Asset-creating liquidator deserving of a pat on the back

Asset-creating liquidator deserving of a pat on the back

Asset-creating liquidator deserving of a pat on the back

Asset-creating liquidator deserving of a pat on the back? Well the case of Walker Morris v Khalastchi [2001] 1 BCLC involved a liquidator’s refusal to afford a firm of solicitors an undertaking not to release documents from files they were to release to the Inland Revenue.

Nicholas Strauss QC held that the undertaking need not be provided but also afforded an account of the nature of the rights of a liquidator to disclose information to creditors in furtherance of the liquidation.

Extracts from the Judgment

In his conclusions he made the following notable comments culminating in the suggestion that the asset creating liquidator would appear to be deserving of a ‘pat on the back’:

(1) The starting point is that the files are the property of the Company, and the Liquidator is entitled to possession of them. The applicants have no right whatsoever to withhold them.

(2) A liquidator’s duty is to investigate the affairs of the Company, and there is an obvious and urgent need for him to investigate the capital gains tax situation. The applicants’ conduct has already resulted in delay of nearly a year. Mr Khalastchi’s initial request should have been answered much more quickly, and the documents should have been handed over to him so that he could get on which his investigations, with a request for an undertaking that he should disclose nothing to the Inland Revenue pending the decision of the Court on this application; if such a request had been refused, an application for an interim direction could have been made.

(3) It is for a liquidator to decide whether to make a voluntary disclosure of the Company’s documents, whether privileged or not, to third parties. If he needs guidance as to where his duty lies, he can apply to the Court for directions. Otherwise, there is no reason for the Court to interfere unless there is reason to fear that he proposes to act in a manner which is not in the Company’s interests or is otherwise improper.

(4) I can see no way, and Mr Moss has been unable to suggest any way, in which the Company’s interests could be harmed by the disclosure of documents in these files, whether subject to legal professional privilege or not, or of information derived from these documents. That is because the Company has no assets and the addition of another claim by the Inland Revenue, however large, therefore cannot damage its position or that of its existing creditors.

(5) However paradoxical this may seem, it may be for the benefit of the Company and its creditors that the Inland Revenue’s claim if valid should be assisted, so that it is worth its while to finance proceedings to recover the dividend and thereby produce a fund which is sufficient to enable the creditors (including the applicants) to recover all or part of their debts. In that situation, Mr Khalastchi might well consider it to be in the interests of the Company and the creditors to disclose documents including privileged documents to the Inland Revenue. Mr Moss criticises this as “attempted asset creation”, but it seems to me that Mr Moverley Smith’s response, that an asset-creating liquidator deserves a pat on the back, is correct.

(6) It is also possible that he may consider that he has a legal duty to disclose some of the documents (although probably not privileged documents) or that, if he does not, the Inland Revenue will be able to exercise its powers to obtain them so that to withhold them would cause needless trouble and expense.

(7) It being thus clear that there are circumstances in which Mr Khalastchi could properly disclose documents to the Inland Revenue, his refusal to give an undertaking not to do so without an order of the Court is in my view entirely reasonable. There is no reason whatsoever to disbelieve his statement that he will review them “with the utmost propriety” before deciding whom to consult and what action to take. There is no reason to apprehend impropriety; Mr Khalastchi is entitled to decide for himself whether he needs to ask the Court for directions.

The above addresses most of the matters put forward in argument, but I should deal specifically with three submissions.

First, it was submitted that Mr Khalastchi owes a duty to the Court and to the other creditors to act “fairly” and that this involves an obligation to resist disclosure to the Inland Revenue, which might prejudice the creditors’ position. I do not accept this submission. Mr Khalastchi’s duty is to act in the interests of the creditors (including the Inland Revenue) and of course with propriety. As I have sought to show earlier, disclosure could not prejudice or disadvantage creditors and might benefit them. Mr Khalastchi has no duty to act fairly to the applicants’ clients, who have no interest in the liquidation and may be debtors of the Company.

Secondly, it was submitted that the undertaking sought from Mr Khalastchi involved no disadvantage, that the refusal to give it conveyed an impression that he was not holding an even balance between the Revenue and the other creditors and that the safeguard of an application to the Court was therefore needed. It rarely advances a claimant’s case to show that an undertaking unreasonably demanded, as in my view this one was, involved no disadvantage; in any event, this did involve a disadvantage, namely the cost and loss of time involved in applying to the Court. It is for Mr Khalastchi to decide if he needs the guidance of the Court and there was no justification in seeking to impose such a safeguard on him. In any event, there is no balance to be held as between the Inland Revenue and the other creditors as creditors; their interests as creditors are the same.

Thirdly it was submitted that there was a danger that by collusively admitting the Inland Revenue’s claim when it ought not to be admitted, Mr Khalastchi may manufacture a claim against the applicants’ clients. I can see no such danger. The applicants’ clients would not be bound by an admission by Mr Khalastchi. They would only be liable if proceedings brought against them were successful; they would have every opportunity in any such proceedings to contend that his Inland Revenue’s claim was invalid and should not have been admitted. In any event there is again no justification for assuming that there is any risk of Mr Khalastchi admitting the Inland Revenue’s claim collusively or otherwise improperly.

Observation

The notion that there might be something to be critical about of an asset-creating liquidator would seem remarkable. A liquidator’s job is to not only deal with the disclosed assets but also to deal with the undisclosed assets in the event of their discovery. Assets are frequently discovered later on in a liquidation; that is one of the purposes of having matters properly and independently investigated.

A liquidator’s duty to investigate is not in doubt as can be seen from the matter of Khan v ICAEW [2018] EWHC 1378 (Ch) which can be considered in the post on Comet, Confidentiality and Conflict. Such investigation duties do not exists purely for reporting purposes to regulators and creditors; investigations have their roots in discovery of assets and claims as well. Indeed in the matter of Lambert Carton-Kelly v Edwards [2020] EWHC 131 (Ch) which was considered in the connected post Comet, Confidentiality and Regulatory Interevention, Deputy Insolvency and Companies Court Judge Frith made the following notable observation:

“…as with most investigations, proceedings of some description will follow…”

So is an asset-creating Liquidator deserving of a pat on the back? Is it not axiomatic that the answer simply has to be that they are not only deserving of a ‘pat on the back’ but a medal to go along with it?

Disclaimer:

The aforesaid is not legal advice and is not to be relied upon as such. No liability is accepted by the writer for any reliance placed on the same. 
If you have a specific query then you should seek independent legal advice on the same.

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