This week’s expert is Kieran Wallace, a partner with KPMG in Dublin, specialising in company restructuring.

QUESTION
I am the owner/director of a manufacturing company. We have faced difficulties meeting payment obligations over the past 18 months and I have decided to wind up the company. I believe that an arrangement can be made whereby creditors accept less money than the full amount due to them. Can you explain this procedure and its benefits?

ANSWER
You will often hear references to companies going into liquidation or being ‘wound up’.

A company liquidation or ‘winding up’ is a process by which the assets of a company are realised and the proceeds are distributed to the creditors and members. The order of priority of the distribution of assets is determined by company legislation.

However, not all liquidations are the same. In fact, there are three types: creditors’ voluntary liquidation, members’ voluntary liquidation and court liquidation.

In a members’ voluntary liquidation, the directors and members of a solvent company decide to wind up the company, primarily for the purpose of realising its assets and distributing the surplus to its shareholders.

On the other hand, a creditors’ voluntary liquidation is usually initiated by an insolvent company, acting through its board. In such a case, the liquidator is primarily concerned with the interest of the creditors of the company.

Finally, a court liquidation is commenced by order of the courts on foot of a petition. The petitioner in a compulsory liquidation will usually be the company itself, or a creditor who will pet it ion on the grounds that a company is unable to pay its debts.

The arrangement you are referring to is the voluntary arrangement under Section 279 of the Companies Act, 1963.

The legislation provides that, if a company is about to be - or is in the course of being - wound up, a voluntary arrangement can be entered into between the company and its creditors, whereby the creditors agree to accept less than they are owed.

This arrangement will be binding on the creditors of a company only if 75 per cent of the creditors - in number and value - accept the terms of the scheme. If you decide to pursue this route, you should engage an experienced insolvency practitioner to set up and administer the scheme.

Once a proposal has been drawn up, the company will set up a meeting of its creditors and issue notice and proxy forms for the meeting. At this meeting, the proposed scheme will be put before the creditors, and they will be asked to vote for or against the scheme.

If the scheme is accepted, then your company’s assets will be realised and the dividends paid over to the creditors.

There are benefit both to you, as the owner of the company, and the creditors in accepting the terms of these schemes, rather than taking the traditional route of a creditors’ voluntary liquidation.

For directors, once the creditors have accepted the scheme and the payments have been made, the company is considered solvent and can be wound up as a members’ voluntary liquidation.

This means that it will not be subject to a report being filed with the Office of the Director of Corporate Enforcement - which would be the case if the company was liquidated as a creditors’ voluntary liquidation.

The main benefits for the creditors are that they get a dividend against their debt and it is paid in a timely manner. Typically, in insolvent liquidations, unsecured trade creditors get little or nothing. Even if there is a dividend, it can typically take years for it to be paid.

As ever, it’s worth securing professional advice in these matters.


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