A company is insolvent when it cannot pay its debts as they fall due. The company can take action itself and appoint a Liquidator, or if the situation becomes hostile, a Creditor may appoint a Liquidator or a Receiver.
Creditors' Voluntary Liquidation
In a Creditors' Voluntary Liquidation, the Liquidator is appointed to the company by the Creditors of the insolvent company. The process commences with the Directors passing a resolution to make a recommendation to the Members that a Liquidator be appointed because the company is insolvent and cannot pay its debts as they fall due. The Liquidator is responsible for realising all of the company's assets on behalf of the creditors and shareholders. The Liquidator reports to the Director of Corporate Enforcement in accordance with the Company Law Enforcement Act, 2001.
Official Liquidation is the name given to the form of liquidation which is brought about by Order of the High Court. The procedure is brought about by way of petition. The petition can be taken by the company itself or creditors of the company.
The Liquidator, known as the 'Official Liquidator', is appointed by the Court and is an officer of the Court. Under special circumstances, a Provisional Liquidator may be appointed, for example if there is a risk of the assets being dissipated.
A Receiver is usually appointed by a secured creditor under a debenture containing a fixed and/or floating charge over all or most of the company's assets. The Receiver is usually appointed because either the principal under a debenture is in arrears, the interest under a debenture is in arrears, or some other event has happened by which under the terms of the debenture the security has become enforceable. The powers of a Receiver are essentially to manage the business of the company, carry it on and realise assets so as to repay the debenture holder. The Receiver's powers and duties depend largely on the terms of the debenture under which he/she has been appointed.
Examinership - An Alternative
Examinership is a process whereby the protection of the Court is obtained to assist the survival of a company. It allows a company to restructure - it is an alternative to winding up the company in financial difficulties. The Examinership process was provided for in the Companies Act 1990. A successful examinership must address the following core questions:
- Can the company prove that it has a reasonable prospect of survival?
- Does the company have investors ready to proceed with an immediate injection of capital?
- Will the company be able to avail of sufficient working capital to cover the period of Examinership?
- Are there sufficient assets in the company to cover the costs of the Examinership?
In order for the Examinership to succeed, the Creditors must agree to accept a ‘Scheme of Arrangement’ that is to accept a percentage of the debt.