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Appointing an Insolvency Practitioner and the perception of independence cropped up as an issue last week when a creditor of a company that had gone into Administration asked if we could assist with remedying their position. The creditor had been a Director, Creditor and minority Shareholder of a company that had been struck off at Companies House around a year ago.

They were owed several hundred thousand pounds as the largest creditor according to the Statement of Affairs submitted by another Director of the relevant company. 

The complaint was the company should not have gone into Administration and they suggested there had been some irregularity about the insolvency event that they had been excluded from deciding upon and on the appointment therefore of the identity of the Administrator. There was no need for it they said and as a result, it had cost them a lot of money. Misconduct was hinted.

The other shareholder / Director had put the company into Administration against the creditor’s wishes.

However, the company had been dissolved around twelve months ago and the approaching creditor did not seem to have funds to pursue their concerns. We considered that even if the company was restored they could well find themself frustrated with how matters might develop. They said they were already frustrated. 

appointing an insolvency practitioner and the perception of independence

Impact On Independent Creditors When Appointing An Insolvency Practitioner

A key issue is given the insolvency regime is for the benefit of creditors, then if creditors are frustrated that their wishes might have been bypassed why does it not ensure engaged creditors can as a minimum appoint the office-holder. Currently, if engaged creditors independent of the Directors and or shareholders are in a minority they do not usually control who will be appointed as the office-holder.

In most cases, a Director will appoint the Insolvency Practitioner and that is the right thing to do. Wrongful trading might loom if they don’t and it is often the responsible course of action for a Director to take when a company is insolvent and unable to move forward without some form of insolvency procedure.

Director Investigations By An Insolvency Practitioner

However, what works for most cases perhaps should not outflank what is relevant to potentially many other cases. Insolvency procedures such as insolvent Liquidation and Administration involve reporting on Director conduct to the Insolvency Service via the Director Conduct Reporting Service. Such insolvency procedures arise when something has gone notably wrong with a company and caused creditors to suffer loss. That does not mean there will necessarily be misconduct on the part of a Director but there might have been.  

It therefore follows that an investigation of Directors’ conduct is a necessary ingredient of such insolvency proceedings. 

Should Directors be able to appoint the individual who will be marking their homework? 

Well, do pupils pick those who mark their GCSE and A Level scripts? Does the Prime Minister pick the Leader of the Opposition whom he or she faces across the despatch box on Wednesday’s Prime Minister’s Questions? Does a litigant pick the Judge in adversarial proceedings? Obviously not. 

Yet it is perhaps arguably somewhat ironic that in many (if not most) insolvencies Directors do pick the office-holder that is going to investigate their conduct. So long as creditors do not object to this then it is conceivably fair enough.

Need For An Insolvency Practitioner To Be Independent

However, at the heart of the appointment of a Liquidator or Administrator is that the relevant Insolvency Practitioner who accepts the role must be independent and free from an unmanageable conflict of interest. The Insolvency Practitioner Code of Ethics demands this to be the case. An Insolvency Practitioner who fails to comply with that Code can face disciplinary proceedings.

Potential Change Of The Law Of Appointing An Insolvency Practitioner In Some Cases

Notwithstanding that position, the problem from simply the perception of independence is not that the office-holder will actually adopt a Nelsonian eye where Director misconduct is concerned because the Director has appointed him or her but that creditors may harbour concerns that it is a real possibility and could happen. The legal maxim germane here is that justice not just be done but seen to be done.

It appears arguably a gap in the current system that is potentially easily addressed. Simply enabling creditors who are properly independent of a company’s Directors and shareholders to trump the votes of the connected and or associated party creditors when determining the appointment of such an Insolvency Practitioner.

Given it conceivably only would entail a relatively simple modification to the existing law is there a good reason for it not to be introduced?

GET IN TOUCH FOR HELP

For a free no obligation chat about any of the matters detailed above, please do get in touch for help. An expert will call you back or if you prefer exchange emails.

We can explore your situation and consider the best way to help you and your business needs. You can call us 020 3925 3613 or fill in the form below and will get back to you quickly. We Know Insolvency Inside Out.

Author: Elliot Green
Last Updated: May 20, 2024

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Disclaimer: Appointing An Insolvency Practitioner And The Perception Of Independence

This page is not legal advice and is not to be relied upon as such. This article Appointing An Insolvency Practitioner And The Perception Of Independence is provided for information purposes only. You should take independent advice on the facts of your case. No liability is accepted for reliance upon this post.

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