Many assume that a liquidator’s job is to sell company assets and distribute available funds to creditors. However, liquidation can involve a much broader investigation into the company’s financial affairs, transactions, and the circumstances leading to insolvency.
One of the first things a liquidator does is an information sweep. This involves gathering and reviewing financial and bank statements, information provided by creditors, and other records to establish the company’s financial position and how/when financial difficulties arose.
Liquidators have statutory powers to obtain and request information and documents relating to the liquidated company. Under section 261 of the Companies Act 1993 (the Act), a liquidator can require directors and other relevant persons to provide information and documents relating to the company.
A liquidator will then look at what the company owes, owns, and owned. Assets held by the company at the date of liquidation may be secured, realised or otherwise dealt with. Where an asset is subject to a valid security interest, the secured creditor has rights over that asset. Other company assets may be sold by the liquidator, with the proceeds distributed according to the statutory priority rules detailed in schedule 7 of the Act.
The investigation is not limited to the assets held by the company at the date of liquidation. Where assets have been sold or transferred pre-liquidation, the liquidator will examine the circumstances surrounding those transactions. This includes when the asset was sold, who purchased it, the price paid and whether the company received fair value.
This is important when assets have been sold shortly before liquidation or when transactions involve directors, shareholders or other related parties. A pre-liquidation sale is not automatically an issue, but the liquidator will need to ensure that the transaction was for fair value and not to undermine creditors.
The liquidator will also review payments made in the period leading up to liquidation, including payments to creditors, directors and related parties. Certain transactions may be challenged and recovered dependant on the situation.
Conduct of the director leading up to liquidation is also considered. This involves reviewing decisions made by the directors particularly in periods of financial difficulty and if they acted in accordance with their duties set out in the Act.
This may include looking at whether the company continued to trade when it was unable to meet its obligations and if appropriate steps were taken when the company’s financial position deteriorated.
However, the fact that a company has failed does not necessarily mean that the directors have acted improperly. The purpose of the liquidator’s review is to establish the facts, understand the decisions that were made and determine whether any issues require further action.
Ultimately, the role of a liquidator goes beyond selling company assets. It involves piecing together the company’s financial affairs, tracing what happened to its money and assets, examining transactions and determining whether there is opportunity to recover value for creditors.
