Director of a Liquidated Company? – Everything You Need to Know
No one wants to be a director of a liquidated company. Insolvency and eventual liquidation are two of the most undesirable things for any business. Most directors view it as proof of failure and incompetence. And yet, hundreds of businesses go into liquidation every year in Ireland. In some cases, there is simply no choice, and in other instances declaring insolvency is in the business’ and stakeholders’ best interests.
Ireland’s corporate laws which incorporate insolvency and liquidation are complex and dynamic. They are also strict and come with harsh penalties for those who break them. You should be careful about how you handle your business’ liquidation.
Frequently Asked Questions by Directors of Liquidated Companies
The thought of liquidation prompts many questions, especially from the person in charge. What does the future hold? Is this the end of the road in upper management? Here are answers to some important and common questions from a director of a liquidated company.
How Long Does the Liquidation Process Take?
Liquidation periods vary from company to company. It all depends on the company’s size and the number of assets and parties involved in the process. It typically takes six to eighteen months to liquidate small businesses. However, the process can drag on for several years for large corporations.
What Happens to Me During the Liquidation Process?
As a director of a liquidated company, you will be required to cede your power and all management roles to the appointed liquidator. However, there are still some channels that you can take to retain some of your powers and have some say in the process. For starters, the committee of inspection can decide to retain you as a director. The creditors also have the power to do this in the absence of a committee of inspection. And, in the case of a members’ voluntary liquidation, the shareholders can vote on whether or not to retain you as a director.
Is it Possible to Halt a Company Liquidation?
Yes, it is possible to prevent your company from being liquidated if you believe that there are positive prospects for the near future. The best way to do this is by applying for examinership.
Examinership will afford you High Court protection and allow you enough time to negotiate with creditors as you seek new investment or restructure.
Examinership is a rescue procedure comprised of three main components:
- Putting a plan in place to ensure future viability.
- Injecting new investment into the company.
- Getting a “legal stay” order against creditors for 100 days.
Examinership, however, is not a silver bullet. Concerned creditors and other third parties can still force the company into liquidation if they make a valid petition showing that there are no viable prospects of its survival. Creditors can also prevent examinership by applying for receivership. You should also note that the company’s ownership may change following further investment unless the investor is a current shareholder.
Can a Liquidated Company be Revived?
Yes, a company that has been liquidated and dissolved can be revived in the future. The liquidator, or any other interested party, may make a petition with the high court to have the company reinstated. If the petition is successful, the courts will make the dissolution void within a two-year period.
Can I Become a Director of Another Company?
The greatest concern of a typical director of a liquidated company involves his/her credibility. Most directors fear that what is perceived as their failure will impede their future career prospects. However, there is no law that prevents directors of liquidated companies from becoming directors of other companies. You can even become a director of a similar company or a different company in the same line of business.
The liquidator will need to decide whether you have acted honestly and responsibly in all your company dealings. If it is found that you have acted dishonestly, fraudulently or recklessly there is a high likelihood that you will be restricted or disqualified from acting as a director for a period specified by the courts.
However, it is important to learn from your past failures and approach company formation with extra caution. Most importantly, you will need to incorporate your new business. Some of the benefits of incorporating your business are:
- Reduced business tax liability
- Protection of your personal assets
- Ensuring continuation of business
- Access to a wider range of funding options
- Easier access to international markets
Company formation in Ireland can be just as complex as liquidation. There is a lot of paperwork to file with the Companies’ Registration Office. You will be required to provide detailed information regarding yourself and the company. The required data include:
- Company name, address, type, and objectives
- Information regarding at least one director – name, address, nationality, age, occupation, and other management positions.
- Information regarding an appointed company secretary separate from the company director (if only one director appointed).
- Authorised share capital
- Information regarding shareholders – names, addresses, and the number of shares allocated
Experts recommend soliciting the services of professionals with experience and expertise in company formation.
General FAQ’s regarding Company Liquidation
When is Liquidation Necessary?
Understandably, most of the reasons behind business liquidation or insolvency have to do with financial challenges. In rare cases, however, the director of a liquidated company can close shop at will once he/she feels that the business has achieved its purpose. Here is an overview of the common causes of businesses’ liquidation in Ireland:
- Poor Bookkeeping & Record-Keeping
Accounting and bookkeeping are an integral part of every business’ long-term plan for success. Reviewing the figures regularly is the best way to determine many factors in a company, including its current performance and future prospects. It is also how the authorities monitor your company’s affairs and determine how much you owe the government.
Poor bookkeeping and management is an indication that there is something wrong with the company. It is also an indictable offence. Most concerning, however, is that it is considered a viable reason for a company to liquidate.
- Break-Even Sales
It is not unusual for businesses to break-even, or even lose money, during the first stages after opening. However, it is not sustainable, and it shouldn’t be allowed to continue. At some point the business may become insolvent once all credit channels dry up. Liquidation is an inevitable consequence in this case.
- Incurring Losses
Incurring losses is the leading cause of most businesses going under. Unless your business is as ambitious as Tesla, it will be challenging to stay in business as you incur losses. Most directors do not accept this fact at first. Many turn to creditors for financial aid as they try to stay afloat and perform better. In desperate cases, the director of liquidated company may resort to funding the businesses out of their own funds. Unless you have a viable business it is not a wise decision to use your own money to salvage an already failing business.
All these desperate measures rarely succeed without a good business plan. In urgent cases, it is other stakeholders, such as creditors, who step in and make formal petitions to enforce insolvency and liquidation.
- Inability to Pay Bills
A company’s inability to pay its bills is a clear indication of struggling cash flow. Missing payments will not only get your company penalised (which means more bills), it will also affect your relations with various suppliers and creditors. It is unsustainable and will eventually lead to insolvency and liquidation. Again, as mentioned, a creditor may also sue the company and force it into liquidation in a bid to get compensation.
- Poor Credit Rating
Banks and creditors are all about profit. They wouldn’t take the risk of funding a business that is already struggling or one that has a bleak future ahead. They are also thorough and accurate in their analysis. This is why stakeholders, directors, and business owners view poor credit rating as a symptom of poor business performance. Healthy long-term cash flow will be difficult to maintain with a poor credit rating, so at some point, insolvency and liquidation will be inevitable.
Who Can Call for Liquidation?
Ideally, it is the director of a liquidated company who should call for its liquidation once it has been declared insolvent. However, there are other parties who have the authority to do the same depending on the given circumstances. Additionally, the party that initiates liquidation determines its type and category. There are three types of business liquidation in Ireland:
- Creditors’ Voluntary Liquidation
Once a company becomes insolvent, the next step should be to initiate creditors’ voluntary liquidation. The board of directors, led by the director of a liquidated company, is responsible for starting the process following a board meeting.
Amendments made to the 2014 Companies Act stipulates that a company going into liquidation in this manner should announce the said meeting of creditors at least ten days prior. The notifications should be issued personally to shareholders and creditors. The notification should also be publicly advertised on at least two local newspapers.
Once the liquidation process is started, creditors have the right to enquire about the company’s Statement of Affairs. The Statement of Affairs should give an accurate picture of the company’s book value as well as its assets’ realisable value along with a breakdown of all company debts.
- Compulsory/Court Liquidation
A creditor or shareholder may also force a company into liquidation following a successful petition with the authorities. Creditors often do it once a business defaults on its bills. A successful petition is often followed by an order from the Director of Corporate Enforcement to wind up.
Compulsory liquidation can be an expensive affair. The official liquidator appointed by the court will not only be expensive but also stern and thorough.
- Members’ Voluntary Liquidation
As mentioned, a company’s directors can decide that a business has run its course and call for liquidation. This is what happens with members’ voluntary liquidation. It is also a convenient way of dissolving dormant businesses and liquidating their assets. The company is dissolved once the liquidation process is complete.
The Liquidation Process
The appointed liquidator oversees the whole liquidation process. The liquidator is charged with realising assets for all involved stakeholders. However, there is a hierarchy in the distribution of realised monies.
Fixed charge holders get compensated first under individual agreements with the liquidator. Super preferential creditors (unpaid employees) come in second. The liquidator then returns trust money before distributing the rest of the funds to other parties in the following order:
- Paying for the costs of the liquidation process, including liquidation costs and outlays
- Preferential creditors which comprise of unpaid taxes and employee entitlements
- Floating charge holders
- Unsecured creditors
- Members and contributories
Avoid a Bumpy Ride – Consult the Experts
Liquidation can be a messy affair considering all the legal stipulations. This is why you should solicit the services of a professional advisor as soon as you become aware that your company is at risk of insolvency and liquidation.
Russell & Co. Accountants Cork is one of the leading liquidation firms in Ireland. We can help prevent your company from going under if you contact us early by suggesting options such as examinership, restructure, scheme-of-arrangement and further investment. We can also monitor the whole liquidation procedure to ensure that everything goes as planned without any hitch.
Our services do not end with liquidation. We can help you form another company with our comprehensive suite of company formation services. If you are a novice or a director of a liquidated company, we will also go a step further to provide business coaching services that will help you keep up with the market’s dynamic demands and avoid potential insolvency and liquidation.