McDonald Vague The Insolvency & Business Recovery Specialists

'Friendly Liquidators' - A Further Discussion

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A recent article discussed how companies on the verge of going bust are settling with trade and other creditors, then voluntarily winding up their businesses leaving the Inland Revenue Department out on a limb. This happens all too often. Also, there are as the title suggests too many "friendly liquidators".

Various solutions were offered. My view is that those solutions are not the only solutions.

Registration of Insolvency Practitioners
The one thing upon which many professionals agree is the need for the registration of insolvency professionals. As it stands, at the present time a liquidator needs no academic qualifications, no training and no experience. The only requirement is that the liquidator must not be less than 18 years old, must not be a creditor, must not be a director, must not be a bankrupt, and must not be committed under the Mental Health Act. No positive attributes whatsoever are required.

On the other hand, registration could demand the following:

•Membership of the Institute of Chartered Accountants of New Zealand or the New Zealand Law Society. Both of these bodies have a code of ethics under which professional independence is mandatory. Both bodies have a robust disciplinary system under which the acts of the members can be examined.
•The Institute of Chartered Accountants has a system under which the files of Insolvency Practioners are examined. Members of the Law Society would need to make arrangements for examination of their insolvency files.
•Registered practitioners would need to demonstrate they had appropriate
•experience and would need to show they had attended courses each year to enable them to keep up-to-date.
•They would have to show each year they had adequate Professional Indemnity Insurance.
•They would have to show they were respected by their peers as suitable persons to be registered.
Law changes required
To give creditors a say in the conduct of a liquidation the creditors need information. The principal duty of any liquidator is to take possession of, realise, and distribute the assets of the company to its creditors in accordance with the act. Another duty is to prepare and send to every creditor a report containing a statement of the company's affairs and proposals for conducting the liquidation. Progress reports are made every six months.

In theory this is fine. In practice there is one enormous loophole that enables the friendly liquidator and the cowboy liquidator to thrive and thumb their noses at the creditors.

None of the reporting including the statement of affairs needs to be done if the liquidator files a notice stating that he or she is satisfied that the value of assets available for distribution to unsecured creditors is not likely to exceed 20 cents in every dollar owed to such creditors. In practice, in order to properly hold that belief, a statement of affairs has to be prepared. Once prepared then it is not a large step to at least file at the company's office a first report and statement of affairs. Likewise progress in liquidations has to be reviewed and monitored by liquidators. Consequently, it is very little trouble to send six monthly reports to the company's office.

In practice the cowboy prepares neither a first report nor six monthly reports. The only report is a final report. Unfortunately once this has been filed, the liquidation is completed and the cowboy liquidator and his horse have disappeared into the sunset.

I believe that with the role of liquidation comes certain responsibilities. The section dealing with no reporting should be repeated and all liquidators should file a first report and six monthly reports. Without such reports there is no accountability to the creditors.

Friendly liquidators - who appoints them?
The original article suggested that it would be prudent to introduce legislation banning shareholders from appointing their own liquidator once a liquidation petition is before the Court.

The reasoning is that the shareholders would, at that stage, no longer have the opportunity to appoint a friendly liquidator. The idea has some merit but on the whole we do not agree with it. In the first place, the liquidator appointed by the shareholder might be a totally independent frontline liquidator. In the second place, the shareholders may have nothing to hide.

In practice, the shareholder of the failed company is often under immense stress. An immediate appointment is better than waiting six to eight weeks for a court hearing. The immediate appointment also places someone in charge who can seize the assets for the benefit of creditors. There is a real danger that in the six to eight week period assets will dissipate and creditors will do a raid on the company and take away assets to which they are not entitled.

If there is to be a change then it could be on the basis that if the shareholders appoint a liquidator in the five working day period prior to the application to the court, then that liquidator should be present in the court to answer any questions the judge might have.

Another law change? Meeting of creditors to change the liquidator

It is very difficult to change a liquidator for the simple reason that shareholders, in respect of the current account, and related parties have a vote on the same basis as unsecured creditors. This can lead to obvious unfairness.

•The shareholders are able to contact friendly creditors;
•The creditor wanting to change liquidators does not even have a list of creditors;
•In many cases the money owed to the shareholders has been inflated;
•In some cases the amount owed to shareholders could be regarded as part of their share capital.
It is arguable that the law should be changed so that at a creditors' meeting shareholders/directors do not get a vote in respect of any money the company might owe them.

The assumption that a court appointed liquidator would be independent
By friendly liquidator we mean a liquidator who is on the side of the directors rather than on the side of the shareholders. The assumption seems to be that shareholder appointments are bad, and court appointments are good. The argument is clearly fallacious. The front-row liquidators all do an excellent job regardless of whether they are appointed by either the shareholders or the court. The incompetent liquidators remain incompetent whether they are appointed by the shareholders or the court. What matters most is who is appointed rather than how they are appointed.

For example, in a recent case a creditor had a disputed debt. The liquidator was friendly to the creditor and was not in a position to independently examine the creditor's claim. Obviously, neither was the liquidator in a position to independently examine the issue of voidable preferences which had been received by the creditor. The point here is that this was a Court appointed liquidator. It underscores the point that Court appointed liquidators are nominated by the applicant creditor and on that basis they also are not always truly independent and impartial.

Conclusions
Friendly liquidators are a fact of life. Law changes to combat them are required urgently. Meantime, it remains a fact that regardless of how they are appointed, the front-line liquidators will demand of themselves and their staff a standard of excellence and independence on all appointments.

DISCLAIMER
This article is intended to provide general information and should not be construed as advice of any kind. Parties who require clarification on issues raised in this article should take their own advice.