How does the Act provide for the operation of companies in jeopardy?
In the United States, and certain other jurisdictions, protection is available to companies in the form of what has become known as "Chapter 13" applications. On such an application, a company may obtain an order from the court that prevents creditors from foreclosing on the company's assets. This gives a company in jeopardy a breathing space to attempt to revive itself. Trinidad and Tobago, despite the opportunity given to it by the adoption of new companies legislation, has chosen not to adopt this approach.
The upside of not permitting "Chapter 13" type applications is that the country has retained its attractiveness as a jurisdiction for foreign lenders, particularly in large limited recourse project financing transactions in the energy sector. Instead, Trinidad and Tobago has maintained the traditional approach, providing for receivership, and the Companies Act essentially codifies the position at Common Law.
What are the functions of the receiver?
A receiver of any property of a company may, subject to the rights of secured creditors, receive the income from the property, pay the liabilities connected with the property and realize the security interest of those on behalf of whom he is appointed. Except to the extent permitted by the Court, a receiver may not carry on the business of the company. However, a receiver may do so if he is also appointed manager of the company. In most cases, therefore, if the intention is to sell the company as a going concern, it is imperative that the debenture include a right to appoint a receiver-manager.
When a receiver-manager is appointed, the directors may not exercise those powers that the receiver-manager is authorized to exercise until the receiver-manager is discharged. Given the extent of the powers of most receiver-managers, the directors will have only a tiny space within which they are free to exercise their powers. Generally, the directors will not be prevented from bringing an action seeking relief as a result of the receiver's alleged improper appointment or conduct while in office.
What is the duty of a receiver?
A receiver or receiver-manager appointed under an instrument shall act honestly and in good faith and deal with any property of the company in his possession or control in a commercially reasonable manner. The latter duty is expressed somewhat differently from the Common Law position, which was to take reasonable care to obtain the best price that the circumstances permit and to exercise reasonable care in choosing the time for the sale. It remains to be seen whether our Courts will construe this new provision in a manner consistent with the former Common Law principles.
The Companies Act does not deal with the question of whether the receiver or receiver-manager is the agent of the bank appointing him or of the company. However, in most instances a properly drawn debenture will expressly provide that any receiver is the agent of the company. Despite such an express provision, if it were shown that the bank appointing him interfered with the conduct of the receivership, then the bank may be made liable for the actions of a negligent receiver.
What liabilities are a receiver exposed to?
A receiver is personally liable on any contract entered into by him in the performance of his functions except to the extent the contract otherwise provides but is entitled to an indemnity out of the assets of which he has been appointed receiver. In most instances a receiver will also obtain an indemnity from the bank appointing him.
What are the priorities in a receivership?
Where a receiver is appointed over property that is subject to a floating charge, the following are required to be paid in priority to all other debts out of the assets comprised in or subject to the floating charge:
· Rates, charges, taxes and NIS contributions which became due and payable within 12 months before the appointment of the receiver;
· All wages or salaries of employees (other than directors) due in respect of the period four months before the appointment of the receiver;
· All severance benefits not exceeding the equivalent of two months' basic wages accruing to any employee (not being a director) whether retrenched by an employer, a receiver, a liquidator or some other person (this provision comes into effect on 18 April 1999); and
· All accrued amounts due for workmen's compensation before the appointment of the receiver.
Why are companies wound-up?
One often imagines that the reason for winding-up or dissolving a company is because it is unable to pay its debts. Certainly, it is companies which find themselves in an insolvency situation which tend to grab the headlines. However, a fair percentage of dissolutions occur because of the shareholders' desire for the company to cease carrying on business and for its assets, after payment of all liabilities, to be distributed among the shareholders. To achieve these differing goals there are two modes of winding-up provided by the Companies Act: winding-up by the Court- that is compulsorily winding-up or voluntarily winding up.
A winding-up is not solely concerned with realizing the assets of a company and distributing the net proceeds among the creditors and the balance between the shareholders. In a winding-up, the conduct of the company's management may also be examined, which may result in the adjustment or avoidance of certain transactions and criminal or civil proceedings being instituted against any person found guilty of committing offences in relation to the company's affairs.
On what grounds may a company be wound-up by the Court?
The Companies Act specifies six different grounds upon which a company may be wound up by the court. The most important of these grounds is that the company is unable to pay its debts, the next most important being if the court is of the opinion that it is just and equitable that the company should be wound up. This latter ground is invariably used as a remedy in cases where shareholders are being unfairly prejudiced or there is a deadlocked management. A simple method is afforded to creditors who are owed more than TT$5,000 (US$794) to establish that a company is unable to pay its debts.
Once a company is generally known to be in financial difficulties a creditor's ultimate remedy is to petition the court for a winding-up order. If the court makes such an order, the first step is to appoint a liquidator to administer the company's affairs and property, upon which appointment the board of directors ceases to function.
How is a voluntary winding-up effected?
A voluntary winding-up starts with a resolution by the company to wind-up its affairs. If the company is insolvent, then it must cause a meeting of its creditors to be summoned. At this meeting the creditors and the company may nominate, or, in default of agreement, the creditors may appoint, a liquidator who then proceeds to liquidate the company by way of a creditor's voluntary winding-up.
If, on the other hand, the company is solvent, then the directors are required to make a declaration of solvency and the company appoints a liquidator to wind-up the affairs of the company by paying off its debts and distributing any surplus among the shareholders.
When does a winding-up commence?
In the case of a voluntary winding-up, the commencement date is taken as the date of the resolution to that effect being passed by the shareholders, whereupon the company must cease to carry on business except so far as is required for its beneficial winding-up. In the case of a winding-up by the court, once an order is made, the winding-up is deemed to have commenced on the date that the winding-up petition was presented.
This relating-back feature is important as it can have the effect of invalidating property dispositions and executions of judgements. It also impacts on the time period for determining whether certain transactions are liable to adjustment.
What effect does winding-up have on contracts?
As a general rule, liquidation of a company, whether voluntary or compulsory, does not automatically terminate subsisting contracts unless special provisions to that effect are embodied in such contracts or, by necessary implication, such contracts cannot survive the liquidation.
Compulsory liquidation operates as a dismissal of all employees from the date of publication of the order. This rule was designed so as to crystallize the position of employees at the earliest possible moment and so give them an advantage over other unsecured creditors. This rule also frees the employees to seek employment elsewhere. In the case of a voluntary winding-up, the resolution to wind-up only operates as a notice of dismissal if it involves the termination of the employees.
What if a receiver had previously been appointed?
If a receiver is appointed then the winding-up of the company has the effect of determining the receiver's role as agent of the company and consequently operates as a dismissal of employees. The receiver can nonetheless carry on the business and realize the company's assets in his capacity as principal or as agent for the debenture-holders. The role of a liquidator of a company in receivership is:
- To invoke, where applicable, certain statutory remedies (e.g. in respect of fraudulent preferences or transactions at an undervalue);
- To scrutinise the security of the debenture-holder and conduct of the receiver; and
- To assert his right to all assets which lie outside the charge and any surplus after discharge of the debenture.