Directors of insolvent companies have a series of obligations they must fulfil. Chief among these obligations is to act in the best interests of the company’s creditors. In many cases, the best option is to place the insolvent company into liquidation. This will require the appointment of a licensed insolvency practitioner to the role of liquidator. They will then carry out the liquidation and provide valuable advice along the way. In some cases, the insolvency practitioner will identify a route that allows the company to be saved.
Given that liquidators play such a crucial role in the closing of an insolvent company, or the identification of a possible rescue plan, the extent of their powers isn’t necessarily obvious. For example, can a liquidator recover company assets? Can they unilaterally choose what procedure to enact?
In this article, Clarke Bell will provide a detailed overview of the liquidator’s role, what they will do during liquidation, and how directors may be impacted.
What is company liquidation?
Company liquidation is a somewhat generalising term that encompasses several different procedures, each resulting in the closing of a company and the disposal of its assets. While the specifics of each procedure differ, they all share a similar throughline. Namely, a liquidator will be appointed to carry out the liquidation, money will be extracted from the company through the sale of its assets, and the funds will be distributed amongst the appropriate parties. Although there are several forms of liquidation, for the purposes of this article we will focus on Creditors’ Voluntary Liquidation (CVL), as it is the main procedure for insolvent companies.
Creditors’ Voluntary Liquidation
Creditors’ Voluntary Liquidation is an option available to insolvent companies. It works in the interests of both directors and creditors, offering both parties key benefits that help reach the most favourable possible outcome. Creditors benefit because the CVL procedure allows for the straightforward recovery of debt, where possible, with repayments stemming from the liquidation of assets. However, directors benefit in more ways than just financial.
The CVL procedure is voluntary, which affords two main advantages to directors. Firstly, directors are able to appoint an insolvency practitioner of their choosing to carry out the procedure. This is a luxury not afforded in a compulsory liquidation.
Secondly, as a CVL is voluntary, it demonstrates that directors are willing to act in the interests of their company’s creditors. This reduces the likelihood that accusations of misconduct are levied, and acts as a strong defence in the event such accusations are made. For more on CVLs, read our complete guide to the CVL procedure.
What are a liquidator’s responsibilities during liquidation?
Liquidators have two main responsibilities when carrying out a liquidation. First and foremost is a responsibility to creditors. The liquidator must dispose of any assets for the highest value possible in order to deliver the largest sum possible to creditors. Although creditors will be repaid in a hierarchy, and it is possible that some will go without receiving any money, the liquidator will strive to repay every outstanding creditor the full amount.
A liquidator’s second responsibility is to investigate the company’s financial activity and its directors’ conduct. This is in line with the previous goal of achieving the best result for creditors, and it should evidence any misconduct that is found.
Can a liquidator recover company assets?
As liquidators are mainly concerned with achieving the best result for creditors, it is natural to wonder whether a liquidator can recover company assets under their own authority. The short answer to this question is yes. In line with their aims, liquidators are entitled to sell assets at their discretion, provided it is done with the purpose of raising funds to distribute amongst outstanding creditors. This includes assets such as machinery, stock, vehicles, property, and anything else the company owns.
Investigation of director conduct and financial activity
To reach the best outcome for creditors, liquidators are responsible for carrying out an investigation into the company and its directors. The aims of this investigation are twofold; to see if any fraud or misconduct has been committed by directors, or if there has been any misuse of the company’s funds.
Misconduct and misuse of company funds can take many forms, but the main actions liquidators will look out for are personal use of funds, preferential payments, and transactions at undervalue.
Personal use of funds is self-explanatory, referring to directors of insolvent companies who used company funds for their own gain, instead of fulfilling their obligations to creditors. What constitutes the other two actions is not so obvious, so below is an explanation of the terms.
Preferential payments refer to repayments made to creditors outside of the normal repayment hierarchy. In other words, if a director prioritises the repayment of a creditor for their own gain, then it would be considered a preferential payment. An example is where a director chooses to repay a loan secured by a personal guarantee when there are outstanding creditors higher up in the payment hierarchy. The director would no longer have debt that threatens their personal finances, but they will not have acted in the best interests of the company’s creditors as a whole. If evidence of such an action is discovered, guilty directors could face serious legal penalties.
Transactions at undervalue
Transactions at undervalue refer to the sale of assets at a value lower than their market value. It applies to when a company has become insolvent, and two years prior. Transactions at undervalue are treated as misconduct as they reduce the overall value of the company. While they might drum up much-needed funding in the short term, the long-term effects of transactions at undervalue mean creditors will not receive as much as they would have otherwise. As such, transactions at undervalue are treated as misconduct, and penalties may apply to guilty directors.
Clarke Bell can help you
If your company is struggling with financial problems, or you want to put it into liquidation, Clarke Bell can help you.
There are many roles for a liquidator, including dealing with the company’s assets and its creditors. Give us a call and we can talk you through the CVL process, as well as giving you a price to liquidate your company.
We have more than 29 years of experience in helping directors find the best solutions to their company’s financial issues. We can do the same for you.
Call us today for your free advice.