Insolvency procedures: winding up part 4

Last week we looked at the case of Centrebind and some of the unfortunate consequences which could follow from liquidators being appointed who sold assets to the former directors or shareholders of the company in liquidation (or companies controlled by them or associates of theirs) cheaply and to the prejudice of creditors. One safeguard against improper conduct is the licensing of insolvency practitioners (giving them a vested interest in behaving properly for fear of the risk of losing the ability to act as insolvency practitioners). Another safeguard arises from specific provisions in the Insolvency Act section 166.

Section 165 (which cross refers to other parts and in particular a number of powers specified in part 1 of Schedule 4 to the Act) set out what powers a liquidator has and the circumstances in which those powers can be exercised. What section 166 does is restrict the circumstances in which those powers can be exercised. It does this by saying in general terms that the liquidator cannot exercise the powers before the creditors meeting is held except with the sanction of the court. Therefore for the liquidator to be able to do the things which his powers would otherwise allow him to do, he would need to go to court and get the leave of the court in order to be permitted to exercise those powers. This means that in general, before the creditors meeting takes place, the liquidator cannot prejudice the position of the creditors. The liquidator has powers under section 112 to refer various questions to the court.

However there are some powers which the liquidator is entitled to exercise without going to court or awaiting the creditors meeting. These are powers to take possession or control of property which the company is entitled to (or which it seems to be entitled to), to dispose of perishable goods (no point in waiting for a creditors meeting before disposing of a consignment of fresh fruit which would have rotted) or other goods with value likely to diminish if not immediately disposed of (market conditions may mean that the likelihood is if you do not get rid of particular goods straight away you will suffer a loss), and to do all such other things as may be necessary to protect the company's assets. (Someone might be challenging or threatening to take the company's property and proceedings or other steps may be needed to stop them).

When the creditors meeting takes place at the liquidator is to attend and report to the meeting on any exercise of his or her powers. Thus the creditors will get an opportunity to find out why the liquidator thought it necessary to do something. As well as the importance of the liquidator behaving properly in order to retain his status as a licensed insolvency practitioner, the knowledge that his powers are restricted and that he will have to explain any use of those restricted powers would tend to enforce good behaviour.

There is a similar provision to deal with the position of directors, namely section 114. This restricts any exercise of directors' powers after resolution for winding up and before appointment of a liquidator. All they can do (without court sanction) is dispose of perishable goods or goods whose value is likely to diminish, and do other things necessary for the protection of the company's assets.