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Some Questions to Share

Author: Chris Millar

1. Does a conflict of interest arise where a solicitor acts for both the Petitioning Creditor and the Liquidator of a company? 

It is often acceptable for solicitors to act for both the Petitioning Creditor and the Liquidator where the Petitioning Creditor’s claim is straight forward.

However, where the claim is complex and open to question e.g. an unliquidated damages claim, the potential for conflict of interest should bar the solicitor from acting.  That was the view of the Scottish Court of Session in Re Quantum Distribution (UK) Limited in 2012. 

Whilst it is common for the same firm to act for a creditor and then subsequently for the appointed insolvency office-holder, the potential of conflict must always be considered, and managed and safe guarded appropriately. IP’s should also bear in mind the provisions of the IPA’s Ethics Code for Members. 

2.  What will happen to a creditor’s Winding-Up Petition if a company’s CVA is approved?

Unless the company is eligible for and has availed itself of the small company’s CVA moratorium, the interaction between the CVA and the liquidation is that:

  • If the CVA is in place when the Petition is heard, the Court can appoint the supervisor as the liquidator. 
  • If the CVA is approved and reports have been delivered to the Court more than 28 days before the Petition is heard, the winding-up proceedings may be stayed under Section 5(3) or the Court may be persuaded to adjourn a winding-up hearing pending the lapse of that period. 

The terms of the CVA itself might provide for what action any creditor who is bound by the CVA, should take in relation to its outstanding Petition as well, and equally, the CVA might also provide for the liquidation to be an event upon which the CVA may fail or be terminated.  This answer assumes that the Petitioning Creditor is not a majority creditor who may control the approval of the CVA. 

Conversely, where a CVA is approved in respect of a company already in liquidation, the company remains in liquidation and the CVA will usually legislate for the interaction between the CVA and the liquidation, and also as to what is to happen at the conclusion of the CVA. 

The Court can also be asked to stay the liquidation, and give directions with regard to the liquidation, pursuant to an Application under Section 5(3).  However, even if a stay is ordered, the company remains in liquidation. 

Note that the supervisor has obligations to discharge, or give an appropriate undertaking to like effect, the fees, costs, charges and expenses of the liquidator, and the liquidator has the benefit of a statutory charge to that effect. 

3. Can former partners of a partnership in liquidation re-use the name if they carry on business in a new company? 

Whilst there is no clear authority on the point, the Insolvent Partnership’s Order 1994 deems an insolvent partnership to be an insolvent company, which allows the partnership to be wound up as if it were an unregistered company.  The effect of Section 216(8) is to include unregistered companies within its ambit and therefore within the phoenix trading regime. 

As Section 216(3)(c) applies the ban on re-using partnership names to a business carried on otherwise than by a partnership (and therefore including a company), then the ban should apply to the partners carrying on business in a new company with the same name as the former company.

4. May the payment of dividends be a transaction defrauding creditors under Section 423? 

In BTI 2014 LLC v Sequana SA (2016), Rose J determined upon the facts of that case that the directors did have the purpose of putting the dividend monies beyond the reach of the Claimant (and creditors in general), and therefore did fall within the scope of a transaction at an undervalue.

Interestingly, in respect of the underlying reduction of capital effected by the directors by special resolution, the Judge held that in making the solvency statement, it is not a requirement that the directors should have reasonable grounds for the opinion they formed, provided the directors did in fact form the opinion.

In answer to the claim that in making the dividend the directors were in breach of their fiduciary duties to act in the best interests of creditors, the Judge held that where a company may have on its balance sheet a provision in respect of a long term liability which might turn out to be larger than the provision made, it cannot be right for the duty to have regard to creditors interests, to apply for the whole period during which there is a risk that there will be insufficient assets to meet that liability.That would result in directors having to take account of creditors rather than shareholders’ interests when running a business over an extended period.  

To discuss any of the above issues please contact Chris Millar, either by email c.millar@downslaw.co.uk or on 01306 502225.

Posted on 03/02/2017 by Pam Bowring

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