If a creditor has served liquidation proceedings on your company, you may want to consider placing the company into liquidation before the matter is brought before the court and the court appoints a liquidator chosen by that creditor. In doing this, the company’s shareholders have the chance to appoint a liquidator (usually referred to as a voluntary liquidation) who could act more favourably towards them as opposed to the creditors throughout the course of the liquidation. Section 241AA of the Companies Act 1993 (“the CA”) forces companies to act quickly when considering this option. Creditors can bypass and replace the shareholder appointed liquidator with one who would act more favourably towards their interests. However, they too must act quickly.
Purpose of section 241AA
Under section 241AA of the CA, a company has 10 working days to appoint its own liquidator from the date when it was served with liquidation proceedings from a creditor. The 10 working-day provision in section 241AA(2)(a) pushes companies to take quick action to move into voluntary liquidation if appropriate. It also prevents a company from deferring voluntary liquidation until shortly before the court is due to consider the liquidation application, which can lead to excessive costs for the creditor.
In 2020, section 241AA(2) was amended and section 241AA(2)(b) was introduced to allow for the company shareholders to appoint a liquidator after the 10working day limit if the creditor that brought the liquidation proceedings consents to the appointment. This also assists in avoiding any unnecessary costs as the creditor may agree with the appointment of the liquidator suggested by the company shareholders.
The shareholder appointed liquidator
A company can place itself into liquidation by the passing of a special resolution of its shareholders (granted it is within 10 working days of being served liquidation proceedings from a creditor). Passing a special resolution requires 75% of all shareholders that are entitled to vote on the matter to then vote in favour of the resolution. A shareholder resolution is not required to be passed if the consent of the petitioning creditor to the appointment has been given.
If the shareholders appoint a liquidator, there is a perception that the liquidator is more likely to act in the interests of the shareholders as opposed to one appointed by the creditor. Although this is not true to every situation, it is still a strong trend in insolvency.
For example, a liquidator will have a contact network of lawyers and accountants. If a lawyer has a client that intends to place their company into liquidation, they will recommend a liquidator that would tend to act in the interests of shareholders. This would be a liquidator who is less likely to pursue areas such as an overdrawn current account or breach of director’s duties.
In many cases the shareholder appointed liquidator will typically remain appointed. Creditors do have an opportunity to replace them, however.
The creditor appointed liquidator
Creditors must act quickly to replace a liquidator if they are concerned by one appointed by the shareholders. In this circumstance, the most cost-effective way to achieve this is by passing a resolution to replace the liquidator at an initial creditors’ meeting.
The process to calling a creditors’ meeting is as follows:
- The liquidator must give notice of the creditors’ meeting to every known creditor (see section 243 of the CA).
- If the liquidator has decided not to call a meeting, they must give notice to the creditors advising that no meeting will be held and provide reasons for this (see section 245 of the CA).
- If a creditor wishes for a creditors’ meeting to be held, the creditor must notify the liquidator in writing within 10 working days of the liquidators’ notice to dispense with a creditors’ meeting (also under section 245 of the CA).
The timeframes to call a creditors’ meeting are critical. If a creditor fails to notify within the statutory timeframes, the opportunity to attempt to replace the liquidator is lost.
A resolution to replace the liquidator may be put forward by a creditor at the creditors’ meeting and, if passed, the proposed liquidator will become the new liquidator of the company. The majority in number and value of the creditors voting must vote in favour of the resolution for it to succeed.
In many cases the creditors will be unsuccessful in replacing liquidators who have been appointed by the shareholders. The number of steps in the replacement process and the amount of lobbying of fellow creditors to vote in favour of the resolution to replace the liquidator can sometimes be too tall of a task.
Conclusion
If the perception of the favourable liquidator is legitimate, we suggest following our recommendations above to appoint a liquidator who will act more favourably toward your interests. As a word of caution, please note that although these perceptions exist, sometimes it can merely be a perception.
Whether it be creditors or shareholders that we act for, we encourage our clients to investigate a liquidator and their history to see if they are likely to act in the best interests of our clients. A liquidator’s reputation can be investigated either by publicly searching through judicial decisions or discussing with one of our insolvency experts.
If you require our legal assistance, please contact us for a no obligation discussion.
Brent is the Director of Norling Law. He has a wealth of experience in the District Court, High Court, Court of Appeal and Supreme Court. Brent is passionate about negotiating favourable outcomes for his clients and able to implement this in his daily negotiations.
Alice is a senior solicitor at Norling Law . Alice has regularly appeared before the Tenancy Tribunal, District Court and High Court of New Zealand.
Alice is fluent in English, Farsi and Azeri.
