Could This Simple Mistake Cost You Your Business?

closed-for-business

Imagine this.

You’ve worked hard to build up a solid base of clients in your hairdressing or beauty salon business.

It hasn’t been easy, but you began to see the fruits of your hard work, long hours, and commitment pay off around 12 months ago.

In fact, it got so busy that you had to take on another hairdresser and, after fielding applications and interviews, you took on Nigel 9 months ago.

Nigel seemed to be the perfect person for the job; he was originally from the area and had spent the last 5 years in Dublin working in one of the country’s top salons gaining valuable experience.

You agreed the main parts of his employment contract-his salary and working hours-and things have gone surprisingly smoothly. You didn’t give him a written contract because you were both happy enough and the real meat of the agreement was how much he would be paid and how many hours per week he would work, and you were agreed on this.

You noticed that he got on great with all your clients and they really liked him.

Last weekend, though, you heard some disturbing news: you were told Nigel was going to set up his own salon on the Main Street in your town. You didn’t believe it at first, but couldn’t help worrying about it because there was a nagging concern in the back of your head.

If it was true, it would not be hard to imagine pulling a lot of your clients with him.

Then you notice a friend of his wishing him well on his new venture on his Facebook page.  You can’t wait any longer and you confront Nigel and put the disturbing rumours to him.

Nigel confirms your worst fears and gives you a month’s notice.

You ring a solicitor with your questions:

  1. Can you dismiss him immediately?
  2. Do you have to give him notice? If so, how much?
  3. Will he have a case for unfair dismissal?
  4. Do you have to pay him if you terminate his employment today?
  5. Can he bring your clients with him?

You’re told that you can dismiss him and, while he is entitled to one week’s notice, he does not have the required 12 months’ service to bring a claim for unfair dismissal.

But you now quickly realise that the most serious aspect of this whole affair is Nigel setting up his new competing business on Main Street, and the danger of you losing a lot of your clients-clients you had spent years acquiring.

And the most stomach churning part of the whole affair?

You now know that if you had a written contract in place from the start of Nigel’s employment you could have protected yourself and your business with a non-compete clause.

This non-compete covenant may have only lasted for 12 months after Nigel left, and it may only apply to a limited geographical area, for example your town or County, but it would have been a huge help, wouldn’t it?

Because if Nigel had to click his heels and wait for 12 months before starting on Main Street maybe he would thought twice about quitting now; and if he couldn’t set up in your town maybe he would have started his business far enough away from you that it would have no impact on your existing clients.

The sad thing is you will never know now because there is no non-compete clause, because there is no contract.

There are plenty of risks involved in running your own business-some avoidable, some unavoidable.

Putting a written contract in place for all your employees is not expensive, and a well drafted one specifically for your needs might even help save your business.

Learn more about contracts of employment here.

Winding Up and Liquidation of a Company-How Personal Liability Can Arise for Directors

The striking off of a company from the Register of Companies can be voluntary or involuntary.

company-liquidation

There are two forms of company strike off involving striking the company off the Register of Companies at the Companies Registration Office (CRO)-voluntary and involuntary.

It is important to understand the difference.

Voluntary strike off

Section 311 of the Companies Act 1963 allows the Registrar of Companies to remove companies from the Registrar as part of an administrative voluntary strike off scheme operated by the Companies Registration Office (CRO).

To request a strike off a company director must file a request on a form H15 requesting removal and the power to strike off is a discretionary one.

Voluntary Strike Off Criteria

To avail of the voluntary strike off mechanism a company must

  1. Have ceased trading or never traded
  2. The assets of the company must not exceed €150
  3. The liabilities of the company must not exceed €150
  4. Have filed all annual returns and paid any outstanding penalties up to the date of application for strike off
  5. Obtain a letter of No Objection from the Revenue Commissioners (dated within 6 months of the application)
  6. Advertise it’s intention to be struck off in a national newspaper within 6 weeks prior to the application.

This voluntary strike off procedure, whilst relatively straightforward, is slow and the Registrar of Companies will write to the Company on two separate occasions a month apart to confirm the request for strike off.

The Registrar of Companies must then advertise her intention to strike off the company and a month after this advertisement the company will be struck off and no longer exist.

Consequences of strike off

It is important to note that a company that is struck off, whether voluntarily or involuntarily ceases to exist as a legal entity.

If this occurs then a company which continues to trade could have far reaching and serious consequences for company directors such as-

  • Company property becomes property of the State on dissolution
  • Directors may be held personally liable for company debts as limited liability protection no longer exists
  • Possible application by the Director of Corporate Enforcement to have the directors disqualified or restricted as directors.

Serious consequences

When a company is struck off the Register of Companies it is dissolved and no longer exists.

This means that

  • Company directors could be held personally liable for debts of the company incurred after strike off;
  • Limited liability protection no longer exists;
  • The company’s property becomes the State’s property.

Involuntary strike off

Involuntary strike off can happen if the Registrar of Companies strikes off for failure to file returns for example; the Revenue Commissioners can also apply to have a company struck off.

If the company has been struck off for less than 12 months then it can apply to the Registrar to have the company restored.

However if the company has been struck off for more than 12 months then an application will have to be made to the High Court to have the company restored to the Register.

This can be a costly exercise.

When making this application by way of Petition you will have to notify

  • The Registrar of Companies
  • The Chief State Solicitor’s Office
  • The Revenue Commissioners
  • The Revenue solicitors
  • The Minister for Finance.

As in the case of the voluntary strike off scheme a restoration application can only be made where all returns are up to date and all penalties and late filing fees paid.

The first step in the application is to obtain a Letter of No Objection from the Companies Registration Office.

Then the application to the High Court will have to be made and if successful the Order of the High Court permitting restoration of the company must be served on the Registrar of Companies within 3 months.

The application to the High Court will be by way of Petition and will involve a grounding affidavit, notice of motion and petition. If successful a further Letter of No Objection will need to be obtained-this time from the Revenue Commissioners.

Company strike off and restoration can be a costly exercise, particularly where an application to the High Court is necessary and all company returns will need to be brought up to date and penalties paid as a starting point.

Personal Liability for Company Directors in a Company Liquidation

Company directors can be held personally liable for the debts of the company in exceptional circumstances.

Fraudulent trading

This would occur if a director carried on business with the intent to defraud but the intent to defraud must be proven. This is known as fraudulent trading.

Reckless trading

Reckless trading can also lead to personal liability for directors. Reckless trading is where a director is knowingly a party to the carrying on of any business of the company in a reckless manner.

The most common occurrence of reckless trading is where it can be shown that the directors have permitted the company to incur liabilities without having reasonable grounds to believe that those debts would be paid.

Failure to keep proper books of account is another offence that can lead to personal liability but if the director can show that he took reasonable steps or appointed another competent and reliable person to keep the company accounts he can avoid liability.

Consequences for directors of an insolvent liquidation

Directors can be disqualified or restricted from acting as directors.

A restriction occurs when a liquidator applies for a restriction order seeking to have the director prevented from acting as a director for a period of five years.

A good defence to such an application is for the director to show that he acted honestly and reasonably.

Director Disqualification

Directors can be disqualified from acting as directors on a number of grounds such as

a) The conviction of an indictable offence or fraud

b) Breach of duty

c) Persistent default in relation to the relevant company law requirements

d) Having a declaration of personal liability made against them.

Other issues re insolvent liquidation

Other matters that directors need to be aware of in the liquidation of a company include

  1. Post commencement dispositions-payments made out of the company bank account after the appointment of a liquidator are void
  2. Fraudulent dispositions-if the effect of a disposition of company property is to defraud the company this disposition can be reversed by the High Court on application by the liquidator
  3. Fraudulent preference-any payment or disposal of a company with a view to giving a creditor a preference over other creditors is a fraudulent preference and is invalid.
  4. Most of the acts referred to above must take place within six to 12 months of the commencement of the liquidation.

Winding Up a Company-Voluntary or Compulsory

Winding up a company in Ireland can be effected by a voluntary winding up by the members or a “voluntary” winding up by the creditors of the company.

This latter winding up arises when a liquidator appointed by the members forms the opinion that the company is unable to pay it’s debts.

1) Voluntary winding up

Members Voluntary Winding Up

The process of winding up a company by the directors is known as a members’ voluntary winding up which is provided for by sections 256-264 Companies Act 1963. In order to avail of this method of winding up the company must be solvent so technically it is not an insolvency procedure.

To wind up a company in this fashion the directors must meet and make a statutory declaration (under s. 256) that they have made a full enquiry into the affairs of the company and that they have formed the opinion that the company will be able to pay it’s debts in full within a period not exceeding 12 months from the commencement of the winding up.

This statutory declaration must be sworn at a meeting of directors before a commissioner for oaths or solicitor. It will also contain a statement of the company’s assets and liabilities at the latest date before making the declaration.

This declaration must be accompanied by a report from an independent person (usually the company’s accountant) stating whether he is of the opinion that the directors declaration above is reasonable and that the schedule of assets and liabilities is reasonable.

If it is subsequently proved that the company is unable to pay it’s debts within the period specified in the declaration of solvency, a Court may declare a director personally liable if the Court decides that the declaration was made without reasonable grounds.

After the directors’ statutory declaration and the independent report of the accountant/auditor the directors must call an EGM within 28 days of the declaration.

At this EGM the members pass a special resolution that the company be wound up voluntarily as a members’ voluntary winding up and appoint a liquidator. Within 14 days the directors then publish a notice to this effect in Iris Oifigiuil.

The company then ceases business save for whatever work is required to wind up the affairs of the company and distribute the assets.

If at any time the liquidator forms the opinion that the company is unable to pay its debts in full he must advertise and call a meeting of the creditors of the company.

The members voluntary winding up then becomes a creditors’ voluntary winding up.

Creditors’ Voluntary Winding Up

Once the liquidator has done his job he calls a final meeting of members and provides an account of the winding up.

This meeting must be advertised in 2 daily newspapers and he then makes a return to the Registrar of Companies.

The company is then deemed dissolved three months after the Registrar receives the liquidators report and an account of the final meeting.

This procedure is a liquidation started by the shareholders and where the company is insolvent. (And as pointed out above will be the procedure if the winding up starts off as a members voluntary winding up but he declaration of solvency cannot be sworn).

The steps for this winding up are
1) The board decide to appoint a liquidator to implement a creditors voluntary liquidation
2) The board call a meeting of shareholders and passes an ordinary resolution that the company cannot continue to trade and should be wound up voluntarily
3) The members pass a resolution for the appointment of a liquidator and winding up of the company
4) A meeting of all creditors is called to advise the creditors, to present a directors statement of affairs to creditors
5) To confirm the appointment of a liquidator
6) The liquidator then realises the assets of the company and distribute the proceeds to creditors in the order laid down by the company’s acts.

2) Compulsory winding up

This involves the High Court winding up the company on the petition of a creditor, member or the company itself.

The common grounds for such a petition are

1)      The company is unable to pay it’s debts

2)    Under s. 213 where it is just and equitable to wind up the company.

This type of winding up is similar to the other two voluntary situations outlined above except the appointment of the liquidator is by the High Court.
By Terry Gorry
Google+