Insolvency procedures winding up part 3 Getting in a Centrebind

There was a case called Centrebind in which the Court considered the court considered what happened when a liquidator was appointed before the first creditors meeting in the creditors' voluntary winding up. In Centrebind a liquidator was appointed before the creditors meeting and he immediately took proceedings to try and stop the Inland Revenue "levying distress" (effectively seizing property of the company in respect of unpaid tax). The Inland Revenue challenged whether the proceedings were valid on the basis that the liquidator was appointed by the members not creditors. The court held that the appointment was valid as the appointed liquidator was the liquidator unless and until the creditors meeting took place and possibly appointed another liquidator in his place.

This might seem somewhat technical and irrelevant but in practical terms the procedure caused problems. If the liquidator was appointed by the shareholders he would then be in charge of the assets of the company. He could then sell them. In general terms the shareholders were unlikely to appoint a liquidator who they felt was adverse to them. They would obviously have an incentive to appoint a liquidator who they thought would look after their interests. Unfortunately a common occurrence was for the liquidator to immediately sell anything in the company that was valuable. For an immediate sale it would often be a knockdown price, and the usual buyers were either perform at directors or shareholders or persons close to them were acting on their behalf. Essentially therefore they would get for virtue nothing everything that was of any value in the company, and the creditors would be left to whistle for their money. Needless to say this was not exactly a desirable state of affairs.

However balanced against that consideration is the fact that sometimes urgent steps do need to be taken. If the liquidator does not act promptly, or is not appointed promptly, then the company could sustain loss. The idea is that the liquidator will take those steps which are necessary to protect the company's creditors, not ones however which have the effect of prejudicing them.

Since the Insolvency Act 1986 (section 388) all liquidators (and administrators or administrative receivers, other persons with insolvency rules which will be dealt with later in this insolvency series, or trustees in bankruptcy control the estate of bankrupt persons) have to be qualified insolvency practitioners. Therefore one would expect them to behave properly and if they do not they can lose that status. Essentially there are two routes to being a qualified insolvency practitioner. One is by being a member of a recognized professional body (section 391) and satisfying certain other requirements. These recognized professional bodies are bodies such as the Institute of Chartered Accountants, the Chartered Association of Certified Accountants, the Insolvency Practitioners Association and the Law Society. Each professional body will have rules in order to determine whether someone is a fit and proper person and amongst the things that can be done is to revoke the ability to act as an insolvency practitioner. Alternatively it is possible to act by being given a specific authorisation under sections 392 and 393. Again the person would need to show that they are fit and proper person and satisfy certain demands of practical training and experience. (These requirements include passing the Joint Insolvency Examination or suitable foreign equivalent). Likewise the authorisation can be withdrawn.

Next week we will look at what specific provisions there are to deal with the "Centrebind" problem in terms of the liquidator exercising powers urgently before the creditors meeting is called.