Entrepreneurs may be able to avoid bankruptcy by anticipating difficulties - if they keep a close eye on the financial situation of their business.
The legislation governing liquidation and winding up proceedings is outlined in Companies Acts:
"Insolvency" is defined as "the failure to pay one's debts as they fall due"). The forms of corporate insolvency are:
- Examinership (rescue of insolvent companies);
- Receivership (sale of charged property of the company by an agent of the charge holder);
- Liquidation (the winding up of the company).
Individual insolvency is called bankruptcy.
The vast majority of insolvencies are corporate insolvencies. This is because the corporate entity for reasons of tax and limited liability is the preferred mode of enterprise in Ireland.
Reorganisation out of court
Both corporate entities and individuals are entitled to reorganise their affairs out of court. Out-of-court reorganisation is an arrangement primarily under private law between debtor and creditors without court involvement. In general, the creditors voluntarily waive part of the debt and the rate can be freely arranged with the creditors.
In corporate insolvencies, such reorganisations require an approval by 75% of each class of creditor in order to bind all creditors.
In individual bankruptcies, the method used is a Deed of Arrangement where the property of the person is transferred to an assignee who realises the property and discharges the creditors. This is sanctioned by the individual consent of each of the creditors.
In both corporate and individual insolvencies, the person retains full control over the assets until they are transferred. If the agreed sum is paid in due time, the debtor will be discharged from the residual debt. Failing this, the debts will be reinstated and this failure normally constitutes sufficient grounds upon which insolvency or bankruptcy proceedings may be commenced.
The High Court deals with matters related to corporate insolvencies and individual bankruptcies.
Entrepreneurs having experienced bankruptcy should not lose confidence in their ability to embark on a new business.
Bankruptcy procedure: a step-by-step guide
A person may commit an "act of bankruptcy" in a number of ways including primarily by:
- failing to pay debts as they fall due;
- failing to pay debts in accordance with a required notice;
- making a fraudulent transfer of property.
The creditors or in rare instances, the debtor, may file a petition which results in the person being summonsed to Court at which time he may be judged bankrupt.
There is no minimum figure of debt required although a Court is unlikely to grant a petition where the sum due is less than €1,904.61.
For the bankruptcy to proceed, the creditor must post sufficient funds (provided by themselves or from the bankrupt's estate), approximately €5,000, to enable the administration of the estate to commence.
Then control over the individual's assets is transferred to a court-appointed Official Assignee who is obliged to collect the individual's assets, establish a list of the bankrupt's creditors and discharge the expenses of the bankruptcy and the bankrupt's creditors.
The residual debt remains until the bankrupt is discharged. Discharge is granted at the discretion of the Court normally after the majority of the original debt has been discharged. Bankruptcies are publicised in the Official Gazette and on the public register of the High Court.
If bankruptcy has commenced as set out above, an individual may seek a compromise with his creditors. The Court may stay the proceedings to allow a meeting of the creditors who if they approve a settlement by 60% in value and number attending the meeting, then the compromise binds all creditors. If the person makes payments according to the compromise, they will be discharged from bankruptcy.
For companies, a liquidation process can be started voluntarily with meetings of the members and creditors of the company ("creditors voluntary liquidation") or by application to the High Court to have the company wound up on various grounds including failure to pay debts as they fall due, deadlock, etc. ("official liquidation").
Upon opening the bankruptcy proceedings, control over the company is withdrawn from the officers of the company and transferred to a liquidator who may be appointed by the members and creditors' in Voluntary Liquidations or in the case of Official Liquidations by the Court.
The liquidator is obliged to:
- collect the company's assets;
- establish a list of the company's creditors;
- discharge the expenses of the liquidation and the company creditors.
He/she may pursue the officers and the members of the company for the return of the assets of the company if they have carried out dishonest or fraudulent transactions.
Liquidations are publicised in the Official Gazette and on the public register of the Companies Registration Office.
The shareholders/officers of the company may make a compromise with its creditors after the commencement of proceedings. If the company is no longer insolvent the Court may grant an application to have the liquidation of the company ceased.
Other procedures apply for the termination of a business if it is, for example, in the form of a limited partnership, or if it is the branch or place of business of a foreign company.
A company in Ireland may be dissolved involuntarily by reason of its failure to make Annual Returns to the Companies Registration Office. A significant number of insolvent companies are struck off the register this way, 7,938 in 2011.
In cases of abuse, a creditor or the Director of Corporate Enforcement can apply to take remedial action in respect of such companies.
Creditors are entitled to apply to the Court for the liquidation of such companies. The Director of Corporate Enforcement is entitled for example to apply to have the officer of the company disqualified normally for a period of five years.
Reorganisation - Companies
In the event of existing or impending insolvency, a company, its officers or creditors may apply for the protection of the Court from its debtors and file for reorganisation (known as "Examinership") in the High Court.
The Court appoints a suitably competent person (known as an "Examiner") to examine the affairs of the company and to determine whether the company or a substantial part thereof can be saved.
This person (normally an accountant) prepares a "Scheme of Arrangement" within a period of 70 days under which the affairs of the company - including its management - are reorganised and the debts of the creditors are compromised. There is no minimum rate of return for creditors.
Unsecured and preferential creditors have separate meetings and if at least one class of creditor accepts the Scheme, it is referred to the Court for approval and for the making of such supplemental orders as are necessary.
The company's officers cease to have powers except those granted to them by the Examiner and the Court. If the agreed sums are paid in due time, the debtor will be discharged from the residual debt. Failing this, the debts will be reinstated.
Reorganisation - Individuals
A court may order that an individual be placed under the protection of the Court. During that period the individual cannot dispose of a mortgage or otherwise deal with his property.
The Court directs the calling of a meeting of the creditors at which the debtor makes a proposal. If the compromise is approved by 60% in value and number of those present and voting, it becomes binding on all creditors, subject to the discretion of the Court.
On such approval, an official of the Courts Service called the "Official Assignee" collects and distributes the person's property in accordance with the compromise.
If there is default in complying with this process or if no approval is obtained, the Court may adjudicate the debtor "bankrupt".
Particular procedures apply if a company is being wound up on the order of the High Court (at the instigation principally of any member or creditor of the company in appropriate circumstances). The Court appoints the liquidator and he/she becomes an officer of the Court and works under its supervision.
Documents relating to the winding-up of a company and the appointment of a receiver or examiner must be submitted to the Companies Registration Office.
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