Four things for directors to keep in mind when considering appointing liquidators02Feb2021
Handing over control of a company to strangers is a tough decision, but is one that is ever-present for a director facing the prospect of insolvency. Ian De Witt and Troy Greig point to some high-level issues that any sensible director facing this scenario should bear in mind.
1. Letting go, but staying involved
A director’s right to exercise any powers in relation to the company ends immediately upon the appointment of liquidators. From then onwards, the liquidators alone manage the company’s affairs with the goal of identifying, preserving and realising its assets for distribution to creditors. Liquidators place creditors’ interests above all else and will not act upon instructions from a director.
But this does not mean that a director can then simply walk away.
Rather, a director is obliged to assist the liquidators in carrying out their duties. For example, a director must tell the liquidators about all of the company’s known assets and liabilities. Liquidators have extensive and coercive powers of examination should a director fail to provide information when asked to do so.
It is a serious criminal offence for a director to in any way interfere or obstruct the liquidators from carrying out their functions. This includes falsifying, withholding or destroying books and records, hiding assets or providing false or misleading information.
2. How to choose between a shareholder or creditor driven liquidation
Is the company solvent now and for the next 12 months? Broadly speaking a company is solvent when it can pay its debts when due and payable.
If solvent, the shareholders may resolve to place the company into liquidation.
If insolvent, only a creditor driven process is possible.
Each process follows its own unique procedure which impacts the likely timeframe for completion, the type and number of meetings to be held with interested parties and the fees and expenses of the liquidators.
For example, the shareholder process (or members’ voluntary liquidation) is typically completed in about 12 months.
Whereas the creditor process (or creditors’ voluntary liquidation) can take several years to come to an end and is comparatively more expensive (largely due to the additional administrative duties placed on the liquidators and the likelihood of multiple creditor meetings).
There is a “third” or director driven voluntary liquidation process. This process may only be used if the directors (or majority if more than 2 directors) form the opinion that the company cannot continue because of its liabilities and it is not practicable to use another process to wind up the company and meetings of shareholders and creditors will be held within a certain period.
This “third” process is rarely used and serious penalties exist to punish those who abuse or misuse it.
3. A director must attend the creditors meeting (and where to hold it)
At least one director should preside at the creditors’ meeting, it is an offence if the director’s default is made without reasonable excuse.
However, the directors may not be able to attend for good reasons, especially during the COVID-19 pandemic where various social restrictions are imposed.
If a director is unable to attend and chair the meeting, any attendees of the meeting can be elected to act as chairman. The failure of the director to attend and chair the meeting will not invalidate the resolutions passed and may be excused if there is a good reason for not attending (e.g. incarceration / severe illness). The reasonableness of the absence will be determined by a court on a case-by-case basis.
The creditors meeting should take place in the most convenient place for the majority of creditors or shareholders.
Given the migration to web-based meetings (now accelerated because of COVID-19) it is more likely than not that creditors meetings can now be conducted almost entirely remotely, with a modest physical location being provided for the few who insist on attending in-person or have no means to attend remotely.
This is a natural evolution as attendance at scheme of arrangement meetings by telephone or other technological means has been commonplace for some time.
4. Director loan – priority of repayment
Generally the assets of the company are applied in the following order of priority: (1) liquidators’ costs and expenses; (2) claims secured by a fixed charge; (3) claims by preferential creditors; (4) claims secured by a floating charge; (5) unsecured creditors; and any residual to (6) shareholders.
A debt is not deferred in priority to other creditor claims merely because it arises from a loan to the company from a director.
However, a director loan is subject to an extended period of time during which the transaction (including the validity of any security by way of fixed or floating charge) can be challenged.
For example, if a floating charge was entered into within 2 years prior to the company being placed into liquidation its validity may be challenged if the company is insolvent or becomes so as a result of granting the charge. Other possible challenges to the validity of security (either fixed or floating) include on the basis it is an unfair preference or a transaction at an undervalue.
The above assumes that the charge was registered in accordance with the Companies Ordinance Cap. 622 and the transaction is not impugned by dishonesty or fraud.
Ian De Witt and Troy Greig
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Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.