Company liquidation in Ireland – FAQs part 1

COVID-19 has dealt a severe blow to the cash flow of countless companies. Many businesses which performed well prior to the pandemic, may now have become unviable.  As a result, these companies face insolvency and will either require investment to shore up losses or a liquidation to wind up the company. The question often facing directors is that, if funds are available, should they put them into the insolvent company or set up a new company?

At Crowe we help directors of insolvent companies make the best decisions and make the best of what is a difficult situation. In the first of a two-part article, our restructuring and insolvency team answer some of the frequently asked questions from directors of ailing companies.

How do I decide when it is no longer reasonable to continue to trade?

The first question to consider is whether your company is insolvent or not. An insolvent company is one where its debts outweigh its assets, or where the company cannot pay its debts when due. There are two simple tests to assess whether a company is insolvent – the balance sheet test and the cash flow test. 

Of these two insolvency tests, the cash flow test is probably the most important, as you can have a strong asset position but if you cannot pay your bills on time you may find the company is forced into liquidation.

1. The balance sheet test
   If the value of your assets is lower than your liabilities, you are insolvent. This test aims to determine whether the company’s cash at bank combined with the total value of assets gives a value that is more or less than the total quantum of its liabilities.
2. The cash flow test
   If the company cannot pay its bills as they fall due, you are facing insolvency. This test should map the amount of working capital you have available at any given time, comparing forecasted sales with payments due. 

However, there are many circumstances in which a company may not pass one or both of the above tests but it is still reasonable for the directors to continue to trade. For example, certain companies may have a seasonal business where the company may temporarily fall into insolvency during the quiet period and subsequently regain solvency once trade improves. This fact has been recognised by the courts, and in the case of Re Hefferon Kearns Ltd the judge remarked that:

“it would not be in the interests of the community that whenever there might appear to be any significant danger that a company was going to become insolvent, the directors should immediately cease trading and close down the business. Many businesses which might well have survived by continuing to trade coupled with remedial measures could be lost to the community.”

Therefore, the decision to cease trading and liquidate should be made when the company is insolvent and the directors are satisfied that there is no reasonable chance of the company being able to trade out of its insolvent position. Company directors should seek appropriate professional advice at this point as there may be alternatives available to winding up the company, such as informal restructuring, examinership, a scheme of arrangement, etc. 

Can I be a director of another company after a liquidation?

In most liquidations, no sanctions are placed on the directors of the company, and as a result there is no impact on their continuing to act in companies where they are already a director or on becoming a director of another company. 

To avoid any sanctions, directors must demonstrate to the satisfaction of the liquidator that they have acted in an honest and responsible manner during their stewardship of the company. Recent guidance allows liquidators to discount the impact where a company traded at a loss during the COVID-19 challenges due to the unforeseeable and unknown extent of the pandemic on businesses. 

Over the three-year period from 2017 to 2019, only around 13% of all insolvent liquidation cases resulted in a restriction or disqualification. 

What sanctions might I face if my company goes into liquidation?

There is a small proportion of cases where directors have acted dishonestly in their stewardship of a company prior to the liquidation. In these circumstances, there are different levels of sanctions that may be imposed upon the directors, depending on the severity of their misconduct. These sanctions are:

• Restriction order
  This sanction is placed on directors who are found to have acted irresponsibly or dishonestly in their actions as a company director. While an individual who is subject to a restriction order can still act as a company director, the company must have a minimum share capital of €100,000 to act as a capital base to protect creditors of the entity should losses arise.
• Disqualification order
  When a disqualification order is placed upon a company director, they are barred from acting as a company director for the duration of the disqualification order. The disqualification order is generally for five years. 

In part two of this article, which includes a downloadable factsheet, we answer questions about the cost of liquidations and what exposure company directors may have to creditors, what is required of a director during the liquidation process, how long it can typically take and how Crowe can support directors through the process.

Please contact a member of our restructuring and insolvency team if you wish to confidentially discuss your requirements and receive a no-obligation consultation.