Generally speaking, in the liquidation of a company, creditors of equal ranking in the liquidation are treated equally. So, if there are funds to distribute, they will all receive the same proportion of the amount that they have claimed. This is known as the Pari Passu Rule.

The exception to this rule is when there is a mutual set-off between the company in liquidation and another party that is both a creditor to whom the company owes money, and a debtor that owes the company money.

The requirement for the mutual set-off is set out in section 310 of the Companies Act 1993 as follows -

310 Mutual credit and set-off

(1) Where there have been mutual credits, mutual debts, or other mutual dealings between a company and a person who seeks or, but for the operation of this section, would seek to have a claim admitted in the liquidation of the company,—

     (a) an account must be taken of what is due from the one party to the other in respect of those credits, debts, or dealings; and
     (b) an amount due from one party must be set off against an amount due from the other party; and
     (c) only the balance of the account may be claimed in the liquidation, or is payable to the company, as the case may be.

Note that the wording of the section includes the use of “must”, meaning, in a liquidation, if the conditions for a mutual set-off are met, then it is mandatory and cannot be contracted out of.

There are further provisions in S 310 that place restrictions on the ability to claim the mutual set-off because of the timing of the relevant transactions, in relation to the date of the company’s liquidation, or the other party’s relationship to the company in liquidation.

The key legal requirements for set-off in liquidation are:

• The claims must exist at the start of the liquidation. At that time, there must be mutual dealings capable of being subject to an accounting between the parties.

• The claims must be measurable at the commencement of the liquidation. In effect, there must be money claims each way. The claims must be provable in liquidation but need not be for a liquidated amount or an amount due at the date of liquidation. This would include damages, whether liquidated or not, contingent claims, secured debts and future debts due to mature after the commencement of the liquidation.

• The parties must be the same and the claim must be in the same right. No set-off can be asserted against a person in different capacities, for example, debts due from a person in their capacity as a trustee or partner cannot be set-off against a claim against that person in a personal capacity.

Conclusion:

The requirement to use the mutual set-off provisions in a liquidation is an exception to the pari-passu rule. It is there to avoid the injustice that could occur if a liquidator could require a person, who is both a debtor and a creditor of the company, to make payment in full of the amount they owe to the company in liquidation, when the same person, as a creditor of the insolvent company, may potentially receive nothing at all.

If you would like more information about mutual set-offs, or any other matters relating to insolvency procedures, please contact one of the McDonald Vague team.

Welcome to the month of double lockdowns and Americas Cup racing.

February is typically the first month of the year where we see a steep uptake in all insolvency appointments across the board after the lower months of December and January. Directors will take a hard look at their company after a quiet Christmas period and January break and make the call on whether they want to continue through another year or pack it in. Individuals will often go through a similar process after having spent up large over the Christmas period and having little to show for it and no prospects of paying off the debts they may have racked up and will need to assess their insolvency options.

So aside from staying indoors and watching boat racing what else happened in the month of February on the insolvency stats front:
• Winding up applications for the month beat all individual 2020 months.
• IRD finally began pulling the trigger on winding up applications.
• Personal insolvency figures were up to the 2020 high point levels.
• February figures were still down on prior years.

We continue to hear grumblings from businesses around the country with the upcoming minimum wage increases to $20 per hour and the additional pressure this will put on already tight margins. Banks have not eased up stringency with which they are lending to small to medium size businesses making it increasingly difficult for new businesses to get the necessary funding, while residential lending powers are forward fuelling the property market. We are also seeing increasing material and shipping/logistic costs as product shortages continue as goods cannot be brought into the country fast enough with backlogs at ports across the country.

The latest two lockdowns have done no favours for businesses with the government maintaining some level of support for those businesses negatively affected the most by the lockdowns if they manage to meet the application criteria.

If you want to have a free chat about any issues your business is experiencing or about any other insolvency matters, please contact us on 0800 30 30 34 or email This email address is being protected from spambots. You need JavaScript enabled to view it..

Graphs

Corporate Insolvencies

While the February numbers are still behind the previous year’s February figures, they have begun to approach the higher points of 2020. The bulk of the 129 appointments were made up by shareholder resolution liquidations at 87 followed by court appointments making up 31. This is a reflection on the lower winding up applications figures seen over the closing months of 2020 and the slow January start where the courts remain closed for a time and people remain on holiday. This will likely flow through to later months of the year.

Personal Insolvencies

While the personal insolvency figures remain down on the past 4 years Februarys, similar to the corporate insolvency figures, they come close to the higher points of 2020 levels. Bankruptcies and No Asset Procedures continue at similar levels respectively of 73 & 72, with Debt Repayment Orders dragging up third contributing 27.

Corporate Winding Up Applications

Finally, a graph and figures showing figures higher than 2020 levels across the board. This was boosted hugely by the IRD finally chasing some overdue debts and progressing to winding up applications of 18 for the month compared to non IRD applications of 15. Given IRD had only advertised 7 total applications in the prior 6 months they were long due to pull the trigger on these delinquent debts. Will this be a sign for the remainder of 2020 and the increased winding up applications will flow through to actual appointments? Only time will tell.

McDonald Vague have a team of licenced insolvency practitioners with experience across corporate insolvencies and assisting individuals with alternative options to bankruptcy. We can assist with company compromises, voluntary administrations, receiverships, liquidations, and personal proposals.

Murphy’s Law (or one version of it) states "whatever can go wrong, will go wrong" and that can appear to be the case when you are running a business in the current environment.  If it’s not a lockdown, it’s a shortage of supply, or it’s a major client failing, or it’s another of the myriad of things that can go wrong. 

While having good contingency plans in place, including cash reserves or access to a fighting fund, can help your business get through the hard times, when these problems come at you one after another in quick succession, things can turn to custard very quickly. 

When that happens, there are things that, as a director of the company, you should be doing and, equally as important, things that you shouldn’t be doing. 

What to Do:

The first thing to do, when you have run out of ideas on what can be done to rescue your business, is to seek professional advice.  Sometimes, all it needs is for someone who has the required expertise and experience and is one step back from the frontline, to look at what is happening and come up with viable rescue options.  These could include –

• A compromise with creditors in which the creditor agrees to receiving an agreed percentage of the amount owed to them, with the balance written off, allowing the company to continue trading.
• A Hive-down which transfers the valuable or profitable parts of a failing business to a new entity with the market value of the assets transferred paid to the failing business for the benefit of its creditors.

Consider your duties as a director of the company – to act in the best interests of the company or, if the company is insolvent, to consider the interests of the creditors. Take steps to ensure that you don’t allow the company to continue operating if it is going to increase the risk to creditors of the company.

What Not to Do:

Don’t put your head in the sand and decide that the only option is to keep working harder in the hope that things will come right in the long run.  All you may be doing is digging the hole deeper.

Don’t put your personal interests ahead of those of the company or its creditors. 

• It is not a legitimate transaction to move all of the assets out of the failing company into your own name, or into the name of a new company that you have set up, without making payment to the failing company of the true market value of the assets moved.
• It is not appropriate to use company funds to repay yourself, for unsecured funds advanced to the company, ahead of making payment to the company’s other creditors such as the employees, IRD and trade suppliers. 
• Do not continue to operate the company so that you can repay creditors who may have a personal guarantee from you but, at the same time, increase the amount that is owed to other creditors.

If liquidators are appointed to the company, either by the shareholders or by the High Court, the liquidators will look at the steps you have taken, as director, and consider how your actions have impacted on the creditors.

If you took actions that were to the detriment of the creditors, you may be held personally liable for the losses they incurred.

Conclusion:

The failure of the company may not have been as a result of anything that you did, or didn’t, do, but your actions once the issues have arisen can have a marked effect on the outcome for creditors and on any personal liability you may face.

As soon as you identify that your company is, or will become, insolvent, you need to get the professional advice required and take the appropriate actions required of you as a director. 

If your company is facing solvency issues, please contact one of the team at McDonald Vague for a free initial discussion about your company and the options available.

INSOLVENCY SUPPORT

We hope you are safe and well.  If you have concerns to discuss, our licensed insolvency practitioners are available to provide advice and act as liquidators, receivers, compromise managers etc. We can meet online via Zoom or Teams or can communicate via mobile or email. Our licensed insolvency practitioners are all vaccinated and can meet with you (subject to mandates at the time).

We are trading according to the protocols with our people available to talk to you as you need.

You can call us on our 0800 number (0800 30 30 34) or email us at This email address is being protected from spambots. You need JavaScript enabled to view it. .

Alternatively If you have any questions or concerns, please do not hesitate to reach out to us by mobile:

Support Available

• MBIE have the following advice/resources on the restrictions:  click here
• If your business has closed and you seek advice on next steps, give us a call. We can help to bring closure and assist with the process.
• If you are continuing to trade but would like to discuss restructuring, cashflow or compromises, we are here to help.
• If your company has no assets (empty company), refer to our offering here

We would like to take this opportunity to thank you for your continued support.

The MVP Team