As more and more businesses find themselves in financial trouble, TheJournal.ie explains some common terms and what they mean.
The Citizens Information website defines liquidation as “the process of winding up a company so that it no longer exists by using its assets to pay its debts.”
The liquidation options available to a company depend on whether it’s solvent (can pay its debts) or insolvent (cannot) and whether it enters it voluntarily or not.
Voluntary liquidation
When a solvent company decides to go into liquidation, it enters what is called a members’ voluntary liquidation, where the majority of the directors declare that the company is, indeed, solvent.
Once this is agreed upon, the primary role of the liquidator is to recoup the maximum amount possible for the company’s shareholders (paying creditors should be a non-issue because of its solvency).
If the company determines that it is unable to pay its debts, it can opt for a creditors’ voluntary liquidation. In this case, the company directors meet with both the shareholders and the creditors.
By the time they meet with the creditors, however, they will have appointed a liquidator, which the creditors can decide to accept or reject.
The focus of the liquidator in this case is on the creditors and their repayment.
Involuntary liquidation
This is where the insolvent company comes before the High Court to be wound-up (this is sometimes also known as official liquidation).
When this happens, the court appoints a liquidator who, acting as an agent of the court, helps creditors to get their money.
Examinership
This is an alternative to liquidation and, potentially, less drastic. A company can enter examinership when it’s in financial trouble but still has the potential to return to profitability.
In this case, an examiner is appointed by the courts, whose job it is to come up with a strategy to save the company, having first determined that it is possible.
For as long as the examiner is in place, the company is afforded court protection, which means that it cannot be wound-up or have a receiver appointed.
So what’s a receiver?
Receivership
Nearly always instigated by a creditor (usually a bank), receivership occurs in order to enforce a loan agreement (contract) that had been in place between the company and the creditor.
The receiver’s allegiance is to the creditor and, while the business can continue trading, the sale of assets in order to pay the outstanding debt can make this impossible, as was recently seen when receivers were appointed to Olhausen and Glencullen Holdings Ltd.
Receiverships are generally viewed as the option of last resort.
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