10 avoidable mistakes made by directors during liquidation
Liquidating too late
The law requires that a company goes into liquidation when it is unable to meet its debts as they fall due. This can be a difficult moment in time to recognise. Liquidating after this moment exposes the directors to the possibility of the offence of trading while insolvent.
See the attached link for signs that a company may be approaching such a moment.
Inadequate preparation for the creditors’ meeting
The documentation, notice period and time/date/venue of the creditors meeting are set out in law. Failing to adhere to these can cause difficulties later in the process (see point 6 below). The solution is to engage, in good time, an experienced professional.
We have worked with experienced insolvency professionals over the years and can recommend, if required, such a person who will act directly for the company.
Poorly prepared Statement of Affairs and Chairman’s Statement
These are the two key documents required for the creditors meeting. A statement of affairs in the correct format should, to the very best of the directors’ ability, include all creditors with the proper amounts due. The chairman’s statement must include basic information about the company, but more importantly the directors’ side of the story. It should set out:
- how the company got into difficulty;
- how the directors responded and;
- how the company came to be liquidated.
It should include reference to matters that are likely to arise at the creditors’ meeting so that replies to questions can be directed back to the chairman’s statement.
Not controlling the creditors’ meeting
The creditors’ meeting is the emotional highpoint. Directors ought to be advised by a solicitor or other experienced insolvency professional. The professional should not only be well versed with the law but also have the presence to steer the meeting through the agenda. It is shocking to see directors without an advisor lose control of the meeting and represent their own position in a much poorer way than the facts would indicate.
Dealing with questions at the creditors’ meeting in an inappropriate way
A good professional will advise the directors to answer all questions honestly and as succinctly as possible. The meeting is being minuted, so questions posed and answers given are recorded. There is no expectation that the director will have detailed answers to all questions posed. In those situations, the questioner should be told only what is absolutely known to the director at the time of questioning. The liquidator may follow up incomplete answers after his appointment. Speculation has no part to play when replying to questions. Long answers to questions often throw up more questions. Directors are encouraged not to give overly detailed answers and answer only the question asked. The creditors’ meeting is not the place to engage with disputed issues. The director should simply state their position and move on.
Employees attending the creditors’ meeting not being properly addressed
When employees attend, they want to know how much they will get, will it be taxed, when will they get it and how do they get it. This work should be done before the meeting. The liquidator should be able to make themselves available immediately after the meeting and deal with employee claims as a priority. If this groundwork is done the employees attending will sense that their interests are being addressed in a pragmatic and speedy way.
Professionals attending seeking to take control of the creditors’ meeting
Professionals know a limited amount about the dealings between their client and the company but a lot about the protocols of a creditors’ meeting. So expect lots of technical questions. If points 2 and 3 above are addressed adequately ahead of the meeting then these will not be a concern. They will focus on specific matters between their client and the company and the approach in point 5 is important. Contentious matters known before the meeting may be outlined in the chairman’s statement. They may seek to appoint their own liquidator. As a technical matter the advice of the director’s advising professional should be followed.
Revenue attending the creditors’ meeting not being given the respect their office demands
Revenue have a core of experienced officials who attend. They will want to ensure that all Revenue debt is fully recognised as preferential or non-preferential. So get this right .They will also ask a series of questions – eg When did the directors realise the company was insolvent and how quickly did the directors act thereafter? They will also want to know about asset movements, directors/their families’ salaries and whether any payments were made in the final months of trading that had the effect of reducing the personal exposure of the directors in an improper way. These points may be addressed in the chairman’s statement.
Trade creditors attending the creditors’ meeting feeling they are being dismissed
Some creditors attending are passive. They may only wish to know arrangements for retention of title. Therefore, know the procedures so it can be dealt with speedily.
Other trade creditors may be exercised over their loss and wish to project that sense of loss citing understandings, commitments given and custom/practices adopted. It is important that exchanges in these situations are kept on a formal footing and that overly detailed replies are not made. While a questioner may sometimes personalise these questions, replies should be truthful, business-like and as brief as the facts allow.
Over the years we have recorded the most popular questions raised and the reasons for asking those questions. This listing of questions and underlying rationales is available to any professional advising directors of a company about to go into liquidation
Failing to engage meaningfully with the liquidator post the creditors’ meeting
Understandably the directors’ desire for closure will mean that they are less inclined to engage with the liquidator. It is a legal requirement that he assists and this assistance is brought to the attention of the ODCE when the issue of their conduct is being considered. Usually the assistance is required just after the creditors’ meeting and quickly fades.