When a company is placed into liquidation, creditors are often left in the dark, especially when the company’s shareholders have appointed the liquidator. This kind of appointment can raise serious questions about fairness, independence, and whether the process will truly serve the interests of all creditors.
Should you care who appoints the liquidator? If the debt is small, perhaps not. However, if you are owed a substantial amount, that decision could significantly affect your outcome.
Brent Norling of Norling Law and Damien Grant of Waterstone Insolvency discuss the concerns that can arise when a shareholder-appointed liquidator is perceived to be aligned with the company’s directors. The result can be a creditor base that feels disenfranchised from a process meant to act in their interests.
When you are a creditor in a liquidation, and the shareholders appointed the liquidator, should you care? Possibly. If you are owed $1,000, you might not be too concerned. However, if you are owed a million dollars, perhaps yes, you have a reason to care. Given that the liquidator will dictate the outcome for you as a creditor, that appointment is really important.
Some questions you may be asking are: is this liquidator known for pursuing directors, and pursuing claims? Is there a cost-benefit analysis around that? Are there any expectations from the company’s shareholders in that appointment?
The main question is: Who referred the shareholder to the liquidator?
Of course, liquidators have a code of conduct that they must follow under New Zealand insolvency law. However, in some firms, there is an expectation that if a client is referred to a liquidation, the liquidator will not pursue the client once the company is in liquidation.
There is at least a perception of that conduct, and if you are owed a significant amount of money, it is a valid question to ask.
You can look at the cost-benefit analysis and the history of the liquidator. For example, if you can see in their statutory reports that they have taken $5 million in fees and distributed only $500,000 to creditors, that is probably not a liquidator you would want appointed.
Creditors often get a notoriously bad outcome in liquidations, and we have seen many creditors’ meetings where there is a sense of defeat—a belief that lawyers and liquidators will be the only winners.
However, that does not have to be the case.
We have seen real success where creditors have banded together and chosen the liquidator that they want. Despite the shareholders’ choice, you can call a creditors’ meeting for the purpose of electing a new liquidator. If a majority of creditors (by number and value) vote to replace them, that appointment is overturned.
For example:
If the resolution passes, meaning a majority of creditors by number and value vote in favour, the existing liquidator is removed, and the replacement is appointed without the need for court involvement.
The selection of liquidators by a company’s shareholders during the liquidation process is a subject rife with complexity and legal nuance. While the Companies Act 1993 provides clear rules regarding the way in which a liquidator is appointed, the practical and ethical implications of a shareholder appointment can significantly impact creditor outcomes.
Concerns often arise when a liquidator is appointed by the shareholders, particularly where large debts are involved or where independence is in questionThe following sections delve into these concerns in more detail, including the strategic implications of shareholder appointments, perceptions of bias, and the measures creditors can take to protect their interests.
The operation of liquidators is significantly influenced by their professional networks, which often consists of accountants and lawyers. These networks are not just social but are deeply entwined with the potential for future business, creating a delicate balance. The threat of losing future referrals for taking actions against a referred client’s interests introduces a moral hazard, forcing liquidators to walk a fine line between aggressively enforcing rules and maintaining professional relationships. For creditors, this dynamic may undermine confidence in the liquidation process.
One prevalent notion in the realm of insolvency is the belief that when a liquidator is appointed by a company’s shareholders, they might inherently favour the interests of the directors or those who appointed them. While this perception holds water in certain circles, it is crucial to understand that it does not apply to all cases. The ethical landscape within which liquidators operate is far more complex, governed by both statutory duties under the Companies Act and professional integrity that mandates a balanced consideration of all stakeholders’ interests.
Regulatory frameworks are designed to mitigate potential biases and ensure that the actions of appointed liquidators align with the broader interests of all stakeholders, not just those who appoint them. These frameworks, grounded in New Zealand’s insolvency law, are critical to maintaining the integrity of the insolvency process. Whether through required disclosures, reporting obligations, or oversight of a liquidator’s final report, these rules help ensure that the process remains fair and just, even where creditors were not involved in the original appointment.
The complexity of the liquidation process is further amplified by the dual roles often played by liquidators or their advisors. On the one hand, there is a strategic component to structuring liquidations in a manner that minimises compulsory actions, often advocated for shareholders seeking to protect their interests. On the other hand, there is a crucial role in mobilising creditors to ensure their voices are heard, especially in creditors’ meetings where the replacement of a liquidator may be proposed.
Creditors’ meetings are a pivotal avenue for stakeholders to exercise their influence, potentially swinging the decision to replace a liquidator. These meetings provide an opportunity for creditors to vote on replacing a liquidator, and such a resolution, if passed by a majority in number and value, can effect a valid change. The significance of these meetings cannot be overstated, as they remain one of the few formal mechanisms through which creditors can influence the course of liquidation proceedings.
In scenarios where alignment between a liquidator’s actions and creditor interests is in question, the formation of a creditors committee becomes a strategic tool. While such committees do not carry binding legal authority, they can serve as an effective forum for engagement and negotiation, offering a platform for creditors to voice their concerns and influence the process.
The importance of active engagement from all parties in insolvency proceedings cannot be overstated. Whether it is through strategic structuring of the liquidation process, attending creditors’ meetings, or calling for a vote to appoint a new liquidator, staying involved helps protect your position. This is especially important where the original liquidation application came from shareholders and where the conduct of the appointed liquidator may raise concerns. In many cases, the creditors who take steps to stay informed and assert their rights are the ones most likely to recover funds or influence the outcome.
The landscape of shareholder-appointed liquidators is fraught with ethical dilemmas, strategic considerations, and regulatory challenges. Understanding these facets is crucial for all stakeholders involved in a company’s liquidation. It requires a nuanced understanding of the incentives at play and the regulatory safeguards in place to ensure fairness and equity.
As the corporate world continues to evolve, so too will the dynamics of liquidation proceedings, necessitating a continued focus on ethical practices, strategic engagement, and regulatory compliance.
At Norling Law, we offer a free 30-minute legal consultation. Book your consult call now if you need assistance.
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.
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