Why Would The Odds Be Stacked Against Creditors In Liquidation?
Are the odds stacked against creditors in Liquidation?
Well, at the risk of the consistency of Vicky Pollard, the answer is probably:
no but yeah but no but yeah
Or an answer of pellucid clarity – yes here it comes again:
it depends
It does depend on the type of creditor for example only. If you are a fixed or floating charge creditor the prospect of a return from an insolvent estate is different from that of an unsecured creditor. In particular, a fixed charge creditor tends to be in the most secure position because the assets over which they have their fixed charge are in effect their property.
For the purpose of this post, the matter considers the position of the unsecured creditor in the case of relatively few assets. This is a common scenario as insolvent companies all too often do not have significant assets left on their balance sheets when the Liquidator arrives to survey the scene.
Furthermore, there may be assets (or property) that have been misapplied by company Directors which means that such assets may not be disclosed voluntarily to the Liquidator. Although there can and should be no assumption that undisclosed assets or other misconduct will exist, it is a huge problem evident in many Liquidations.
Director Disqualification
Indeed the Insolvency Service recognises this issue at this time, notably in the context of Covid finance support.
The Insolvency Service has now put in place new procedures to target abuse of the Bounce Back Loan Support Scheme. In Article 53 of Dear Insolvency Practitioner on Director Disqualification, we see these new arrangements being fleshed out, seeking assistance from Insolvency Practitioners.
However, a longstanding issue with the Director Disqualification regime is that it suffers from the potential problem that it is not intended as a mechanism to recover money for creditors but simply to keep an individual from acting as a Director for a period of anything up to 15 years.
Although rules have been introduced which enable the Insolvency Service to seek compensation for the benefit of creditors, it is not clear if indeed they have been deployed in a great number of cases.
Creditor Rights
The creditors are entitled to expect an investigation is undertaken by a Liquidator in all cases where they suffer losses ie. in insolvent Liquidations such as Creditors Voluntary Liquidation or Compulsory Liquidation.
Creditors are entitled to:
- The maximum returns from an insolvency case (Section 391C(3)(c) of the Insolvency Act 1986).
- An investigation being undertaken in every case by the Liquidator (Statement of Insolvency Practice 2).
Maximising returns for creditors is somewhat akin to the duty of a Director to promote the prosperity of a company for its shareholders.
Odds Of The Unsecured Creditor
In cases of few assets remaining upon Liquidation, the odds of the unsecured creditor can be influenced by a whole range of factors. The most common are:
- What money is still remaining in the company to pay the costs of the insolvency?
- What money will be available to fund any investigations?
- What money could fund legal opinions from solicitors and barristers?
- What money could finance the costs of litigation including the costs of losing a case?
Funding Problem Stacking The Odds Against Creditors
The funding problem can be the number one problem for creditors because whilst a Liquidator is bound to undertake investigations and attempt to recover undisclosed assets that come to light, that does not mean he or she is required to risk their own assets to pursue recoveries for the benefit of creditors. Creditors, often themselves are unwilling to risk throwing good money after bad and so in effect get stuck.
An accessory problem here is that in many instances when a Liquidator litigates to recover assets such as transactions at undervalue, preferences and wrongful trading for example only, he or she is doing so at added personal risk. It is the nature of such litigation that if the legal action is unsuccessful then the Liquidator will usually be personally liable to pay the costs of the legal proceedings. Critically that means not only his or her own legal costs but the costs of their opponent as well. Such costs can be very substantial and dwarf any current asset realisations in the Liquidation.
Oliver Elliot Comment: Are The Odds Stacked Against Creditors In Liquidation?
It is troubling if in effect a Director who through misconduct can strip away a company’s assets causing loss to creditors, leaving nothing to fund an investigation and their recovery. It is the ultimate circular problem.
Is it possible this Gordian Knot could mean a rogue Director might conceivably be at reduced risk of being successfully pursued if their misconduct is sufficiently egregious that they leave few or no assets behind to fund their pursuit?
The current system appears to leave matters in the hands of creditors themselves to fund such civil recovery proceedings. It is axiomatic that the good money after bad problem will caution many (if not most) creditors from flirting with the prospect of incurring further losses by financing the pursuit of rogue Directors.
Even with the development of the litigation funding market, not all cases are viable to pursue due to cost considerations. Not all cases will meet the evidential threshold required to prove the facts required to pursue the recovery of undisclosed assets. There are no easy answers but there are options available for creditors as explained in our nil asset insolvency recoveries page.
Oliver Elliot Final Thought
A public policy change that could conceivably help to address this thorny issue might be to change the law and reverse the effect of the decision in Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274. That case is one of the leading authorities which says that if a Liquidator pursues certain claims such as antecedent transactions, he or she is usually likely to be personally liable for all of the costs of an unsuccessful action.
The law could be changed whereby with Court sanction such claims could be brought without a Liquidator having to run such a personal risk and this could potentially unblock many legal claims which could enhance returns for creditors.
Are you a creditor looking to recover your money?
If you are a creditor of an insolvent company or a bankruptcy, Oliver Elliot can help you. We Know Insolvency Inside Out.
Share This Page!
What Next?
Expert Advice Is Just A Click Away
If you have any questions in relation to Are The Odds Stacked Against Creditors In Liquidation? then contact us as soon as possible for advice. Oliver Elliot offers a fresh approach to insolvency and the liquidation of a company by offering specialist advice and services across a wide range of insolvency procedures.
Our expertise is at your fingertips.
Disclaimer: Are The Odds Stacked Against Creditors In Liquidation?
This page Are The Odds Stacked Against Creditors In Liquidation? is not legal advice and should not be relied upon as such. This article Are The Odds Stacked Against Creditors In Liquidation? is provided for information purposes only. You can contact us on the specific facts of your case to obtain relevant advice via a Free Initial Consultation.
Recent Posts / View All Posts
