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Creditor Interests When Appointing the Liquidator Overview

Are creditor interests when appointing the Liquidator safeguarded?

A Liquidator is appointed by the creditors of an insolvent company. However, there are two instances where the position of creditors can potentially be affected. 

One position is in a Creditors Voluntary Liquidation when a Director or connected party is able to in effect appoint a Liquidator notwithstanding that the Director has engaged in misconduct. The other situation is in the case of a Compulsory Liquidation when alongside the voting issue referred to aforesaid the creditors cannot appoint a Liquidator because they do not appear to meet the threshold to compel a meeting of creditors or decision procedure to replace the Official Receiver with an Insolvency Practitioner.

The question posed at the heart of this article is this – should a person who may have engaged in misconduct be able to influence the appointment of a Liquidator who is a person who then will have to investigate their conduct? Alternatively, would it be unfair for a Director to be denied their creditor voting rights before allegations of misconduct have actually surfaced and or been proven?

It is not an easy question to answer but it will no doubt invoke strong views. This article does not debate both sides of the coin but highlights the way issues may spring forward for creditors.

Liquidator Role

Liquidator duties dictate a Liquidator has to get in realise and distribute the assets known about and those they may not know about but which could be discovered as a result of the investigations. A Liquidator has to be efficient, vigorous and unbiased as highlighted in the recent article on this site called Section 303 Trustee In Bankruptcy Application Succeeds in which HHJ Paul Matthews said in the case of Patley Wood Farm LLP & Ors v Kicks & Ors [2022] EWHC 2973 (Ch):

Any trustee, but especially professional trustees in bankruptcy, ought to possess a certain degree of robustness. You are looking after someone else’s interests, not your own.

An Insolvency Practitioner acting as a Liquidator has a duty to investigate the causes of the company’s failure and see if there are any claims capable of swelling the assets. If assets have been improperly hoovered up by the Directors at the expense of creditors then that must be investigated by a Liquidator and action taken to attempt to recover the same.

However, creditors might be concerned about the voting position of Directors on the Liquidator’s appointment, if such Directors could have participated in misconduct and might be keen to avoid being subject to investigation and legal action that involves the recovery of assets from them.

Director And Connected Party Voting

It appears perfectly proper for a Director or connected party who are creditors of the company to participate in the appointment of a Liquidator in most instances. 

However, the Director Disqualification regime does appear to evidence a corporate landscape littered with Directors disqualified due to varying types of misconduct from naivety, incompetence to outright fraud. In the period April 2021 to March 2022 there were 802 Directors disqualified and in that same period, there were 16,566 company insolvencies. 

Although there are many factors at work that affect the proportion of insolvent companies where the Directors are disqualified, it can be seen that in a small but not insignificant number of insolvent companies there is evidence of Directors having engaged in serious misconduct. They have either voluntarily surrendered their right to be a Director for a period of time or been compelled to do so by a Court in Director Disqualification Proceedings.

The actual figure of Directors whose conduct might make them unfit to be a Director could be far higher than the numbers disqualified each year. For most of the last ten years, this number has hobbled around the 1,200 a year mark.

Should Directors who may have been responsible for misconduct and loss to creditors be permitted to have any voting rights on who is to be appointed as the Liquidator?

It is worth remembering that creditors have suffered a loss when a company goes into insolvent Liquidation. Whilst they may have taken a commercial risk in trading with the relevant company and been fully aware it was a Limited Liability Company, neverthless they would presumably wish to be assured that a thorough and independent investigation into the conduct of the Directors will take place. 

Double Blow To Creditors?

It could conceivably be a concern if creditors who have experienced a loss then have to grapple with the perception (rightly or wrongly) that the insolvent company’s affairs might not properly be investigated. In view of the strict ethical considerations for Insolvency Practitoners such concerns should conceivably be unwarranted.

However, it may perhaps naturally invoke suspicion if a Director or connected party can as a creditor of an insolvent company have a major say in who the Liquidator will be. 

It is notable that this issue was highlighted in the case of Fielding v Seery [2004] BCC 315:

(4) A liquidator should not be a person nor be the choice of a person who has a duty or purpose which conflicts with the duties of the liquidator. There are many illustrations of this principle. I was referred in particular to Re City & County Investment Co (1877) 25 WR 342, Re Charterland Goldfields (1909) 26 TLR 132, and Re Corbenstoke (No. 2) (1989) 5 BCC 767.

(5) More specifically the liquidator should not be the nominee of a person: (a) against whom the company has hostile or conflicting claims as in Re City & County Investment Co, (and see also Deloitte & Touche AG v Johnson [1999] BCC 992; [1999] 1 WLR 1605); or (b) whose conduct in relation to the affairs of the company is under investigation as in Re Charterland Goldfields (and Re Mansel, ex parte Sayer).

As it is not difficult to see there could be instances where creditors have concerns about a Director being in a position to appoint the Liquidator, might it be appropriate for a Director’s vote not to count?

Compulsory Liquidation Threshold Question

In the case of Compulsory Liquidations, an additional issue can sprout before the question of voting on the appointment of the Liquidator arises at all. This is the ability of a creditor to replace the Official Receiver with a Liquidator of their own choice.

Rule 15.18 of The Insolvency (England and Wales) Rules 2016 stipulates that before creditors can vote on the appointment of a Liquidator they must command the support of at least twenty five percent of creditors by value (“the 25% Threshold”). 

The problem that may arise is that a creditor can be shut out of the right to vote if the 25% Threshold is too high because for example only, a Director or connected creditors have claimed to be creditors for larger sums than they ought to be entitled.

Oliver Elliot Observations

Is it a wonder perhaps how successive governments responsible for the insolvency legislation have not inserted additional safety valves so creditors do not need to consider these issues?

Creditor interests are at the heart of insolvency as without creditors losing out there would be no need for a Liquidation in the first place. 

Of course, that means that when considering creditors, creditors need to be considered as a whole because insolvency is a class action. Once creditors have to submit to an insolvency regime their individual rights merge into the class. As a result, there is a tricky balance to strike before with any of alacrity the rights of the Directors (and connected parties) as creditors could be outflanked by those of the unconnected creditors. The rights therefore of the Directors as creditors matter and need to be taken into account. The question is can competing interests amongst creditors be managed? The fact that cases such as Fielding v Seery exist and from time to time arise, highlights this tightrope the Courts may have to have to walk.

It is perhaps notable that where the judiciary is concerned there is no question that litigants cannot pick their own judges. Judges may readily recuse themselves where perceptions of bias may arise. Further, in criminal proceedings, the defendant has no say in who their investigating police constable might be. Victims would no doubt be outraged if a defendant could cherry-pick such a person. In disciplinary proceedings brought by a regulatory body against a regulated professional, the complainant might be up in arms if the professional complained about could appoint the personalities who comprised the constitution of an investigating committee. 

Of course, there are key differences between criminal and regulatory proceedings compared to the procedures deployed to enable a Liquidator to be appointed. When a Liquidator is appointed there may be no suggestion of any misconduct by the Directors. However, some people might be concerned the system may not necessarily proactively protect creditors from what appears a foreseeable potential problem. Such parties may instead consider it can only react once a clear case of impropriety has arisen. They may therefore be concerned that this might come too late in the day and at considerable cost to creditors when seeking a remedy. 

However, it is conceivably in the interests of creditors that the insolvency system and its concomitant investigations avoid being tainted by perceptional problems that might be avoided. So is a change in the law now reasonably required or is everything working just fine?

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.

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Disclaimer: Competing Creditor Interests When Appointing The Liquidator

This page Competing Creditor Interests When Appointing The Liquidator is not legal advice and should not be relied upon as such. This article Competing Creditor Interests When Appointing The Liquidator 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.

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