The European Lawyer

In Ireland, where a company or family of companies finds itself to be insolvent, the following are the options available to it:

– the members of the company resolve that the company can no longer continue to trade by reason of its liabilities and that it be put into liquidation and a liquidator appointed. At an obligatory meeting of the creditors of the company, the creditors can vote for their own liquidator to replace the person appointed by the company and will succeed if they have the majority in value.

– a petition to wind up a company may be presented to the High Court by any of the following:

• the company itself;
• a creditor or creditors of the company;
• a contributory or contributories. A contributory is a person who is liable to contribute to the assets of the company in the event of its being wound up;
• an oppressed member (need not be a minority).

– if a company is in default, a secured creditor may, at the invitation of the company, or independently, appoint a receiver to realise assets sufficient to repay the debt due to the secured creditor. A company is usually placed in liquidation after the appointment of a receiver.

– where the whole or any part of the undertaking of an insolvent company’s business is capable of survival as a going concern the company may be ‘protected from its creditors’ by order of the High Court. Any of the following may apply to the High Court for the protection order:

• the company;
• the directors of the company;
• a creditor, including a contingent or prospective creditor, including an employee;
• members holding not less than 10 per cent of the paid-up share capital in the company entitled to vote at general meetings of the company.

The High Court appoints an examiner who will formulate a scheme of arrangement to be voted on by all classes of creditors and, if approved, to be considered for implementation by the High Court.

– a company can attempt to agree a scheme of arrangement with its creditors although this is rarely attempted in practice. This chapter will deal with both voluntary and court liquidations under the generic term ‘liquidation’ and where differences arise between the two methods these will be highlighted.

A. DOMESTIC FAMILY OF COMPANIES

1. If insolvency proceedings must be commenced for the family of companies, does your law permit a joint proceeding, ie, a single court file, a single judge, a single list of creditors, single notice list, or must the case for each member of the family proceed separately with no practical acknowledgment of the related proceedings?

Given the separate legal status of companies, although related, insolvency proceedings must be commenced separately for each company.

Where two or more related companies are being wound up, the liquidator of any of the companies may apply to the High Court for an order directing that the liquidations be conducted as one (Companies Act 1990, s 141). This is the case even if the same person is liquidator of some or all of the companies concerned – it is the liquidations that are separate. The Court may make such order where it would be just and equitable to so do and on such terms and conditions as the Court directs. In considering whether it is just and equitable the court will have regard to the following:

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

If the Court declines to make the ‘pooling’ order, the liquidations of the companies must proceed separately.

(a) What if the members of the family are organised under, or operate in, different locations within your country? Can a company from a distant location in your country commence its bankruptcy proceeding where its affiliate is located, if the affiliate has already commenced its bankruptcy proceeding?

In the case of a voluntary liquidation the extraordinary general meeting of the members of the company to consider the winding-up proposal may be held anywhere, even outside the country. However, the meeting of creditors must take place near where the company carried on its business, or where the majority of creditors are located.

In the case of a court liquidation the winding-up application is presented to the High Court sitting in Dublin.

(b) To the extent your country has different types of insolvency proceedings (such as Chapter 11 reorganisation and Chapter 7 liquidation in the US), do the members of the corporate family all have to proceed under the same type of proceeding?

No, different procedures can apply to each of the members of the corporate family. However, if a parent company is in examinership (rescue procedure), it is likely that all members of the corporate family will be in examinership also.

2. Does your law permit, or prohibit, a single administrator/ trustee/ receiver to administer the assets and the liabilities of the entire corporate family?

Unless a pooling order has been made by the High Court, a liquidator/receiver must deal with each company and its creditors and debtors separately. The same person can be liquidator/receiver to all, but it is possible for different individuals to be involved.

(a) If so, is there a hearing for the court to determine whether the administration by a single party is appropriate? Are secured and unsecured creditors or other parties in interest allowed to object or be heard at such hearing?

When applying for a pooling order the Court will accept submissions from the various liquidators to the companies concerned, although the Court can direct that it wants other parties to participate in the court hearing.

However, in making the order the Court will have regard to the interests of parties who are members of some but not all of the companies concerned.

The position of secured creditors is not affected by the pooling order and this is specifically provided for by s 141(3)(c). Where a pooling order is made by the High Court, the unsecured creditors of the pooled companies will be treated as one group and shall not be distinguished with reference to the company of which they were creditors.

(b) What about joint representation by other professionals, such as law firms or accounting or auditing firms?

Joint liquidators may be appointed to a company or group of related companies, either by the Court or in a voluntary liquidation situation. In such cases, it is usual for each liquidator to retain his own advisers.

3. Does your law encourage or discourage overlapping boards or management teams for separate members of a corporate family?

In general, a person may hold no more than 25 directorships of Irish-registered companies (Companies (Amendment) (No 2) Act 1999, s 45). However, there are exceptions to this rule where, for example, group companies are concerned.

There is nothing to discourage a person from accepting directorships of several related companies. However, there is a duty to act in the best interests of a company to which one is appointed. In a group situation this may give rise to a conflict situation for directors on several boards. In such circumstances a conflicted director needs to consider his position very carefully. A person acting as a director of a company must act ‘honestly and responsibly’ in relation to the conduct of the affairs of the company. There are onerous statutory requirements.

(a) If the directors of a parent company are not directors of the subsidiary, but they either directly or indirectly manage the affairs of the subsidiary anyway, do your country’s laws render such people de facto or ‘shadow’ directors of the subsidiary?

Jurisprudence in Ireland recognises the ‘position’ of de facto and shadow directors.

Section 2(1) of the Companies Act 1963 defines ‘director’ as including ‘any person occupying the position of director by whatever name called.’ In one High Court decision the judge found that the concept of a de facto director was compliant with this definition and he set out the circumstances in which a person may be found to be a de facto director, although not validly appointed a director of a company, as follows:

• where there is clear evidence that that person in question has been either the sole person directing the affairs of the company; or
• where the person in question is directing the affairs of the company with others equally lacking in valid appointment; or
• where there were validly appointed directors with whom the person in question was acting on an equal or more influential footing in directing the affairs of the company.

The judge also decided that when there is evidence that the role of the person in question is explicable by the exercise of a role other than director (for example a professional adviser), the person should not be held to be a de facto director.

A shadow director is ‘a person in accordance with whose directions or instructions the directors of a company are accustomed to act … unless the directors are accustomed so to act by reason only that they do so on advice given by him in a professional capacity’ (Companies Act 1990, s 27(1)). Therefore, a professional adviser shall not be deemed to be a shadow director of a company if the board merely relies on and acts in accordance with his or her professional advice.

(b) Do the duties or responsibilities of officers or directors of a family of companies change when the companies become insolvent? For example does their duty shift from a responsibility to the shareholders to a responsibility to the creditors? What if only one of the companies is insolvent?

When companies are solvent, directors have responsibility to the shareholders of the relevant companies, although they are not answerable to the shareholders individually.

When a company is insolvent the directors’ duties are to the creditors of the company. The directors must ensure that no new liabilities are created, no existing liabilities are paid and that the assets of the company are preserved for the benefit of the creditors as a whole. The directors of an insolvent company have a duty to put the company into liquidation (or examinership, if appropriate) as soon as possible unless there is a real and reasonable prospect of trading out of the insolvency in the short term.

4. Are the rules regarding members of the corporate family transferring assets among one another (such as by way of loans, capitalisation, other transactions) different when the members are insolvent?

(a)

Are cash sweep procedures allowed, that is, all cash from all subsidiaries is swept out to one account controlled by one of the family entities and then redistributed among the family members to pay bills?

(b)

What if the redistribution results in a healthy subsidiary funding the shortfalls in another subsidiary that is losing money?

Where a company is insolvent the directors must preserve the assets of the company for the benefit of the creditors as a whole. Any disposition of the company’s assets with the intention of preferring one creditor to another/others is a fraudulent preference (Companies Act 1963, s 286). If the disposition occurs within the six months before the date of liquidation, a liquidator can recover the relevant assets. Where the recipient of the asset is a connected person, the period is extended to two years prior to the date of liquidation. A ‘connected person’ is defined in s 286(5) of the Companies Act, 1963 as a person who at the time of the transaction was:

(a)

a director of the company, including a de facto director of the company;

(b)

a shadow director of the company;

(c)

a director’s spouse, parent, brother, sister or child;

(d)

a related company, defined as a holding or subsidiary company; a company which, on its own or with another related company holds more than 50 per cent of the nominal value of the equity share capital in the company or which is entitled to exercise more than 50 per cent of the voting power at any general meeting; a company which has common shareholders with the company; a company whose business has been carried on with that of the other company in such a way that the business of the company is not readily identifiable from the business of the company, or a substantial part of it is inseparable or a company which shares a common related company with the company;

(e)

a trustee of or surety or guarantor for the debt due to any of the persons set out in (a) to

(d) above.

5. How does your law treat claims of one member of a corporate family against other members of the corporate family?

If a company is an unsecured creditor of an insolvent related company, that creditor company is treated no differently from any other unsecured creditor with regard to the debt due to it.

With regard to the disposition of an insolvent company’s assets to a related company, the period under scrutiny is extended from six months to two years prior to the date of liquidation. Further, if such a disposal to a related company occurred within the two-year period, it shall be deemed to be a fraudulent preference and the burden of proof then falls to the beneficiary company to prove that the disposition was not a fraudulent preference, rather than the liquidator having to prove that it is, as is the case where the beneficiary is not connected.

Where a floating charge on the undertaking or property of a company was created in favour of a connected person within two years of the date of commencement of the liquidation of the company which created the charge, the charge shall be invalid except to the extent of money actually advanced or the reasonable value of goods or services sold or supplied to the company, unless the connected person can show that the company was solvent immediately after the creation of the charge (Companies Act 1990, s 288(3)) in which case the charge will be held to be invalid.

Where a floating charge is created on the undertaking or property of a company in favour of a person who is not connected the relevant period is reduced to 12 months prior to the date of commencement of the liquidation (Companies Act 1990, s 288(1)).

(a) Are such claims invalid or unenforceable?

All claims of a related company, if valid, must be taken into account by the liquidator of the insolvent related company.

(b) If not, are such claims on equal footing with those of third party creditors, or are they subordinated, or is there other treatment required or permitted under your law?

Valid unsecured claims of a related company rank equally with the other unsecured creditors of the company in liquidation.

If the claims are as secured creditors, provided the security does not fall foul of the provisions of s 286 or s 288 of the Companies Act 1963, the related company may rely on its security and ranks as an unsecured creditor in the liquidation for any shortfall.

6. Does your law allow for the pooling of assets and liabilities of all members of the corporate family, so that a creditor of one member becomes, in essence, a creditor of all members?

Yes, subject to the companies satisfying the requirements set out earlier in this chapter. An order of the High Court is required. It is essential that the companies are in insolvent liquidation.

(a) If so, is such pooling automatic or does it require a factual showing and court involvement?

Pooling of companies’ assets can only be done by order of the High Court.

(b) What proceedings (motion, request, trial, etc) are required for the court to order the pooling of assets and liabilities?

A liquidator of one of the companies concerned may apply to the Court setting out in affidavit the reasons the assets of the companies should be pooled. The liquidator(s) of the other company or companies may object. Creditors may object if the court agrees.

(c) Does your country’s law contemplate any partial pooling of assets and liabilities?

The Court, when making the pooling order, may make it on such terms and conditions as it considers appropriate. Pooling orders are rare in Ireland.

(d) If the pooling of assets and liabilities is called for, are there any protections for certain types of creditors, such as creditors with a lien or other security interest in particular assets?

Section 141(3)(c) provides that the position of secured creditors shall not be affected by the pooling order. This section merely reflects the reality of the position of a secured creditor, who falls outside the scope of the liquidation due to the security held, except to the extent that the security, when realised, is insufficient to satisfy the entire debt due to the secured creditor. Where there are amounts due to the secured creditor after the security has been realised, that creditor will rank as an unsecured creditor for the amount of the shortfall.

7. How are secured creditors treated with respect to a family of companies? For instance, if a creditor has a security interest in the assets of one member of the family, and a guarantee from another member of the family, are both such claims valid in insolvency proceedings of the entire family?

In a scenario such as this, the secured creditor will enforce his security against the first company and then prove in the liquidation of the guaranteeing company as an unsecured creditor for any shortfall.

8. Do your laws or courts provide for post-insolvency commencement of new financing that allows continued operation of the business and provides adequate protection to the lender who made the loan? Explain.

The only statutory provision in this regard is in the case of an examinership, where the company continues to trade during the period of protection. An examiner may certify liabilities of the company as they arise where, in the examiner’s opinion, the survival of the company as a going concern during the protection period would otherwise be seriously prejudiced.

These certified liabilities then rank as an expense of the examinership after the examiner’s fees, costs and expenses and before claims secured by way of floating charges and before unsecured claims. The certified claims rank after claims secured by fixed charges.

Certification does not guarantee payment, it merely improves the priority to be afforded to the liabilities.

9. Are directors and officers subject to civil or criminal sanctions if:

(a) Fraud or misrepresentation of a company’s finances are discovered?

Yes. It is an offence for any person (not only an officer of a company) to be knowingly a party to the carrying on of the business of the company with intent to defraud creditors of the company or creditors of any other person or for any other fraudulent purpose. Any person found guilty of such an offence can face imprisonment for a term of up to seven years and/ or a fine not exceeding €63,500.

If during the course of a liquidation or examinership it appears to the liquidator/examiner that an officer of the company was knowingly a party to the carrying on of any business of the company in a reckless manner or with intent to defraud the creditors of the company, or creditors of any other person, the court may declare that officer personally liable for the debts of the company, without any limitation of liability.

A failure by a company to keep proper books of account is also an offence which carries a fine. In a liquidation situation a liquidator may be obliged to bring an application seeking to restrict the directors of the insolvent company to which he is appointed from acting as directors of any other company for a period of five years, unless those other companies satisfy certain minimum requirements designed to protect creditors. A failure to keep proper books and records and a failure to make annual returns are matters which the court would take into account in making its decision on such a restriction application.

(b) They allow the company to continue to operate while knowing it does not have the ability to pay the debt being incurred?

If the directors continue to operate knowing that the company does not have the ability to pay the debt being incurred and believing that it never will, then the courts would consider them to be acting recklessly or with intent to defraud the creditors and may hold them personally liable for some or all of the debts of the company.

If the directors continue to operate knowing that the company does not have the ability to pay the debt being incurred but genuinely believing on reasonable grounds that it will in the short term then it is unlikely that the courts would consider the directors to have acted recklessly or with intent to defraud and they will not be held liable for the liabilities of the company.

(c) Same as (b) above but the directors believe that if some event occurs (eg, chance to obtain new contract in prospect, new equity infusion, or new financing) it will be able to save the company and pay its bills?

If such a belief is genuinely held on reasonable grounds and for a relatively limited period then the directors are committing no offence in continuing to operate and incurring further liabilities while waiting for the event to occur.

B. INTERNATIONAL FAMILY OF COMPANIES

1. If one or more members of the corporate family is incorporated under or governed by the laws of another country, does that change your answers to any of the questions set forth above?

Each company in a group of companies must be considered individually and on its own set of circumstances. It does not matter that there is a group relationship.

In general, where a company is incorporated under the laws of a country other than Ireland, the company, its obligations and the procedures available will be dictated by and governed by the laws of the country in which the company is incorporated. However, there are two exceptions to this statement.

Firstly, Council Regulation (EC) No 1346/ 2000 on Insolvency Proceedings (known as the Cross-Border Insolvency Regulation and hereinafter called ‘the Regulation’) became operative in Ireland on 31 May 2002.

By virtue of the Regulation, the Irish High Court has jurisdiction to open insolvency proceedings where a company has its Centre of Main Interest (COMI) in Ireland or where there are assets located in Ireland.

The Regulation defines ‘insolvency proceedings’ for the Irish jurisdiction as including creditors’ voluntary liquidation (where confirmed by the High Court), court liquidation and examinership. The regulation does not cover receiverships. Other areas are also covered but they are not relevant for the purposes of this chapter.

COMI is not defined in the Regulation. However, the preamble states that COMI, ‘should correspond to the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties.’

In addition, under the Regulation the High Court may commence ‘secondary’ proceedings (which must be winding-up proceedings, ie excluding examinership) against the Ireland-based assets of a company where its COMI is in another EU Member State.

Secondly, s 212 of the Companies Act 1963 gives jurisdiction to the Irish High Court to wind up ‘any company’. This section does not specify that the company must be registered in Ireland. Therefore, in certain circumstances the Irish High Court will wind up a non-Ireland registered company.

A pooling order could not be sought from the Irish High Court in relation to a company incorporated abroad unless it could be wound up under the provisions of s 212 of the Companies Act 1963.

2. If insolvency/restructuring proceedings are instituted for corporate family members in different countries:

(a) What controls as to where the case must be filed (eg, centre of main interests, principal place of business, location of parent, etc)?

See question 1 above.

(b) Do the courts attempt to exercise jurisdiction over the assets of the company filing domestically no matter where located (for example, overseas), or do they limit their jurisdiction to only those assets located in your country?

Where the Irish courts open proceedings pursuant to the Regulation, all assets wherever located are captured. Where secondary proceedings are opened the assets located in that other EU Member State will be captured by the secondary proceedings.

The assets of a company wound up pursuant to s 212 of the Companies Act 1963 are captured by the Irish process, wherever located.

However, where a company is registered outside the EU and has assets outside the EU the conflict of laws provisions will apply in respect of those assets located outside the EU.

(c) Would your courts enforce a court order from a foreign country that attempted to exercise jurisdiction over assets located in your country but owned by the company that is subject to the foreign insolvency proceedings?

Subject to certain conditions being met, the High Court will grant an order in aid

(d) Has your country adopted any procedures (such as the Model Law on Cross-Border Insolvency) to address the various issues that arise in dealing with cases of cross-border insolvency?

Other than the Cross-Border Insolvency Regulation, there are no other relevant inter-jurisdictional procedures in force in this jurisdiction.