BY- PRABHAN PATEL, SLS HYDERABAD

                                   

INTRODUCTION

The liquidator is a person who manages the whole liquidation process in general. When a company is going to close, the company’s properties must be realised and divided amongst the ‘debenture holders,’ ‘creditors’ and ‘shareholders’ etc. A individual who does the essential things until the company “ceases to exist” is nominated for this reason. This entity is known as the corporate law liquidator. So, in the time of the end of a business, the liquidator takes place. The winding method can be of two kinds. Those are as follows:

1. Necessary Winding up

2. Winding up voluntarily.

In the time of compulsory winding-up, the official liquidator is named. The officer liquidator is the high court prosecutor. It will be designated from the date of the winding order. He has such responsibilities in compliance with the Companies Act and, subject to orders from the High Court, must do everything necessary in relation to the compulsory closing of the company. In one of the insolvency processes such as the Creditors’ Voluntary Liquidation (CVL), a liquidator will be named which happens when management make their decision willingly when approached by insolvent businesses that cannot completely pay their creditors. The management plan to close the organization and start anew. The procedure is started in this situation by the management and not the creditors of the company. The CVL mechanism requires shareholders’ and investor meetings to pass appropriate resolutions and nominate a licensed insolvency practitioner (IP) liquidator. The liquidator is named to professionally close the company to ensure that the company’s assets are adequately allocated among creditors. The Court or the official beneficiary here did not engage in a CVL proceeding.

Liquidators are also named as members of the MVL. Here the corporation is stable and all its creditors will be paid in full. Managers also plan to use the MVL route for tax purposes or to reorganize the business. The related proposals shall be adopted at a general meeting under this case to shut down the organization and to name a liquidator.

COMPANIES ACT

“Section-310 of Companies Act,2013

Appointment of Company Liquidator.

1.     The company in its general meeting, where a resolution of voluntary winding up is passed, shall appoint a Company Liquidator from the panel prepared by the Central Government for the purpose of winding up its affairs and distributing the assets of the company and recommend the fee to be paid to the Company Liquidator.

2.     Where the creditors have passed a resolution for winding up the company under sub-section (3) of section 306, the appointment of the Company Liquidator under this section shall be effective only after it is approved by the majority of creditors in value of the company:

Provided that where such creditors do not approve the appointment of such Company Liquidator, creditors shall appoint another Company Liquidator.

3.     The creditors while approving the appointment of Company Liquidator appointed by the company or appointing the Company Liquidator of their own choice, as the case may be, pass suitable resolution with regard to the fee of the Company Liquidator.

4.     On appointment as Company Liquidator, such liquidator shall file a declaration in the prescribed form within seven days of the date of appointment disclosing conflict of interest or lack of independence in respect of his appointment, if any, with the company and the creditors and such obligation shall continue throughout the term of his or its appointment.”[1]

Even if the procedure is clear, the liquidation of the corporation will confront a variety of challenges to ensure that the process is done correctly.

The entire liquidation process is handled by a liquidator or official purchaser. He or she shall be named when a corporation becomes liquidated or when the Court has been damaged by a hated creditor in a forced liquidation procedure.

The liquidator is empowered to carry out or sell the assets of the company and to use the income to debt payment. The liquidator is taking care of the firm, fulfils paperwork deadlines, advises the authorities, resolves all company lawsuits, interviews the directors and reports about the reasons for the settlement. In other terms, it would also dissolve the corporation from the Companies House public registry.

Liquidation is the end of most companies where the properties are sold and the proceeds are used to resolve shareholder lawsuits. The result is closing of the firm. The arbitration process restores creditors’ assets and ends all court actions against the company and its management. However, the closure of businesses usually leaves directors / shareholders with no return.

ANALYSIS

A liquidator ‘s position in insolvency is mainly to ensure that an insolvent company’s assets are allocated equally to its creditors. In certain cases, the insolvency lawyer (an person allowed to work in conjunction with an insolvent corporation) tries to save the corporation if it thinks this will give the creditors a better return.

When the rescue of a company is not feasible, the recipient can serve as the liquidator of the company if the situation is very striate. In more complicated situations, a private insolvency lawyer, usually an attorney or an attorney, is usually named to finalise the wind-up. All present and past business officers are obliged to comply with government recipients and private liquidators. In compliance with the Insolvency Act 1986, this could lead to incarceration.

“HOW IS AN INSOLVENCY PRACTITIONER APPOINTED?”

A specialist in insolvency shall be named to a reputable meeting or the Industry, Creativity, and Skills Secretary of State. This typically takes place within 4 months of the order of closure, and multiple liquidators may be named to work together in complicated situations.

When named by the meeting of creditors, the position of a liquidator is formally recognised; this is to be written in the Gazette. Each creditor must be notified personally whether the appointment is made by the Secretary of State.

“WHAT ARE THE DUTIES OF A LIQUIDATOR?

Once appointed, the liquidator is responsible for:

  • Realising the assets of the insolvent company and achieving the best possible price;
  • Address outstanding claims against the limited company and satisfy the claims as set-out by law;
  • Distributing the returns to the company’s creditors in order of priority;
  • Acting in the best interests of the creditors (not the directors).”[2]

“MAXIMISING THE RETURN FOR CREDITORS”

The liquidator is solely responsible for optimising the return for creditors. They may appeal to the court as part of this obligation to reinstate wrongly disposed land. For instance, assets could have been sold for less than their fair value to a related organisation.

“INVESTIGATING THE POSSIBILITY OF WRONGFUL OR FRAUDULENT TRADING”

A liquidator can act against existing directors or former directors of the company who have not represented their creditors’ best interests (Section 214). If, for example , despite being insolvent, the company continues to trade and make more losses, directors shall be responsible for debts directly.

“WHAT IS A PROVISIONAL LIQUIDATOR?”

Often the judge would find it to be too dangerous to resume trading while a closing motion is made before the court. This is due to the fact that the asset is at stake and that, in some situations, the court appoints a temporary liquidator to defend the corporation before the entire appeal is heard. The former purpose of the official letter shall be sent to company administrators, reminding them of the nomination of the Official receiver as the temporary liquidator with or without warning. ‘Without warning’ means that only a person is informed of a circumstance by the official receiver and this is typically attributed, whether the corporation finds out or demonstrably in the public interest, to the concern that the company’s properties can somehow vanish.

“APPOINTING A CREDITORS’ COMMITTEE”

In certain cases, the creditors of the corporation will opt to set up a committee of creditors to protect and advance their best interests. The committee may have between three and five members. In order to prevent impasse in committee motions, it’s easier to have three or five members rather than four. The liquidator shall then report the progress of the settlement to the committee and take all costs and expenditures into account.

“HOW IS THE LIQUIDATOR PAID?”

For the job they perform, a liquidator is paid. They may be charged in the form of a set amount already negotiated, an hourly rate or the proportion of their actives. The creditors or the creditors committee should settle on the bill.

On the basis of the level of payment earned by the liquidator:

• The case’s complexity

• How they do their homework effectively

• The liquidator bears some additional liability

• Commodity worth and nature •

In advance of their operation, a full estimation of the liquidator ‘s fee should be given. The argument should be made in accordance with documentation of any expenditures and the improvements made. If the liquidator earns an hourly rate, there may be a summary of the time expended on the event. The guidelines set out in The Declaration of Insolvency Procedure (SIP) 9 should be followed.

“PAYMENTS ARE MADE WHEN COMPANY ASSETS ARE REALISED”

The practitioner of insolvency shall first be compensated out of the money collected if the properties of a corporation are realised. In the following sequence, contributions will then be made to the creditors:

  1. Preference creditors’ claims, such as outstanding salaries and overtime time for workers.
  2. Then floating charges holder is charged out of the proceeds from the selling of properties under a “floating fee.”
  3. The dangerous creditors, including industrial and expenditure creditors, will also be paid. If the unsecured creditors are not paid enough money in full, they are paid in proportion of the sum owed.
  4. If preferred and insecured lenders’ liabilities have been entirely paid they are entitled to interest on the late settlement of their liabilities. Payments of interest shall be made from the date of the order for winding.
  5. If capital has not been left, it will be returned to the owners of the company after the costs of the liquidation have been incurred.

“IS THERE ANYTHING I SHOULD BE AWARE OF BEFORE ENGAGING AN INSOLVENCY PRACTITIONER (IP)?”

If you consider hiring an insolvency lawyer to become a liquidator of your company, be mindful of what you believe is not a privileged pre-engagement. The explanation for this is simple: for the creditors the liquidator works, not you the principal. There is a personal duty of responsibility, but in the heat of a business closing you can quickly forget this. As many administrators have genuinely learned to answer their expenses, but note who the IP is.

You should also be informed that the IP cannot (or should not at least) provide your personal security advice and how to deal with the bank or all other creditors. The explanation is clear, since they serve the bank, they will have a direct conflict of interest. We are rescue contractors in the business and thus operate on behalf of the director with proper consideration for the lender.

“COMPLETION OF THE PROCEDURE”

The liquidator holds a final consultation with the shareholders after the liquidation process has been concluded and the funds dispersed. The insolvencies are reported and refunds and settlements are summarised. They will attempt to free themselves from the workplace at this stage and the settlement is completed.

“ROLE OF THE LIQUIDATOR IN CVL”

On nomination, the liquidator conducts the winding-up process through the provision for creditors and, where applicable, through creditor meetings. He or she is going to sell the assets of the company and after the negotiated expenses and commissions are deducted the profits are used to pay creditors. All the necessary documentation will be prepared and submitted by the liquidator. It is also its job, for the last three years before the winding- up, to research the behaviour of its managers. He or she is obligated to report to the authorities involved all signs of illegal conduct.

“INSOLVENCY PRACTITIONERS’ ROLE COMPULSORY LIQUIDATION”

If a borrower asks the Court to obligate the corporation to wind up, a forced winding-up occurs. When the appeal has succeeded, the Court will harm the corporation and appoint an official receiver. The directors no longer manage the corporation or its properties until the insolvent firm is forced to wind up. The liquidator’s job is to take over the company, sell the assets of the company and transfer the income to its creditors.

The official beneficiary also moves the winding-up procedure to an insolvency lawyer (IP). However, the OR will handle the documents, sell the properties for compensation to creditors and examine the actions of the director and report to the appropriate authority on the conduct of the director.

“MEMBERS’ VOLUNTARY LIQUIDATION (MVL)”

This technique is used in direct contrast to shut down a solvent business. MVL is actively implemented by the management of the organization and can only be used where insolvency does not present a challenge. The owners are expected to make a formal solvency statement that specifies that the corporation is solvent and will repay the creditors within 12 months.

The corporation appoints a liquidator to sell the assets of the company and to ensure that the obligations of the company are paid off. It gathers all the money owing to the organization and settles any conflicts of law. The lenders would also be compensated with the liquidator’s equity capital.

The job also requires contracts, and it also ensures that all contracts will be signed, signed or exchanged in strict accordance with the law and that the firm will be registered for VAT purposes. Finally, until the day the company stopped trading, the liquidator registers the final company accounts.


CITATIONS

[1] Companies Act, 2013

[2] Section 35: Powers and duties of liquidator – IBC Laws, IBC Laws (2020), https://ibclaw.in/section-35-powers-and-duties-of-liquidator/ (last visited Oct 26, 2020).

Analysis on the Role of a Company Liquidator

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