In the second blog in our series about Corporate Insolvency and Restructuring, we’re taking a look at what happens when no viable rescue option can be found for a stricken business – liquidation.
Unlike the formal insolvency procedures discussed in our previous blog, rescue is not the purpose of liquidation. Just the opposite, in fact. Also referred to as ‘winding up’, liquidation is the process of shutting a company down.
While there is a form of liquidation intended to allow solvent businesses to wind down (Member’s Voluntary Liquidation), for this series we’ll focus on liquidation for the purposes of using an insolvent company’s assets to repay creditors.
Liquidation can follow an Examinership, Receivership or SCARP if no suitable rescue plan can be formulated for an insolvent business, or if a company defaults on a Scheme of Arrangement.
There are two types of liquidation in this category – court liquidation, and creditors’ voluntary liquidation.
Court Liquidation
Court liquidation is a compulsory process ordered by the High Court, usually at the instigation of one or more creditors over unpaid debts.
As per the Companies Act 2014, creditors can apply to the Court for a winding up petition if they are owed more than €10,000 and repayment demands have not been met within 21 days. On accepting a winding up application, the Court appoints a liquidator or insolvency specialist to manage the closure of the business.
The liquidator’s role is to use an insolvent company’s assets to pay back monies owed to creditors. There is a hierarchy which dictates the order in which creditors are paid once assets are realised. At the top of this list are lenders and investors who secure loans against assets as collateral, and therefore have a contractual claim on them in the event of a default on the debt.
Once a company’s assets are liquidated and distributed among creditors, the business is officially dissolved or shut down.
Creditors Voluntary Liquidation
Unlike a Court Liquidation, a Creditors Voluntary Liquidation (CVL) may be instigated by the members or directors of an insolvent company. This happens in circumstances where directors realise there is no viable rescue or restructuring option, perhaps having gone through a formal insolvency procedure, and gives the company more control over its own winding down compared to a court petition.
Alternatively, the Court may also instruct a liquidator to ask members and directors of an insolvent company if they wish to participate in a CVL in the course of approving a winding up petition.
Although often triggered by members and directors, the CVL process gives creditors significant powers to oversee the liquidation. The process must be triggered by a creditors’ meeting at which company directors must account for the inability to find a rescue option and how the liquidation will impact creditors’ interests.
Creditors then in effect have control over how the liquidation proceeds, including the ability to instruct the liquidator. This control, and the improved returns it can result in on defaulted debt, means creditors tend to prefer the CVL route to Court liquidation.
Speak to an expert
To find out more, please contact our Corporate Insolvency team.
