolvent company within twelve months of insolvency is automatically set aside unless new value or consideration is given. The charge is invalidated if the company is insolvent at the time.
Where new monies are advanced or goods and services are received, the charge may be allowed as security for the new sums only plus 5% interest. The new consideration, whether by way of cash or goods or their value, must be paid to the company at the time that the charge is agreed.
Where the purchase of goods is involved, the charge must be agreed at the time of the sale. This exception does not apply to transactions with directors. New cash advanced or goods supplied by them, do not prevent the charge from being invalidated.
Disclaimer of Onerous Contracts I
The liquidator may apply to the court to disclaim an onerous contract. An application for an order of disclaimer must be made within 12 months of the commencement of liquidation. Persons who are potentially affected by the disclaimer, are to be given notice of the application.
The court may make such orders as it considers appropriate. The other party to the contract will be an unsecured creditor, in respect of sums to which it is entitled.The other party is entitled to apply to the court for compensation, by way of damages.
An onerous contract will be typically a contract at uneconomic rates and leases at high rents. Where an onerous contract or lease is disclaimed, the landlord or another party may prove for his loss in the liquidation. Where an application is made to effect the disclaimer, the court may make such orders as appropriate.
Disclaimer of Onerous Contracts II
The power to disclaim applies to any onerous or unprofitable contract or obligation. It is not enough that better terms or a better deal could have been struck. The contract must be on wholly uneconomic terms such that it interferes with the liquidator’s duty to efficiently wind up the company.
The effect of a disclaimer is to terminate the rights, interests and liabilities of the company in the asset concerned. It thereby removes future liabilities. The disclaimer discharges the contract insofar as necessary for the purpose of releasing the company. It does not affect the liabilities and rights of other persons.
Third parties who are affected by a disclaimer may claim in the insolvency in respect of their loss. A third party may apply to the court to have the asset vested in him. For example, a sub-lessee or mortgagee may apply to have the asset vested in him.
Fraudulent Transfers I
The bankruptcy law principle of fraudulent preference applies in company liquidations. A fraudulent preference is a transaction which is intended to benefit one creditor, to the prejudice of the general body of creditors.
A transfer of assets made by a company within six months of the commencement of winding up in favour of a creditor is potentially a fraudulent preference if the company is insolvent at the time of the transfer. There must be a predominant intention to prefer one creditor over others.
A fraudulent preference may be challenged by a liquidator in a winding up. A third party who takes the asset in good faith, is not prejudiced. The six-month period is extended to two years, in the case of transactions with or for the benefit of connected persons. In this case, the onus is on the connected person to prove that there was no intention to prefer.
Fraudulent Transfers II
Yielding to commercial pressure alone does not comprise an improper motive. Companies on the verge of insolvency are commonly put under commercial pressure and may be in a position to show that their predominant motive was to keep open a particular source of supply etc.
A common scenario is that the company’s directors cause it to discharge a liability in order to relieve their potential liability on personal guarantees for the same debt. The courts will readily set aside such transactions as improper preferences.
Where the transferee/ payee is connected with the company, a period of two years prior to liquidation applies. A person may be connected to a director or a de facto director by falling within certain categories of relatives, partners, trustees, etc. The onus is on the connected person to prove that the predominant objective was legitimate.
A liquidator, creditor or a shareholder may initiate misfeasance proceedings against directors and other officers of the company. There is a summary form of procedure to enforce duties and remedies where there has been wrongdoing in relation to the company. The proceedings may be taken against any present or past officer, persons who have formed the company, a liquidator or a receiver. It also applies to shadow and de facto directors.
The procedure is available where an officer has misapplied, retained or become liable to account for any money or assets of the company or has been guilty of any breach of duty or misfeasance. It may be used to take action for breach of duty and abuse of power. This may be a breach of fiduciary duty, fraudulent preference or other improper action.
Negligence by itself is not enough to constitute misfeasance for this purpose. Gross negligence may be a sufficient breach of duty, where it results in the company’s assets being misapplied.
The court may order monies to be repaid or assets to be given back to the company. It may order the payment of compensation to the company. The court may exonerate directors who have acted honestly and reasonably.
Certain breaches of a director’s duties may be ratified by the company itself. This would mean that the minority shareholders cannot take action against it. If, however, the company was insolvent and accordingly owed duties to its creditors, the confirmation of the shareholders will not suffice in this case.
References and Sources
Companies Act 2014 S.596 – S.616 (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) Part VIII 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