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Overview Of Liquidator Duty To Creditors

Liquidator Duty to Creditors was an issue considered in the case of Re Longmeade Ltd (In Liquidation) (Rev 1) [2016] EWHC 356 (Ch).

At the heart of the duty of a Liquidator is the concept of independence because without it Directors would liquidate their own companies which could fetter discovery of misconduct. Even solvent Liquidations require an independent Liquidator to oversee matters.

The notion of independence of mind assists with objectivity and integrity. You do not mark your own homework, litigants do not pick their own judges and so it is the creditors that pick the Liquidator.

The Liquidator has to take commercial decisions in the interests of creditors and they have to deploy the funds of the Liquidation consistent with in effect spending their own funds to avoid wastage.

In this case, Allen & Anor, Re Longmeade Ltd (In Liquidation) (Rev 1) [2016] EWHC 356 (Ch), the Liquidators had received positive legal advice that there were claims with merit against the Secretary of State for an action in negligence.

The Liquidators had secured funding and were in a position to pursue the claim without apparent risk for the benefit of creditors to improve the recoveries. However, there was still a problem in that 99% of creditors objected to the Liquidators’ pursuit of such an action.

One of the objecting creditors was HMRC who was opposed to the proposed litigation because it involved an action against another government department.

Notwithstanding the comprehensive objection to the proposed proceedings, the Court suggested that the Liquidators were free to do so because not all creditors were opposed and creditors as a whole stood to benefit.

The Court assessed Liquidator duty to creditors by examining what a Liquidator could and could not do. In particular, it considered the ability of a Liquidator to take commercial decisions. In a nutshell, it said that the Court was not there to act instead of the Liquidator.

Longmeade was an example of a case in which the Court answered the question When Will The Court Control A Liquidator? by saying err ‘not on this occasion’.

Longmeade Judgment Relevant Extracts

In the instant case, the first point to make is that I do not think that the Liquidators are obliged to summon a meeting of the creditors of Longmeade under section 168(2) IA 1986. The wishes of most of the creditors have already been expressed through the process that I have described, and for reasons that I have already given, the Liquidators would not be bound by the vote at such a meeting. Further, I think that the Liquidators would in any event be entitled to discount the views of the two largest creditor groups, who are plainly influenced by extraneous and individual considerations.

The position of HMRC is manifestly driven by concerns for BIS and the overall potential impact of the litigation upon the public purse; and to the extent that it has been explained, the approach taken by or on behalf of LBHI and its affiliates appears to reflect the particular position of those US Lehman Brothers companies. What, however, I think that the Liquidators ought to do, is to give Eldon, LBHplc and Bankhaus a last opportunity to clarify and explain their wishes in correspondence: Eldon’s position has never been explained, and LBHplc’s and Bankhaus’ views are unclear. If these creditors clearly indicate that they do not wish the Claim to be brought, so that all of the creditors are agreed, then I do not think that the Liquidators should bring the Claim.

If, however, any of the creditors remain either in favour of the Claim being brought or are simply neutral, it will be for the Liquidators to take a commercial decision in the interests of the creditors as a whole as to whether to commence the Claim and, if so, how to fund it. As regards the decision to commence litigation, although it is not for the Court to take that decision for the Liquidators, the circumstances of this case are highly unusual and I think that some reassurance for the Liquidators is appropriate. 

In my view, if there remain one or more creditors, even for comparatively small amounts, who would lose the opportunity for a materially increased distribution if the Claim were not to be pursued, then on the basis of counsel’s advice and the other material placed before me which demonstrates that the majority of creditors are pursuing their own agendas, I think that a decision by the Liquidators that Longmeade should pursue the Claim at no financial risk with the assistance of funding from Manolete would be within the range of decisions that a reasonable liquidator could properly take.

As regards funding, the preference of the larger creditors for using Longmeade’s own funds if (contrary to their primary view) the Claim is to be pursued, is a majority view to which the Liquidators will doubtless wish to have regard in deciding what to do. As well as the merits, the Liquidators should also consider the adequacy of the funds available in the liquidation, the likely costs (and hence risk of diminution in future dividends) to which Longmeade would be exposed if the Claim were to fail, and the proportion of the damages to be shared with Manolete if the Claim were to be successful.

What I might usefully add in this respect is that I do not think that the comment in the Explanatory Notes to the SBEE Bill that liquidators, “…should not undertake actions that are likely to have a negative financial impact on the estate. Such conduct may give rise to disciplinary concerns which may be addressed the regulatory system” should be read out of context or be taken to indicate that liquidators must always adopt the alternative that has the lowest risk of loss to the insolvent estate. The overriding requirement is for liquidators to exercise their professional judgment in what they believe to be the best interests of creditors. It is obvious that they should not voluntarily do something that is likely (i.e. more probable than not) to result in loss to the estate. But that does not mean that they cannot properly run some risk of loss: otherwise no liquidator could ever embark upon litigation without a 100% costs indemnity from a third party.

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Disclaimer: Liquidator Duty To Creditors

This page is not legal advice and should not be relied upon as such. This article is provided for information purposes onlyYou can Contact Us on the specific facts of your case to obtain relevant advice via a Free Initial Consultation.