Insolvency, Receivership, Examinership

Question 1

What are the main duties of a receiver?

Answer 1

A receivers’s main duty is to receive and realise the assets of a company that are the subject of a charge.

The receiver then discharges this debt and vacates his office. The receiver’s responsibility is to the debenture holder and not the company. In discharging these duties, however, the receiver’s actions may affect the company, as the sale of the company assets may result in the company having to be brought to an end or to the downsizing or restructuring of a business.

Question 2

Examples of the duty of a receiver to sell property at the best price reasonably obtainable?

Answer 2

In the case of Ruby Property Co Ltd v Kilty [1999] IEHC 50, the receiver sold the company property on the advice of the estate agent, but without advertising it publicly. Held: the receiver may have a duty to consider representations from the company as to how to conduct a sale to comply with section 316 of the Companies Act 1963 (now section 439 CA 2014).

The court held, however, that the receiver was not liable as he did not have the benefit of hindsight.

Question 3

Explain the Duty of receivers to apply to the court for direction:

Answer 3

The receiver and any officers and members of the company may apply to the court for direction in relation to any potential liability of the receiver in relation to contracts created by him in the performance of his duties.

Question 4

Explain Duty of Receivers to notify and account to the Registrar:

Answer 4

The receiver also has a duty to notify the Registrar of his appointment and the cessation of this appointment ( section 436 CA 2014). Within a prescribed timeframe during his appointment and following cessation of this appointment, the receiver has a duty to notify the Registrar which of the assets of the company he or she has taken into his or her possession, the value of the proceeds of sale of any such asset and his or her expenses ( section 430 CA 2014).

A receiver in default of this requirement shall be guilty of a category 4 offence.

Question 5

Within fourteen days of his appointment, the receiver is entitled to receive a statement of affairs in relation to the company which must state what?

Answer 5

• Particulars of all the company’s assets, debts and liabilities at the date of appointment of the receiver;

• The name and residences of the company’s creditors;
• The securities held by those creditors;
• The dates when the securities were respectively given
• any further or other information that may be required

Within two months of his appointment, the receiver must send a copy of this statement of affairs to:

1) the CRO;
2) the court;
3) the company; and
4) the debenture holders and/or their trustees

including any comments regarding this statement that the receiver sees fit to make.

When a person ceases to act as a receiver, he or she is also required to report on his or her opinion as to whether or not the company is solvent to the CRO which, upon receiving the statement, will forward a copy of it to the Director of Corporate Enforcement.

Question 6

Explain the duty of receiver to pay the company’s debts in a manner fixed by law?

Answer 6

If a receiver is appointed by a debenture holder and realises assets on a fixed charge or a legal mortgage, he has an obligation to pay the debenture holder and realises assets on a fixed charge or a legal mortgage, he has an obligation to pay the debenture holder first. Any surplus over the realisation of the asset should be returned to the company.

Question 7

What happens ff a receiver is appointed by a debenture holder and realises assets secured by a floating charge?

Answer 7

If a receiver is appointed by a debenture holder and realises assets secured by a floating charge, however, the Companies Act provides that the receiver can apply the proceeds realised to discharge the debt owed to the debenture holder, provided that the receiver uses the proceeds to pay the debts due to the preferential shareholders first. Any surplus can then be used to repay the debt outstanding on foot of the floating charge.

Question 8

What is the prescribed priority for the repayment of company debts on receivership?

Answer 8

• the costs of receivership;
• the fixed charges in the order that they were registered;
• the preferential debts;
• the floating charges in the order that they were registered;
• the unsecured creditors

Question 9

What is examinership?

Answer 9

Examinership is a process that offers protection to failing companies and affords them the opportunity of implementing plans to facilitate any required changes in order to ensure their long-term survival.

Question 10

What is the purpose of an examinership?

Answer 10

In effect, with examinership a company is awarded temporary protection by the court. The purpose of this protection is to prevent actions taken by the creditors that may result in the demise of the company, as well as allowing the company the time to investigate its own business affairs and make a proposal for change within the company to enable its survival.

Question 11

Who is an examiner?

Answer 11

The examiner is an officer of the court, who investigates the company’s affairs and reports to the court on its prospects of survival.

Question 12

In Re Holidair Ltd [1994]IESC 1, Chief Justice Mr Finlay stated that in reading the Companies Act (1990) people should be mindful of the twin objectives in relation to examinership.

What are they?

Answer 12

• provision of a period of protection; and

* if possible, that the company be enabled to continue as a going concern

Question 13

How can an examiner be appointed?

Answer 13

The examiner is appointed by the High Court if the company ( other than companies deemed to be a ‘small company’ under section 350 CA 2014, wherein the process is overseen by the Circuit Court) can satisfy the court that it has a reasonable chance of survival as a going concern. During the period of examinership, the appointed examiner will prepare a report on the possible future of the company and possible schemes of arrangement for the company’s survival.

Question 14

What are the grounds for the appointment of an examiner?

Answer 14

As stated by s 509 CA2014, the grounds for the appointment of an examiner are that a company has a reasonable prospect of survival as a going concern and that:
1. the company is or is unlikely to be unable to pay its debts; and
2. no resolution subsists for a winding up of the company; and
3. no order has been made for the winding up of the company
In determining whether a company is unable to pay its debts, one of the key factors is whether the value of its assets is less than the amount of its liabilities.

Question 15

The process of appointing an examiner commences with a lodging of a petition to the High Court.

A petition may be presented to the court by whom?

Answer 15

• the company;
• the directors of the company;
• a creditor or a contingent or prospective creditor (including an employee) of the company; or
• a member or members of the company holding at least 10% of the fully paid-up voting capital

Question 16

An application to the court to appoint an examiner is an ex parte application, meaning what?

Answer 16

The company does not have to be in court on that day.

Question 17

The ex parte application to have an examiner appointed has been described as an uberrimae fidei procedure, meaning what?

Answer 17

It is an application that must be made in the utmost good faith.

This requires that all information relevant to the examinership must be brought to the attention of the court at the application stage and the application must be for the primary purpose of rescuing the company, not for any other ulterior purpose.

Question 18

Given an example of a case where an application for examinership wasn’t made in upmost good faith?

Answer 18

In [Wogan’s (Drogheda) Ltd], the court rejected the application because the company’s real motive for bringing such an application was that it did not want to pay the Revenue Commissioners .

Furthermore, the directors deliberately misstated the value of Revenue debts in the balance sheet presented on foot of the petition.

Question 19

On hearing the application for examinership, what can the court do?

Answer 19

On hearing the application, the High Court may appoint an examiner, refuse to appoint an examiner, adjourn the petition to enable the applicant to present further evidence, make an interim order or make such order as it thinks fit .

The appointment lasts for seventy days and must be advertised in Iris Oifigiúil and two daily newspapers. The company must amend all its documentation to include the words ‘in examination.’

Question 20

A petition to the High Court requesting for examinership must be accompanied by what?

Answer 20

the petition to the High Court be accompanied by a report of an independent expert. This is usually the statutory auditor of the company or a person who is qualified to be appointed as an examiner of the company.

Question 21

What must this report contain?

Answer 21

a) the names and addresses of the officers of the company;
b) the names of other companies of which the directors of the company are also directors;
c) a statement as to the affairs of the company, showing particulars of the company’s assets and liabilities ( and whether or not any deficiency between the assets and liabilities of the company has been satisfactorily accounted for);
d) whether the company and the whole or any part of its undertaking would have a reasonable prospect of survival as a going concern;
e) whether the formulation, acceptance and confirmation of proposals for a compromise or scheme of arrangement would offer a reasonable prospect for the survival of the company and the whole or any parts of its undertaking, as a going concern;
f) whether an attempt to continue the whole company would be more advantageous than a winding up of the company;
g) recommendations as to the course that should be taken in relation to the company;
h) whether the facts disclosed would warrant further enquiries with a view to proceedings;
i) details of the extent of the funding required to enable the company to continue trading during the period of protection and the sources of that funding;
j) recommendations as to which liabilities incurred before the presentation of the petition should be paid;
k) an opinion as to whether the work of the examiner would be assisted by a direction of the court in relation to the role or membership of any creditors’ committee;
l) such other matters as he or she thinks relevant

Question 22

Before the court will appoint an examiner, it must appear to the court that?

Answer 22

• the examiner is suitably qualified;
• no winding up of the company has commenced;
• the company has been in receivership for more than three continuous days before the petition was presented;
• it appears to the court that the company is likely to be unable to pay its debts;
• the person designated to act as examiner by the petitioners consents to the appointment in writing;
• the examiner was not within the previous twelve months an officer or servant of the company or a partner of that person

Question 23

The court will take the report of an independent expert into consideration, but retains the discretion not to grant an application for examinership.

Give an example of this happening.

Answer 23

in Re Missford Ltd t/a Residents Club [2010] IEHC 11 , Missford Ltd traded as a private member’s club in St Stephens Green, Dublin , managed by two brothers. The club never showed a profit. The company petitioned the court to have an examiner appointed.

The application for examinership was supported by the company’s creditors. Held: in exercising its discretion not to grant examinership, the court was critical of both the independent accountant’s report and the management of the company.

The court was highly sceptical of the independent accountant’s opinion that the company had a reasonable prospect of survival. The independent accountant had based this view in part on the business plan which was in the court’s view excessively optimistic, projecting profits for 2010 and 2011 for a company with liabilities with €4 million in a time of economic downturn.
The court strongly criticized the management of the club, in particular the use by the club of PAYE and VAT monies owed to the Revenue Commissioners.

Question 24

Can anyone be an examiner?

Answer 24

A person shall not be qualified to be appointed to act as an examiner of a company unless he or she would be qualified to act as its liquidator, with the exception he does not does not have to comply with the requirements regarding professional indemnity cover. A person who acts as examiner of a company when he or she is not qualified to do so shall be guilty of a category 2 offence.

Question 25

What are the powers of the examiner?

Answer 25

• the powers of the company’s directors can be transferred to him or her;
• he or she may obtain information in the same way as the company’s auditor;
• he or she may convene or preside over meetings and is entitled to receive notice and be heard at all directors’ and general meetings;
• He or she may seek direction from the court to assist him or her;
• He or she may sell property which has a charge with the approval of the court;
• He or she may certify expenses and ascertain and agree claims against the company;
• he or she may halt, prevent or rectify the effects of any act , omission, course of conduct or decision or contracts made in relation to the income, assets or liabilities of the company, where such is likely to be detrimental to the company or any interested party.

The examiner’s ability to repudiate contracts is now confined to contracts entered into during the period of the examinership only. The examiner has a duty to examine the affairs of the company and report within twenty-one days to the court. The examiner must report if the company has a reasonable prospect of survival and what procedures should be taken to ensure that this comes about.

Question 26

What is the effect of the examiner’s protection?

Answer 26

Once the company is given protection, creditors will be prevented from taking the following actions against it for the next seventy days from the date of the petition:

• no winding up or receivership may commence against the company;
• where a receiver has been appointed within three days before the examiner’s appointment, the receivership is to cease;
• no legal action can be taken against the company except with the consent of the examiner;
• no attachment, sequestration, distress or execution shall be put into force against the property or effects of the company except with the consent of the examiner;
• where any claim against the company is secured by a mortgage, charge, lien or other encumbrance or a pledge of, on or affecting the whole or any part of the property , effects or income of the company, no action may be taken to realise the whole or any part of that security, except with the consent of the examiner;
• no steps may be taken to repossess goods in the company’s possession under any hire-purchase agreement , except with the consent of the examiner;
• no application for relief by a minority shareholder may be made during the period of examinership;
• no other proceedings in relation to the company may be commenced except by leave of the court and subject to such terms as the court may impose, and the court may, on the application of the examiner, make such order as it thinks fit.

Question 27

What is most important due of the examiner?

Answer 27

The most important duty of the examiner is to report to the court.

Question 28

What does this involve?

Answer 28

• formulate proposals for a compromise or scheme of arrangement ;
• report on those proposals to the court, within thirty-five days after the date of his appointment (the court may, of its own motion, or on the application of the examiner, extend the period concerned for a further thirty days);
• perform such functions as the court may direct the examiner to perform;
• convene and preside at such meetings of members and creditors as he or she thinks proper for the purposes of formulating proposals and obtaining agreement for the compromise or scheme of arrangement;

• supply a copy of his or her report under this section to:
1 - the company concerned on the same day as he or she causes the report to be delivered to the office of the court; and

2 - any  interested party on written application being made to him in that behalf

Question 29

What is contained in the the content of the Examiner’s Report?

Answer 29

• the proposal for a compromise or scheme of arrangement;
• any adopted modifications to these proposals;
• the outcome of each of the meetings held regarding these proposals;
• the recommendation of the committee of creditors, if any;
• a statement of the company’s assets and liabilities ( including contingent and prospective liabilities);
• a list of the company’s creditors and the amount owed to them;
• a list of the officers of the company;
• the examiner’s recommendations;
• such other matters as the examiner deems appropriate or the court directs

Question 30

What are proposals for a compromise or schemes of arrangement?

Answer 30

Where a company enters examinership, in order for that company to continue to survive, it is likely that changes will need to be made, the majority of which are likely to affect the financial structure of the company. Other changes, such as those relating to the management structure, may also be necessary.

These planned changes are known as ‘proposals for a compromise’ or ‘schemes of arrangement.’
For example, an examiner might propose a reduction in unsecured debt, the waiving of interest or the freezing of certain debts, the elimination of the cumulative preference dividend or a reduction in the rate of preference dividends.

Question 31

What must the proposals for the compromise or scheme of arrangement do?

Answer 31

• specify each class of members and creditors of the company;
• specify any class of members and creditors whose interests or claims will not be impaired by the proposals;
• provide equal treatment for each claim or interest of a particular class ;
• provide for the implementation of proposals;
• specify what changes should be made in relation to the management or direction of the company
• specify any changes the examiner considers should be made in the constitution of the company, including such other matters as the examiner deems appropriate

A statement of the assets and liabilities should be submitted to the members and creditors at the meeting at which these proposals are to be considered.

Question 32

When does the protection to a company in examination cease?

Answer 32

The protection granted to a company in examination shall cease either on the coming into effect of a compromise or scheme of arrangement or on such earlier date as the court may direct.

Question 33

What are court-ordered winding ups?

Answer 33

Court-ordered winding-ups are also known as compulsory or official liquidations. This type of winding-up begins with a petition to the High Court. A company may be wound up by the court if:

• the company has passed a special resolution to be wound up;
• the company does not commence trading within twelve months of its incorporation;
• the members of the company are all deceased or no longer exist;
• the company is unable to pay its debts;
• the court is of the opinion that it is just an equitable that the company should be wound up;
• the court is satisfied that the company’s affairs are being conducted in a manner that is oppressive to any member; or
• the court is satisfied that it is in the public interest that the company be wound up

In addition, the company may also be placed in compulsory liquidation where it has failed at examinership

Question 34

Only those with an interest may bring a petition to wind up the company. What are these people called?

Answer 34

These persons are called persons who have locus standi.

Question 35

Who are the persons with locus standi?

Answer 35

• the company itself;
• creditors;
• contributories and members;
• the Registrar of Companies;
• the Director of Corporate Enforcement

Question 36

What are the most common grounds to bring a petition for compulsory liquidation?

Answer 36

1. if the company is unable to pay its debts;
2. if the court is satisfied that the company’s affairs are being conducted in a manner oppressive to any member; and
3. if the court is of the opinion that it is just an equitable that the company should be wound up

Question 37

A company is deemed to be unable to pay its debt in 3 different circumstances?

What are they?

Answer 37

• when a creditor has served a demand in writing to the company for a sum owed that exceeds €10,000 and this demand has not been satisfied with twenty-one days
• when a creditor has attempted to execute a judgment, decree or order of the court and this has been returned unsatisfied by the County Sheriff

This last may arise where a claim is made to the court regarding the non-payment of a debt and the court makes an order in favour of the applicant requiring the respondent to pay the debt.

Question 38

There are grounds to bring a winding up order in the case of oppression. Outline this.

Answer 38

There are ground to bring a winding up order where “the court is satisfied that the company’s affairs are being conducted, or the powers of the directors are being exercised, in a manner that is oppressive to any member or in disregard of his interests as a member..…” and where the court is satisfied that winding up is justified in the circumstances.

Question 39

How was oppression defined in Scottish Co-operative Wholesale Society Ltd v Meyer?

Answer 39

‘oppression’ in this context was defined as behavior that is “burdensome, harsh and wrongful to the other members of the company, or some of them, and lacks the degree of probity which they are entitled to expect in the conduct of the company’s affairs.”

Question 40

a company may be wound up by the court, if the court is of the opinion that it is just and equitable to do so.

Describe this.

Answer 40

As ‘just and equitable’ grounds are discretionary, the courts have concluded that they must be assessed on a case-by-case basis.

Question 41

Give an example of a case where the courts have justified the liquidation of a company on just and equitable grounds.

Answer 41

In Re Yenidje Tobacco Company Ltd [1916] 2CH 426,a company was formed by two tobacco manufacturers who were equal shareholders and the only directors of the company. They had a disagreement and refused to talk to each other. Their only communication was through a secretary. Held: despite the profitability of the company, it had to be wound up on the ‘just and equitable’ ground that they refused to talk to each other directly and this created a deadlock in the corporate management.

Question 42

What is a voluntary winding up?

Answer 42

A voluntary liquidation is when a company initiates its own winding up and has control over the process.

Question 43

In what 3 circumstances can a company be voluntarily liquidated?

Answer 43

• the company resolves by special resolution to wind itself up voluntarily (known as members’ voluntarily winding up or liquidation);
• the company resolves by resolution that it cannot by reason of its liabilities continue in business and a resolution is passed to liquidate the company voluntarily (known as creditors’ voluntary winding up or liquidation);
• a period fixed for the duration of the company expires or on the occurrence of an event that the company’s constitution provides

Question 44

What is a member’s voluntary winding up?

Answer 44

A members’ voluntary winding up is when the members declare in general meeting that the company is solvent and should be liquidated.

Question 45

What is a creditors’ voluntary winding up?

Answer 45

A creditors’ voluntary winding up occurs when the company is insolvent and the members in general meeting pass an ordinary resolution to state that the company cannot by reason of its liabilities carry on with its business. In this scenario, what generally happens is that the directors realise that the company is insolvent and, not wanting to trade recklessly, request that the members agree to pass a resolution to effect a creditors’ voluntary liquidation. In some cases, this may begin as a members’ voluntary winding up where the members or a liquidator believe that the company is unable to pay its debts within twelve months, despite having sworn a declaration of solvency to this effect.