Swelling Assets

Unlawful Preference I

The bankruptcy rules on “asset swelling” apply to a company liquidation. These rules deem certain pre-liquidation transfers to be invalid. The liquidator may challenge certain transfers and unwind them, in much the same way as the Official Assignee may do in a personal bankruptcy. This has the effect of swelling or increasing the assets available for the creditors.

Any conveyance, mortgage, delivery of goods, payment, execution or other act relating to the assets of the company, done by or against a company which is  unable to pay its debts as they become due, in favour of a creditor or any person in trust for a creditor with a view to giving that creditor, or any surety or guarantor for such creditor, a preference over other creditors, shall be deemed an unfair preference. It is deemed invalid if winding up commences within six months of the act, and the company is, at the time of commencement of the winding up, insolvent.

The relevant period is two years in the case of a transaction or act with a connected person. It is deemed to have been done with a view to giving such person an unfair preference over other creditors until the contrary is shown.  The provisions do not affect the right of persons taking the title in good faith and for valuable consideration through or under a creditor of the company.


Unlawful Preference II

Where an act is rendered void as an unfair preference of a person interested in property mortgaged or charged, then the person preferred shall be subject to the same liabilities and have the same rights, as if he had undertaken to be personally liable as surety of the debt to the extent of the charge or the value of his interest over or in the property, whichever is less. The value of the interest shall be determined as if the interest was free of all encumbrances other than those for which the charge for the company’s debt was then subject.

On an application to the court in relation to payment on the basis of an unfair preference of a surety or guarantor, the court may determine questions arising between the person to whom it was made and the guarantor and grant relief in respect thereof.  It may give leave to bring in the surety or guarantor as a third party.


Effect on Charges

A floating charge created within 12 months of the commencement of winding is invalid unless it is proved that the company was solvent, at the time of its creation.  This does not apply, to the extent that new monies have been advanced or to the extent of the actual price of goods sold to the company, subsequent to the creation of the charge together with interest.  The market value of the goods or services is applied.  A two-year period applies where the floating charge is granted to a connected person.

Where a company is being wound up and

  • the company was within 12 months before the winding up indebted to any officer or a connected person;
  • such indebtedness was discharged whether wholly in part and
  • the company created a floating charge over its assets within 12 months from the date of commencement of winding up,

then such charge is invalid to the extent of repayment unless it is proved that the company immediately after the creation of the charge was solvent.


Misappropriated Assets

If in the course of winding up, it appears that any person who has taken part in the formation or promotion of a company or any past officer, liquidator, examiner has misapplied, retained or become liable to account for any money or property of the company or has been guilty of any misfeasance or another breach of duty or trust in relation to the company, then the court may on the application of the ODCE or the liquidator or any contributory, examine into the conduct of that person.

Such person may be compelled to repay or restore the money, property or any part of it respectively with interest at such rate as the court thinks fit or to contribute such sum to the assets of the company by way of compensation in respect of such misapplication, retainer, misfeasance or other breach of duty or trust, as the court thinks fit.

A similar provision applies, in the case of a winding-up of a subsidiary, where it appears that a director of the subsidiary’s holding company has misapplied, retained or become liable or accountable for any money or property of the subsidiary, or has been guilty of any misfeasance or another breach of duty in relation to it.

Where any property is disposed of by conveyance, mortgage, loan, or in any other way, whether by act or omission and the effect of the disposal was to perpetrate a fraud on the company, its members or creditors, the court, if it deems just and equitable to do so, may order any person who appears to have the use, control or possession of the asset or the proceeds of sale, to deliver it to the liquidator on such terms or conditions as it sees fit.

In deciding whether it is just and equitable to make an order, the court shall have regard to the rights of persons who have bona fide and for value acquired an interest in the property concerned.


Orders to Restore I

The following provisions apply if in the course of winding up a company it appears that—

  • any person who has taken part in the formation or promotion of the company;
  • any past or present officer;
  • liquidator  or examiner of the company, or receiver of the property of the company,

has misapplied or retained or become liable or accountable for any money or property of the company.

In these cases, the court may, on the application of the ODCE, the liquidator or any creditor or contributory of the company, examine into the conduct of the promoter, officer, liquidator, examiner or receiver, and

  • compel him or her to repay or restore the money or property or any part of it respectively with interest at such rate as the court thinks just, or
  • to contribute such sum to the assets of the company by way of compensation in respect of the misapplication, retainer, misfeasance or other breach of duty or trust as the court thinks just.

Orders to Restore II

The power applies notwithstanding that the person in respect of whom an order has been sought, may be criminally liable in respect of the matters on the grounds on which the order is to be made.

Under a separate provision, the court may, on the application of a liquidator direct that all or part of the property or assets of the company held in trust for it, shall be vested in the liquidator in his official name.

On making an order, the liquidator may, after giving an indemnity, as the court may direct, bring or defend in his official name any action or other legal proceeding relating to the property or which it is necessary to bring or defend for the purpose of winding up the company and recovering the property.


Subsidiaries

The power also applies if, in the course of winding up a company which is a subsidiary of another company, it appears that any director of the subsidiary’s holding company has—

  • misapplied or retained or become liable or accountable for any money or property of the subsidiary, or
  • been guilty of any misfeasance or another breach of duty or trust in relation to the subsidiary.

The court may, on the application of the liquidator or any creditor, contributory or member of the subsidiary, examine into the conduct of the director concerned and compel him or her—

  • to repay or restore the money or property or any part of it respectively with interest at such rate as the court thinks just, or
  • to contribute such sum to the assets of the subsidiary by way of compensation in respect of the misapplication, retainer, misfeasance or another breach of duty or trust as the court thinks just.

The power applies notwithstanding that the person in respect of whom an order has been sought may be criminally liable in respect of the matters, on the ground of which the order is to be made. This is without prejudice to any other basis for imposing liability on any person (whether related to the company or not) in respect of the person’s acts or defaults in relation to the company or its property.


Summary Recovery I

There exists a summary procedure by which an application may be made by liquidators, receivers, creditors, shareholders and others for orders to redress wrongdoing or misappropriation by officers or certain others, who were involved in the business of the company.  The application may also be made against persons who promoted the company and against past liquidators, receivers, and examiners.  Shadow directors may also be the subject to this summary procedure.

The mechanism is procedural and it does not create any new obligations in itself.  It operates as a mechanism by which misappropriation, diversion, breach of fiduciary duties (such as secret profits), preferment of creditors and other abuses may be enforced.

Proceedings for negligence on the part of directors and other officers cannot be brought under this procedure.  There must be “misfeasance” which implies in either fault or breach of fiduciary duty.


Summary Recovery II

The defences available are those generally available in respect of the particular wrongdoing.  In the case of certain breaches of duty, the company in general meeting before liquidation may cure certain instances of misfeasance. This may be done before liquidation or receivership, provided that the company was solvent at the time.  If the company is insolvent, then it owes wider duties to creditors, and a ratification by the shareholders will be ineffective.

The court may make whatever order is necessary to make restitution of the misappropriated monies or breach of duty.  Accordingly, the assets potentially available for distribution are thereby increased. The court has the discretion to relieve officers for breach of duty, provided that they acted honestly and they ought reasonably to be excused.


Disclaimer of Onerous Assets I

The liquidator may disclaim onerous property.  Onerous property means property, whether tangible or intangible of a company being wound up such as:

  • land burdened with onerous covenants;
  • shares or stock in any company;
  • an unprofitable contract;
  • any other property which is not saleable or not readily saleable by reason of its binding the possessor to the performance of onerous acts or payment of money.

The liquidator may, with leave of the court and subject to the below provisions, disclaim the asset by notice in writing given within 12 months of commencement of winding up. If the asset has not come to the liquidator’s attention within one month of commencement of winding up, the power may be exercised, within 12 months after the date, the liquidator becomes aware or such extended period, as may be allowed by the court.


Disclaimer for Onerous Assets II

The court may require notices to be given and impose conditions on the disclaimer.  The disclaimer shall operate to determine, from the date of disclaimer, all rights, interests, and liabilities of the company in the disclaimed property.  It shall not affect the rights or liabilities of another party, except and in so far as for the purpose of releasing the company and the property from the liability.

A liquidator shall not be entitled to disclaim any property under this provision where an application in writing has been made by any person interested requiring the liquidator to decide whether or not he will disclaim and the liquidator has not, within 28 days given notice that he intends to apply to the court for leave to disclaim.

The court may, on the application of any person, entitled to the benefit and burden of a contract made with the company, make an order rescinding the contract on such terms as to payment by or to either party, of damages for the non-performance, or otherwise as the court thinks fit. Any damages are provable as a debt in the winding up.


Consequential Orders

The court, on application of any person who either claims an interest in the property disclaimed or is under a liability not discharged, in respect of the property so disclaimed,  may make an order for the vesting of the property in, or delivery of the property to, any person entitled to it, or to whom it may seem just that the property should be delivered, by way of compensation for any liability of the above kind, or a trustee for him on such terms as the court thinks fit.

Where the property is of a leasehold nature, the court shall not make a vesting order in favour of any person claiming under the company, whether as under-lessee or mortgagee by demise, except upon the terms of making that person subject to the same liabilities and obligations as those to which the company was, under the lease in respect of the property at the commencement of the winding up, or if the company thinks fit, subject to the same liabilities and obligations as if the lease has been assigned to that person and in either event, as if the lease had comprised only the property in the vesting order.

Any mortgagee or under-lessee declining to accept the making of the vesting order upon such terms above shall be excluded from all interest in and security on the property concerned.

If no person claiming under the company is willing to accept the making of the order on the above terms (subject to the same liabilities, etc.), the court has power to vest the estate or interest of the company in the property concerned in any person liable either personally or in a representative character, either alone or jointly with the company, to perform the lessee’s covenants in the lease, freed and discharged from all estates, encumbrances and interests created therein by the company.


Winding Up Related Company

A related company may be required to contribute to the discharge of the debts of the company being wound up if the court is satisfied that it is just and equitable to so require.  Upon the application of a liquidator, creditor or member of a company that is being wound up, the court may make an order that the related company shall pay to the liquidator an amount equivalent to the whole or any part of the debts provable in the winding up.  The order may be on such terms as may be specified.

In deciding whether it is just and equitable to make an order under this power, the court shall have 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 company being wound up; and
  • the effect which such order would be likely to have on the creditors of the related company.

No order shall be made unless the court is satisfied that the circumstances that gave rise to the winding up are attributable to the acts or omissions of the related company.  It shall not be just and equitable to make an order if the only ground for making the order is the fact that the companies are related and that the creditors of the company being wound up have relied on the fact that, that another company is a related company. A creditor for this purpose must have a debt of at least €10,000.


Winding up Together

Where two or more related companies are being wound up and the court, on the application of the liquidator, creditor or contributor, is satisfied that it is just and equitable to do so, then it may make an order to the extent specified that the companies shall be wound up as one.  If this order is made, the court shall have regard to the interests of the persons who are members of some but not all of the companies.

Notice of the application is to be served on every company specified and on such other persons as the court may direct, at least eight days in advance. Where the court makes an order under this power, it may remove a liquidator of one of the companies and appoint any person to act as liquidator of any one or more companies.  It may give directions as it sees fit, for the purpose of giving effect to the order.

Secured debts are not to be affected. The preferential debts of a company shall, to the extent that they are not paid out of the assets of that company, be subject to the claims of holders of debentures under any floating charge created by any of the other companies. Unless the court otherwise orders, the claims of all unsecured creditors of the companies shall rank equally among themselves


Winding up Together

In deciding whether it is just and equitable to make an order under this power, the court shall have regard to

  • the extent to which any of the companies took part in the management of the other;
  • the conduct of the companies towards the creditors of any of the other companies;
  • the extent to which circumstances which gave rise to the winding up is attributable to the acts or omissions of any of the other companies;
  • the extent to which the businesses of the companies have been intermingled.

It shall not be just and equitable to make an order under this power on the ground only that the companies are related and that the creditors of one company, in fact, relied on it being related to the other company.


References and Sources

Primary References

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) Paart 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

Shorter Guides

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

UK Sources

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