From time to time we are approached by persons or companies pursued by liquidators of other insolvency firms. We are also asked to provide guidance or opinions on how a liquidator should act, what is reasonable and how to respond to demands/requests.
Insolvency specialists take different approaches and some Insolvency Practitioners ("IP") do not always act in the best interests of the company creditors. There have been several reported instances in recent years.
At McDonald Vague our objective is to maximise the return for creditors. We do not always achieve a return for unsecured creditors but have a good reputation for taking a firm and fair approach and getting returns. Cost/benefit is always a consideration.
This blog post discusses the skills and competence required of an IP, the differing approaches of liquidators, reasons why applicant creditors or shareholders should appoint an accredited IP, or a member of CAANZ or NZLSA and what should be considered in taking an action.
Competent liquidator and principal duty
A reasonable and competent liquidator should take into account the amount owed to creditors, the prospects of recovery and consider the cost versus benefit of advancing claims and legal actions. It is a liquidator's obligation to maximise the return to creditors and to act in a reasonable and efficient manner.
Underlying principles to regard
Every liquidation is different but the underlying principals are the same. In all liquidations, the liquidators should have regard to:
- Duties imposed on liquidators by the Companies Act 1993;
- Schedule 6 of the Companies Act 1993;
- Companies Act 1993 Liquidation Regulations 1994;
- Insolvency Engagement Standards issued by NZICA;
- Court decisions (eg. Peace and Glory Society (in liq) v Samsa  2 NZLR 57);
- The value of the assets available to be realised (if possible);
- The probable claims and creditors to pay from asset realisations.
Benefits of governing bodies and regulation
Liquidators who are members of the CAANZ or the New Zealand Law Society have a governing body they need to report to. The Insolvency Engagement Standards ("IES") issued by the Board of the CAANZ apply to a firm's conduct on any insolvency engagement. IES provides the required standards of a CAANZ insolvency professional.
These standards should be required of all liquidators. IES is not binding on non-Institute members. A member of the Institute acting as a liquidator is required to comply with Rule 10 of the Code of Ethics 2003 which relates to timeliness and to the Insolvency Engagement Standards SES-1 and paragraph 22 of IES. The New Zealand Law Society have their own high standards for conduct. Many IP's are now CAANZ accredited insolvency practitioners.
Key standards for CAANZ members
Key standards include:
- An Insolvency Practitioner has a duty to apply the degrees of specialised skill, knowledge, judgment and competence required to perform a job in a timely manner. A liquidator has a professional responsibility to carefully plan the liquidation and perform in an efficient and effective manner and assure quality of work performed.
- A liquidator is required to ensure that all personnel engaged in insolvency work adhere to the principles of objectivity and integrity.
Companies Act 1993 - obligations and duties
Section 253 - Principal duty of liquidator
Subject to Section 254 of this Act, the principal duty of a liquidator of a company is -
- To take possession of, protect, realise and distribute the assets, or the proceeds of the realisation of the assets, of the company to its creditors in accordance with this Act; and
- If there are surplus assets remaining, to distribute them, or the proceeds of the realisation of the surplus assets, in accordance with Section 313(4) of this Act - in a reasonable and efficient manner.
In undertaking an investigation, a liquidator must bear in mind a duty to act in a reasonable and efficient manner.
Liquidators have different approaches to recovery actions often driven by creditor attitude/requirements. Some liquidators will be compelled to bankrupt directors. In the absence of other recoveries, the net costs of these actions should be borne by the liquidators or a particular creditor if that creditor has agreed to fund the cost.
A liquidator also has a duty to have regard to the views of creditors and shareholders under Section 258 of the Companies Act 1993.
Considerations for liquidators when taking actions
These are always judgment calls and a balancing of the various interests.
A liquidator should consider the financial position, the likely prospects of recovery, and public interest (if pursuing bankruptcy) and the costs in advancing an investigation and legal action.
A liquidator should consider the likely return to creditors against the costs, and if spending money that could or should otherwise be distributed to creditors the likely increased return for creditors by advancing the action.
Along with the economic factors above, there is also sometimes a feeling that other enforcement action is required, such as bankruptcy, which affects all of the creditors of the individual who owes money. A bankruptcy option should recognise that this will stop any chance of future recoveries being made.
A liquidator should therefore question whether it is reasonable to issue proceedings against an individual when there is a good prospect of bankruptcy but no likelihood of a return from bankruptcy, particularly where there are competing claims likely in the bankruptcy estate, and where the party is clearly insolvent, or where another creditor could, with minimal cost, advance bankruptcy proceedings.
Certain actions require funding. Creditors can be approached and litigation funders are an option.
Estimating costs when litigation is involved is a difficult exercise as some legal costs are reactive to positions taken by the defendants. Settlement can avoid legal costs associated with discovery, interlocutory matters and trial preparation.
While we recognise that insolvent individuals and companies are a risk to their creditors there are recovery avenues available for the insolvent. They are referred to in our articles on our website, but include:
- Part 5 subpart 2 proposals;
- No asset procedure;
- Summary instalment orders;
The McDonald Vague approach to debt collection and legal action
Our approach in collecting debts is some money is better than none.
To that end, our aim is to:
- Assess the likely ability to collect;
- Set a game plan and budget;
- Write claiming as quickly as possible;
- React/report any dispute;
- Consider legal action if the benefit has more than reasonable prospects of exceeding the costs of pursuit and will more than likely provide a return to creditors;
- If appropriate, appoint a professional debt collection agent; and
- Consider settlement and repayment options.
We do not typically bankrupt individuals for overdrawn current accounts, particularly when they can show in sworn statements of position that there would be no benefit to creditors in doing so. Each case is considered on its merits and we often agree to repayment plans.
For those directors/shareholders who have acted with a clear intent to defraud creditors, we take the appropriate action. In any action, a liquidator needs to consider the cost and benefit and the public interest and risk.