What are the Powers of a Liquidator in the Insolvency Process?
Insolvency occurs when a business cannot pay its debts as they become due. In such cases, a liquidator may be appointed to wind up the company’s affairs and distribute its assets to its creditors.
A liquidator is a licensed insolvency practitioner whose primary responsibility is to gain the best possible return for company creditors.
To help them in their role, they have a range of powers that allow them to investigate the company’s affairs, sell assets, pursue legal action, distribute funds to creditors, terminate contracts, and disclaim onerous property.
These powers are designed to ensure that the liquidation process is fair and efficient and that the interests of all stakeholders, including creditors and shareholders, are taken into account.
In this piece, we will explore these in detail, examining the importance of these powers for successful insolvency processes.
We are fully licensed Insolvency Practitioners. If you need to appoint a company liquidator, we provide a specialist, experienced service. We work with businesses of all types and sizes but are especially well known for advising small businesses.
What are the Key Powers of a Liquidator?
Here are some of the key powers that a liquidator possesses, as per the Insolvency Act 1986:[1]Trusted Source – Legislation – Insolvency Act 1986, Part IV, Chapter VII, Liquidators powers and duties
It’s important to note that any person has the right to apply to the court if they are aggrieved by an act or decision of the liquidator.
- Power to Investigate the Affairs of the Company: One of the most important powers of a liquidator is the ability to investigate the company’s affairs. This allows the liquidator to review the company’s books and records and interview staff. By doing so, the liquidator can identify any potential wrongdoing or recoverable assets, which can help maximize the returns.
- Power to Sell Company Assets: The ability to sell the company’s assets allows the liquidator to convert assets into cash, which can be used to pay off the company’s creditors. The liquidator can sell any type of asset, including property, equipment, and intellectual property.
- Power to Take Legal Action Against Directors or Officers: This can include pursuing claims for breach of duty or seeking to recover assets that were wrongfully taken from the company.
- Power to Distribute Funds to Creditors: A key part of the liquidator’s role is ensuring that creditors are paid in order of priority, in a fair and transparent manner.
- Power to Terminate Contracts: This can include contracts with suppliers, customers, and employees.
- Power to Disclaim Onerous Property: Onerous property is a property that is burdensome to the company and which the company would have difficulty selling. By disclaiming (renouncing any legal claim), the liquidator can free the company from these burdens and focus on selling the company’s more valuable assets.
- Investigating the Possibility of Wrongful or Fraudulent Trading: liquidator can also take action against current or previous company directors who did not act in the best interests of creditors (Section 214). For example, if the company continued to trade and made further losses after becoming insolvent, the directors can be personally liable for the debts.
Power to Investigate the Affairs of the Company
Any liquidator has a duty to investigate the circumstances of the case they’re working on to ensure fair play for creditors.
This involves establishing how the company ran into financial difficulty and what actions were taken in the period leading up to the insolvency
The liquidator may use various tools at their disposal, such as forensic accounting, to uncover any potential wrongdoing or recoverable assets.
The investigation serves several purposes, including:
- Identifying any potential claims: The liquidator’s investigation may reveal any potential claims that the company may have against third parties, such as customers, suppliers, or directors.
- Recovering assets: The investigation may uncover any assets that were wrongfully taken from the company or transferred to third parties.
- Identifying any fraudulent or illegal activity: The investigation may reveal any fraudulent or illegal activity that was undertaken by the company or its directors. The liquidator can take legal action against the parties responsible and recover any misappropriated assets.
Power to Sell Company Assets
The power to sell company assets allows the liquidator to convert hard assets into cash in order to pay creditors what they’re owed.
The liquidator has the power to sell any type of asset, but they must follow strict procedures, such as obtaining valuations and marketing the assets in a fair and transparent manner.
The proceeds from the sale of assets are typically used to pay off the company’s secured creditors first, followed by its unsecured creditors. Any remaining funds are distributed to the shareholders of the company.
Power to Take Legal Action Against Directors or Officers
The liquidator can pursue various types of claims against directors or officers, including claims for breach of fiduciary duty, fraudulent trading, and wrongful trading. These claims may seek to recover assets that were wrongfully taken or to hold directors or officers personally liable for any losses suffered by creditors.
The power to take legal action against directors or officers is important for several reasons. If there has been misfeasance, it can help hold those responsible for the company’s insolvency accountable for their actions. This can act as a deterrent to others who may consider engaging in similar conduct in the future.
Second, it can help to recover assets for the benefit of the company’s creditors, which may otherwise be lost.
In practice, taking legal action against directors or officers can be a complex and time-consuming process, and there may be challenges involved in pursuing such claims. For example, the liquidator may need to establish that the director or officer in question acted dishonestly or with a lack of care, which can be challenging to prove.
Additionally, the costs of pursuing legal action may be high, and there is no guarantee that the liquidator will successfully recover assets or hold those responsible to account.
Power to Distribute Funds to Creditors
The liquidator must follow certain procedures when making creditor distributions, which include notifying all creditors of the proposed distribution. The liquidator must also follow the order in which creditors are paid, which is determined by law.
Secured creditors are generally paid first, followed by preferential creditors, and finally, unsecured creditors. Any remaining funds are distributed to the shareholders of the company.
Power to Terminate Contracts
As part of the process of closing down the company, the liquidator has the power to terminate any contracts, including those with suppliers, landlords, or finance providers.
This will also include making staff redundant and educating them on their rights to claim statutory redundancy from the Redundancy Payments Service.
However, the power to terminate contracts is not absolute. The liquidator must act in the best interests of the company’s creditors and follow the procedures set out in the relevant legislation and case law.
Power to Disclaim Onerous Property
Onerous property can be defined as that which is burdensome to the company and which they would have difficulties selling, such as a lease on premises that are no longer needed or a contract with unfavourable terms. It is covered under Section 315 of the Insolvency Act 1986[2]Trusted Source – Legislation – Insolvency Act 1986, Part IX, Chapter IV, Disclaimer of onerous property, Section 315.
The liquidator may disclaim onerous property by giving notice to the affected parties, such as the landlord or counterparty to the contract. The disclaimer releases the company from its obligations, allowing the liquidator to can focus on selling more valuable assets.
The power to disclaim onerous property is important for several reasons. First, it allows the liquidator to reduce the company’s ongoing expenses and free up assets for distribution to creditors. Second, it allows the company to focus on selling its more valuable assets, which can help maximize creditor return. Finally, it enables the company to be wound up promptly and efficiently, reducing the costs associated with an extended liquidation process.
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The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.
You can learn more about our standards for producing accurate, unbiased content in our editorial policy here.
- Trusted Source – Legislation – Insolvency Act 1986, Part IV, Chapter VII, Liquidators powers and duties
- Trusted Source – Legislation – Insolvency Act 1986, Part IX, Chapter IV, Disclaimer of onerous property, Section 315
