Overview Of Court Control Of A Liquidator

So just when will the Court control a Liquidator? The answer is not that often.

When it happens it arises from the unique position the Court has in insolvency proceedings such as in Liquidation.

The Court is powerful having much discretion to step in when it feels that it needs to do so upon being served with a complaint.

Role Of The Court

There is a role for the Court routinely deployed when the legislation has made specific provisions for its involvement. An example of this might be when there is an appeal against a Liquidator’s rejection of a creditor’s Proof of Debt. In such an instance the creditor can appeal that decision to the Court. Another example might be in the context of Bankruptcy if the Trustee in Bankrupt wants to realise a Bankrupt’s property they may well need to apply for an order of the Court for possession and sale.

Alternatively, the Court routinely has to consider applications made by Liquidators for orders for the production of information to assist the Liquidator’s investigation into the company’s affairs, dealings and property. Again there is a specific provision in the legislation in which the powers of the Liquidator (in this example) to obtain information, are not without restriction.

However, when it comes to the commercial decisions of an Insolvency Practitioner like a Liquidator it is a different matter. Whilst the Liquidator is there to act instead of the Directors; the Court is not there to act instead of the Liquidator. It is the Liquidator who has to make decisions for the benefit of the Liquidation, not the Court per se, otherwise, why would Liquidators have a role to play at all if they forever needed permission from the Court for their decisions?

Court Control For Creditors

The Court is there to control the Liquidator when it is in the interests of creditors to do so. This might be required in circumstances where there are sufficiently complicated legal matters to address but it will not generally do so otherwise. And yet the Court may well refuse to step in and take the decision for the Liquidator.

The Court’s role is very much as the oversight guardian for the creditors and other stakeholders in a case.

Liquidator’s Tightrope

A Liquidator has to walk a tightrope. He or she cannot please all of the people all of the time. A Director may well have very different motivations to that of the independent creditors who may be wanting to see an investigation of Director misconduct. A Director may not welcome such an investigation. A Liquidator has to be independent to investigate and report serious instances of misconduct.

However, the Liquidator is not in office to be the hired gun of creditors. Whilst a Liquidator has a duty to creditors as a whole, he or she is not under their control or instruction. If creditors are dissatisfied then they can look to remove a Liquidator. That is their ultimate available remedy if they can gain enough support for removal when confidence has been lost.

A desire to remove a Liquidator is not substituted by the action instead to control the decisions of a Liquidator through the Court.

Commercial Decisions Of A Liquidator

The Court will rarely interfere with the commercial decisions of a Liquidator. It is the job of a Liquidator to take commercial decisions in the creditors’ interests as was said in Re Longmeade Ltd (In Liquidation) (Rev 1) [2016] EWHC 356 (Ch):

… it will be for the Liquidators to take a commercial decision in the interests of the creditors as a whole

However, if a Liquidator takes a decision no reasonable Liquidator could have made then the Court will be prepared to step in and exercise control.

The Perversity Test

The perversity test is really where matters sit with a Court’s control of a Liquidator. This was referred to in the case of Re Edengate Homes (Butley Hall) Ltd [2022] EWCA Civ 626 (“Edengate”) when the Court of Appeal assessed a connected party’s complaint about an assignment of a right of action by a Liquidator to an insolvency litigation funder.

The Court of Appeal referred to the Terry Venables case of Edennote Ltd, Re [1996] EWCA Civ 1349 when he had a dispute with Alan Sugar. This involved a Court application over an assignment of an action arising from Mr Venables’ time as manager of Tottenham Hotspur Football Club. What the Court of Appeal said about the perversity test was:

It is common ground that the test on the merits is one of perversity or, as it was put more fully in Re Edennote, affirming previous authority, the correct test (fraud and bad faith apart) is that:

“the court will only interfere with the act of a liquidator if he has done something so utterly unreasonable and absurd that no reasonable man would have done it.”

As the judge said, this is a formidable test. Mr Curl pointed out that it leaves a potentially large category of cases where the liquidator’s conduct may be open to valid criticism, but where that conduct cannot be so characterised.

That is a very high hurdle to haul over when a complaint is lodged at Court to control the conduct of a Liquidator.

Dissatisfaction Is Not Sufficient

In fact, so high is this hurdle that the Court of Appeal in rejecting the appeal in the Edengate case said that although certain aspects of the Liquidator’s explanations were considered unsatisfactory by the Judge of first instance, it did not meet the perversity threshold:

The judge did not accept the explanation given by the liquidator for not approaching Mrs Lock and her family. He described that explanation as “unsatisfactory”. Mr Collings submitted that, having rejected the liquidator’s explanation, it was not open to the judge to substitute other reasons for those which the liquidator gave, in order to avoid a finding of perversity. I would reject that submission also. Whether a liquidator’s act is perverse in the sense described in the authorities is an objective question. The judge was entitled to conclude, if the facts justified it, that the liquidator’s decision to assign the claims to Manolete was not perverse even if the reasons which he gave for his decision were unsatisfactory.

Oliver Elliot Comment: When Will The Court Control A Liquidator?

It is important that when you consider attempting to use the Court to control a decision of a Liquidator you ask yourself the following question:

If I was unaffected by the decision would I look at the decision taken and say to myself (regardless of whether or not I agreed with the decision and whether or not I would have taken the same decision), this is a decision that no reasonable person could have taken?

If hand on heart you can say no reasonable person could have taken that decision, then you may want to consider seeking independent legal advice on whether the matter could be progressed. However, if you get the balance wrong and the Court does not agree, you could be hit with a Liquidator’s substantial costs. And your own!

So be careful, beware but don’t despair.

What Next?

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Disclaimer: When Will The Court Control A Liquidator?

This page When Will The Court Control A Liquidator? is not legal advice and should not be relied upon as such. This article When Will The Court Control A 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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