Investigating the Directors: Appointment of Liquidator

Liquidator Investigation

Investigating the Directors: Appointment of Liquidator. An Insolvency practitioner has a duty to creditors and such a duty will involve investigating the Directors conduct. But the relationship that an Insolvency Practitioner has with the Directors does not always start out as it ends up.

In the Beginning

At the outset the relationship that an Insolvency Practitioner has with directors of limited companies will arise when Directors start having concerns about their position, particularly from the vantage point of how their companies are performing and the need for advice. That their conduct could run the risk of falling within the scope of wrongful trading will give them an incentive to seek out professional advice.

This will particularly be an issue when creditors come knocking and there appears to be insufficient funds available to discharge the creditor debts when they fall due for payment.

At this point the engaged Insolvency Practitioner will typically be embroiled in advising the directors about the risks of wrongful trading in the event that the company goes into insolvency liquidation. This can notably arise if Directors continue to accept credit in the name of the company when it has no apparent future, after consideration of alternative (rescue) options such as administration or a company voluntary arrangement. It may well be that liquidation is deemed to be the only realistic outcome.

In such an event the insolvency practitioner will usually be called upon to advise the directors and assist them in the administration of the company’s affairs in its dying days. Such administration will amongst other things likely put a freeze on the company’s bank account, caution the director’s to be aware that accepting further credit in the name of the company is something that should not happen and make them aware about the prohibition on the re-use of company names. The Directors are at that stage being advised by the Insolvency Practitioner but when the Insolvency Practitioner is appointed as the Liquidator, the situation changes.

Transformation to Liquidator

Transformation to Liquidator

No longer is the Insolvency Practitioner acting in a capacity where he or she is advising the Directors. The Insolvency Practitioner who takes over as Liquidator of the company is now directly acting in the interests of the creditors as a whole. Previously the Insolvency Practitioner was providing the Directors with the signposts to follow to seek to ensure that during those dying days of the company’s life, they acted in the best interests of the creditors.

When the Insolvency Practitioner formally assumes the reigns upon being appointed as the Liquidator that duty will involve the duty of investigating the Directors through an investigation of the conduct of the Directors prior to the company entering in solvent liquidation. Indeed it can and should entail consideration of whether or not the Directors took the advice of an Insolvency Practitioner when placing the company into liquidation and also not just whether they took advice but if they followed it.

That investigation culminates in the Liquidator having a mandatory obligation to report on the conduct of the Directors to the Secretary of State.

The Liquidator will often in effect be reporting on the conduct of the parties who are responsible for his attainment of the office of Liquidator. This is a delicate balancing act because the Liquidator has a duty to be vigorous, efficient and unbiased in the execution of his or her duties as Liquidator of the company. That duty cannot be permitted to be affected by any prior relationship that arose as a consequence of advising the Directors and assisting them in placing the company into insolvent liquidation.

This may raise a question mark in the minds of some creditors as to whether or not someone who has been appointed as the Liquidator should be the same person as the one appointed by the Directors to assist them. This can happen frequently if the Directors are creditors of the company, enabling the Directors to have a material vote on the issue of who is appointed.

Fielding v Seery

Should the Directors of a company be in a position where they can deploy their voting rights as a creditor to appoint or procure the appointment of their choice of Insolvency Practitioner to be the Liquidator?

A notable case on this issue was that of Fielding v Seery [2004] BCC 315 (“Fielding v Seery”) which was referred to in the case of Power v Petrus Estates Ltd & Ors [2008] EWHC 2607 (Ch) in which there were certain principles involving investigating the directors through a liquidation which were specifically held to be applicable to the choice of a person to hold the office of Liquidator:

(4) A liquidator should not be a person nor be the choice of a person who has a duty or purpose which conflicts with the duties of the liquidator. There are many illustrations of this principle. I was referred in particular to Re City & County Investment Co (1877) 25 WR 342, Re Charterland Goldfields (1909) 26 TLR 132, and Re Corbenstoke (No. 2) (1989) 5 BCC 767.

(5) More specifically the liquidator should not be the nominee of a person: (a) against whom the company has hostile or conflicting claims as in Re City & County Investment Co, (and see also Deloitte & Touche AG v Johnson [1999] BCC 992; [1999] 1 WLR 1605); or (b) whose conduct in relation to the affairs of the company is under investigation as in Re Charterland Goldfields (and Re Mansel, ex parte Sayer).

(6) By contrast it is not an objection to a liquidator that he is allied to or the choice of a person who is concerned to pursue the claims of the company through the liquidator.

Fielding v Seery [2004] BCC 315

If Directors are to be investigated by Liquidators who have advised them, then it is not inconceivable that this position can bring the principles broadcast in the case of Fielding v Seery into the minds of independent creditors. There might be if nothing else the threat to the perception of the independence of such an appointment, when a director who claims to be a creditor could effectively enable the appointment of their own choice of Liquidator, whereas the independent creditors might be unable to do so.

This might be a problem in circumstances, where there could be disputes as to the size of certain creditor claims. Independent creditors who harbour concerns about the conduct of the Directors may be concerned about them being able to vote at all in such an appointment process, particularly if they consider there are material claims against those Directors that they think such a Liquidator should bring. The worry may even give rise to a Director having voting rights and influence for sums far in excess of what might be by some considered reasonable.

If one were to put the matter under the spotlight and consider if indeed it is desirable, you might consider the following situation that is arguably comparable ie. that in litigation between two parties, imagine if your opposing litigant was able to pick the judge! Would you be happy?

Justice Must Not Just be Done but Seen to be Done

Justice must be seen to be done

The cardinal principle that might be applicable here is that justice must not just be done but also seen to be done. Such principles involve perceptions of bias and can even be sufficient to overturn judicial decisions. So if such scenarios can be sufficient to overturn judicial decisions, it is perhaps not surprising that they could govern the appointment for the office of Liquidator.

However it might be worthy to note that the Directors’ nominated Liquidator may have built up a good working relationship with the Directors and may therefore be in a position to obtain information to enable the necessary investigations take to place expeditiously. That position however might not be enough to satisfy the position of independent creditors as to who should hold office.