If you are a director or creditor of an insolvent company, Oliver Elliot can help you address your claim and concerns arising from the Liquidator duties.
Liquidator duties encompass the following:
Liquidator duties involve a number of statutory duties which apply as follows:
- Duty to call meetings when requisitioned in accordance with the Insolvency Rules.
- Duty of notification via advertisement of the appointment and the convening of creditors meetings
- Duty to provide annual progress reports to creditors and file the same at Companies House
- Duty to provide information to the Official Receiver.
- Duty to collect the Company’s assets.
- Duty to realise assets and discharge liabilities.
- Duty to discover who the creditors of the Company are and the amount of their claims.
- Duty to meet the prescribed requirements for the provision of security (referred to as a bond) for certain types of losses in relation to the insolvent estate.
- Duty to manage and administer the insolvent estate and its funds.
It is the primary duty of a liquidator of a company to collect its assets with a view to discharging its liabilities to the extent the assets permit. To perform that function the liquidator needs information. The companies legislation has for many years given a liquidator power to obtain it from those who can be expected to have relevant information.
A Liquidator is obliged to take custody and control the Company’s property, which includes its books, papers and records as defined in Section 436 of the Insolvency Act 1986. A Liquidator enters office as a relative stranger to the Company and is required pursuant to Statement of Insolvency Practice Number 2 (“SIP 2”) to investigate and reconstitute knowledge of the Company. SIP 2 states as follows:
“…an office holder has a duty to investigate what assets there are (including potential claims against third parties including the directors) and what recoveries can be made… locate the company’s books and records (in whatever form), and ensure that they are secured…”
In the satisfaction of reconstituting knowledge of the Company a Liquidator is obliged to consider any claims capable of swelling the Company’s assets, including but not limited to consideration of prior transactions that could give rise to an action for recovery. A Liquidator would therefore need to seek to identify, discover and recover the Company’s property. To undertake that exercise a Liquidator will need to obtain the books and records for the Company from its Officers and if relevant its agents. Whilst there are many and varied statutory functions of a liquidator, obtaining the books and records is arguably one of the most important duties. Without the same it could be difficult to identify the assets with sufficient specificity to enable their recovery.
A Liquidator is obliged under SIP 2 to undertake an Initial Assessment (“the Initial Assessment”) of matters which might lead to recoveries for the Company. In consideration of the extent of those investigations, the legislation directs that a Liquidator is required to investigate the Company’s affairs, dealings and property.
A Liquidator has duties under Section 143 of the Insolvency Act 1986 to:
- Provide information and assistance to the Official Receiver.
- Enable the Official Receiver to inspect the company records.
A Liquidator investigating a hotly disputed issue should obtain and consider the information available on an objective basis.
A Liquidator needs to consider conclusions arising from incomplete information and opinions that rely upon nothing more than bare assertion.
A Liquidator needs to consider and reconsider the documentary information arising from an investigation as it progresses.
These principles were broadcast in the case of Re Guardian Care Homes (West) Ltd (In Liquidation)  EWHC 2664.
Liquidator duties will involve the need to undertake an initial investigation which include a review of the financial information available and obtaining further information from third parties via the following kind of preliminary enquiries:
- Invite creditors to bring to his or her attention any particular matters which they consider requires investigation.
- Make relevant enquiries of accountants, solicitors and other professionals
- Compare the statement of affairs and or the official receiver’s report with the last filed accounts in order to ascertain whether all significant assets can be identified and material movements in assets can be properly explained.
- Conduct an initial review of the books and records in order to identify any unusual or exceptional transactions
In conducting this exercise they would have regard to the size of the business, the level of assets avaiIable to fund any identified further investigations or actions, and the materiality of any matters that may have arisen. This review will often result in further, more detailed, investigation into aspects of the financial affairs.
As a result of the Initial Assessment Liquidator Duties may render it necessary to undertake a number of further enquiries, typically such as those detailed below:
- Communicating with tbankers and obtaining all relevant bank records.
- Reconstructing the books and records to deal with any incompleteness, perceived or otherwise as to the position of the records.
- Forensic examination of the bank records, including bank statements, bank mandates, copy cheques and any other items of interest.
- Communicating with the accountant and obtaining all relevant accounting information, including any electronic data.
- Forensic examination of accounting information to establish the financial history and the reasons for its insolvency.
- Identifying financial transactions which may lead to recoveries from claims arising from swelling the assets and property.
- Forensic examination of the books and records.
- Communication with the director(s) to obtain, where necessary, books and records, financial records and to complete and return standard questionnaires to assist with investigating the financial and trading history of the company.
- Communication with agents and/or third parties to obtain information and records relating to the trading and financial history of the company.
- Identifying assets and property with a view to realising any residual value and/or identifying any disposal of assets by the company at less than the market vaIue.
- Reviews to consider ongoing investigations relating to the financial and trading history of the company and potential recoveries for the estate.
Section 144 of the Insolvency Act 1986 in a Compulsory Liquidation states that: “…the liquidator…shall take into his custody or under his control all the property and things in action to which the company is or appears to be entitled” and in a Creditors Voluntary Liquidation is a power by virtue of Section 166 of the Insolvency Act 1986.
In a Compulsory Liquidation a Liquidator is obliged pursuant to Section 143 of the Insolvency Act 1986 to furnish and assist the Official Receiver with such information as may be reasonably required for the purposes of carrying out his or her functions in relation to the winding up.
By virtue of Section 386(3) of the Companies Act 2006 the Company’s accounting records should have contained daily entries confirming details of all monies received and paid by the Company. In addition, the same should have contained a record of the assets and liabilities of the Company.
A Liquidator would ordinarily be unable to independently verify what assets exist or should exist without having taken possession of the Company’s books, papers and records to assist a Liquidator to reconstitute knowledge of the Company. A fundamental feature of Liquidator Duties is to obtain such records.
Liquidator duties will usually involve the need to undertake an information gathering exercise to obtain the books and records and also to obtain the Director’s cooperation to obtain data on the Company.
A Liquidator in accordance with the Insolvency Practitioner Code of Ethics has a duty of transparency to creditors. However, where such transparency might prejudice the administration of the liquidation, a Liquidator may restrict the extent of that transparency. Transparency has to take into consideration matters of privilege, confidentiality and whether it might compromise investigations and or litigation. Legislation or regulation may also produce a conflict for a Liquidator when considering matters of transparency and generally in such regards, then confidentiality will prevail.
There are usually a number of sources of the Company’s books, papers and records to enable a Liquidator to more fully understand the Company’s affairs, dealings and property as follows:
- The Company’s officers such as its Directors.
- The Company’s accountants who may and often will have acted as its tax agents.
- The Company’s bankers who may and often will have acted as its agents in the processing of transactions.
- The Company’s solicitors who may have acted as agents.
Once the information has been obtained a Liquidator would usually need to be catalogue and then review it to investigate the Company’s affairs, dealings and property.
If there are any matters that arise from a review of the same that lead a Liquidator to still not have a satisfactory understanding of the Company’s financial affairs or information is incomplete, then it may be necessary for a Liquidator to interview some or all of the Directors. Investigations generally may also involve contacting third parties as part of the process of unscrambling the Company’s dealings.
Liquidator duties in investigations ought to typically have regard to any transactions or trading that appear capable of giving rise to greater realisations for creditors. The provisions under the Insolvency Act 1986 and Companies Act 2006 which may enable a Liquidator to effect the same would include but not necessarily be limited to the following:
- Section 212 of the Insolvency Act 1986 – Misfeasance and Breach of Duty
- Section 213 of the Insolvency Act 1986 – Fraudulent Trading
- Section 214 of the Insolvency Act 1986 – Wrongful Trading
- Section 238 of the Insolvency Act 1986 – Transactions at an Undervalue
- Section 239 of the Insolvency Act 1986 – Preferences
- Section 423 of the Insolvency Act 1986 – Transactions defrauding creditors
- Section 847 of the Companies Act 2006 – Unlawful Dividends
The Liquidator’s duty to creditors is very important in any insolvency process. However, a Liquidator’s duty is to act in the interests of creditors but that is not the same as acting on their instructions per se.
A point highlighted as an issue in the case of Ward v Hutt & Ors  EWHC 77 (Ch) which has been commented upon in a post called Abuse Of Process Suggestion And A Liquidator ‘Doubly Out-of-Pocket’ was whether it was an abuse of process for a Liquidator to bring legal proceedings when he or she appears to have been the main beneficiary of the same.
There is however a considerable body of case law that suggests that it is in the interests of creditors for a Liquidator to bring legal proceedings, even if the recoveries from them end up only going towards satisfaction of some or all of the costs and expenses of the Liquidation and do not result in a distribution to creditors. For instance in the case of Lyle & Anor v Bedborough & Anor (Rev 1)  EWHC 220 (Ch) which was commented on in the post: Delay Sale Of Bankrupt’s Home: Exceptional Circumstances and Divorce Ultimatum the following was said by the Court:
The creditors’ interests, which predominate, require the Property to be sold at some point and that is the case even if (as has been suggested but not proved) the proceeds of realisation of Mr Bedborough’s estate will be swallowed up by the costs of the bankruptcy.
If for example only, a Liquidator was to be working on a case and because the Directors refused to be transparent or to cooperate, costs escalated in fulfilling statutory and regulatory duties, it does not seem particularly satisfactory, if the results of those investigations revealed claims due to Director misconduct, for the Directors to in effect avoid such claims simply because all the recoveries might go in costs and Liquidation expenses with nothing to creditors. It would potentially risk a state of affairs that could act against what is in the public interest, particularly in nil-asset or fraud cases.
A Liquidator will typically have to ensure the following tasks are undertaken in relation to dealing with the claims of creditors:
- Ensure that all creditors’ claims are listed with the correct addresses and references and that the amount claimed correlates to the Statement of Affairs.
- Enter proof of debt forms/claims as and when they are received.
- Before paying a dividend, review the level of funds available and ensure that all costs and expenses have been paid in accordance with the rules of priority.
- Assignment of the right to dividend, where notice is given to the Office-Holder by a person entitled to a dividend that he wishes the dividend to be paid to another person.
- Deal with enquires from creditors.
- Adjudicate on claims.
- Declare and pay a dividend, if sufficient funds are available.
A Liquidator’s administration tasks will usually involve the following responsibilities (reference to the Official Receiver and the Court will apply only in case of Compulsory Liquidation not Creditors Voluntary Liquidations):
- On appointment, set the case up on an insolvency database and maintain and separately record all financial records on the case, including the recording of creditors and employees.
- Notify creditors of appointment.
- When applicable return to the Official Receiver a signed undertaking to pay out of the first realisations of assets, both the balance currently appearing in their account and those monies, including fees, guarantees and advances paid by the Official Receiver, becoming due in future and payable under Insolvency Act 1986 and the IR 2016.
- Obtain a Specific Penalty bond for a sum equal to the company’s assets subject to the statutory provisions. This bond covers any losses to the estate for any possible fraud or dishonesty of the Liquidator whether acting alone or in collusion with one or more persons and/or the fraud and dishonesty of any person committed with the connivance of the Liquidator.
- To provide creditors with the opportunity to establish a Liquidation Committee when a decision procedure is required.
- If a Liquidation Committee is established prepare a certificate of constitution and hold the first Committee meeting.
- Obtain the company’s books and records.
- Establish whether the company has an occupational pension scheme.
In addition to the tasks identified above, each year as Liquidator is required to undertake the following statutory tasks:
- Prepare and issue an Annual Report to creditors.
- Undertake case reviews to ensure that the case is being progressed efficiently and in a timely manner; statutory duties have been undertaken; consider any ethical, money laundering and Bribery Act 2010 issues pertaining to the case and ensure that any identified matters are addressed.
- Submit VAT returns to HM Revenue and Customs, to ensure that any VAT refunds or payments are received or paid.
- Submit annual Tax returns to HM Revenue and Customs.
- Maintain the case cash book, by undertaking Insolvency Service Account or other bank account reconciliations.
After concluding all case related matters, a Liquidator is required to:
- Prepare and submit a letter to HM Revenue and Customs requesting clearance to close the case.
- Reconcile the cash book ready for closure.
- Prepare and issue the Final Account to creditors.
- Send the final receipts and payments account where applicable to the Court, the Official Receiver and the Insolvency Service and confirmation that I have received my release.
- If the creditors have so resolved, obtain release from the Secretary of State.
- When applicable obtain authorisation from the Official Receiver to destroy the books, papers and other records of the Insolvent Estate.
- Retain and store the liquidation records for a minimum of 6 years after the vacation of office.
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