What is the Role of a Liquidator in the Insolvency Process?
The role of a liquidator in the insolvency process is primarily designed to ensure a fair distribution of an insolvent company’s assets for the benefit of its creditors. In many cases, the insolvency practitioner (an individual who is authorised to act in relation to an insolvent company) will try to rescue the business if they believe this will produce a better return for the creditors. If a company rescue is not viable, the official receiver may act as the company liquidator if the case is relatively straightforward. In more complex cases, they will usually appoint a private sector insolvency practitioner, usually an accountant or solicitor, to complete the liquidation.
Company officers, both current and former, have a duty to co-operate with the official receiver and private liquidators. Under the Insolvency Act 1986, failure to do so could lead to jail time.
How is an Insolvency Practitioner Appointed?
An insolvency practitioner is appointed at a creditor’s meeting or by the Secretary of State for Business, Innovation and Skills. This will usually occur within four months of the winding-up order, and in complex cases, more than one liquidator can be appointed to act jointly.
The role of a liquidator becomes officially recognised when appointed by a meeting of creditors; this must be advertised in the Gazette. If the appointment is made by the Secretary of State, each creditor must be informed individually.
What are the Duties of an Liquidator?
Once appointed, the liquidator is responsible for:
- Realising the assets of the insolvent company and achieving the best possible price;
- Address outstanding claims against the limited company and satisfy the claims as set-out by law;
- Distributing the returns to the company’s creditors in order of priority;
- Acting in the best interests of the creditors (not the directors).
Maximising the return for creditors
Maximising the return for creditors is the liquidator’s primary responsibility. As part of this duty, they may apply to the court to restore property that has been disposed of in an unfair way. For example, assets may have been sold to a connected business for less than their market value.
Investigating the Possibility of Wrongful or Fraudulent Trading
A 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 make further losses after becoming insolvent, the directors can be made personally liable for the debts.
What is a Provisional Liquidator?
Occasionally, when a winding up petition is presented to court, the judge will deem it too risky for the company to continue trading. This may be because the assets are in some way at risk and, in these instances, the court will appoint a provisional liquidator to safeguard the company until the full petition is heard. This can be done either with or without notice to the the company, the former meaning an official letter will be sent to company directors informing them of the appointment of the Official Receiver as provisional liquidator. ‘Without Notice’ means that it is only the Official Receiver who is aware of the situation, and this is usually due to a fear that company assets may disappear in some way, if the company finds out about it, or that it is demonstrably in the public interest.
Appointing a Creditors’ Committee
In some cases, the company’s creditors will choose to appoint a creditors’ committee to protect and promote their best interests. Between three and five members can be elected to the committee. It is better to have either three or five member, rather than four, to avoid deadlocks in committee votes. The liquidator must then report to the committee on the progress of the liquidation and account for any costs and expenses.
How is the Liquidator paid?
A liquidator is paid for the work that they do. Their payment can be in the form of a pre-agreed fixed sum, an hourly rate, or as a percentage of the assets they realise. This payment should be agreed at the creditors’ meeting or with the creditors’ committee.
The level of payment the liquidator receives should be based on:
• The complexity of the case
• How effectively they carry out their duties
• Any extra responsibility the liquidator takes on
• The value and nature of the assets
A full estimate of the liquidator’s fee should be provided in advance of the work they complete. Their payment claim should be made along with evidence of any expenses and the progress that has been made. There should also be a breakdown of the time spent on the case if the liquidator is receiving an hourly rate. This should be in keeping with the principles set out in The Statement of Insolvency Practice (SIP) 9.
Payments are Made When Company Assets are Realised
The insolvency practitioner is the first to be paid from the money raised when a company’s assets are realised. Payments are then made to creditors in the following order:
1. Claims from preferential creditors such as employees for unpaid wages and holiday pay.
2. Floating charge holders are then paid from the proceeds of the sale of assets over which a ‘floating charge’ is held.
3. Next to be paid are the unsecured creditors, which includes trade and expense creditors. If there is insufficient money to pay the unsecured creditors in full, they are paid in proportion to the amount they are owed.
4. If the debts of preferential and unsecured creditors have been paid in full, they are then entitled to interest for the late payment of their debts. Interest payments are paid from the date of the winding-up order.
5. In the unlikely event that there is money left over after the expenses of the liquidation have been paid, this is returned to the shareholders of the company.
Is there anything I should be aware of before engaging an insolvency practitioner (IP)?
If you are considering engaging an insolvency practitioner with a view to becoming your company liquidator be aware what you say pre-engagement is not privileged. The reason is simple the liquidator acts for the creditors, not you the director. They do have a duty of care where personal guarantees are concerned, but this can be easily overlooked in the heat of a company closure. As a lot of directors have learnt to their cost answer honestly but remember who the IP represents.
You also need to be aware the IP cannot (or at least should not) be providing advice on your personal guarantees and how to negotiate with the bank, or other creditors. The reason is simple they would have a direct conflict of interest as they represent the bank. We are company rescue consultants so act on the director’s behalf having due care for the creditors – the exact opposite of the liquidator.
Completion of the Procedure
Once the company liquidation procedure has been completed and the assets have been distributed, the liquidator will hold a final meeting with the creditors. They will report on the insolvency and provide a summary of their receipts and payments. At this point, they will seek to be released from office, and the liquidation will be concluded.
Role of the Liquidator in CVL
On appointment, the liquidator will manage the liquidation process by dealing with creditors and organising creditors’ meetings where necessary. He or she will sell the company’s assets, and the proceeds will be used to pay creditors after agreed costs and fees have been deducted.
The liquidator will complete and file all the required paperwork. It is also his or her role to investigate the conduct of the company directors for the last three years before the liquidation. He or she has a duty to report any evidence of criminal activity to the relevant authorities.
Insolvency Practitioners’ Role Compulsory Liquidation
A compulsory liquidation arises when a creditor petitions the Court for the compulsory winding up of a company. If the petition is successful, the company is wound up by the Court, and an official receiver (OR) is appointed as liquidator. Once the insolvent company is in compulsory liquidation, the directors are no longer in control of the business or its assets. The role of the liquidator is to take control of the business, sell the company’s assets and distribute the proceeds to its creditors.
The official receiver will frequently pass the liquidation process to an insolvency practitioner (IP). However, on occasion when the OR deals with the compulsory liquidation, he or she will manage the paperwork, sell the assets to repay creditors, and investigate director conduct and report on director conduct to the relevant authorities.
Members’ Voluntary Liquidation (MVL)
In sharp contrast, this process is used to close down a business that is solvent. The MVL is initiated voluntarily by the company’s directors and can only be used in the cases where insolvency isn’t an issue. As part of the process, shareholders must make a statutory declaration of solvency, which states that the business is solvent and can repay its creditors within 12 months.
The company appoints a liquidator to sell the company’s assets and ensure the company’s debts are settled with the proceeds. He or she will collect all monies owed to the business and settle any legal disputes. The shareholders will also receive their share capital from the liquidator.
The role also encompasses contracts, and he or she also makes certain that all contracts are completed, ended or transferred fully in line with the law as well as deregistering the company for VAT purposes. Finally, the liquidator files the latest company accounts up to the date that the business ceased trading.
How can we help?
For liquidation advice, or to speak with one of our team to see how you could avoid a liquidation procedure, please call for free, no-obligation today or hit the orange live support button on the lower right-hand side.