Updated: 17th February 2021
When a company becomes insolvent, and a liquidator is appointed to deal with proceedings, the person taking office must ensure that a fair distribution of the company’s assets takes place amongst creditor groups.
This distribution is carried out according to a statutory hierarchy for repayment of debts, and the overriding aspect as far as the liquidator is concerned is acting in the best interests of creditors to maximise their returns.
From start to finish, the liquidator’s role is to oversee what is an often complex procedure, and one which can result in legal action against directors if any instances of misconduct are found.
Begbies Traynor has vast experience of insolvency across all industries, and will offer professional guidance if your company is threatened with the prospect of liquidation.
The Official Receiver (OR) may initially act as liquidator if the company has been forced into compulsory liquidation, but the company’s creditors may be given the option to appoint their own choice of liquidator at some point.
Alternatively a liquidator can be appointed by the directors of the insolvent limited company if liquidation is being entered into voluntarily through a CVL. Either way, the office-holder will take control of the company’s affairs once appointed, and work in the interests of creditors as a whole, rather than the directors, the company, or shareholders.
If directors have already obtained advice from a licensed insolvency practitioner who remains in office as liquidator, there may appear to be a conflict of interests. But in these instances, the IP’s role is clear – they no longer work on behalf of the directors, and are unable to provide professional advice to individual directors with regard to the liquidation.
Each creditor must submit a proof of debt form, which is essentially a claim for the debt they believe is owed to them. The liquidator will assess whether the debt should be repaid in full, in part, or if they should seek a compromise with the creditor. In some instances, claims may be rejected completely.
A major part of the liquidator’s role is to communicate with creditors in relation to various aspects of the process. These include charting the progress of claims, the circumstances that led the company into insolvency, and providing information about the distribution of assets.
Arranging for company assets to be professionally valued is crucial during the liquidation process if returns for creditors are to be maximised. A principal part of the liquidator’s role at this point in proceedings is the restoration of property that may have been sold at undervalue – also known as an ‘antecedent transaction.’
The liquidator must ensure an equitable distribution of funds to creditors, taking account of the ‘prescribed order’ - a hierarchy for repayment which starts with the costs of liquidation. Following this, the liquidator must ensure that secured and preferential creditors are paid, along with floating charge holders. Positioned at the bottom of the hierarchy are unsecured creditors.
If the liquidator identifies wrongdoing by the company’s directors, they must submit a report to the Secretary of State. Such wrongdoing may include instances of ‘antecedent transactions’ which are transactions that compromise creditor returns.
Transactions at undervalue and preference payments are both common examples of antecedent transactions, and might include the sale of an asset to a family member for below its market value.
Sometimes directors repay a specific lender if they have a personal connection, or have provided a personal guarantee. The liquidator’s role demands that they apply to the court to restore property for the benefit of creditors, or reverse the transaction(s) in question.
The office-holder will interview company directors in order to gain a better perspective on what has led to the company’s insolvency and subsequent liquidation. In this regard they take on a public protection role, in order to identify directors who deliberately attempt to defraud creditors, or those who simply act carelessly in their position as director.
Begbies Traynor specialises in business rescue and recovery, and can offer professional assistance if your company is facing insolvency. We may be able to help you avoid liquidation and will advise on the options available, but it is important to act quickly if your creditors are threatening to take legal action.
Contact one of our licensed insolvency practitioners to arrange a free same-day consultation in complete confidence at one of our extensive network of local offices.