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March 2016

Company Issues

When a company is in financial difficulty, it might enter voluntary administration, receivership or liquidation. There are important differences between these processes, as outlined below.

Voluntary Administration

Under Part 15A of the Companies Act 1993 (‘the Act’), an administrator may be appointed to a company by:

  • its board;
  • a liquidator or interim liquidator where the company is in liquidation;
  • a chargeholder with an enforceable charge over all, or substantially all of a company’s property; or
  • in certain circumstances the Court.

This administrator takes control of the company from the directors and reviews the operation of the company during a 20 working day period. After this period, a “watershed meeting” is held to decide the future of the company. By this time, the administrator will have considered the interests of the creditors of the company moving forward. At the watershed meeting, the creditors may decide that:

  • the company execute a ‘deed of company arrangement’ governing how the company’s affairs are to be dealt with and dealing with creditors’ claims;
  • administration should end; or
  • a liquidator be appointed where one has not already been appointed.

Depending on the outcome of voluntary administration and the watershed meeting, this process may allow the company to resume all or some of its business once it has ended, and provide real benefit to the company in terms of compromise with creditors, and future direction.

Receivership

Where a company has provided security over company assets to a creditor, and the company is in default of its obligations under the terms of the security agreement, the secured creditor (e.g. a bank with a General Security Agreement over the assets of the company) may appoint a receiver.

A receiver acts for the benefit of the secured creditor in respect of the secured property, and other creditors should be mindful that a receiver does not act for their benefit. A receiver’s powers are governed by the Receiverships Act 1993 and the specific terms of the creditor’s security arrangement with the company. For example, a receiver may demand and recover the income of any secured property from a company. Importantly, even where an administrator has been appointed for a company, in some circumstances, a receiver may still be appointed by a secured creditor.

Liquidation

Where a company is unable to pay back its debts it may go into liquidation; this is the point of no return for a company.

A liquidator can be appointed by the shareholders, board of directors or creditors of a company, or by court order. A liquidator takes control of a company’s assets primarily for the benefit of unsecured creditors, but appointment of a liquidator does not affect the rights of a secured creditor in respect of secured assets. A liquidator’s primary role is to bring in all the assets of the company and distribute them to the creditors of the company in accordance with the Act. The liquidator also has further duties, such as duties in respect of providing reports to the creditors and shareholders of the company throughout the process.

During the liquidation process, the directors of the company have very limited powers. The net effect of liquidation is that the company is ultimately struck off the Register of Companies, and can no longer trade.