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									                               CORPORATE INSOLVENCY

                   BAR COUNCIL CPD SEMINAR by Conor Dignam, BL

                                      LIQUIDATION

“Liquidation” refers to the process by which the affairs and life of a company are wound
up and ultimately leads to the company being dissolved and its life being terminated.


There are essentially two broad types of liquidations or winding up:-


   (i)       Compulsory or official liquidation; and


   (ii)      voluntary liquidation.


Section 206 of the Companies Act, 1963 recognises these two types where it provides:
          “The winding up of a company may be-
          (a) by a court; or
          (b) voluntary”


Within that latter category there are two sub-types:-


             (a)     members voluntary winding up; and


             (b)     creditors voluntary winding up.


Created by CDignam - 1 -CDignam Page 1 11/21/2010
Official liquidations are those which are supervised directly by the High Court and are
referred to in section 206 as a “winding up by the court”.


I propose to deal firstly with official liquidations and then to move on to voluntary
liquidations. Before doing so, I should say that the main provisions in relation to winding
up are contained in Part VI of the 1963 Act.
                                  Official Liquidation


An official liquidation or, as it is also known, a compulsory liquidation or winding up
arises on foot of a High Court order that a company be wound up and a liquidator be
appointed. The jurisdiction of the High Court to make such an order arises from Section
212 of the Companies Act, 1963 which states:-


      “The High Court shall have jurisdiction to wind up any company”.


Locus Standi


The persons who are entitled to present a petition to have a company wound up are set
out in section 215 of the 1963 Act and are the company itself, a creditor of the company,
a contributory, a member of the company, the Director of Corporate Enforcement and the
Registrar of Companies. However, it is important to note that Section 215 of the
Companies Act, 1963 limits the grounds upon which each of these categories can petition
the court.




Grounds upon which the Court may wind up a company


The grounds upon which the High Court may wind up a company are set out in Section
213 of the 1963 Act. Section 213 provides that:-


      “A company may be wound up by the court if:-


      (a)    the company has by special resolution resolved that the company be wound
             up by the court;
(b)   the company does not commence its business within a year from its
      incorporation or suspends its business for a whole year;


(c)   the number of members is reduced, in the case of a private company, below 2,
      or, in the case of any other company, below 7;


(d)   the company is unable to pay its debts;


(e)   the court is of the opinion that it is just and equitable that the company,(other
      than an investment company within the meaning of Part XIII of the Companies
      Act, 1990, or the European Communities (Undertakings for Collective
      Investments and Transferable Securities) Regulations, 1989 (S.I. 1989/78),
      should be wound up;


(f)


(g)   the court is satisfied that the company‟s affairs are being conducted, or the
      powers of the directors are being exercised, in a manner oppressive to any
      member or in disregard of his interests as a member and that, despite the
      existence of an alternative remedy, winding up would be justified in the
      general circumstances of the case so, however, that the court may dismiss a
      petition to wind up under this paragraph if it is of the opinion that
      proceedings under Section 205 would, in all the circumstances, be more
      appropriate;


(h)   after the end of the general transitional period, within the meaning of the
      Companies (Amendment) Act, 1983, the company is an old public limited
      company within the meaning of that Act;
      (i)   after the end of the transitional period for share capital, within the meaning of
            the Companies (Amendment) Act, 1983, the company has not complied with
            the conditions specified in Section 12(9) of that Act.”


We will be concentrating on grounds (d) and (e) above.


Court’s discretion
However, before we look at those individual grounds, it must be emphasised that Section
213 is, in its express terms ie. “a company may be wound up by the court…”, a
discretionary provision and the court retains a discretion as to whether to wind up a
company even where it is satisfied that one or other of the above grounds exists. This
point was noted by McCracken J. in Re Genport Limited (Unreported 6 th November,
1996), when the court said that:-


      “It is quite clear that Section 213 is not mandatory, and there remains a discretion
      in the court.”


In that case, McCracken J. refused to grant a winding up order notwithstanding the fact
that he concluded that there was no doubt but that the petitioner had proved that the
company had been unable to pay its debts. It was held that the combination of the
ulterior motive of the petitioner to prevent further litigation (although not in itself
necessarily an improper motive) and the fact that a winding up might not be of any real
benefit to ordinary creditors were sufficient to persuade him to exercise his discretion to
refuse to make a winding up order.


One matter which can and has influenced a court‟s decision on a petition is the wishes of
other creditors.


It should also be noted that this discretion which rests in the High Court to refuse to wind
up a company despite one or more of the grounds contained in Section 213 existing can
also lead the court to restraining a proposed petitioner from presenting or advertising a
petition.


Inability to pay Debts
This is probably the ground which is relied on most often in order to have companies
wound up.


Section 213(e) of the 1963 Act can not be read divorced from Section 214 of the same
Act in that section 214 sets out when a company will be deemed to be unable to pay its
debts, thereby easing the evidential burden on the petitioner.
Section 214 provides:
      “A company shall be deemed to be unable to pay its debts:
      (a)   if a creditor, by assignment or otherwise, to whom the company is indebted in
            a sum exceeding €1,269.74 then due, has served on the company by leaving it
            at the registered office of the company, a demand in writing requiring the
            company to pay the sum so due, and the company has for 3 weeks thereafter
            neglected to pay the sum or to secure or compound for it to the reasonable
            satisfaction of the creditor; or


      (b)   if execution or other process issued on a judgment, decree or order of any
            court in favour of a creditor of the company is returned unsatisfied in whole
            or in part; or


      (c)   if it is proved to the satisfaction of the court that the company is unable to pay
            its debts, and in determining whether a company is unable to pay its debts, the
            court shall take into account the contingent and prospective liabilities of the
            company”.


The first of these is the one most relied on by creditors in seeking to have a company
wound up on the grounds that it is unable to pay its debts. This is because it is the
simplest in the sense that the evidential burden on the petitioner is relatively easy to
satisfy.


Notwithstanding the simplicity of the procedure, it is essential that same be complied
with strictly. The first requirement is
(i) that the demand be made in writing.
(ii) the second requirement is that this demand must be served by “leaving it at the
registered office of the company”. That requirement has been interpreted as a
requirement that the 21 day letter must be served by hand at the registered office of the
company. Faxing the demand does not constitute proper service (Re WMG
(Toughening) Limited [2001] 3 IR 113. Murphy J adopted a statement by Nourse J. in
Re A Company [1985] BCLC 37 in which he said:-


      “…[A] statutory demand is a solemn document with potentially serious
      consequences. I can well understand that the legislature might have consciously
      intended that the service of a document of that character should be carried out in
      much the same way as the service of a winding up petition, which cannot be sent
      through the post and certainly cannot be sent on the telex machine.”


(iii) the third requirement is that the 21 day letter must also be unequivocal, express and
peremptory terms and must be unconditional.


Of course, the overarching or principal requirement is that in order for a petitioner to rely
on this ground, the company must be indebted in the sum exceeding €1,269.74 then due.
It is clear from the section itself and, indeed, from other cases that this debt, grounding
the petition, must not be disputed on bona fide grounds by the company. If there is a
bona fide dispute then it is not clear that the company is, in fact, indebted to the
petitioner. Where there is such a dispute the appropriate remedy for the proposed
petitioner is to sue in respect of the debt in the first instance. The courts have made it
clear that a winding up petition is not an appropriate forum within which to determine the
validity of the parties‟ claim or defence in respect of the debt. Indeed, the courts have
gone so far as to describe attempts to have a company wound up for failure to pay a debt
which is, in fact, the subject of a bona fide as an abuse of process (see Re Bula Limited
[1990] 1IR 440).


Not only will the courts refuse to wind up a company where the alleged debt grounding
the petition is bona fide disputed but the courts will also injunct the presentation of the
petition or the advertisement of same. In those circumstances, the petitioner may well
end up being liable for the costs of the injunction application.


O‟Hanlon J. in Re Pageboy Couriers Limited [1983] IRLM 510 approved of the
following statement from Stonegate Securities Limited .v. Gregory [1980] 1AER 241 :-


        “If a company in good faith and on substantial grounds disputes any liability in
        respect of the alleged debt, the petition will be dismissed, or if the matter is brought
        before a court before a petition is issued, its presentation will in normal
        circumstances be restrained. That is because a winding up petition is not a
        legitimate means of seeking to enforce payment of a debt which is bona fide
        disputed.”


Ungood–Thomas J. put the matter as follows in Mann .v. Goldstein [1968] 2AER 769 at
775:-


        “For my part, I would prefer to rest the jurisdiction directly on the comparatively
        simple proposition that a creditor‟s petition can only be presented by a creditor,
        that the winding up jurisdiction is not for the purpose of deciding a disputed debt
        (that is, disputed on substantial and not insubstantial grounds) since, until a
        creditor is established as a creditor, he is not entitled to present the petition and
        has no locus standi in the companies‟ court; and that, therefore, to invoke the
        winding up jurisdiction when the debt is disputed (that is on substantial grounds) or
        after it has become clear that it is so disputed is an abuse of the process of the
        court.”
The court‟s preparedness to injunct the presentation or advertisement of a petition stems
from the stark consequences which can arise from it becoming publicly known that a
company may be in financial difficulty. If it becomes known that a winding up petition
in respect of a company has been presented or is to be presented, the company may find
itself in grave difficulty with its suppliers or its bankers.


In Truck and Machinery Sales Limited .v. Marubeni Komatsu Limited [1996] 1IR 12
Keane J. held in the High Court that:-


      “It is clear that, where the company in good faith and on substantial grounds
      disputes any liability in respect of the alleged debt, the petition will be dismissed, or
      if the matter is brought before the court before the petition is issued, its
      presentation will in normal circumstances be restrained. This is on the ground that
      a winding up petition is not a legitimate means of seeking to enforce payment of a
      debt which is bona fide disputed.”


However, in Truck and Machinery, the company admitted that it owed in excess of
€1,269.74 but disputed part of the balance. Keane J. held that in those circumstances the
creditor should not normally be restrained from presenting or advertising a petition
although he did acknowledge that even where a company is insolvent, the court could
restrain the presentation of the petition if same was being brought for an ulterior motive
or not in good faith (in this regard see Re Bula Limited).


Keane J. then went on to consider the test which sho uld be applied on an injunction
application to restrain the presentation or advertisement of a petition. Firstly, he said that
the jurisdiction to restrain the presentation of a petition is one to be exercised with great
caution. He then said that the normal test for an interlocutory injunction as formulated by
the Supreme Court in Campus Oil Limited .v. The Minister for Industry and Energy (No.
2 [1983] IR 88) was not applicable to an injunction to restrain the presentation of a
winding up petition because:-
     “…the object of the application is to prevent the respondent from exercising his
     right of access to the court whether by way of ordinary process or a winding up
     petition.”


Keane J went on to say that the factors to be taken into account in such a situation had
been identified in the English case of Bryanstown Finance Limited v De Vries (No. 2)
[1976] 1 Ch 63. He cited the following assertion form Buckley J‟s judgment in that case:-


     “The plaintiff company cannot assert such a right in respect of any particular
     anticipated litigation without demonstrating that, at least, prima facia that
     litigation would be an abuse”.


Keane J went on to say:-


     “The constitutional right of recourse to the courts should not be inhibited, save in
     exceptional circumstances, and this applies as much to the presentation of a
     petition for the winding up of a company by a person with the appropriate locus
     standi as it does to any other form of proceedings. The undoubted powers of the
     court to restrain proceedings which are an abuse of process is one which should
     not be lightly exercised. In the context of winding up petitions, I have no doubt that
     it should be exercised only where the plaintiff company has established at least a
     prima facie case that its presentation will constitute an abuse of process. In many
     cases, a prima facie case would be established where the plaintiff company adduced
     evidence which satisfies the court that the petition is bound to fail or, at the least,
     that there is a suitable alternative remedy.”


This approach was indorsed by the Supreme Court in Meridian Communications Limited
.v. Eircell Limited (Unreported Supreme Court, 10 th May, 2001). McGuinness J. in
giving the judgment of the court said that:-
   “(a)    Since a winding up petition was not a legitimate means of enforcing payment
           of a debt which was bona fide disputed, the presentation of a petition would in
           normal circumstances be restrained if the company, in good faith and on
           substantial grounds, disputed all liability in respect of the debt claimed.


   (b)     Where a company admitted its indebtedness to the creditor in a sum exceeding
           £1,000 but disputed the balance, even on substantial grounds, the creditor
           should not normally be restrained from presenting a winding up petition.


   (c)     Even where the company appeared to be insolvent the court might in the
           exercise of its equitable jurisdiction, restrain the presentation of the petition
           where it was satisfied that the petition was being presented for an ulterior or
           collateral purpose and not in good faith; but that the court must approach the
           position of such a company with the interests of the creditors particularly in
           mind;


   (d)     The jurisdiction to restrain the presentation of the petition should be exercised
           only with great caution;


   (e)     Since an application to restrain the presentation of a winding up petition
           involved not the restraint of an alleged violation of a plaintiff‟s right but of the
           exercise by a creditor of his right of access to the courts, the normal
           considerations of a fair question to be tried, the adequacy of damages as a
           remedy and the balance of convenience did not arise; instead, it was for the
           plaintiff to establish at least a prima facie case, which would, in many
           instances be established established by evidence that the petition is bound to
           fail or, at the least, that there was a suitable alternative remedy.”


The courts have also considered whether the existence of a valid or legitimate
counterclaim against the petitioner which equals or exceeds the petitioner‟s claim can
ground a refusal to grant a winding up order or an order restraining the presentation or
advertisement of the petition. In other words, notwithstanding that the company does, in
fact, owe the debt claimed to the creditor, whether the court should refuse to wind up the
company, where the creditor itself owes an equal or greater amount to the company.


It was held in Malayan Plant (PT) Limited .v. Moscow Narodny Bank Limited [1980]
MLJ 53 which is approved in Re WMG (Toughening) Limited [2001] 3 IR 113 that:-


     “There is no serious distinction in principle but in cross claim of substance and the
     serious dispute regarding the indebtedness imputed against a company, which has
     long been held to constitute a proper ground upon which to reject a winding up
     petition.”


The cross claim must be “genuine, serious and have substance”. (See Ryan Media
Marketing Limited .v. Media Brook Limited & Anor. [2002] 1BCLC 184).




Just and Equitable


Certain common threads have arisen through the case law and the types of circumstances
can now be grouped together under a variety of headings:


       (a) quasi partnership cases;


       (b) deadlock in corporate management;


       (c) the failure of substratum;


       (d) illegal objects (I do not propose to deal with this in any detail as it speaks for
           itself. It arises in circumstances where the Registrar of Companies registers a
           company without averting to the fact that it includes illegal objects).
       (e) corporate instruments of fraud; this refers to the situation where the company
           is being used as an instrument of fraud. One example of this jurisdiction
           being used is Re Shrinkpak Limited (Unreported 20 th December, 1989, High
           Court.)


       (f) public interest.


Quasi Partners hip Cases


This category has proved to be particularly appropriate or suitable in the context of Irish
company law. Very many Irish companies are small, two or three person companies,
which are based on close relationships between the members. That relationship is more
akin to partnership than incorporation. Where a company is based on such a relationship
(which is described as a relationship of “mutual trust and confidence”) and that
relationship breaks down, the court may wind the company up on just and equitable
grounds.


The development of this approach in Ireland has its roots in the judgment of Lord
Wilberforce, in Ebrahimi .v. Westbourne Galleries Limited [1973] AC 360. Lord
Wilberforce recognised that of particular relevance are the questions of whether the
company was an association which was formed or continues on the basis of a personal
relationship involving mutual confidence between the members, an agreement or
understanding that all of the members will participate in the management of the business
and one which has restrictions on the transfer of shares.


What this jurisprudence allows the court to do is to essentially look behind the legal
structure of incorporation to the underlying relationship between the members. Lord
Wilberforce said in Westbourne Galleries that:-


     “The words [„just and equitable‟] are a recognition of the fact that a limited
     company is more than a mere judicial entity, with a personality in law of its own;
     that there is room in company law for recognition of the fact that behind it, or
     amongst it, there are individuals, with rights, expectations and obligations inter se
     which are not necessarily submerged in the company structure …the „just and
     equitable‟ provision does not, as the respondents suggest, entitle one party to
     disregard the obligation he assumes by entering a company, nor the court to
     dispense him from it. It does, as equity always does, enable the court to subject the
     exercise of legal rights to equitable considerations; considerations, that is, of a
     personal character arising between one individual and another, which may make it
     unjust, or inequitable, to insist on legal rights, or to exercise them in a particular
     way”.


This approach was followed in Ireland in Re Murphs Restaurant Limited [1979] IRLM
141. It was found as a matter of fact by Gannon J. that great care was taken to ensure that
equality was maintained as between the three members even in relation to „drawings‟
taken by the members. The business was extremely successful. However, at one stage,
two of the members bought a hotel which was part financed through loans from the
company and those two members developed this premises into 3 houses for use by the
two members who had acquired the hotel. The third member of the company was
unaware of this transaction and that the money had been taken from the company to
finance it. Ultimately, the 2 members who had bought the hotel decided that they no
longer wished to have the third member working in the company. They sent him a notice
of a meeting where it was proposed to remove him from office. That member then
petitioned to have the company wound up on the basis of oppression under Section 205
of the 1963 Act and also on the just and equitable ground. Gannon J. acceded to the
application to have the company wound up on the just and equitable ground. In doing so,
he said that the action of the 2 members in attempting to remove the third member from
office was:-


     “[A] deliberate and calculated repudiation by both of them of that relationship of
     equality, mutuality, trust and confidence between the three of them which
     constituted the very essence of the company”.
This is a very useful formulation of what is at the heart of the quasi partnership category
of cases.


Gannon J. went on to cite the statement from Westbourne Galleries:-


         “People do not become partners unless they have confidence in one another and it
         is of the essence of the relationship that mutual confidence is maintained. If neither
         has any longer confidence in the other so that they cannot work together in the way
         originally contemplated then the relationship should be ended – unless... the party
         who wishes to end it has been solely responsible for the situation which has
         arisen”.


One potential difficulty with this approach is that the members, if not the directors, of the
company retain the right to remove a director from office. In Ireland, that right is given
statutory force by Section 182 of the Companies Act 1 and the Articles of Association of a
company will normally also provide for that right. That raises the question of whether it
is an inappropriate exercise of the court‟s jurisdiction to wind up the company if it does
so on the grounds of the lawful exercise by the members or directors of their rights. That
point was expressly dealt with by Lord Wilberforce in Westbourne Galleries where the
court said that the just and equitable provision “does, as equity always does, enable the
court to subject the exercise of legal rights to equitable considerations; considerations,
that is, of a personal character arising between one individual and another, which may
make it unjust, or inequitable, to insist on legal rights, or exercise them in a particular
way”.


Gannon J. cited with approval a further passage from the report where he said:-


           “The question is, as always, whether it is equitable to allow one (or two) to make
           use of his legal rights to the prejudice of his associates… The just and equitable

1
    Section 182(1) of the 1963 Act provides:
        provision … comes to his assistance if he can point to, and prove, some special
        underlying obligation of his fellow member(s) in good faith or confidence, that so
        long as the business continues he all be entitled to management participation, an
        obligation so basic that, if broken, the conclusion must be that the association be
        dissolved”.


This point was also addressed in the case of Feighery .v. Feighery [1999] 1 IR 321 and
McGilligan .v. O‟Grady [1999] 1 IR 346. In the first of these cases, Laffoy J. refused to
grant an injunction to restrain the removal of a director because she held that the
members had a statutory right under Section 182 to remove an individual as a director
and that in those circumstances it would be inappropriate to grant an injunction
restraining the exercise of that statutory right. However, in McGilligan .v. O‟Grady, the
Supreme Court held that the exercise of a statutory right could be subjected to equitable
consideration by the court and that the court could, therefore, restrain the exercise of that
statutory right.


Deadlock in Corporate Management


In Bluzwed Metals Limited .v. Transworld Metal S.A. (Unreported, 9 th May, 2001, Lavan
J) it was held that where a company‟s activities are “effectively paralyzed to the
detriment of both the members and creditors” it may be wound up on the just and
equitable ground.


In Re Yenidje Tobacco Company Limited [1916] 2 Ch 426 the company was formed by
2 tobacco manufacturers who held equal shareholdings in the company and were the only
directors. Differences arose between them and they refused to converse directly. They
also became involved in litigation in respect of their differences. The company continued
to be profitable but the Court of Appeal nonetheless wound the company up on the just
and equitable ground. The court said that:-
          “Certainly, having regard to the fact that the only two directors will not speak to
          each other, and no business which deserves the name of business in the affairs of
          the company can be carried on, I think the company should not be allowed to
          continue.”


In Re Vehicle Buildings and Insulations Limited [1986] ILRM 239, Murphy J. held that:-


          “[I]n a case such as the present where the petitioner establishes equality of
          shareholding and equality of management and a complete unwillingness of each
          party to cooperate with each other, it seems to me that to put it at its lowest that
          the onus shifts to the respondent or the company to show some means by which
          this apparently insoluble problem may be resolved.”


Obviously, implicit in that is that if there is no means by which this “apparently insoluble
problem may be resolved” other than the company being wound up, the court will resort
to that remedy.


In Re Irish Tourist Promotions Limited (Unreported 22nd April, 1974, High Court),
Kenny J. ordered that a company should be wound up on the basis that the relationship
between the parties had become so bad that the business of the company had almost
ceased.


Re Dublin and Eastern Regional Tourism Organisation Limited [1990] 1IR 579.




Failure of Substratum


This category of cases refers to a situation where the purpose for which a company was
formed is no longer pursued. If that occurs, the court will wind it up on the just and
equitable ground. Generally, the substratum or the purpose for which the company has
been formed is to be found in or equate with the company‟s main object. This category
may be relatively rare given the extensive nature of the objects which a company may
have in its objects clause. However, the court may still exercise its discretion under this
heading if it can establish precisely what the intentions of the parties who came together
in the company were and that those purposes are no longer pursued.


Re. German Date Coffee Company [1882] 20 Ch 169.


Public Interest


Under Section 12 of the 1963 Act, as amended, the Director of Corporate Enforcement
can petition to have a company wound up on the grounds that it is just and equitable
following a report made under Section 11 of the 1990 Act or a report made by Inspectors
appointed under the 1990 Act.


These types of applications are referred to in England and Wales as applications to wind
up in the public interest. This appears to refer to the fact that the application is brought
by a public body rather than in the context of private relationships between the company
and its creditor or the members of the company.


Procedure


Order 74 of the Rules of the Superior Courts.


An application to have a company wound up by the court on any of the aforementioned
grounds is made by way of petition (Appendix M Forms 2, 3 and 4). The facts set out in
the petition are also verified on affidavit. The petitioner issues the petition in the Central
Office. This is known as “presenting the petition”. The Central Office will give the
petitioner a hearing date, stamp and keep the original and a copy and indorse the date of
hearing on a further copy of the petition. It is then necessary to advertise the petition and
its hearing date. The Central Office will direct the newspapers in which the petition is to
be advertised. The verifying affidavit verifying the facts contained in the petition, must
be filed within 4 days after the presentation of the petition. The petitioner must then
serve a copy of the petition on the company by leaving it at the registered office of the
company. Generally speaking, this step of serving the petition is taken before the petition
is advertised as it gives the company an opportunity to pay the debt (if the petition is
grounded on an unpaid debt) before other creditors become aware of the proceedings.
The danger of other creditors becoming aware of the proceedings is that they may panic
and present petitions or if the petitioner decides not to proceed with his petition, other
creditors may step into the petitioner‟s shoes. The effect of this may be that the company
will be wound up in any event.


The petitioner must advertise the petition in accordance with the directions of the Central
Office. Those directions will normally be that the petition should be advertised in Iris
Oifigiúil and two national newspapers. The rules provide that the advertisements must
appear at least 7 clear days prior to the date on which the petition is to be heard. The
advertisement must be vouched in the Central Office of the High Court before the hearing
of the petition.


Following that, creditors must notify the petitioner of their intention to appear at the
hearing of the petition and the petitioner must give a list of those creditors who have
given such notice to the petitioner to the Registrar of the High Court prior to the hearing
of the petition.


At the hearing of the petition, the options available to the court are to hear or adjourn the
petition and, obviously, to dismiss or grant it 2 .




                                   Voluntary Liquidations


MEMBERS VOLUNTARY WINDING UP



2
    Section 216 of the 1963 Act
A members voluntary winding up occurs where the company is solvent and the members
of the company decide to wind up its affairs. It is the least controversial type of
liquidation because the central element or character is that the company is solvent.


Section 251 of the 1963 Act sets out the grounds upon which a company may be wound
up voluntarily. Section 251(1) provides:
       “A company may be wound up voluntarily –
       (a)     when the period, if any, fixed for the duration of the company by the
               articles expires, or the event, if any , occurs, on the occurrence of which
               the articles provide that the company is to be dissolved, and the company
               in general meeting has passed a resolution that the company be wound up
               voluntarily;
       (b)     if the company resolves by special resolution that the company be wound
               up voluntarily;
       (c)     if the company in general meeting resolves that it cannot by reason of its
               liabilities continue its business, and that it be wound up voluntarily.”


It is only if the resolution passed by the members falls within (a) or (b) above that the
winding up will proceed as a members voluntary winding up.


The key element in a members voluntary winding up is that the company is solvent.
Practically speaking, this means that the resolution that the company should be wound up
voluntarily must be preceded by a declaration of solvency which must be sworn by the
directors of a company or a majority of them at a meeting of the directors.


Declaration of Solvency


The declaration of solvency is dealt with in Section 256(1) of the Companies Act, 1963,
as amended, which provides:
       “Where it is proposed to wind up a company voluntarily, the directors of the
       company or, in the case of a company having more than two directors, the
       majority of the directors may, at a meeting of the directors, make a statutory
       declaration to the effect that they have made a full enquiry into the affairs of the
       company, and that having done so, they have formed the opinion that the
       company will be able to pay its debts in full within such period not exceeding 12
       months from the commencement of the winding up as may be specified in the
       declaration”.


Sub-section (2) provides:
       “A declaration made as aforesaid shall have no effect for the purposes of this Act
unless -
       (a)     it is made within the 28 days immediately preceding the date of the
               passing of the resolution for winding up the company….;
       (b)     it embodies a statement of the company‟s assets and liabilities as at the
               latest practicable date before the making of the declaration and in any
               event at a date not more than three months before the making of the
               declaration;
       (c)     a report made by an independent person in accordance with the
               provisions of this section is attached thereto;
       (d)     it embodies a statement by the independent person referred to in
               paragraph (c) that he has given and has not withdrawn his written consent
               to the issue of the declaration with the report attached thereto; and
       (e)     a copy of the declaration is attached to the notice issued by the company
               of the general meeting at which it is intended to propose a resolution for
               voluntary winding up under paragraph (a) or (b) of section 251(1). ”


The involvement of an independent person was only introduced by the 1990 Act and it
probably reflects a growing trend of having such a person to make an input at crucial
stages of the company‟s life.
Section 256(4) provides that the report of the independent person (who must have
qualified at the time of the report to be appointed auditor of the company) must state
whether, in his opinion, and to the best of his information and according to the
explanations given to him, the following are both reasonable:-


   (a) the opinion of the directors in the declaration of solvency;


   (b) the statement of the company‟s assets and liabilities as embodied in the said
       declaration.


Section 256 (8) also provides:-
     “Where a statutory declaration is made under this section and it is subsequently
     proved to the satisfaction of the court that the company is unable to pay its debts,
     the court on the application of the liquidator or any creditor or contributory of the
     company may, if it thinks it proper to do so, declare that any director who was a
     party to the declaration without having reasonable grounds for the opinion that the
     company would be able to pay its debts in full within the period specified in the
     declaration shall be personally responsible, without any limitation of liability, for
     all or any debts or other liabilities of the company as the court may direct.”


A failure to comply fully with Section 256 and the requirements contained therein in
relation to this declaration of solvency will result in the liquidation being deemed a
creditors voluntary winding up rather than a members voluntary winding up (Re Favon
Investment Company Limited [1993] 1IR 87).


It should be noted that the necessity to get an independent persons report probably gives a
degree of protection to directors in making the declaration of solvency as it is certainly
arguable that if the directors‟ views are indorsed by those of an independent person, who
must be qualified to act as auditor of the company, then it is difficult to see how the
opinion of the directors could be said to be other than reasonable.
Once the directors have made the declaration of solvency, the next step in the process is
to bring the matter before the members of the company. This is done by the convening of
an extraordinary general meeting of the company. At that meeting, the members must
pass a special resolution to wind up the company. If that is done (and the requirements in
relation to the declaration of solvency are complied with), the winding up then proceeds
as a voluntary winding up. Section 253 provides that such a winding up shall be deemed
to commence at the time of the passing of the resolution.




Creditors Voluntary Winding Up 3


As I said the defining element of a members voluntary winding up is the making of a
declaration of solvency by the directors. If the directors fail to make a declaration of
solvency, the winding up will proceed as a creditors voluntary winding up. It is clear
from this that the key difference between the two types of voluntary liquidations is the
solvency of the company. Indeed, this is expressly recognised by Section 251(1)(c) of
the 1963 Act which provides that the company may be wound up voluntarily if the
company in general meeting resolves that the company “cannot, by reason of its
liabilities, continue its business, and that it be wound up voluntarily”.


A creditors voluntary winding up comes about as follows. The directors must consider
the affairs of the company. In fact, it has been held that where a company is insolvent,
the directors have a duty to take the necessary steps to initiate a winding up of the
company. Of course, this duty can be seen as part of the directors‟ general duty to act
honestly and responsibly in relation to the affairs of the company and not to act
recklessly. In Re Shannonside Holdings Limited (Unreported, 20 th May, 1993, High
Court), Costello J. held that:-


         “[I]t is not denied that the company was insolvent and unable to pay its debts. The
         directors had a duty to wind up the company and the members of the company

3
    Section 266 – 273 of the 1963 Act apply specifically to creditors voluntary liquidation.
         acceded to the request that a resolution to wind up be passed. Even though it may
         be advantageous to directors to pass a winding up resolution, it seems to me that
         the resolution to wind up cannot be challenged on this ground once insolvency has
         been established and the duty to wind up shown to exist.”


Once the directors make the decision that the company should be wound up, they must
then resolve to convene two meetings; one of the members of the company and the other
of the creditors of the company. Section 266 of the 1963 Act provides that the creditors
meeting must be summoned for the same day or the next day after the members meeting.
The directors must then prepare a full statement of the affairs of the company, including a
list of the creditors of the company in order that same may be placed before the above
meetings 4 .


If the members resolve at their meeting that the company should be wound up by reason
of its liabilities the winding up is deemed to have commenced. The members will
generally nominate a liquidator for the purposes of winding up the affairs of the
company.


The creditors meeting later that day or the following day will then consider the statement
of affairs prepared by the directors; the appointment of the liquidator appointed by the
members and replacement if desired; and the appointment of a committee of inspection.




4
    Section 266(3) of the 1963 Act provides:
           “The directors of the company shall –
           (a)      cause a full statement of the position of the company‟s affairs, together with a list of the
                    creditors of the company and the estimated amount of their claims to be laid before the
                    meet ing of the creditors to be held as aforesaid; and
           (b)      appoint one of their number to preside at the meeting.”

								
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