Overview Of Liquidators Litigating For Company Records
Liquidators litigating for company records can be a difficult issue.
There is no question that Liquidator Duties demands that Liquidators get in the company records a Director has kept.
The Liquidator is not simply getting in company records to realise assets to make distributions to creditors. He or she is also doing so in order to discover undisclosed assets and enable third party investigations eg those of the Insolvency Service in the public interest to be productive.
Statement of Insolvency Practice Number 2 says:
The office holder should locate the company’s books and records (in whatever form), and ensure that they are secured, and listed as appropriate.
Dear Insolvency Practitioner 80 of March 2018 (“Dear IP 80”) said:
IPs should ensure the books and records are safe and secure…
Where an IP encounters difficulty in obtaining the insolvent’s books and records, as an officer of the court, there are available procedures under the Insolvency Act to assist in obtaining the full co operation of relevant persons and in these circumstances it should be clearly documented why the courts assistance has not been obtained.
The difficulty arises when Directors do not voluntarily cooperate. How far does the Liquidator need to go? Must the Liquidator litigate for the company records?
Liquidator Personal Liability For Litigation Over Company Records
When a Liquidator litigates in their own name then if he or she loses the litigation they can expect to be personally liable for the costs of the Director who has opposed the application to Court. That position was highlighted generally in the case of Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274.
A Liquidator who sues in a personal capacity, which he or she does under Sections 234/235 and 236 of the Insolvency Act 1986 (collectively hereinafter referred to as Section 236 for ease of reference and understanding) is doing so at personal risk. Therefore a Liquidator looking to secure a company’s books and records will perhaps wish to weigh up the position according.
The Liquidator’s entitlement to an indemnity from the company to recover any such adverse costs could potentially be of no real benefit if the company has no known assets. The risk is if the company records are not recovered then assets/claims may go undetected. However, at the same time that perhaps may have to be balanced against the risk to the Liquidator personally arising from engaging in litigation where there appears little or no prospect of protection from the adverse costs risk.
It is axiomatic that no litigation is risk free. All litigation is speculative at some level and therefore there can be a commercial consideration involved in a Liquidator litigating for company records. It is speculative that assets/claims will arise from the company records to enable a Liquidator to discharge the added costs of the Liquidation that may arise from litigating for the company records.
Whilst a Liquidator is a fiduciary the job of a Liquidator does not necessarily suggest he or she has to litigate at serious personal risk. It will clearly depend on what the risks involved amount to. A Liquidator will have to consider such decisions in the context of a decision that no reasonable Liquidator would have taken.
Dear IP 80 does not appear to say a Liquidator MUST deploy the court procedures to get company records when faced with uncooperative Directors; it says the Liquidator should document their reasons if not doing so.
Funding The Litigation For Company Records
In cases where there are few or no assets, an application under Section 236 of the Insolvency Act 1986 would likely need to be funded in respect of legal fees, Court fees and a Court advocate’s fees (barrister). However, recovery of those costs even when a Director appears to have not properly cooperated in producing records for the Liquidator does not mean they will necessarily have to pay the costs of the Liquidator’s application.
Without real prospects of claims/assets available to pay the costs, a Liquidator may find it difficult to be able to instruct solicitors to act on a recoveries / CFA-type basis. There is a limit to which it might reasonably be anticipated that a Liquidator would be required to fund the pursuit of company books and records out of their own pocket. Potentially the Liquidator could ask the creditors to fund him or her if the matter became particularly problematic.
To put the funding point into perspective at the start of the case, when a Liquidator consents to act, he or she will be able to foresee certain costs such as statutory advertising and an Insolvency Practitioner Bond, for example only. However, where a Liquidator post appointment is faced with Directors who do not readily cooperate in handing over company records then that issue will usually not have been foreseeable at the point of consenting to act.
There is therefore some scope potentially for commercial considerations to come into play and in Re Longmeade Ltd (In Liquidation) (Rev 1) [2016] EWHC 356 (Ch) the Court said:
… it will be for the Liquidators to take a commercial decision in the interests of the creditors as a whole
Risks Of A Section 236 Application For Company Records
The risk of pursuing a Section 236 application goes up very significantly when some company records are handed over by a Director. That is because it can arise that Directors may assert in dispute that all of the records have been handed over.
In many instances, this is the problem that often develops. Whilst not necessarily unheard of that Directors may avoid handing over any records at all perhaps the more notable issue is when some but not all records are handed over.
Section 236 applications may start out as reasonably simple proceedings but when contested they can develop into substantial Court hearings. Examples of the same can be seen in the matters of Green v Chubb [2015] EWHC 221 (Ch) and Green v BDO Stoy Hayward Llp [2005] EWHC 2413 (Ch). Those cases were not against Directors seeking company records but seeking information from prior company accountants or receivers. However, there is no reason why a Section 236 application against a Director for company records could not mushroom into a major and even risky piece of litigation.
Recourse to litigation under Section 236 is an action that should be taken with a great deal of care, consideration and deliberation. It is certainly not litigation that should be resorted to with any excess of alacrity.
The powers under Section 236 available to a Liquidator are overseen by the Court which undertakes a balancing exercise to be fair to the litigants. That means that there is always the prospect that such an application can be lost by a Liquidator.
Oliver Elliot Observation
Important as it is for a Liquidator to get in company records it can also be illuminating to consider an absence of certain records that would otherwise have been anticipated. Thinking outside of the box may offer a Liquidator clues as to what further investigations may reasonably be required and where to direct their enquiring mind in the search for relevant information.
It is however important to remember the following from Patley Wood Farm LLP & Ors v Kicks & Ors [2022] EWHC 2973 (Ch):
… in ordinary circumstances an officeholder who lacks funds or risks paying costs will not be required to enter into litigation. In Seear v Lawson (1880) 15 Ch D 426, a decision that it was lawful for a trustee in bankruptcy to sell a right of action for the benefit of the estate, despite the common law doctrine of champerty, Sir George Jessel MR (with whom James LJ “entirely” agreed) said, at page 433:
“The proper office of the trustee is to realise the property for the sake of distributing the proceeds amongst the creditors. Why should we hold as a matter of policy that it is necessary for him to sue in his own name ? He may have no funds, or he may be disinclined to run the risk of having to pay costs, or he may consider it undesirable to delay the winding-up of the bankruptcy till the end of the litigation.”
