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Thursday, 25th April 2024 |
| Increased reporting requirements for liquidators |
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| Gavin Simmons explains the Company Law Enforcement Act, which established the position of the director of corporate enforcement. |
The Company Law Enforcement Act, 2001 was introduced, as its name suggests, to enforce compliance with the requirements of the Companies Acts. The position of the director of corporate enforcement (‘the Director’) was introduced to enforce the provisions of the Companies Acts and to encourage compliance with them.
Prior to the introduction of this act, the work of liquidators was only supervised by the High Court where the liquidator was appointed by Order of the Court. Otherwise, the creditors of a company in liquidation could bring any impropriety on the part of a liquidator to the Court’s attention. The director now has an active role in supervising the work of liquidators, howsoever appointed. Among the main areas of impact of the director’s role in insolvency situations are the following;
Supervision
A liquidator is obliged to report to the director within six months of his appointment. The report is to include details of the liquidator, the company in liquidation, directors and shadow directors, statements of affairs, accounts and report to creditors. Perhaps the most telling requirements of the director in this report are the following, to be completed by the liquidator;
• Please specify in detail the reasons for the liquidation of the company
• Bearing in mind that the company was insolvent at the time of its liquidation (and perhaps before then), do you consider that the relevant persons have acted honestly and responsibly in relation to the conduct of the company’s affairs
• Please specify whether there was any material transfer of the assets of the company to any person during the period commencing 12 months prior to the winding up of the company and ending on the date of this report
• On what date did the company become insolvent
It is clear from the required contents of the report that not only is the director supervising the examination into the company’s affairs carried out by the liquidator, but also the director has his eye on the directors of the company and their conduct prior to the liquidation. These questions are designed to investigate possible actions against the directors for fraudulent trading, reckless trading, non-compliance, restriction and/or disqualification actions.
The director may, with a court order, inspect the books and records of any company in liquidation, be they by court order or by resolution of the creditors. Every officer of the company and the liquidator shall give the director such access and facilities for inspection and copying, as he requires. This again is a further example of the director’s active role in the supervision of companies.
Restriction
Heretofore, only court appointed liquidators were obliged to bring an application under section 150 of the Companies Act, 1990 seeking to have the directors of a company in insolvent liquidation restricted from acting as directors. Regardless of whether a liquidator believed there was merit in such an application, he was obliged to make it. Now the position has changed and all liquidators, be they court appointed or otherwise, must bring a s. 150 application unless the director relieves them from the obligation. Therefore, voluntary appointed liquidators are now obliged to bring such applications, although the number of such applications actually brought before the court may reduce given the director’s ‘filtering’ role. The director has indicated that the relief will only be given in exceptional circumstances and where the liquidator himself makes such a recommendation.
It is not required that a company be in liquidation for a restriction application to be made. The director may make such application where a company has been struck off the Register of Companies for failure to file annual returns, or where there have been two or more offences of failing to keep proper books of account or three or more convictions for failing to comply with company law in the preceding 5 years.
In a case where a restriction order is made, s. 150 (4B) now empowers the High Court to order the costs of the application and any costs incurred by the applicant (the director, liquidator or receiver) in investigating the matter against the directors so restricted. In a recent s. 150 application (Hillstar Properties Limited, In Liquidation) the liquidator was obliged to extensively investigate the company’s affairs to rebut allegations made by the directors. At the last minute, the directors consented to the restriction order being made against them. The High Court could not order costs against the directors in that case as s. 150 (4B) was not in force when the liquidator carried out his work. However, the court indicated that in similar cases in the future, the court is likely to award costs against the directors.
The impact of this section is that now liquidators can hope to recover their costs in cases where there have been clear breaches of the legislation by directors. Previously, bringing such an application could have a detrimental affect on the creditors of the company in liquidation.
Also, the directors facing such an application may not challenge it due to the costs implications for them personally. This is especially so as the applications being made will have gone through the director’s ‘filtering’ process and should, therefore, be meritorious applications.
It is clear from the Act that the work of liquidators will increase greatly for each liquidation on which they are working. Clearly, the investigative role and functions of the liquidator has not changed, merely the new reporting requirements whereby the liquidator must report to the director within six months of his appointment and at regular intervals thereafter.
Due to this increased workload, liquidators may be loathe to accept the job of liquidator where there is insufficient money in the liquidation to satisfy their costs and expenses in investigating the affairs of the company, reporting to the director and bringing a s. 150 application. The result of this may be that companies will be wound up with no liquidator appointed. If no liquidator is appointed, no notification would be sent to the Companies Registration Office, and therefore, no notification would be sent to the director. This could obviously only happen in the case of creditors’ voluntary liquidations. However, the Revenue Commissioners have taken an active role in creditors’ meetings and their presence would help cut down on this type of situation, where it has been created by the directors for the purpose of thwarting the Companies Acts.
Another option for the directors of a company is to let it become dormant. The director has issued a consultation paper in which he has said that he will only interfere in dormant companies in exceptional circumstances. However, an aggrieved creditor may be able to present a winding up petition and the company and its directors will come under the director’s scrutiny.
While the new Act has introduced new features, which help to supervise and ensure compliance with the Companies Acts, there is still some scope for abuse by errant directors. |
Gavin Simons is a solicitor in the insolvency/litigation department of Eugene F. Collins.
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| Article appeared in the October 2002 issue.
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