Licensing And Restrictions on Shareholder Liquidations

The regulation of insolvency practitioners has been welcomed by most, if not all, reputable insolvency practitioners and most of the matters covered in the Insolvency Practitioners Regulation Act 2019 relate directly to the practitioners.

The Insolvency Practitioners Regulation (Amendments) Act 2019 made amendments to various related legislation, including the Companies Act 1993 (“the Act”).

In this article we look at one particular amendment to the Act, which came into force on 1 September 2020 and has a direct impact on the ability of company shareholders to appoint a liquidator in specific circumstances.

Old Position:

Generally speaking, there are two sets of circumstances in which the shareholders appoint liquidators of an insolvent company –

• The company is insolvent, and the shareholders appoint a liquidator to wind the company up; or
• The company is insolvent, and a creditor makes an application to the High Court to wind the company up and appoint the creditor’s choice of liquidator. Within 10 working days of being served with the winding up proceedings, the shareholders can appoint the liquidator of their choice pursuant to Section 241AA of the Act.

The ability of the shareholders to appoint a liquidator of their choice has sometimes resulted in allegations of “friendly liquidators” being appointed to the detriment of creditors.

The New Position:

From 1 September 2020, the amendment to section 241AA took effect. In cases where a creditor has filed an application with the High Court for the company to be liquidated and has served a copy of those proceedings on the company, the shareholders will only be able to appoint their choice of liquidator with the approval of the applicant creditor.

Conclusion:

While it could be argued that the regulation and licensing of insolvency practitioners should mean that there is no difference, in terms of the approach taken to the liquidation, between the liquidators chosen by the applicant creditor and those chosen by the shareholders, we think this amendment is a good one.

The amendment reinforces the need for directors and shareholders to take action early if their company is failing to meet its obligations to creditors.

If you would like to discuss the solvency of your company and the options that are available to you please contact one of the team at McDonald Vague.

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