Third Party Interests
Assets which are held in trust or in which other persons have an interest are taken by liquidator/ assignee, subject to those interests. They take no better title that that which the insolvent individual/ company held in them. The beneficiaries under the trust can assert their ownership against the individual/ company.
Trusts are subject to the laws which prohibit the transfer and disposition of property within certain periods prior to bankruptcy or liquidation. All assets are held subject to equitable interests and rights in them which are held by third parties.
Secured assets do not vest in the company and are owned by the security holder. The proprietary rights in the assets belong to the security holder and are not available to the creditors generally.The liquidator of a company takes the assets subject to such charges, mortgages and liens over the company’s properties as exist.
The security holder has sole recourse to the secured assets to satisfy its debts. He may prove for the shortfall in the insolvency. Some assets which may appear to be owned by the company may not in fact be owned at all, or they may be hired or leased.
Secured Creditors I
The basic rule is that a secured creditor cannot claim in the insolvency for his full debt and claim its security at the same time. The secured creditor may do the following:
- retain its security and rely on it only;
- release its security and claim in bankruptcy for the entire debt;
- realise or value the security and prove for the balance.
It may be that the security is sufficient. If the security yields a surplus, then the surplus must be paid to the liquidator. If the security is insufficient, then the lender will need to consider what course of action is to its best advantage.
Secured Creditors II
The liquidator calls for proof of debt from the various creditors as part of the insolvency process. The secured creditor must state if it is secured. If the security is not declared, it must be surrendered to the assignee, trustee or liquidator for the benefit of the creditors, unless the court allows an amendment and excuses the omission.
A judgment mortgagee is not a secured creditor and has no priority unless his judgment mortgage is registered for at least three months prior to bankruptcy.
There may be a dispute between liquidators, mortgagees, and receivers regarding the validity of charges and security. There are procedures by which the validity of security may be challenged and determined by the court on the initiative of receivers or insolvency officer.
In principle, it is possible to provide under a sale contract, that title will not pass until payment. The default presumption would cause the title to transfer at a much earlier date. Where the title is retained, the seller has effective priority and security in that regard.
If the title has passed to the insolvent company when insolvency commences, then in the absence of effective retention of title or security, the asset will be available to its creditors, irrespective of whether the purchase price has been paid. This may lead to arbitrary results in some cases. Questions may arise in some cases as to whether title to the asset has been transferred.
Goods and movable property generally may be leased or hired. The expressions are largely interchangeable. Large or high-value plant and equipment are commonly leased. In the case of leased property, the superior title is retained by the lessor and is not available to the lessee’s creditors.
Clauses in contracts and leases that attempt to reverse the usual insolvency rules are generally void. Where, for example, there is no retention of the title, but there is a clause which purports to entitle the seller to re-take it in the event of bankruptcy, it will be void unless valid security has been created.
Under hire-purchase, there is a lease or letting of the goods, with an option to acquire the goods on termination. Most hire-purchase agreements and arrangements are regulated under the Consumer Credit Act.
The conditions in hiring and lease agreements, which allow the hirer or lessor to enter premises in order to retake goods are declared void, other than in respect of vehicles, in premises other than dwelling houses and their curtilage.
Once one-third of the hire-purchase price has been paid, court proceedings are required to retake the goods. If the hirer breaches this provision, the contract may be terminated, and the lessee/ hiree may recover sums paid.
Where more than one-third of the price has been paid, the court may order the return of the goods to the owner, on such terms as may be ordered. A stay may be placed on the order, allowing the hiree the time to purchase them. An order may be made with respect to parts of the goods only.
Insolvency Set-Off I
Set-off is the right which may exist to offset a claim by the claimant against the defendant, by way of a claim by the defendant against the claimant. In some cases, contracts provide expressly for set-off. Banks commonly provide for set-off or a so-called combination of accounts, so that, for example, a loan account may be off-set against a deposit account in circumstances of default.
Set-off may give some creditors effective priority that would not otherwise apply. The principle is well established, and it is justified by the principle that a party should not be obliged to pay debts to a creditor while foregoing a debt owed by that creditor to him.
Under the default position, the debts must be owed by the same parties in the same capacities. Set-off is allowed only if there are mutual obligations between the parties. If any factor exists by which mutuality is not present, set-off at common law/ equity is not available. Where, for example, debts have been assigned, mutuality would not exist. Where debts are mortgaged under a charge, there would be insufficient mutuality between the receiver and the creditor.
Insolvency Set Off II
There are set-off rules which apply in liquidations and in bankruptcy. It is arguable as to whether parties can contract out of them. It appears that contracting out is not possible under similar UK provisions. However, the relevant wording differs from the Irish provision in some respects.
Set-off applies to pre-liquidation debts of the company and creditor. It does not apply where the debt have been assigned.The debts must be mutual.
Unlike other contexts, the requirement for mutuality is in less onerous terms. The debts may be entirely unconnected and may arise from different transactions.
The debts may be liquidated or require quantification in proceedings. There may be set-off between sums due and goods held. However, the right must be capable of being reduced into monetary terms.
Each of the company and the creditor must be beneficially entitled to the debts. Joint liabilities may not be set-off against sole liabilities. However most commonly, there are joint and several liabilities, so that set-off is permissible.
Priority of Expenses I
If the assets are insufficient to pay the liabilities, the court may order payment out of assets, of the costs, charges, and expenses incurred in the winding upon such terms as to priority as it considers just. The expenses of a liquidation, bankruptcy, examinership, and to some extent a receivership, enjoy priority over most other claims. This can be extremely significant in many cases, where the available assets, realise less than or little more than the costs of the insolvency process itself.
The expenses of realisation usually have priority in respect of the proceeds of the asset realised. The liquidator’s expenses have priority over the claims of the ordinary creditors and preferential creditors. Liquidation expenses include the costs of realising assets and the costs of preserving assets. In particular, this will usually include the outgoings to the business including rent and salaries.
Pre-liquidation expenses are not liquidation expenses unless they are for the purpose of the liquidation and winding up. Rates and other taxes incurred in the course of the liquidation and insolvency proceedings may be expenses of the liquidation. Tax on income earned is a liquidation expense.
Priority of Expenses II
In a court winding up, the costs of the petition for liquidation, associated expenses, disbursements, and necessary expenses, the costs of the official liquidator, the remuneration of the official liquidator and expenses incurred necessarily and those necessarily incurred by the committee of inspection have priority. The court may vary this order if it deems it to be appropriate.
The costs and remuneration of examiners and the expenses properly incurred in an examinership enjoy extensive priority. They generally have priority over the costs of the winding up of the company. In relation to the proceeds of a floating charge security, the certified liabilities of the examinership itself and statutory preferential creditors take priority.
Preferential Debts I
Certain preferential debts have priority over the debts owed to the other unsecured creditors. They also have a certain degree of priority in relation to the proceeds of floating charges security.
The priority applies to certain employment and tax debts which arise within certain periods before the commencement of liquidation. Up to one year’s tax liability has priority. The Revenue can choose the relevant year in some cases. It need not choose the latest year or indeed the same year for each tax.
Value added tax, employers’ PRSI and Relevant Contracts Tax together with interest incurred in the 12 months before liquidation have priority.Rates in the 12 months prior to liquidation have priority.
Employee PRSI contributions due to the Revenue have super preferential status over all other creditors. They are effectively treated as received on trust for the Revenue.
Preferential Debts II
Sums due to Revenue may have priority over the proceeds of fixed charges over book debts, where such security has been successfully created. However, this liability is limited if details are given to the Revenue within 21 days of the charge being created.
The chargee is liable for PAYE and VAT, but this is limited to the sums received by the chargee. The Revenue must notify the chargee. If the relevant notification is made within 21 days, it does not apply to liability outstanding at that time.
Arrears of salaries relating to service in the four months prior to liquidation are preferential debts up to a maximum. Accrued sick pay pension contributions under any pension scheme and holiday pay are preferential debts without limit. Unfair dismissal compensation is a preferential debt. Damages for personal injury are similarly preferred.
Monies advances to finance preferential debts may enjoy the same priority as the debts themselves. It must be specifically advanced for this purpose.
A receiver must pay the proceeds of floating charge to the preferential debt holders before payment to the appointing secured creditor. The obligation arises once possession in taken.
References and Sources
Companies Act 2014 S.617- S.623 (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