Insolvency Act Powers – Reaching for the Section 236 pen; does the 234 one instead have more ink?
Insolvency Act Powers – Reaching for the Section 236 pen; does the 234 one instead have more ink? I am routinely coming across judgments in which there is reference to a liquidator’s so-called powers to obtain information to thereby investigate. This article looks at a hypothetical scenario that a liquidator might be faced with and some of the twists and turns that might possibly arise in some theoretical correspondence. Is this a power of the liquidator or that of the Court?
A liquidator’s duty is to be efficient, vigorous and unbiased. To fulfil that duty the liquidator needs information and may therefore need to reconstruct the records of the company to enable reconstitution of knowledge of the company. If the Directors are unable and or unwilling to assist to the liquidator’s reasonable satisfaction, then he or she may need to look elsewhere for information.
It is often suggested that a liquidator has powers under Sections 234, 235 and 236 of the Insolvency Act 1986. The ability to investigate is one thing but deployment of powers could be said to be another.
Section 236 of the Insolvency Act 1986 has a history of case law about the “reasonable requirement” threshold. Granted it is a reasonable requirement; there is no need for the liquidator to demonstrate an absolute requirement for the information sought. However, it is not always so simple.
Picture the scene, you are liquidator of a company with creditors asking that you fully investigate and who make allegations about the directors’ misconduct to you. You approach parties to whom you would consider it axiomatic they ought to have information of use to you as liquidator. However, you have not seen this information and you are embarking upon reconstruction of the company’s records. Such parties might be the company in liquidation’s former advisers. Your lawyers (and perhaps even Counsel) advises you these people are likely to be able to assist and they should by virtue inter alia of Section 235 and or Section 236 of the Insolvency Act 1986.
Your first approach to one of the former advisers is a request for relevant information they have relating to the company which is met with a response that asks you to be specific about what you want. You pick up the latest copy of an IP’s bible, Sealy and Milman, and you see Section 235(3)(c)’s commentary on the Insolvency Act Powers which seems helpful. It refers to those who have been employed by the company under a contract for services may be called upon to cooperate with you. Leaving aside the potential debate that might sprout as to whether or not a professional adviser constitutes ‘employment’ by the company, you write back to the adviser and say that they have a duty to assist by virtue of Section 235. The adviser responds to you again suggesting that they will happily assist you but please set out what it is that you want, and they will help.
This is now letter number 3 so you start to wonder whether the case was really worth taking on in the first place and whether you are going to be suitably rewarded for your efforts but you stretch yourself and reach for your keyboard to get on with it but what do you now say? You have creditors issuing complaints to you about how they have lost money due to the Directors and you need to reconstruct sufficient information about the company to enable you to embark upon your investigations into the creditors’ concerns. However, your dilemma is only just beginning – what do you write in letter number 3? You know a request for everything might not be well received and perhaps again met with a request to be specific, but you do not want to prejudice matters generally by broadcasting allegations made by creditors. You do not know if the advisers are still acting for the directors. You are in a tough spot as you do not know precisely what it is that the adviser has but you feel sure that they must have something of use to you. Letter number 3 is no more successful than numbers 1 or 2 at eliciting further information. You politely invite the adviser to send you everything to save them the trouble of having to search and dig on your behalf as you have no desire to inconvenience them. You even offer to collect the files direct from the storage facility so that they are not charged a disbursement.
The response arrives and the first signs of hostility sprout. It asks that you stop fishing for information and again be specific. You scratch your head because your legal team tells you that the adviser has a duty and you cannot be specific about requesting information that you have not yet seen. Indeed, part of the reason you want to see it is because you enter office as a stranger and could not have seen it. With such advice you decide it is time for the legal heavyweights to get out their pens to start scribbling for you so that you can fulfil your duty to the creditors and really understand what has been going on. The creditors must be right about something (you think) if the adviser has not by now cooperated with you. No smoke without fire?
The lawyer’s letter is put together and some days later you receive it for review and its penultimate paragraph is punctuated by the following:
“We trust that you will now fully cooperate with our client without our needing to enlist the assistance of the Court pursuant to Section 236 of the Insolvency Act 1986…”
After a period of some delay the adviser writes back to your lawyers to say that they are taking legal advice and then several weeks later the next stage of circular correspondence arrives but now it has escalated, lawyer to lawyer, repeating all that has gone on before but the balance has now shifted.
When you started out you thought you were deploying ‘powers’ under Section 236 of the Insolvency Act 1986 as an unbiased impartial IP seeking to undertake duties, including public duties. Now the tables have turned, you are now having to justify your request. You are now not only asked what you want but why it is that you want it.
Therein lies the potential problem which may arise for a liquidator ie. the reasonable requirement threshold means that you need to identify what you want and why you want it because you are ultimately under the control of the court. The next stage is how to deal with that issue because you know that the advisers must have information relevant to the company’s financial affairs that might assist you.
So, your legal team say that it is now time for a court application and witness statement to be put together and you are feeling confident again because you have advice from specialists in the field. The fee earner at the law firm delegates the preparation of your witness statement to a qualified legal adviser and some weeks later you get a draft statement to review with alacrity. In this draft are a series of square bracketed comments for you to add your three penneth, at which point your bemusement with the whole process (and the expense that you have been shelling out for in legal fees) reaches new heights. The statement seems to resemble regurgitation of the chronology of the correspondence to date. Then in the witness statement drafted for you in bold you see the words “[CLIENT TO EXPAND ON WHY WANTS INFORMATION]”. Your newfound confidence is dealt a bit of a blow.
The penny drops. No matter how hard you try, you realise that you can do little more than speculate as to what information the adviser has and even so your speculation has to then surge to new heights by stating how you will be able to make use of the information in the liquidation ie. speculation founded itself on yet more speculation.
You wonder how could life for a liquidator be quite so difficult that you are asked to confirm what it is that you want and why you want it when you have not even seen it? Whereas the person who has seen it (because they have it) will know why you want it and perhaps even ought to have it – it will clearly have something to do with the company’s financial affairs. Can you bring yourself to acknowledge that you can neither identity nor say why you want the information sought with detailed specificity?
For those with experience in being subject to cross examination such an admission could be an advocate’s springboard towards dismissal of your intended application. However, you are comforted in the knowledge that your statement of truth to be signed refers to the words “believe” so you can faithfully sign up to that.
However, you cannot resist temptation (given your legal bills are now clocking up), to training your sights on the Chancery Guide 2016 which cautions you about the content of witness statements. Your research takes you further and a little case law bedtime reading later you learn that positive assertions in a witness statement need proper support.
You realise that you cannot vault the hurdle so easily and that it will then be down to the advocates’ skills of persuasion before the judge. You are also cautioned by your lawyers that as with any piece of litigation you are at risk on costs if the application is unsuccessful.
You ponder thoughtfully to consider if the risks are worth it. You review the next draft of your statement in which a new argument has appeared suggesting that the adviser’s files are likely to contain copies of documents that the Directors should have retained as records of the Company.
Optimism is now flowing more freely in your veins, all the more so when you check out the definition of property in Section 436 of the Insolvency Act 1986 which you consider includes records of the company. Suddenly a whole new vista is clearing for you as Section 234 flashes in your mind.
You review it and are further encouraged by Sealy and Milman’s reference to Walker Morris v Khalastchi which you read years ago over your cornflakes at breakfast one morning. You very vaguely recall that it said something about the files of Walker Morris were such that the liquidator was entitled to them as property of the company. In a somewhat self-congratulatory mood, you reach for your mobile phone with your lawyer on speed dial, alerting them to this apparent stroke of genius by you.
Your lawyer is full of praise and says that he will get a letter put together to ask for the documentation on Section 234 grounds and then suggests that perhaps with the documents you now should obtain, they may even unlock Section 236 doors for you.
A few weeks later the response finally arrives from the other side and you feel sure that it will enclose some files that you have so patiently been waiting for. You read it once and then again and wonder if your eyes are playing tricks on you; you read the words:
“Our client has reviewed its files but does not have any property of the company in its possession.”
Insolvency Act Powers – Reaching for the Section 236 pen; does the 234 one instead have more ink?