Debt Recovery , Leister Leader – December 2008

Question: I am the managing director of a hardware company and we are finding it extremely difficult to recover outstanding accounts. One of our customers owes us in excess of € 45,000.00 and I have only recently noticed that this customer has trade with us through a limited liability company and I am not sure as to the extent of assets that this company may have. I am very worried that I will not be able to collect this outstanding debt and I am anxious to know what options my company has to recover the monies. I have heard that there is a procedure called the winding up procedure which could force this company to pay this debt but I am worried about the costs involved.

Answer:
When you trade with a limited liability company you assume a very significant risk. Many limited liability companies have little or no assets and therefore if they fail to pay their debts a Judgement against them can be of little or no value. In cases such of yours it is always advisable to obtain personal guarantees from the directors of the company before you supply them with any goods. This means that if the debt remains unpaid by the company the directors themselves can be made personally liable and any assets the directors themselves owned personally can be made the subject of any judgment obtained. This is the best chance that any company has in avoiding bad debts.

As the debt in this case amounts to an excess of € 38,000.00 proceedings would have to be taken in the High Court and the first thing would have to be done is a letter of demand would have to be written on behalf of your company by your Solicitor and it should be addressed to the registered office of the debtor company. It would be advisable to also immediately arrange for a company’s office search and Judgment search to be carried out against the company to ensure that the company has neither been struck off the Register of Companies nor wound up. It will also show whether there are other existing judgments against this company which if they remain unpaid would give you an indication as to whether your proceedings are going to be successful or not. You can also search to see what assets the company owns and the charges registered against the company in the Companies Office. All of this should be done prior to proceedings being issued as simply stated if the searches show that the company is insolvent there is little point in pursuing legal proceedings any further against them which will only involve your company in unnecessary legal costs.

Copies of all invoices in respect of the amounts due should be again furnished to the Registered Office of the company to ensure that the company cannot raise a Defence in a later stage of any proceedings that the goods were either not sold, delivered or supplied to the company or that they were in any way defected.

In relation to the wind up procedure this is a compulsory liquidation situation. This is form of liquidation initiated by Order of the High Court. This procedure is commenced by way of Petition normally by a creditor. The liquidator, who is known as an official liquidator is appointed by the Court and is an officer of the High Court for the duration of the liquidation. Compulsory liquidations are regulated by the Companies Acts. Sections 2.1.3 sets out the grounds upon which a Petition may be presented to the High Court. The two most common grounds are as follows: -

* That the company is unable to pay it’s debts as they fall due;
* It’s just an equitable that the company should be wound up.

It is important to note that at the moment the Courts frowned upon the use of Section 2.1.3 by credit it as a means of debt collection and in circumstances whether the company disputes the debt, the Court may refuse to make the order on the basis that the company is not refusing the pay the debt because it is insolvent but because there is a dispute between the parties. However, if a debt is due and it’s not disputed by the company, the failure of the company itself to pay the debt is “prima facia” evidence of it’s inability to pay it’s debts as they fall due and satisfies the grounds set out in the section.

Once the Petition is presented to the Court and an Affidavit is sworn by the creditor as to the truthfulness of the content of the Petition, a hearing date will be given for the Application. The Affidavit sworn by the creditor must set out in detail the facts for the case and this Affidavit and a copy of the Petition must be served on the registered office of the debtor company. The petition must also be advertised in two national papers and in Iris Oifigul. The Company applying for the Petition must also nominate a liquidator; normally an accountant and a letter of consent must be obtained from him agreeing to act as the official liquidator of the debtor company. It is also good practice to notify the Sheriff as this compels him to hold goods he may have seized from the company for proper distribution by the liquidator.

If the company indicates any dispute of the case, the Court usually allows an adjournment to enable the company to put this in writing. This can lead to an exchange of legal documents which will give the Court the opportunity to decide whether the debt is legitimately due or not. If there is no response from the Company then the Court can proceed to make a winding up order including:-

* An Order appointing an official liquidator;
* An Order directing the persuasion of the statement of affairs by the directors of the company;
* An Order to write to the official liquidator to file a short report to the Court.

Once an official liquidator is appointed it is his role to get in all of the company’s assets, to realise them for the best price possible, to pay off the creditors and distribute any surplus remaining amongst the shareholders. The appointment of the liquidator terminates the power of the company to dispose of it’s own property and deprive creditors of their ordinary revenues against the company. The appointment of a liquidator has the immediate effect of restricting shareholders from transferring their shares and in addition the appointment deprives the directors of the company of any say in the company’s affairs.

If the company intends to continue trading and wishes to avoid these procedures, the company will negotiate a settlement of the debt due prior to the Petition being presented to the High Court. Once the Petition is presented and advertised it would be normal for the Revenue Commissioners to then become involved if they were owed money and usually the company’s bankers will also take notice of the Petition. This has the effect of putting extra pressure on the company to pay the outstanding debt. While it is a costly procedure, it is the most effective way of trying to recover a debt in the High Court.