When a business goes into company liquidation control is taken away from the directors and placed in the hands of an appointed liquidator but what exactly are the duties of a liquidator?
In the UK there are very strict rules about the conduct of directors and who can act for a company and on behalf of its creditors during an administration and liquidation process.
There are three forms of liquidation that a company can experience; A Members Voluntary Liquidation (MVL), a Creditors Voluntary Liquidation or CVL and a compulsory liquidation.
A members voluntary liquidation takes place when the company concerned is solvent (it can pay its creditors) and when the shareholders or ‘members’ decide that they don’t need the business any more.
With an MVL a liquidator isn’t appointed by the court but we’d always recommend getting a licensed insolvency practitioner involved as it is easy to make a costly mistake.
A Creditors’ Voluntary Liquidation is where the company is insolvent and to avoid creating any further debt and of course obviate the chances of being accused of wrongful trading.
A CVL is instigated by the directors of the company who voluntarily choose to place the company into the hands of an insolvency practitioner and as such has a measure of control attached to it.
Although in many cases the liquidation might mean the end of the business, in others it is possible to look to plan a pre-pack buy out of the good bits of the company before the liquidator takes control and in doing so, allow the business to continue.
When looking at a CVL there will be a period of planning with the chosen insolvency practitioner who will look at the prospects of the company and the plan for a pre-pack if that is applicable.
In this case the focus of the insolvency practitioners’ efforts will be in planning life after liquidation for the new company and to protect the directors from legal action and costs.
Once the decision to go for a CVL has been made then a liquidator is appointed by a meeting of the company’s creditors. During liquidation they will be charged with obtaining the best deal for the creditors and as such the prior planning period is vital to obtain a successful outcome.
Once the trading style and assets of the business have been sold off to the new company or ‘phoenix’ then the liquidator will be in control of closing the remaining parts of the company such as exiting any remaining premises and selling off what is left.
Finally they will distribute the money collected (minus their fees) as a ‘dividend’ to the creditors of the business and carry out the administrative functions of having the business struck off the register at companies house.
During the process the liquidator will also report to the creditors about the progress of the liquidation and will make a final report
The liquidator can also bring legal action if he feels that the directors have acted against the interest of the creditors such as challenging past transactions or bringing a wrongful trading action.
Whilst there is a measure of control in a CVL the same can’t be said of a compulsory liquidation.
In this case a creditor who has run out of patience with a customer can apply to the court for a winding up order.
The business concerned can of course challenge the action, and if they have the money to pay or can show that there is a reasonable prospect of creditors being paid in the short term (usually seven days) then they may be successful but if not then the court will appoint an Official Receiver to act as the liquidator of the business.
From this point on the Liquidator will take immediate control of the business and is responsible for realising the best possible deal for the creditors that are owed money.
They will perform an immediate assessment of whether it is better to continue to trade and seek a trade sale, whether it would be better to sell off parts of the company and liquidate others, whether the best option is to trade on and turn around the business into a profitable and cash positive concern or, failing all of these to simply close the doors and sell off the assets piecemeal.
The duties of the liquidator at this point are very similar to that of those during a CVL in that they are seeking the best outcome for the creditors of the company and not the directors or shareholders.
These duties may extend to running the business for a short period whilst a trade sale is negotiated or in many cases laying off staff, appointing an auctioneer to sell off the goods and assets and then paying a dividend to creditors.
Directors should also be aware that the court appointed liquidator will be required to assess and investigate the actions of the directors leading up to the insolvency and will report back to the court on any misdeeds. This could result in legal action being taken against the directors and in extreme cases leading to them being banned from running companies.
This has been a quick run through of the general duties of the liquidator but in all cases it is vital that directors of companies take qualified and experienced advice about their specific situation to avoid making what could be costly mistakes.
If you are interested in understanding how best to avoid these troubles then Sochall Smith accountants could potentially help