Insolvency - Corporate Recovery

In the current economic climate business failure is one of the few things showing any signs of growth. Good, well-run companies are facing unprecedented challenges to their viability and there is a legal requirement for company directors to act responsibly and within the law when it becomes apparent that their company may be in trouble.

Insolvency is either a surplus of liabilities over assets or an inability of a company to meet its debts as they fall due. Too often, blind optimism and false hope clouds a director’s judgment and it’s essential for company directors to face up to the reality of insolvency when it arises. If your company is insolvent you should call in a liquidator.

Liquidation is the process whereby a company’s assets are realised to pay its debts. Creditors are divided into preferential creditors and unsecured creditors. When the company’s assets are realised, the proceeds of sale are first applied to pay the liquidator’s costs and expenses. Preferential creditors are next in line for payment. If there is anything left over it at that stage it will be paid pro rata to the unsecured creditors. Only if there are surplus funds after paying the preferred creditors will any money be available to the shareholders.

There are circumstances where alternatives to liquidation may be appropriate and these are set out below:

Scheme of Arrangement:

This is a process whereby you and your creditors voluntarily enter into a contract to help you to restructure, or reduce the amount that you owe them, and the time period over which you will pay them. This can often be negotiated with unsecured creditors who will have little chance of recovering any money in a liquidation situation.

Examinership:

Where a company is in trouble but has a reasonable chance of survival, the Court may appoint an examiner to the Company. A petition is presented to the High Court by the company, directors of the company, a creditor or a shareholder who has at least 10% voting rights at a general meeting. An independent accountant will prepare a report setting out the current financial position of the company and its prospects for survival.

If the Court decides that there is a reasonable prospect that the company can survive it will grant it Court protection for a period of three months, however, the possibility of an extension of not more than 30 days is provided for in the Act and the possibility of a further extension at the discretion of the Court is provided for in the Act.

The company is protected from its creditors and no actions may be commenced against the company for the period of examinership. This gives the directors and management time to put a survival scheme in place. This will typically involve the renegotiation of amounts due to different classes of creditors and the timescale for payment. Following the formulation of the scheme it must be put to the vote of both a meeting of shareholders and creditors. Once the shareholders and creditors meetings have considered and voted on the scheme the examiner must revert to the Court with a report on the outcome of the meetings and any modifications of the proposals adopted at the meetings. If there is broad support for the scheme the Court is likely to be favourably disposed to its adoption.

Act Now.

If your company is in difficulty, act now, before its too late. Call Ian McKenna to discuss your case. Ian is a solicitor and qualified accountant with an in depth knowledge of the difficulties facing companies in today’s difficult times.