IRELAND IS IN the midst of a “deep downturn”, according to the Central Bank, and for many businesses, the future looks entirely bleak.
But for insolvency practitioners PJ Lynch and Declan de Lacy, the pandemic-linked recession will likely mean a more hectic schedule.
That’s because Lynch and de Lacy are company liquidators, the people you call when you want to wind up an incorporated business – either your own or someone else’s. Their work, unfortunately, is about to become even more relevant in the wake of the Covid-19 crisis.
Already, company collapses are generating headlines.
In early April, the decision by its UK parent to liquidate department store Debenhams’ Irish arm seemed to be an early harbinger of the impact of the shutdown on the commercial ecosystem here. It was followed shortly thereafter by the appointment of liquidators to the USIT student travel group and then, separately, Mothercare Ireland.
These are just some of the more high profile examples but de Lacy and Lynch say this is just the beginning.
Why are liquidations on the rise?
During recessions, liquidations of insolvent businesses — companies that have run out of money — predictably spike, de Lacy says.
He believes there could be a deluge of corporate insolvencies as a result of the pandemic.
“In 2008, there were 613 insolvent liquidation and in 2009 [one year into the last great recession], there were 1,245 insolvent liquidation, so over double the amount. In 2019, there were just 426 insolvent liquidations. It’s very difficult to imagine that’s not going to be over 1,000 this year,” he says.
Interestingly, Lynch says he’s already seeing an increase in solvent liquidations of companies a result of the pandemic.
Some company owners are making the decision to wind up their businesses and get out while the going is good rather than face the vagaries of post-pandemic trading environment, Lynch explains.
He says, “They have the cash reserves but they just want to wind the company up, pay everyone off and that’s it. There will be an increase in that sort of thing. I’m out the door with work at the moment. There’s at least one coming in every week.”
So what is a liquidation anyway?
In a nutshell, liquidation is the legal process of winding up a company.
As de Lacy —a partner at Dublin-based accountancy and advisory firm PKF O’Connor, Leddy & Holmes — explains, ‘winding up’ essentially means that the company’s assets “are converted into money. Its creditors [whoever it owes money to] are paid, and the proceeds are distributed amongst the creditors and the shareholders in whatever the appropriate ratio is based on the circumstance.”
Solvent liquidations, which are by far the most common variety, take place when the members of the company (usually its owners or substantial shareholders) take the decision, for whatever reason, to call it quits.
This might be because of the retirement of the owner or for tax reasons or because the company was a special purpose vehicle incorporated to hold an asset for a limited amount of time.
“If they want to do a solvent liquidation which is called members voluntary liquidation,” de Lacy explains, “then the directors have to make a declaration of solvency.
Listed in that will be the total value of the assets, the total value of the liabilities and a statement that the debts will be paid in full within 12 months. They have to arrange for independent accountants to examine their declaration and whatever supporting information they think is appropriate, and then give a written opinion to the effect that the declaration made by the directors is not unreasonable.
This declaration is then filed with the Companies Registration Office.
Within 30 days, the directors of the company have to pass a special resolution to wind up the company and appoint a liquidator. That resolution has to be published in the official state gazette, Iris Oifigiuíl.
After the liquidator’s appointment is confirmed, their job is essentially to tie together the loose ends and make sure everyone gets their money.
What happens if the company has no money?
The winding-up of an insolvent company, one that can’t pay its debts, is called creditors voluntary liquidation.
It’s a similar process but because the company has run out of cash, the liquidator’s job is slightly different.
“The first stage is that the company directors will recognise that the company isn’t in a position to continue because it can’t pay its debt,” de Lacy says.
“In the best of cases, they have looked at cash flow statements and management accounts and they think they can see the writing on the wall. In the worst of cases, they have demands from creditors or the Revenue has put an unpaid tax notice on their bank accounts or the sheriff has been sent around.”
Once the directors take the decision to wind up the insolvent company, they have to call two meetings, the first of which is with the firm’s shareholders or ‘members’ and the second is with its creditors.
“At the members’ meeting, the shareholders will pass a resolution to wind up the company and to nominate a liquidator. At the creditors’ meeting, one of the directors who signed the resolution will give a history of the company and explain the reasons for its difficulties,” says de Lacy.
Creditors can then ask questions of the director and if they’re not happy with the company’s choice of liquidator, they can nominate their own.
If they approve the appointment, the liquidator is now in situ and their job is to take control of the company’s assets, realise whatever value they can from them and divvy it up among the creditors.
Crucially, the liquidator also has to investigate the affairs of the company and decide what role, if any, the directors played in its downfall.
Regardless of whether there is evidence of wrongdoing, the liquidator is required within six months of their appointment to file a report to the Office of the Director of Corporate Enforcement (ODCE), the state body that enforces compliance with company law.
If there has been wrongdoing, the liquidator and the ODCE can apply to have directors restricted from acting as officers of any company for a period of five years.
But de Lacy explains, “In practice, most directors fall below the ideal standard of responsibility and the ODCE relieves the liquidator of the obligation to seek a restriction order unless there is dishonesty or serious irresponsibility involved.”
If the wrongdoing is of a serious nature, the director could be disqualified for a period of 10 years. This might include things like failure to keep proper accounts or failure to file company documents on time or even fraud.
How are the courts involved in the process?
There is a third type of liquidation, which tends to be of an altogether messier nature.
In some circumstances, a creditor or shareholder of the company can apply to the High Court to have a liquidator appointed to a company that owes them a debt.
Lynch is the owner-operator of PJ Lynch & Co Licensed Insolvency Practitioners, also in Dublin. A lot of his work comes from the Revenue Commissioners, who will often move to wind up companies that owe them significant debts.
He’s been involved in high profile liquidations, including the winding-up of restaurateur Jay Bourke’s company Shebeen Chic Ltd, the trading entity behind the pub and restaurant of the same name on Dublin’s George’s Street which was placed into liquidation by the taxman in 2012.
“It all starts with a petition to the High Court,” he says.
“The creditor petitions to have the company, that owes them a debt, wound up and the directors have 21 days to respond and if they don’t respond, the petitioner goes back to the court again, produces an affidavit and they wind up the company through the court and appoint a liquidator.”
The directors then have a month to reply with an affidavit to the court. If they don’t, Lynch says the liquidator can apply to the court for an order for the director’s arrest.
These liquidations can be very adversarial and in Lynch’s experience, a “forensic” look at the company’s records is often required. On some occasions, directors have point blank refused to hand over documents, he says, and in certain circumstances he’s had to go to the gardaí.
“Sometimes you come to some sort of an arrangement with the directors to pay back their tax debts. But not very often,” Lynch says.
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