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Overview Of Can Creditors Control A Liquidator

This guide considers the following question: can creditors control a Liquidator?

In this article you’ll learn about:

  • How creditors might look to control a case
  • How an Insolvency Practitioner might look to maintain control
  • An example of how creditors might look to exercise control in an investigation

The answer to the question: can creditors control a Liquidator is generally no they cannot.

can creditors control a liquidator?

Why Do Creditors Not Control A Liquidator?

In an ideal world, there is no need to consider this question at all. In an ideal world, the creditors and the Liquidator have interests perfectly aligned and they are singing from exactly the same hymn sheet, culminating in the return to creditors that they all have hoped for. However, that perfect world is all too frequently tested. There are constraints on what a Liquidator can achieve in a given case with a given set of facts.

Creditors are one of the most powerful stakeholders in an insolvency case. Ultimately the wishes of creditors should be considered as they are the primary beneficiaries once the costs have been taken into account. Creditors are the party that has suffered loss and it is largely for creditors that the insolvency regime exists.

In theory, creditors could have significant influence over a Liquidation but the practical reality is often they do not. This is due to a range of factors. Perhaps one of the most common reasons is down to organisation.

There are many instances where groups of parties cannot exert real influence due to the organisation and fragmentation of interests and or the differing agendas of those who have the ultimate financial interest in the outcome. Other examples when this approach can be seen when there are multiple parties having a joint financial interest will be leaseholders in respect of service charge accounts, shareholders of Limited companies, and yes creditors of insolvent companies or personal Bankruptcy cases.

Where creditors are usually in control is over the appointment of who the Liquidator will be and the basis of their remuneration.

Insolvency Practitioners operate commercial businesses so they will likely be interested in the attainment of further insolvency appointments and the associated fees that may generate. It is axiomatic perhaps therefore that prior to such an appointment creditors may be afforded an opportunity to have potential influence over the future direction of the case.

However, that influence may be constrained by the duties that a Liquidator has to comply with. Such influence may also dissipate over time because once the Liquidator is appointed and once his or her fee basis has been approved, then creditors may suffer a loss of leverage. Provided the Liquidator’s decisions do not meet the perversity test such that the court steps in to control a Liquidator and provided they are acting in the interests of the general body of creditors then commercial decisions taken in good faith (even if creditors disagree with them) are difficult to challenge.

The Insolvency Regime

However, the insolvency regime also exists to enable an orderly resolution of the affairs of insolvent companies and individuals.

Insolvency is a class action when the creditors bind together as a group to seek to share the benefits of the work undertaken by the Insolvency Practitioner.

The Insolvency Practitioner has a duty to act in the interests of and act with consideration for the interests of creditors as a whole.

Sometimes creditors may look to exercise control over a Liquidation and this may on occasion give rise to some difficulties.

How Creditors Can Control A Liquidator

Creditors can attempt to control a Liquidator as ultimately they can look to remove and replace the relevant Practitioner. However, an Insolvency Practitioner should be independent of creditors and not be controlled because they might be removed from office.

An Insolvency Practitioner should therefore be wary of being controlled by a creditor in a case as they may have an agenda that could conflict with that of the creditors as a whole.

Even where there is a Creditors Committee, creditors do not have the power to direct or instruct the officeholder.

How A Liquidator Might Maintain Control

A Liquidator should deploy their time on a case so there is as little wastage as possible ie. be efficient.

If a Liquidator was at the beck and call of a creditor then costs could be run up to the detriment of creditors as a whole by giving disproportionate attention to such a creditor.

Mr Justice Lightman in Ng v Ng (1998) 2 2 FLR 386, (1997) BCC 507 highlighted an ethical consideration:

A trustee in bankruptcy is not vested with the powers and privileges of his office so as to able him to accept engagement as a hired gun.

It is proper for an Insolvency Practitioner to maintain their position of independence by paying close attention to Mr Justice Lightman’s comment.

Example Of Creditor Attempted Control

It is possible a creditor may wish for an Insolvency Practitioner to adopt a particular approach such as to investigations to be carried out.

An example might be for certain enquiries to be undertaken and interviewing potentially relevant parties. However, when investigations do not produce results voluntarily then a creditor might ask an Insolvency Practitioner to initiate Court proceedings to examine individuals who are thought to be able to assist the officeholder.

In general, a decision by an Insolvency Practitioner to interview someone is a matter of judgment. It is not something that should or should not be done. It depends on the facts of the case.

It might be a strategy deployed to obtain information if the officeholder for example thought they could obtain better information than through written interrogatories. Written interrogatories are usually considered less oppressive. So an Insolvency Practitioner might reflect upon how someone had responded to written enquiries as part of an assessment of whether or not there was a point to then deploying time to attempt to interview someone.

Section 236 of the Insolvency Act 1986 and Section 366 of the Insolvency Act 1986 apart from potentially being expensive procedures to instigate, however, require the officeholder to show a reasonable requirement when seeking a Court order for examination.

Author: Elliot Green
Last Updated: May 20, 2024

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Disclaimer: Can Creditors Control A Liquidator?

This page is not legal advice and is not to be relied upon as such. This article Can Creditors Control A Liquidator? 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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