CAN A DEBTOR COMPANY RIP ME OFF?
Q: I’m owed a decent chunk of money by a small business that has quite a successful website generating most of its cash. I received notice of a creditor’s meeting and chased up the issue with the company owner. The discussion got a bit heated after he admitted he was planning to continue on with his core business with a new company while walking away from his debts. Surely this is illegal? Is there any way this kind of carry-on can be stopped?
A: Unfortunately, ‘phoenix companies’, where a firm goes into voluntary liquidation and a new firm takes its place, are becoming more common: while it allows business to continue, it means creditors get burned if business owners are unscrupulous. In fact, according to a study carried out in October of last year, one in 20 businesses showed ‘phoenix company’ traits, which include common directorships and common business lines of failed firms.
In this case, I’d hazard a guess that the new company has bought the assets – including the website and anything else that generates revenue – from the old one. If a former director of the soon-to-be-liquidated firm is the only prospective buyer, this is legitimate.
That said, the business owner may face repercussions if he is found to have traded recklessly. Under the Company Law Enforcement Act of 2001, the liquidator will have to give a report to the Office of the Director of Corporate Enforcement (ODCE) outlining how the actions of the director contributed to the failure of the company. Then, if it chooses, the ODCE may apply for the directors to be disqualified as a director for a period through the courts.
To put the business into voluntary liquidation, the owner of the company needs to make what’s called a declaration of solvency: a clear statement that the firm is fundamentally solvent and can pay its debts within 12 months. If the company really is unable to pay its debts, then the creditors have the right to choose a liquidator through a creditor’s voluntary winding up.
There are a few circumstances in which a company can be deemed unable to pay its debts: if a company owed over €1,270 has served a written demand that has gone unpaid for three weeks, where a sheriff has not been able to execute a court judgement for a debt, or where the courts are otherwise convinced that the company is insolvent.
At the moment, you don’t know whether this is the case. What I would suggest is going to the creditor’s meeting, seeing the lie of the land, and finding out what the real position is: one confrontational conversation with the owner won’t give you that.
Eamonn Garvey,
Partner,
DCA Accountants and Business Advisors
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