As the number of company failures continues to increase in 2010 along with an increase in the number of companies experiencing trading difficulties due to late payment of debtors, increased pressure from creditors or difficulty in obtaining additional finance from their lending institutions, insolvency is becoming more of a reality for many companies. In the event of a company becoming insolvent or facing serious financial difficulties there are a number of options available to them being:

• Creditors Voluntary Liquidation
• Official or Court Liquidation
• Receivership
• Examinership

The following is a brief summary of what each of these entails and a synopsis of the tax implications.

Creditors Voluntary Liquidation

This type of liquidation arises where the directors of a company decide that it should be wound up by reason of its insolvency.

Official or Court Liquidation

This is where a liquidator is appointed by the Courts after a petition being brought normally by a creditor to wind the company up. This is an expensive and slow method of winding up a company. The liquidator is subject to the Court's supervision and control at all times.

Receivership

This is a process whereby a secured lender seeks to realise charged assets in order to repay the debts due to it through the appointment of a receiver who is charged only with releasing the asset subject to the charge.

Examinership

This is a process which a company can use to seek the protection of the High Court whilst negotiating a settlement with creditors. A company is placed into Examinership to allow the Examiner to develop a rescue plan for the company. The support of the company's funders is crucial. Given the current climate this is proving very challenging.

Irish Tax Implications

From the outset, it is important to be aware that the Revenue Commissioners are treated as a preferential creditor within the various insolvency procedures.

Liquidations

On the appointment of a liquidator the company ceases to be the beneficial owner of its assets.

The liquidator is obliged to send certain information to Revenue within 30 days of their appointment. Some tax implications to consider are:

Corporation tax

The appointment of a liquidator triggers the end of an accounting period for the company. This may affect the use of the company's losses and also have an impact on when the company has to file its tax return, pay its preliminary tax liability, etc. The liquidator will however be able to use trading losses and capital losses that are carried forward to reduce the tax payable during the liquidation period.

The company will no longer be part of the group for corporation tax purposes.

Prior to a trade ceasing, consideration should be given to the following;

• Bad debt relief
• Terminal loss relief
• Other expenses i.e. redundancy costs etc.
• Potential clawback of CGT reliefs claimed
• Review of any group relief claimed as there are certain exemptions that may not result in a clawback where a group relationship ceases as a result of a liquidation.

Capital Gains Tax (CGT)

A CGT group is not terminated by the appointment of a liquidator or receiver. The liquidator is the accountable person for any CGT arising on the disposal of assets. The CGT is paid out of the proceeds received and the tax is calculated as if it were the company who made the disposal.

Stamp duty

It is important to review if any Stamp Duty reliefs were claimed under section 79 or section 80 of SDCA 1999. Generally, a clawback does not arise where the relationship ceases between two companies as a result of a bone fide commercial liquidation. However, we understand Revenue will review this on case by case basis where the liquidation occurs within the two year clawback period.

VAT

The liquidator must account for VAT on the disposal of any goods which have formed part of the business, whether that business continues to trade or not.As a result the liquidator is obliged to register in their own right for VAT within 14 days of making any asset disposal.The liquidator will be issued with a VAT number in the name of the company with the suffix “in liquidation”.

PAYE/PRSI

Where the liquidator continues to employ the staff of the company, they are deemed to be the principal employer and should register as such. However, in practice, liquidators tend to continue the PAYE registration of the company.

In court liquidation, all contracts with the company including contracts of employment are terminated on the appointment of the official liquidator.

Examinerships

The appointment of an examiner does not trigger the beginning or end of an accounting period for the company, also a company's position within a Group is not affected.

During examinership the company continues to be liable for all its registered taxes and charge VAT as normal.

Any creditor discounts negotiated during examinership could give rise to a CT liability, however any such profits could be reduced by current losses if available.

Receiverships

It is important to ascertain whether a receiver is appointed under a fixed charge debenture or floating charge, when considering the tax issues.

If the receiver is appointed under a ‘fixed charge’ debenture then the company will continue to trade as normal and is accountable for tax in the normal manner.

Such an appointment does not trigger the end of an accounting period, and the company remains the accountable person for corporation tax purposes.

The receiver is generally not responsible for corporation tax on income that arises during the receivership. The receiver could therefore leave the company with no funds to pay this tax.

However, the receiver is responsible for the payment of any tax arising on a chargeable gain.

The appointment of a receiver does not affect the carry forward of trading losses or capital losses. Consideration should therefore be given as to whether these losses are available to reduce any tax payable.

In the case of a receiver acting pursuant to a ‘floating charge’ the receiver is liable to account for the VAT in respect of all disposals and supplies of goods. The receiver will apply for and be issued with a VAT number in the name of the company with the suffix “in liquidation”. A floating charge receiver is not required to account for VAT on the supply of services. The company remains liable for this VAT.

Should the company have employees the receiver does not need to obtain a separate PAYE registration, the existing company registration is normally used. The receiver is responsible for ensuring that the correct taxes are deducted and paid over to Revenue and they must also account for employer PRSI contributions.

Other Issues

Inter company loans

It is important to consider the impact of having a company dissolved on the group structure, for example where there are golden shares in place, you need to ensure that dissolving the company will not result in loans between other group companies contravening company law.

Proposed loan write offs

It will often be necessary for a company to write off loans that it owes to other group companies or loans that are owed to it by group companies before it can be dissolved.

It is necessary to consider the tax implications of these write-offs, for example, will such a write-off be treated as a distribution and what are the tax implications for each company.

The authors have made every effort to ensure that the information provided in this article is accurate but they cannot accept responsibility for the consequences of any action taken in reliance on its contents.

Desi Foley is Senior Tax Manager with FPM Chartered Accountants

Email: d.foley@fpmca.com

Niamh Higgins is also Senior Tax Manager with FPM Chartered Accountants

Email: n.higgins@fpmca.com