How Much Can A Liquidator Recover?

Overview Of How Much Can A Liquidator Recover?

How much can a Liquidator recover is at first glance a question that might be answered by saying how long is a piece of string. However, this article is about the restrictions that might be on a Liquidator from recovering money.

The duty of a Liquidator is to get in, realise and distribute the assets of the company. That is the duty in Section 143 of the Insolvency Act 1986.

The assets of the company include all forms of property. This is defined in Section 436 of the Insolvency Act 1986:

“property” includes money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property;

It, therefore, includes assets other than physical assets such as plant and equipment. Non-physical assets such as monies owing to the company by customers and in addition ‘claims’. Claims are disputed or contentious matters of a legal nature that could result in the company receiving funds. For example, claims might involve an Overdrawn Directors Loan Account,  an Unlawful Dividend or other forms of Misfeasance and Breach of Duty. These are legal claims against Directors typically.

In the case of a solvent Liquidation otherwise known as a Members Voluntary Liquidation then the more money the Liquidator recovers, then potentially the better it is for the shareholders who can benefit.

Furthermore, in the case of insolvent Liquidations such as a Creditors Voluntary Liquidation or a Compulsory Liquidation the more money the Liquidator recovers the greater the potential for creditors to receive all of their money. That is reasonably rare but no doubt a welcome event if it can happen. 

So ordinarily there will be no barrier to a Liquidator recovering money. The more the better will be the norm. However, there are circumstances in which a Liquidator will not be able to do so.

Directors Are The Shareholders

In circumstances of an owner-managed company where the Directors are the Shareholders, if when claims are brought by a Liquidator against them due to some misconduct, then to avoid money needlessly going around in a circle and or an unjust recovery, it is commonly the case that the Liquidator may only be able to recover funds up to the satisfaction of all of the costs of the Liquidation and to enable the creditors to be paid off with interest.

There are no hard and fast rules about this as due administration of the Liquidation estate is still a proper procedure. Further, the costs and expenses are not typically static.

Money Going Around In A Circle

This is not all that uncommon a situation because claims against Directors can be far more than the level of the creditors. 

Creditor claims arise at the point of Liquidation whereas a Director’s breach of duty might be revealed by a Liquidator’s investigations. If breaches of duty extended over many years this might outweigh the level of creditors.

How Could The Court Limit How Much A Liquidator Can Recover?

When a Liquidator sues a Director in respect of claims, the resulting liability is usually unrelated to the level of creditors. 

Claims will commonly relate to monies a Director has had out of the Company improperly based on a transaction or a number of transactions. In other words, had such transaction(s) not been entered into the company would still have those funds or property. However, in such an example, due to the conduct of the Directors the company has suffered a specific loss. It is therefore in such circumstances entitled to recognition of that loss.

That said whilst a declaration of say misfeasance might be awarded by a Court there is a distinction between the matter of liability and the relief that a Court might order to be paid over.

There are two exceptions broadly to this which are Wrongful Trading and Fraudulent Trading. Both are claims that have a direct linkage to the level of creditors. In such instances, the money going around in a circle problem is potentially less unlikely to arise.

West Mercia Safetywear Ltd v Dodd

In Manolete Partners PLC v Hope & Anor [2022] EWHC 1801 (Ch) the Court looked into some aspects of the unjust recovery or money going around in a circle issue. The Court examined various cases, including notably the case of West Mercia Safetywear Ltd v Dodd (1988) 4 BCC 30 in respect of a claim in misfeasance brought by a Liquidator against a Director for having caused the company to pay a fraudulent Preference in disregard of the interests of the general body of creditors:

the court has a discretion over the relief, and it is permissible for the delinquent director to submit that the wind should be tempered because, for instance, full repayment would produce a windfall to third parties or, alternatively, because it would involve money going round in a circle or passing through the hands of someone else whose position is equally tainted …This was, in substance, a case of working out the true measure of loss caused to the company by reason of the director’s breach of duty, as opposed to capping the quantum of the claim against the director.

The Court reduced the relief so as not to be unfair to the Director.