I want to wind you up

Omar Ensaff

So there you are, you are acting for a creditor of a company and you are all set (and you may have already presented a winding up petition) to compulsory wind up that errant debtor company.?

Then, lo and behold, the directors of the company put the company into a creditors’ voluntary liquidation (“CVL”) with their chosen insolvency practitioner being the voluntary liquidator.?

Understandably, the creditor client is not happy – I mean would you, as a creditor, be happy with a voluntary liquidator (chosen by the directors) being the person who is responsible for carrying out investigations into the very people who had appointed the voluntary liquidator in the first place; especially if there are suspicions that the directors have been taking part in some financial shenanigans in respect of the company. The voluntary liquidator may well be perfectly competent and a person of utmost integrity…but still, your client is uneasy about it all.

I recently dealt with a case involving this very scenario. The basic facts were these: My client was the creditor. A winding up petition was presented. The company intended to oppose the petition on the basis that the debt was purportedly disputed. At the first return date of the petition, the court gave directions for further witness statements with the substantive matter to be heard at a later date, at a half day hearing. Then, shortly after service of all the witness statements, the company was placed into a CVL. It turned out that the appointed voluntary liquidator was also the voluntary liquidator of 18 other connected companies.?The voluntary liquidator then invited my client, the creditor, to withdraw its petition and further stated that he was considering opposing the petition. So what happens in such a situation?

The first issue is this: Can you even seek to compulsorily wind up a company that is already in a CVL? The answer is straightforward. Simply because a company has been placed in a CVL that does not mean that the company cannot be compulsorily wound up. That is clear from section 116 of the Insolvency Act 1986 which states:

The voluntary winding up of a company does not bar the right of any creditor or contributory to have it wound up by the court; but in the case of an application by a contributory the court must be satisfied that the rights of the contributories will be prejudiced by a voluntary winding up?

Accordingly, even if the company is in a CVL, a creditor can still seek to compulsorily wind up the company. So, even if it is in a CVL, then, a creditor can still present a winding up petition; or, if one was presented prior to the company entering a CVL, it will still progress. However, the court still has a discretion (assuming the petitioner is actually a creditor) as to whether it will compulsorily wind up the company (on which see further below).

The second issue is this: What approach should a voluntary liquidator take when faced with a creditor that has presented a winding up petition against the company that is in a CVL? Firstly, the voluntary liquidator should adopt a neutral approach. The voluntary liquidator should not press one view or the other as to whether the compulsory winding up order should be made. Secondly, the voluntary liquidator should probably provide evidence to the court (and appear by counsel) as to the present position so as to assist the court – but, again, the voluntary liquidator should not press one view or another as to whether the compulsory winding up order should be made (see, for example, the observations in Re Medisco Equipment Ltd (1983) BCC 98,944 and Re Roselmar Properties Ltd (1986) 2 BCC 99,157).??

The third issue is this: How will the court exercise its discretion as to whether to compulsorily wind up a company that is already in a CVL? This is very fact specific, but, as an example, a neat summary of the principles can be found in the High Court case of Re Zirceram Ltd [2000] BCC 1,048. In summary, the main principles are:

(1) The starting point is that court has a discretion, even if a company is in a CVL, to order a compulsory winding up on a creditor’s petition;

(2) If the majority (in value) of the creditors wish the voluntary liquidation to continue, then the petitioning creditor will normally have to show some good reason for there to be a compulsory liquidation;

(3) The principal reason for giving weight to the views of the majority of creditors, who wish the CVL to continue, is that they have the largest stake in the assets of the company. However, their motives (especially if they are connected with the company) for resisting compulsory liquidation may be questionable if the company has no assets or there is no realistic prospect of recovery for unsecured creditors;

(4) However, the exercise of discretion should not leave substantial independent creditors with a strong legitimate sense of grievance. Fairness and commercial morality may require that an independent creditor should be able to insist on the company’s affairs being scrutinised by the process which follows a compulsory order;

(5) A compulsory liquidation may be ordered so that there is an investigation which is not only independent, but seen to be independent. Even if there is no criticism of the voluntary liquidator (i) the fact that associated supported creditors have gone to great lengths to install, and maintain, him in office, may disqualify him in the eyes of the creditors; and (ii) the petitioning creditor may view with cynicism any investigation undertaken by a liquidator chosen by the very people whose conduct is under investigation;

(6) A voluntary liquidator must not be seen as taking sides. Even if there is no attack on the probity or competence of the voluntary liquidator, it may still be right to order a compulsory winding up to protect the interests of the creditors by a full investigation into the affairs of the company by a fully independent liquidator appointed in a compulsory winding up.

Accordingly, in my case, the court ordered a compulsory winding up order. The following were relevant factors which militated against the company continuing to be in a CVL:

(1) The petitioning creditor was the majority in value, and it did not want the voluntary liquidation to continue, but wanted a compulsory order made;

(2) The petitioning creditor would have had a legitimate sense of grievance if the compulsory order were not made and the voluntary liquidation continued, given:

a. The company’s statement of affairs showed no assets. Accordingly, any potential recovery for creditors would arise from investigations by a liquidator into the conduct of the directors (e.g. transactions at an undervalue, preferences etc.). Those investigations should be undertaken by someone seen as being independent, and not by the voluntary liquidator appointed by the very people who may be subject to investigation (i.e. the directors);

b. The voluntary liquidator was also the voluntary liquidator of 18 other companies connected with the debtor company. Again, the voluntary liquidator may not be seen as being independent as a result;

c. The voluntary liquidator had not, strictly speaking, taken a neutral position in respect of the petition as he had indicated that he may oppose the petition and had invited the creditor to withdraw the petition. Again, the voluntary liquidator may not be seen as being independent as a result.

Checklist

The following is a checklist of the main issues to look at, and consider, when a creditor is seeking to compulsorily wind up a company already in a CVL:

(1) What is the position of the creditors? Do the majority in value want the CVL to continue? If they do, then that would lean against a compulsory order being made;?

(2) However, are the creditors (who want the CVL to continue) somehow connected to the company? If they are, then the weight that is attached to their view, that the CVL should continue, will be impacted upon;

(3) What does the company’s statement of affairs show? If it shows limited assets, then that would lean in favour of granting a compulsory order (as any potential recovery for creditors depends on investigations into the affairs of the company – which, in turn, should be undertaken by someone who is seen as being independent);

(4) Has the voluntary liquidator been appointed in circumstances that show that the person is not independent or could be seen as not being independent – if there are such circumstances, then this would lean in favour of making the compulsory order;

(5) Has the voluntary liquidator stated, or done, anything that shows that the person is not independent or could be seen as not being independent – if that is the case, then this would lean in favour of making the compulsory order;?

(6) Even if the majority of creditors want the voluntary liquidation to continue (and even if no criticism can be levelled at the voluntary liquidator), what good reason can the petitioning creditor point to for there to be a compulsory liquidation? A legitimate sense of grievance (in particular taking into account points (3) to (5) immediately above) can amount, depending on the circumstances, to a good reason;?

(7) How far advanced into the process of liquidation is the voluntary liquidation? If it is earlier with much to do, then this would lean in favour of a compulsory order. If it is later, with not much left for any liquidator to do, then this would lean against making a compulsory order;

(8) Did the company enter CVL before, or after, the presentation of the creditor’s winding up petition? If before, then this would lean against making a compulsory order. If after, then this would lean in favour of making a compulsory order.?

It is all very fact specific given that it is an exercise of the court’s discretion. However, the “take away” point is that not all is lost for a creditor that wants to compulsorily wind up a company that is already in a CVL and to seek to have a new liquidator appointed in place of the voluntary liquidator.

Omar Ensaff