January 2003

A version of this article was published in the Sunday Business Post on 26 January 2003. Written by Yvonne Cunnane

Question:

As a self-employed service provider, I rely hugely on my biggest contract with a large multinational based locally. Recent signs have indicated that this company may be in trouble. My services are paid for on a bill system. If the company were to go into liquidation before this payment was finalised, would I have any legal rights with regard to the money owed?

Background facts

On the basis that the customer you supplied services to is an Irish registered company and we assume that you do not hold any security over your customers property for payments due to you, the following is our answer.

When is a company insolvent?

A company is deemed to be insolvent when it is unable to meet its liabilities and pay its debts as they fall due. Once the directors of the company are aware that the company is insolvent they are obliged to cease trading. Failure to do so would leave the directors personally liable for the debts of the company. The directors may decide to wind up the company voluntarily or they may be compelled to do so by the courts through a petition of the creditors or members of the company.

What is the role of the liquidator?

A liquidator is appointed to realise the assets of the company, to pay and settle its debts and to distribute any surplus to the shareholders. If the liquidator is satisfied that there are sufficient assets available to meet the creditors claims he will advertise for the creditors to prove their claims. A simple letter setting out the creditors name, address, particulars of their debts and claims and the name of their solicitors should suffice in an undisputed claim. Once the liquidator has realised all the company’s assets he must then set about satisfying the creditors claims.

Who gets paid first?

While the fundamental rule is that all creditors should rank parri passu with each other – ie they should be treated equally, some creditors are preferred over others and get payment in priority. Claims in each category of creditors must receive full payment before any payment is made to the following category. Where payments cannot be made in full to any one category, all creditors within that class should be treated equally, with their debts abating on a pro rata basis.

The order of priority of payment in a liquidation to creditors is set out in company law as follows:

Holders of fixed charges and mortgages may rely on their security and do not have to go through the liquidation process to realise their claim.

How long will it take to recover the debt?

Liquidation proceedings may drag on for a number of years, incurring costs and expenses for the liquidator as time goes on thereby reducing the surplus available to settle the claims of those creditors further down the priority chain.

Landwell’s answer
From your question it appears that the company is not yet in liquidation. As an unsecured creditor in a liquidation your claim would come in after the claims of preferential and secured creditors. So what can you do now? As an unsecured creditor you might consider taking action to recover your debt rather than waiting for payment under liquidation where you would simply be an unsecured creditor, e.g. by recovering the debt by way of debt collection proceeding in the courts. If you do not wish to take this step you should review your contract with the company to ensure that provision is made for late payments and impose financial sanctions if payment is made outside this time frame. You are entitled to do this under the European Communities (Late Payment in Commercial Transactions) Regulations 2002. You should consider if you have the right to set off the monies owed to you by the company against any debts you might owe to the company.

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