Accountants Affidavit - PowerPoint

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					ACCA – CPD Breakfast Session

             Insolvency & Recovery

    Brian McEnery – Horwath Bastow Charleton
    Contents

•   Insolvency overview – the options
•   Fraudulent preference
•   Independent Accountants Report
•   Payment for professional services in an insolvency
•   Insolvency & the working papers
•   The position / role of the outgoing accountant / auditor
•   Members voluntary liquidations
•   Voluntary strike offs
An overview of the insolvency sector

                   • Some stats
                      – 177 insolvency or rescue
                        appointments in 6
                        months to June 2007
                      – 312 appointments in the
                        same six months to June
                        2008
                      – 130 in the construction
                        industry
                      – 42 in hotels and
                        hospitality
                      – Next biggest is retail
                        with 26
Options in troubled waters

                • Strategies in troubled waters

                   – Informal schemes of
                     arrangement

                   – Examinership

                   – Receivership

                   – Winding up
  Examinerships

• Offer the possibility of Court Protection from creditors
• A grounding affidavit and petition with an “independent
  accountants report”
• The independent accountants report must conclude there
  is a reasonable prospect of survival
• It must outline the circumstances necessary for survival
• Initially an interim examiner may be appointed and some
  days later on a full hearing the position may be
  confirmed
• 70 days to turn the company around
• 35 days to hold the creditors meetings
    Examinerships

• Examiner typically does not assume executive control
• Works alongside the management
• Puts proposals together
• Works on securing new investment, management etc.
• Gets creditors to vote on the scheme
• If at least one class of creditor who has their balance
  impaired votes in favour
• Then the scheme can be considered by the High Court
  and may if it is seen to be fair and equitable be approved
  by the Court
• If so it becomes binding
  Receivership

• Arises on foot of a debenture
• May arise from a fixed or floating charge
• Is appointed by a debenture holder on foot of an event of
  default by the borrower
• Often the debenture give the lender the power to
  appoint a “receiver & manager”
• This allows the receiver to carry on the business of the
  company, if it is deemed appropriate
• May allow for the sale of the business as a going concern
• Once the receiver has completed his job, he hands the
  company back to the directors
   Receivership

• If the company is insolvent, it will probably go into
  liquidation
• It is not unusual to have a receiver and a liquidator in
  place at the same time
• If a receiver is in place under a floating charge
  remember he must pay preferential creditors in priority
  to the charge holder
• Agree the terms of engagement with the charge holder
• Protect yourself, as the company is unlikely to be
  welcoming
   Death of a company – winding up

• Winding up can take a number of forms:

   – Compulsory (Court) Liquidation

   – Creditors Voluntary Liquidation

   – Members Voluntary Liquidation
   Compulsory (Court) Liquidation

• A liquidation ordered by the
  Court
• The liquidator is referred to
  as a compulsory liquidator
• The liquidators actions are
  reported to the Examiner of
  the High Court and the High
  Court
• In many instances High
  Court approval is required
  before the liquidator
  undertakes actions
   Presentation of a winding up petition

• May occur for a number of reasons, but most
  frequently arises out the company’s inability
  to pay its debts
• Frequently as a consequence of a 21 day
  letter, which has been properly served
• The debt must be bona fides owed by the
  creditor
• The debt must be undisputed (unless the
  dispute is unreasonable)
• There must not exist a valid cross claim
• If the debt remains unpaid it is evidence of an
  inability to pay its debts
• Ultimately the Court must determine if it is
  just and equitable to wind up the company
  Being a Compulsory Liquidator

• Need an affidavit of suitability
• Need to inform the Court of the existence and level of
  Professional Indemnity
• May need to have your fees guaranteed by the petitioner
• It is burdensome for certain and will take more time to
  complete than other types of liquidation
• There is also a 2.5% stamp duty payable on the
  realisation of assets sold
• This does not arise on pre-existing cash balances
• Ensure you have a lawyer with experience
• Revenue is the most frequent petitioner
  Creditors Voluntary Liquidation

• Decision by the directors and members to wind up the
  company
• Typically arises in an insolvency situation
• Directors call a members meeting and also a meeting of
  creditors
• Ordinary resolutions for the winding up of the company
  and another for the appointment of a liquidator
• Meeting of creditors usually follows the members
  meeting
• They can be testing occasions and its important to be
  aware of guidance in SIPS and the RSC
  Creditors Voluntary Liquidation

• Auditor can’t be the liquidator
• Typically the auditor helps in preparation of the
  statement of affairs
• Meeting of creditors is chaired by one of the directors
• Notice of the meeting and proxy forms need to be sent to
  all creditors
• There may be a vote in relation to election of liquidator
• If this is the case, then the candidate with the greatest
  value is chosen
   Members Voluntary Liquidation

• Only an option if the
  company is solvent
• The members swear a
  declaration of solvency
• There is an independent
  accountants report on this
  declaration
• Typically done for tax        • A special resolution to wind
  planning reasons-               up the company
  distribution in specie (20%   • An ordinary resolution to
  CGT)                            appoint a liquidator
• The auditor can’t be the      • 12 months to complete the
  liquidator                      liquidation
                                • Get tax clearance before
                                  closing the liquidation
  Fraudulent preference

• Dealt with under Sec 286 (1) CA 1963
• It is an important area to advise clearly on
• Where fraudulent preference is proven, then the
  transaction is void and invalid
• The key period for examination of fraudulent preference
  is 6 months prior to the date of winding up
• This is extended to 24 months in the instance of
  connected parties
• Where an asset has in turn been passed to an innocent
  party at fair value, then the transaction is not voided
   Fraudulent preference

• The onus of proof rests on the liquidator to prove
  fraudulent preference
• This onus passes to the disposee where there are
  connected parties (CA 1990)
• Where there is overbearing pressure from a creditor, it is
  likely to be a defence against fraudulent preference
• Where a preference is likely to benefit the directors /
  members, then there is a higher likelihood of it being
  deemed a fraudulent preference – e.g., paying a bank
  when insolvent so as to reduce the PG’s
   The independent person

• Members voluntary winding up
   – The person must be qualified to act as auditor
   – Therefore the accountant must have an audit practicing
      certificate
   – In the case of a voluntary winding up, the independent
      accountant must sign a report covering
   1) the declaration of solvency sworn by the directors and
   2) also a statement relating to the accuracy of the statement
      of affairs
   • It obviously requires the expression of a professional
      opinion and validation procedures need to be undertaken
   • It is assessing the position at a point in time
   • Don’t underestimate the work or the fee
   The independent accountants report

• Required in the case of an Examinership
• It is required under Sec 3(A) C(A)A 1990
• It is awfully important in getting a co. into
  examinership
• The court places a lot of reliance on it
• It is future looking as well as looking at the
  current position – during the period of the
  Examinership and beyond
• There is a largely prescribed format
  outlined in the Act
• It requires a lot of work around financial
  projections
    The Independent Accountants Report

•   Estimating the position on liquidation etc.
•   A substantial piece of work carrying a lot of responsibility
•   Can be the auditor, or
•   A person who is qualified to act as an examiner
•   Doesn’t have to be a person with an auditing certificate
•   There is no requirement to be an accountant to be an
    examiner
•   So the two criteria of needing to be eligible to be an auditor or
    an examiner, do not marry
•   This area is loose unquestionably
•   Charge a fair fee this report it will take a lot of time
•   There is a gap between the interim protection and full
    protection if you become aware of other info – reveal it!!
   Payment to insolvency practitioners

• Examiner’s fees – have absolute priority over a secured,
  preferential and unsecured creditor
• This means they have priority of claim even above a
  creditor with a fixed charge and indeed before a
  liquidator
• Areas to worry about include debts factored and rights of
  set-off
• Liquidator’s fees – rank after a fixed charge but before a
  preferential liability and floating charge
• Be careful in reviewing the recoverability of non cash
  assets in a statement of affairs
• Have a buffer you may need to take restriction
  proceedings – High Court
   Payment to insolvency practitioners

• Members voluntary liquidation
• Agree fees in advance and leave scope to increase them
  if the assignment takes twists and turns
• Have a letter of engagement
• Get an indemnity from the members surrounding the
  possibility of undisclosed creditors
• Prior to the final meeting ensure you have a letter of no
  objection from the Revenue
• Finally ensure the liquidation is completed within 12
  months – otherwise it becomes a CVL
   Payment for work done by the auditor

• Payment should be agreed with the company and paid before
  the liquidation / examinership
• It is not a fraudulent preference to pay the auditor for work
  done in preparing the statement of affairs in a liquidation prior
  to winding up
• If your not paid prior to liquidation you are an unsecured
  creditor
• Again it is not wrong to pay the independent accountant in an
  examinership prior to getting Court protection
• However it is in fact difficult to get payment sanctioned to the
  Independent Accountant if the company is in examination
• It can seem insensitive to raise the issue, but if you don’t you
  can struggle to recover WIP
    Reckless Trading

•   Proceedings can only arise in two instances:
•   During an examinership
•   During a winding up
•   Therefore it is not possible for an auditor to bring such
    proceedings
•   Can result in personal liability being imposed on an
    officer
•   The bar is that it must be shown that an officer has
    “been knowingly a party to the carrying on of any
    business of the company in a reckless manner”
•   A person can be deemed reckless even where he doesn’t
    recognise the risks of his actions
•   It does need to be gross carelessness
   Reckless trading

• If:
   – Should have known that his actions would cause loss
      to the creditors of the company or any of them
   – He was party to the contracting of a debt and did not
      honestly believe the co would be able to repay it as it
      fell due
• This area is highly subjective and different cases indicate
  this. A good Irish case to look at is Hefferon Kearns Ltd
   Fraudulent Trading

• Doesn’t of course have to be an insolvency
• Any party knowingly guilty to the carrying on of the
  business of a company with fraudulent intent – may be
  convicted on indictment or summarily
• The person must be a party to the knowledge
• A single transaction may constitute fraudulent trading
• Hunting Lodges Ltd is one of the few Irish cases
• Parties other than directors can be convicted under this
  section and have been in the past e.g. a purchaser
  Books of account - liquidation

• Under Sec 236 CA 1963 the court may order the
  surrender of property, books and papers to the liquidator
• Where there is a provisional, court or CV liquidator, no
  person shall be entitled to withhold possession of
   – Deeds
   – Instruments
   – Documents belonging to the company
   – Books of account
   – Receipts
   – Bills
   – Invoices
   – Other papers of a like nature to the accounts or trade
  Books of account - liquidation

• Therefore there is no lien in these circumstances
• But it is not reasonable for a liquidator to expect an
  auditor to compile this information without payment of a
  fee
• The scale of the fee must reflect the time involved in
  compiling the information
• As a consequence this is not the payment of a pre
  liquidation debt, but rather for services carried out on
  behalf of the liquidator
• Reasonable amounts !!
Many thanks – any queries
           Brian McEnery
              Partner
           HBC Limerick
            061 310311
         bmcenery@hbcl.ie

				
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