The recent failure of a building contractor/developer in Gibraltar made me think that there may be a large number of business persons in Gibraltar that may not fully understand the definitions as laid down in the legislation.

1. Compulsory Liquidation

The most common type of winding-up is known as “compulsory liquidation”.  The Courts of Gibraltar can place a company into “compulsory liquidation” when it is shown that the company is unable to pay its debts. The definition of “unable to pay its debts” is straight forward and simple. If a creditor is owed in excess of £500 and serves a demand on a company at the registered office which remains outstanding for more than 21 days, that creditor has the right to apply to the Court for a compulsory liquidation notice.

Obviously the Courts will not simply issue such a notice based on this one debt but will have to be satisfied that the company has not made any attempt to dispute the claim and that the creditor (with or without supporting creditors) has proved their argument that there are insufficient assets and funds for the company to clear its debts. The Court will take into account other contingent or prospective liabilities before making a liquidation order.

There is no doubt that such a process will take some considerable time and, as an insolvency practitioner, I can recall cases that have taken two and three years to get to Court which in a great deal of instances, has subsequently proved futile when the offending company has already closed its doors, ceased trading and has no records or assets!

2. Creditors Voluntary Liquidation

An alternative to making an application to Court is when a company, through its shareholders, considers that they have financial problems and calls a meeting of all known creditors to explain the position. At such a meeting the creditors can, or will, consider the position and possibly appoint a liquidator to collect in the assets and pay off the debts. This would usually result in the creditors receiving recovery of part of their debts, for example 25 pence in the pound or whatever.    

In the two methods mentioned above there is one over-riding comment that has to be made which could benefit the creditors. If it can be shown that the directors and shareholders (and in certain cases, the principal financiers) knew or should have known that they were allowing the company to continue to trade whilst being unable to settle their historic and continuing debts, it is possible to remove the “limited liability” status of the company and go behind the ”corporate veil”.  This would place the offending party in the shoes of the company and successful legal action could be commenced to recover what is due.

3. Members’ Voluntary Liquidation

There is a third method of liquidation, which is relevant when the shareholders and directors know that the company has no debts to third parties and they simply want to wind up the company.  This is known as a members voluntary and can arise both in companies that have not traded or in companies that have settled all their liabilities to third parties completely or by negotiating final payments.


Generally

It is important to remember that in a compulsory liquidation the liquidator is responsible to the Court and has to comply with set laws and regulations whilst in a creditors “voluntary” (an unfair terminology when one considers that the creditors rarely go voluntarily down this route) liquidation a committee of creditors can decide on the route to be taken provided a majority agrees.

In either case as outlined above it is important for the liquidator to consider the concept of trading whilst insolvent and to ensure that the directors/shareholders/principal financiers have not erred by allowing the company to continue to trade when they knew or should have known that debts were expanding whilst income was limited.

In a well reported case a few years ago concerning the liquidation of Electrical Contracting Services Limited there were considerable outstanding debts for PAYE and Social Insurance. The other creditors were not informed of these enormous debts and therefore continued to believe that the company- which was allowed by Government to trade normally - was solvent and in good standing. There are no facilities available to the public or the traders to find out the truth behind such a position, though nowadays, one could look at the accounts in Companies House. Therefore it was a totally reasonable supposition that further credit be granted to the company. Unfortunately, this was ill conceived as when the company admitted its inability to settle its debts, the normal trade creditors were the losers.  To add insult to injury, the PAYE and Social Insurance debts are the only ones which are secured and for which there is personal liability of the directors!

There have been other cases similar to this in the past.

 “In the public interest” and to protect the workforce, the main debts, social taxes due to Government, are absorbed by the administration and redundancies paid out of the Insolvency Fund.  In such cases, the losers are not only the local suppliers but the local tax payers.

Therefore in conclusion you need to consider two issues:

If you trade through a limited liability company and feel that you may not be able to settle all your debts if called upon, then you may lose the benefit of being limited and end up with personal liability.

Secondly, whether trading as limited or sole trader or as a partnership, check as carefully as possible the credit status of the company you are about to deal with BEFORE you grant them a  facility. Because we do not have public information as to tax, social insurance, rates and other Government debts you need to ask around and seek advice. Talk to other suppliers, the GFSB and anyone else that may have information and if in doubt, ask the company themselves for details of their credit position and do not grant credit unless you are certain that payment will be forthcoming. Just because a company appears to be big and involved in Government contracts, does not make it financially viable!   A good idea might be to ask any company you are going to supply large amounts to on credit to confirm in writing that it has no debt of PAYE or Social Insurance which it cannot discharge.  If you are given this in writing and it is not true the relevant director would be committing a fraud and you would be closer to having them personally on the hook for your debt if the company is unable to pay.  Just a GFSB idea to help.