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UK court: process failure does not invalidate liquidator appointment

Out-Law Legal Update | 10 Apr 2018 | 11:11 am | 2 min. read

LEGAL UPDATE: The High Court has said that the failure by company directors to send notice of the deemed consent procedure for the nomination of joint liquidators in a creditors voluntary liquidation (CVL), did not invalidate the appointment of the liquidators. The creditor's argument that the liquidators should be removed for other reasons was also rejected. The decision that the appointment will not be invalid if notice of the nomination procedure is not sent to all creditors of the company will be welcomed by liquidators because it is often impossible to identify all creditors of a company if the books and records of the company are not up to date or if a creditor is not known to exist.

Ceda Limited, Decka Limited and Melad Limited were in CVL. Purported creditor Cash Generator Limited challenged the appointment of the joint liquidators to the companies. It said that the nomination process to appoint the liquidators was invalid as it had not been sent notice of the deemed consent procedure for this process.

Cash Generators also claimed that the liquidators should be removed and others appointed in their place as a result of alleged actions and omissions by the liquidators following their appointment.

The judge had to consider whether the appointment of the liquidators to the companies was invalid and whether the liquidators should be removed so that their conduct post-appointment could be investigated.

In considering the first issue, the judge acknowledged that s100 of the Insolvency Act 1986 (IA86) contains mandatory wording that requires directors to seek the nomination of a liquidator from a company's creditors. Rule 6.14 of the Insolvency (England and Wales) Rules 2016 (IR16) says that notice of the deemed consent procedure to nominate the liquidator must be given. The consequence of failure to comply with the process is that a director is guilty of an offence and can be fined. Neither IA86 nor IR16 specify whether an appointment will be invalid if not all creditors are notified of the nomination process.

The judge considered whether the UK parliament intended for non-compliance to result in the liquidators' nomination by the creditors being invalid. The judge concluded that parliament must have known that in many CVLs there is a possibility that not all creditors will receive notice of the proposed CVL given that, amongst other reasons, the company's books and records may not always be accurate.

On this basis parliament must have intended that any nomination would be valid but that the liquidators might be subsequently removed or replaced. The judge said; "in my judgment the imperative is used to ensure compliance by the director but not to produce the result of an invalid appointment in the event of breach".

On the second issue Cash Generator claimed that as a result of certain transactions before and after the liquidators' appointment the liquidators should be removed and new liquidators appointed in their place. It said that the liquidators should not have agreed to a sale completing post-appointment and was concerned that the liquidators had a conflict of interest and would not investigate the conduct of the companies appropriately.

The judge said that there was no basis for the removal of the liquidators as there was nothing to suggest that the appropriate investigations would not be carried out. The judge also had no concerns with the sale given the evidence presented to the court by the liquidators and the fact that the majority creditor, HMRC, did not support the removal, was an important factor in this decision.

The decision will be welcomed by liquidators given that they are reliant upon the directors to appoint them. It avoids the risk, outlined in the ruling, that "many, if not the majority, of appointments within creditors’ voluntary liquidations will be open to uncertainty and the risk of litigation".

The ruling said that the introduction of the deemed consent procedure was for the purposes of promoting creditor involvement as opposed to ensuring maximum number participation from creditors.

The judge expressed his concern with the IR16 stating that the Rules he had to refer to "are numerous, to be found in a variety of different places and feature so many requirements that they may be difficult to apply in practice". These comments are particularly interesting given that one of the aims of the new IR16 was to consolidate the Rules and make them more user-friendly.

Emily Turnock is a restructuring specialist at Pinsent Masons, the law firm behind Out-Law.com