Recent cases we have been involved in have highlighted the need for Insolvency Practitioners to pay careful attention to the effect that block transfer orders have on administrations where the exit route is a creditors' voluntary liquidation ("CVL"). Failure to do so could risk the appointment of liquidators being invalid.
The statutory requirements
Block transfers are a convenient way of dealing with the transfer of multiple appointments where, for example, an outgoing office holder retires or moves firms. An order of the court can enable the appointments to be transferred to an incoming office holder without the need to convene meetings of creditors in respect of each separate appointment. Whilst a block transfer will have the effect of transferring the office of administrator from one individual to another, the position when an administration is converted to a CVL after a block transfer has taken place is often overlooked.
Administrators are required to specify the proposed exit route from administration in their initial proposals and if they propose to exit using a CVL then the proposals must include details of the proposed liquidator. Exactly what is meant by "provide details of the proposed liquidator" is not specified and is therefore open to interpretation.
The liquidator for the purpose of a CVL following an administration will be either (a) a person nominated by the creditors of the company in the prescribed manner and within the prescribed period, or (b) if no person is nominated under paragraph (a), the administrator. A person is nominated as liquidator by creditors approving the nominated liquidator in the administrators' proposals.
The following wording concerning the identity of the liquidators has been used in the administrators' proposals in cases we have recently been involved in:
"That x and y (named individuals) be appointed joint liquidators"
"That one of the joint administrators, x, be appointed joint liquidator along with y"
"That the joint administrators will act as joint liquidators"
Assume that, after approval of the proposals, x has been replaced as joint administrator by z by reason of a block transfer order. Who will be appointed liquidator when the appropriate notice is registered by the registrar of companies?
The first point to make is that the filing or registration of the notice does not have the effect of appointing those individuals named in the notice. The filing is an administrative process only.
In scenarios 1 and 2 the liquidators will plainly be x and y. At no point has z been nominated as liquidator, but x may be retired or at a different firm and have no knowledge of his appointment as liquidator. If it is wrongly assumed that z has become joint liquidator and acts are carried out in his or her name then they will likely be invalid. Fees drawn will be subject to possible repayment.
In scenario 3, it could be argued that the wording was intended to appoint as liquidators whoever happened to be administrators at the time that the CVL conversion took place, but we have doubts that such an argument would succeed. The more likely explanation is that it was intended that the current administrators would be appointed liquidators and no thought was given to the possibility of one (or both) of the administrators being replaced prior to conversion to CVL. If z has replaced x as administrator then it would be difficult to argue that sufficient details of z as proposed liquidator were included in the proposals.
A detailed consideration of the consequences of an invalid appointment is beyond the scope of this article, but an invalid appointment is a nullity and the acts of a purported liquidator will be prima facie invalid. This could have significant consequences if such a liquidator has, for example, commenced court proceedings or disposed of a valuable asset.
In the cases we advised on it was necessary to apply for the removal and appointment of liquidators pursuant to section 108 of the Insolvency Act 1986 in order to ensure that the correct insolvency practitioners were in office. Any actions taken by the practitioners who were not validly appointed were ratified by those who were in office. Each case was, however, taken on its merits and a detailed review was required of the actions of the 'liquidator' who had not been properly appointed.
If proposals have not yet been circulated then careful consideration should be given to how reference is made to the proposed liquidators to ensure that a subsequent appointment is valid. If proposals have already been approved, the best advice would be to circulate revised proposals. If conversion to a CVL has already taken place following a block transfer order then the proposals should be reviewed in order to ascertain whether the acting liquidators have capacity to act.