One of the joys of working in insolvency is the personal liability that attaches to much of what we do. There are three broad areas that Insolvency Practitioners work in; Receiverships, Liquidations and Voluntary Administrations – and the personal liability differs in each case. Naturally, an Insolvency Practitioner is never liable for any company debts incurred prior to his or her appointment. Personal liability accrues only once the appointment is accepted.
Liquidations
Typically, a liquidator is not personally liable for any costs incurred by the business while it is in liquidation, and for an Insolvency Practitioner this is the safest form of insolvency to work in.
Indeed, when it comes to essential supplies Section 275 of the Companies Act makes provisions that the providers of this service not only must supply, but that they cannot demand a personal guarantee from the liquidator in consideration of the risks they face in supplying a company in liquidation.
In liquidation there are two areas where a liquidator may be held personally liable:
- Getting It Wrong
Schedule Seven and related pieces of legislation and volumes of case law determine what a liquidator must do with the money recovered through the process of liquidation. If a liquidator gets it wrong, they can be held personally liable.In the Sleepyhead case the liquidators of King Rob Limited sold mattresses for $26,000 and disposed of the money to the GSA holder. Sleepyhead had a PPSR over the assets, and the Court found the liquidators paid the $26,000 to the wrong party. They were held personally liable to Sleepyhead for $26,000.Something to keep all liquidators awake at night, no matter how soft the mattress.
- Section 301
Section 301 covers directors, promoters, managers, liquidators and receivers of companies, and hold them liable for losses incurred by the company where any of the above-named converts assets of the company. Simply put, if a liquidator absconds with company goods or money, the courts can hold the liquidator personally liable.
Receiverships
The rule for receiverships is straight forward. A receiver is personally liable for all costs incurred by him during the course of his receivership. The receiver is also indemnified by the assets of the company to cover any exposure.
A receiver that elects to run a business once he is appointed faces personal exposure for all the costs he incurs as a receiver.
There are two exceptions.
- Employment Contracts
Receivers are not liable for the first two weeks pay for any existing staff member provided that they cancel the contract in the first two weeks of their appointment.
- Rent
Receivers are liable for rent that accrues two weeks after their appointment. Thus, receivers have two weeks to cancel rental contracts, or become liable for the cost of the rent. Importantly, the law states that although the receiver is liable for the rent, he is not liable for any other obligations under the rent.
More generally, if a contract is in place and it is not a lease or an employment agreement, then the receiver is not personally liable unless she explicitly binds himself to that agreement.
Voluntary Administration
The personal liability for Voluntary Administrators is very similar to that of receivers, with the rules relating to employee agreement and leases virtually identical to that of receivers except that for leases a Voluntary Administrator has only seven days and not 14 to identify and cancel leases.
Importantly for the lease agreements, the Administrator is liable even if they cancel the lease but the business is still operating the premises. Thus, if a Voluntary Administrator wishes to escape personal liability for a lease they must both identify the lease and evacuate the premises within seven days. The Act is silent on the issue of knowledge, meaning that the Administrator is deemed to be aware of all the leases. If there is a lease in place but the Administrator is unaware of this, they are liable for this cost despite not being aware of it.
Once a company comes out of Voluntary Administration, typically within six weeks and either into liquidation or back to the board by way of a DOCA, then the personal liability for the Administrator ends.
Reason for Liability
There is a good public policy for the personal exposure of Receivers and Administrators. In both Receivership and Voluntary Administration there are often expenses that need to be incurred to realise the value of the business assets.
By making the Insolvency Practitioners personal liability it has the following three public policy gains:
- Minimises the further risk to creditors of ongoing losses.
- Gives confidence to suppliers to the distressed businesses and ensures the continued supply of goods and services needed to achieve a positive outcome for the wider body of creditors.
- Forces Insolvency Practitioners to be prudent in their business decisions
For both Receivers and Administrators, the legislation provides for the Court to grant an extension to the time frames relating to employment contracts and leases.
