A full report
28 April 2003
Since the early 1990s in Ireland, a liquidator of an insolvent company appointed by the court has been obliged to bring applications to the High Court to restrict directors of the insolvent company. Such restriction applications can result in the High Court declaring that a particular director cannot act either indirectly or directly in the affairs of a company for a period of 5 years, unless certain requirements are met.
This obligation has now been extended to liquidators of all insolvent companies. The only way in which a liquidator can be relieved of this obligation is by a decision of the Director of Corporate Enforcement (DCE). This is a new statutory appointment created by the Company Law Enforcement Act 2001. A liquidator is obliged to make a full report on the affairs of the company to the DCE within six months of his appointment. The DCE will act as a filter by relieving liquidators from the obligation in cases where the liquidator states in his report that the director has demonstrated that he has acted honestly and responsibly in relation to the conduct of the company's affairs.
As a result, a flurry of activity could be seen in the offices of many an insolvency practitioner in the last quarter of 2002, as they prepared and submitted the first tranche of reports to the DCE arising out of the obligations imposed by Section 56 of the 2001 act. While liquidators are no strangers to preparing reports, the format of the report required by Section 56 has been predetermined. It is lengthy and de-mands, on occasions, that the liquidator express opinions on certain matters that might sometimes be deemed controversial.
These reports were to be submitted by 31 November 2002 in the case of liquidators app-ointed prior to 1 June 2002 and within six months from the date of appointment in all other cases. By the end of 2002, out of the 309 reports due, the DCE had received 293 relating to 770 company directors.
The DCE has advised that the submitted liquidators' reports suggest that relief is warranted in approximately 50 per cent of cases, but this would appear to be the view of the individual liquidator and not that of the DCE. Further, in approximately 20 per cent of the reports, serious misconduct is reported. Such serious misconduct is stated to comprise of directors using the company for personal purposes, of directors not keeping proper books of account or of directors diverting company assets to themselves.
The first batch of applications under Section 150 will soon be heard by the High Court. In the cases where reports were submitted by 31 November 2002, and where the liquidator is not relieved from the obligation to so do, the motions seeking orders under Section 150 must issue by 30 April, or shortly before.
The DCE also proposes that Section 56 should apply to all liquidators appointed to insolvent companies on or after 1 January 2000 if the liquidations are ongoing on 1 June this year. It is expected that this proposal will take effect shortly.
The President of the High Court has now issued a practice direction setting out the procedure to be adopted where the company is in creditors' voluntary liquidation, as previously there was no mechanism to make such an application for an order under Section 150. The application is to be brought by way of originating notice of motion grounded on an affidavit sworn by the liquidator and exhibiting a copy of the winding up resolution, a Companies Registration Office search showing the directors of the company, a certificate given by the liquidator stating that the company is unable to pay its debts and the letter from the DCE advising that the liquidator is not relieved from the obligation to bring the application. The liquidator must also set out all facts that it feels should be brought to the attention of the court, which should include both mitigating and damning facts.
After the motion is issued, it is served on the director respondent giving more than 21 clear days notice of the return date. A respondent director should then enter an appearance to the application within 10 days and, if they wish to oppose the application, file an affidavit setting out the facts upon which the director wishes to rely in opposing the application. This affidavit should be served on the liquidator or their solicitor on record giving more than four clear days notice. If no appearance is entered, the liquidator must file an affidavit of service in the Central Office of the High Court more than two clear days prior to the return date.
The practice direction states that extensions of time for the filing of affidavits by either party shall not be granted, except in exceptional circumstances where the court is satisfied that the extension of time is required for good reason. If there is no appearance by a respondent to the application, the court may determine the application on the return date, provided the liquidator has complied with all matters set out in the practice direction.
Doug Smith is an associate in Eugene Collins' corporate recovery group