Insolvency procedures: What Directors must and must not do. Part 3

We saw last week that a liquidator can cause a company to pursue its rights as well as having specific rights within the liquidation that he can pursue. Section 212 of the Insolvency Act 1986 (the Act referred to in this series of articles save where the contrary is specified) gives a specific procedure which is very useful to the liquidator in this regard (although not limited to the liquidator). This is a section which is purely procedural in a sense that it does not create any duty upon the director or person managing the company or any right for the company which did not otherwise exist. What it does is provide that the liquidator can use the procedure set out by the section without having to cause the company to bring an ordinary action. However it does not stop the liquidator proceeding in that way if that is the preferred fashion. In other words section 212 provides an additional procedure by which a remedy can be sought in respect of wrongful acts.

The people who can be pursued under section 212 are not just directors. Anyone who has acted as an officer of the company is included, as is anyone who has been concerned or taken part in the promotion formation or management of the company. This is obviously very wide. The definition of officer will include an auditor of the company. They can be pursued if it appears that any such person has "misapplied or retained, or become accountable for, any money or other property of the company, or been guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company.". Obviously they will only actually be held liable if in fact the court decides that they have committed the wrongful act.

Directors and sometimes very senior employees are amongst the category of persons known as "fiduciaries" who thus owe fiduciary duties. The extent of such duties will be dealt with in later articles about the duties of directors, but for present purposes these are duties like those of trustees to put the interests of the beneficiary above their own interests. In other words in lots of respects the director is supposed to pay first attention to the interests of the company rather than his own personal interests. "Misfeasance" is not a specific penalty or obligation, but covers any breach of duty or wrongful act. It is plain from the express words that breaches of any duty can be pursued under the section.

The liquidator is one of the people who can implement the section 212 procedure. Another is the official receiver. The official receiver is a person who acts pursuant to section 399-401. Official receivers can act in relation to bankruptcy (insolvency of individuals) winding up or individual voluntary arrangements (these are arrangements whereby someone enters into an arrangement with their creditors in order to avoid bankruptcy: where that person is a company these company voluntary arrangements). Official receivers are appointed by the Secretary of State and paid a salary. Although they are usually former civil servants, they are no longer a government or civil servants once becoming appointed to this role. On a compulsory winding up the official receiver usually becomes the liquidator at first, although if the winding up order replaces an administration order the court may appoint the administrator and where it replaces a company voluntary arrangement the court may appoint a supervisor as liquidator. The official receiver will then normally convene meetings for the creditors who will decide upon which liquidator to appoint, unless the official receiver thinks the value of the assets is not high enough for a private insolvency practitioner to be appointed.