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Levy & McRae Powers of a Liquidator

July 25, 2012

POWERS OF A LIQUIDATOR

June 19, 2012

BACKGROUND

Liquidators are given by law an array of powers when they are appointed to a Company. Such powers include the ability to investigate, and possibly remedy, aspects of why the Company has become insolvent.

This note focuses on the powers that the Liquidators will have in a liquidation and, in particular, the Liquidators’ additional powers of investigation and remedy. It should be noted that the range of such powers and the conditions for receiving them differ between a creditors’ voluntary winding up and a compulsory liquidation. This paper does not explore the precise differences and is intended to give an overview of both.

POWERS OF THE COURT ON THE APPLICATION OF THE LIQUIDATORS

Power to Order Company Officer to Attend Meetings

The court has the power to order any officer of the Company to attend any meeting of the creditors, contributories, or liquidation committee, for the purposes of giving information about the trade, dealings, affairs, or property of the Company (s.157).

Power to Order the Arrest of a Contributory

If it appears that a contributory may be about to abscond, the court may make an order for his or her arrest (s.158).

Power to Order Inspection of Books by Creditors

The court may at any time give creditors and contributories the right to inspect the Company’s books and papers (s.155).

Power of Rescission of Contracts by the Court

The court may, on the application of a person who is either benefited or burdened by a contract with the Company, order the contract rescinded and require payment of damages from either party for the non-performance of the contract, or otherwise as the court thinks just (s.186(1)). If such damages are payable, they count as a debt in the winding up.

Power to Order Delivery of Property to Liquidator

Where any person has in his/her possession or control any property, books, papers, or records to which the Company appears to be entitled, the court may require that person to pay, deliver, convey, surrender or transfer these to the Liquidators (s.234(2)). In practice this is the most effective power open to the Liquidators for gathering information, and they will be given a wide latitude by the court. There might be issues of legal privilege and confidentiality to address at the relevant time, but the powers granted are draconian.

SPECIFIC POWERS OF THE LIQUIDATOR

The Liquidators may apply to the court to pursue the following areas:

Wrongful Trading

The Liquidators can seek a contribution order against current or former directors and shadow directors of the Company (s.214) for Wrongful Trading. This occurs when further liabilities are incurred at a time when the director or shadow director knew or ought to have known that the Company was already insolvent or unable to pay its debts, and that there was no reasonable prospect that the Company could avoid entering into insolvent liquidation. The court may then, on the application of the liquidator, declare that the director in question is liable to make a contribution to the Company’s assets. This remedy is much mentioned but rarely invoked in practice.

Fraudulent Trading

In contrast to Wrongful Trading, Fraudulent Trading can apply to any persons, not only directors or shadow directors. Fraudulent Trading occurs in the course of winding up when it appears that any business of the Company has been carried out with the intent to defraud creditors of the Company or of any other person (s.213).

It is necessary here to establish criminal intent, showing actual dishonesty, in accordance with the current notions of fair trading. Constructive intent to defraud can be established if credit is obtained at a time when the person knew that there was no good reason to think that funds would become available to pay the debt when it fell due.

The court may, on the application of the liquidator, declare that any persons who were knowingly parties to the carrying on of such business are liable to make contributions to the Company’s assets as the court thinks proper.

Gratuitous Alienations

This is governed by s.242 of the 1986 Insolvency Act. A Gratuitous Alienation can be described as a transfer of property by a debtor (here, the Company) to another person for inadequate or no consideration. The liquidator may challenge such alienations, with the sanction of the court, on the grounds that the alienation has favoured a given person. The court may grant a decree reducing the transaction, restoring the property to the Company’s assets, or such other redress as may be appropriate.

Unfair Preferences, Cash for Debts Due, Collusion

This is governed by s.243 of the 1986 Act. A creditor may challenge a voluntary transaction through which, after the insolvency of the Company, another creditor receives some sort of preference. This preference must be seen as intentionally given to a favoured creditor at a time when the Company’s funds have become inadequate to the payment of its debts. The preference must also be to the prejudice of the general body of creditors. The liquidator may challenge such a transaction with the sanction of the court. As with Gratuitous Alienations, the court may grant a decree reducing the transaction, restoring the property to the Company’s assets, or such other redress as may be appropriate.

LIQUIDATORS’ POWERS OF INVESTIGATION

The Liquidators have the power to apply to the court for an examination into the Company’s financial affairs. The Liquidators will be able to apply to the court for two different types of examination: public examination and private examination.

Public Examination

A public examination is an “open” examination of an individual under oath in open court. This would include any relevant former director (see below). Section 133 of the Insolvency Act 1986 provides that the following persons may be subject to a public examination:

  1. Any person who is or has been an officer of the Company;
  1. Any person who has acted as a liquidator or administrator of the Company, as receiver, or as receiver of its property; and
  1. Any person who is or has been concerned with, or has taken part in the promotion, formation, or management of, the Company.

Unlike in compulsory liquidation, the court is not bound to grant an application for public examination in the course of voluntary liquidation. Instead, in this case, the court must decide whether the granting of the application would be “just and beneficial” (s.112(2) of the 1986 Act).

If the court approves the application, it will appoint a day for the public examination and make a direction that the named person must attend on that day in order that they can be publicly examined. At the examination, questions may be asked by the liquidator or any creditor who has submitted a claim in the winding up, and any contributory of the Company. Generally, the liquidator must give at least 14 days notice of the time and place of examination to those entitled to ask questions. The public examination may also be advertised in newspapers etc.

Private Examination

The liquidator can apply to the court for the examination in private of the same categories of people as mentioned above (s.236). Again, the court is not bound to grant this examination, but must decide on the same “just and beneficial” basis. For a private examination to be granted there should be prima facie evidence of a substantial case against the relevant person which would bring a real prospect of money for creditors.

The court may require any such person to submit an affidavit to the court containing an account of his/her dealings with the Company. Furthermore, the person in question can be ordered to produce any books, papers or other records in his/her possession which relate to the Company. If a person has been summoned by the court to a private examination and fails to attend, a warrant may be granted for that person’s arrest (s.236(5)).

GENERAL POWERS OF THE LIQUIDATOR

Finally, it is worth rehearsing the general powers of the Liquidators, which can be split into the following two categories:

  1. Ordinary Powers
    • These are powers which the Liquidators receive as soon as they have been appointed.
  2. Extraordinary Powers
    • These powers can only be obtained with the sanction of the court or the liquidation committee, or sometimes only with the sanction of the court. Those specific powers only granted with the sanction of the court have been noted above.

These sets of powers are outlined below.

ORDINARY POWERS

  1. Sale of Assets
    • The liquidator may sell any of the Company’s property, including heritable property, by public auction or private contract.
    • In the case of heritable property (eg land or fixed buildings) involving a security right, the liquidator may sell this as long as he/she is able to obtain a price high enough to discharge every security over the property.
  2. Execution of Deeds
    • The liquidator has the power to execute all deeds in the name of and on behalf of the Company.
  1. Mortgaging Assets
    • The liquidator has the power to raise on the security of the assets of the Company any necessary money.
    • The liquidator may not grant a security which takes priority over any existing secured creditors, except with consent or if the creditors are personally barred.
  1. Require Evidence from Persons in Relation to Claims
    • The liquidator may require any creditor who has submitted a claim to produce further evidence, or require any person who he/she believes can produce evidence to do so.
    • If such a person fails to comply, the liquidator may apply to the court for an order for private examination before the court.
  2. Power of Access to Documents in the Hands of Third Parties
  1. The liquidator is entitled to access all documents relating to the assets of the business sent by or on behalf of the Company to a third party which are in that third party’s hands.
  2. If the liquidator meets any obstruction in doing this, he/she may apply to the court for an order ordering any person to cease the obstruction.
  1. Power to Adjudicate on Claims
  1.  
    • Although the liquidator does have the power to adjudicate on claims, the adjudication may be appealed by any claimant or by any creditor.
  2. Power to Engage in Legal Proceedings
    • The liquidator may bring or defend any action or other legal proceedings in the name of the Company. For current purposes, in addition to the remedies mentioned above, the Liquidators could sue the directors for misfeasance (breach of their ordinary and fiduciary duties) or for the repayment of dividends, distributions or other funds paid to the shareholders, and for the return of salary and/or bonuses if the employee in question has acted in breach of contract.
    • The Insolvency Act 1986 gives several categories which are exceptions to this rule. These are actions under:
      1. Fraudulent Trading (s.213);
      2. Wrongful Trading (s.214);
      3. Gratuitous Alienations (s.242); and
      4. Unfair Prejudices (s.243).
    • All of the above exceptions require sanction from the court (as outlined above).
  3. Power to Carry on Business
  4. The liquidator has the power to carry on the business of the Company so far as may be necessary for its beneficial winding up.

EXTRAORDINARY POWERS

  1. Distribution of Estate
    • The liquidator may pay the expenses of the liquidation at any time, and pay the preferred debts at any time, but only with the consent of the court or the liquidation committee.
  2. Compromises and Arrangements with Creditors
    • The liquidator may, with the sanction of the court or the liquidation committee, make any compromise or agree any arrangement with creditors or persons claiming to be creditors.
  3. Compromise with Debtors
    • The liquidator has the power, with the sanction of the court or the liquidation committee, to compromise with debtors in the following ways, on such terms as may be agreed between them:
      1. Calls and liabilities to calls, debts and liabilities capable of resulting in debts and all claims (present or future); and
      2. All questions relating to or affecting the assets or the winding up of the Company, and take any security for the discharge of any such call, debt, liability or claim and give a complete discharge in respect thereof.

 

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