ABANDONED COMPANIES – CONSEQUENCES / LIABILITY FOR DIRECTORS
In recent times the closure of businesses has unfortunately, become common due to trading difficulties. The law provides for the orderly winding up of insolvent companies by means of the liquidation procedures outlined in the Companies Acts, 1963-2009. However, in many cases the directors and shareholders of a company will be tempted to simply abandon the company without arranging for the appointment of a liquidator to wind up the company. The temptation arises by reason of the expense which is inevitably occurred in the winding up process. The question arises as to why the directors and shareholders of a company bother to arrange for the orderly winding up of a company’s affairs when no further cost is incurred by simply walking away from the company and leaving it in legal limbo? There is an important answer.
The Companies Registration Office will strike off a company for failure to make annual returns. A company may be struck off if it has filed to file an annual return for one year. This involuntary strike off mechanism has a number of consequences:
- The company is dissolved;
- The assets of the company (if any) become vested in the Minister for Finance;
- If the business continues to trade the shareholders will no longer be sheltered by limited liability and will be personally responsible for any debts incurred as long as the company is dissolved;
- Any person who was a director of the company at the date of notification to that company of strike off, due to non-filing of annual returns, may be disqualified from acting as a director of any company by the High Court on application by the Director of Corporate Enforcement.
In addition to the consequences set out above Section 251 of the Companies Act, 1990 provides that several provisions, usually only applicable where a company is being liquidated, will apply to the company, its directors and its property where the company has simply been abandoned. Included amongst those provisions are the following:
- The Court can order that a creditor of the company be allowed to inspect the company’s books;
- The Court can summon a director to answer questions on oath in relation to his role concerning the company’s dealings and to produce books and records in this regard;
- Where it emerges, on foot of the examination referred to immediately above, that the director retains company property or is indebted to the company, then the Court can order that director to pay over the money owed or surrender the property retained;
- Where a director has engaged in fraudulent activity in relation to the company or its property that director can be tried for a criminal offence and face up to 7 years in prison;
- Where a director has engaged in fraudulent activity in relation to the company or its property that director can be made personally liable without limitation for the debts and liabilities of the company;
- A court may order that a director shall be made liable to the company for any damage caused by any misfeasance or breach of duty on his part in managing the business of the company;
- A court can order that company property (or the proceeds of sale) that has been misappropriated by a director of the company by returned to the company;
- A director of a company which has failed to keep proper books of account can be liable to a hefty fine and imprisonment for up to 5 years;
- A court can order that a director of the company be personally liable for the debts of that company where proper books of account were not kept.
A director of an abandoned company could face any and all of these sanctions on foot of an application by a creditor of the company to the court for orders in the terms outlined above. The court can proceed to make any of these orders once it is satisfied that the company is unable to pay its debts and it appears to the court that the principal reason for the company not being wound up is the insufficiency of its assets.
In limited circumstances there may be an opportunity to apply to the Registrar of Companies for voluntary strike-off from the Register of Companies rather than utilising liquidation procedures. There are a number of pre-requisites to such an application but, if they can be met, then the trouble and expense of a liquidation of the company can be avoided.
- The company must have ceased trading and will not re-commence trading in the period prior to strike-off;
- The amount of any liabilities of the company do not exceed €150.00;
- The company’s issued share capital does not exceed €150.00;
- All outstanding annual returns must be filed with the Companies Registration Office and all outstanding fines and penalties must be discharged;
- The consent of the Revenue Commissioner must be obtained to the strike-off.
However, if any one of these pre-requisites cannot be met then the option of voluntary strike-off will not be available. Even if they can be met it is important to note that the striking off of any company (voluntarily or involuntarily) does not affect the liability of its directors or shareholders which may exist (and which will continue to exist) as at the date of strike-off.
Simply abandoning a company once it is no longer commercially viable is therefore an extremely dangerous step. Unless formal steps are taken to wind up a company in accordance with the Companies Acts 1963 – 2009 or for voluntary strike off from the register then an individual director can face disqualification, unlimited liability for the debts of the company and even, in some cases, criminal sanction.