It is not unusual for a director of a company to appoint an administrator in the face of a winding-up application, usually as a last attempt to save the company from liquidation.
As is well known, the role of the administrator is to investigate the affairs of the company and provide a recommendation to creditors as to whether it is in their interest for:
- The company's creditors to execute a deed of company arrangement;
- The company to be wound-up; or
- The administration to end.
In our insolvency practice, we are often contacted by administrators who want to continue as the liquidator where liquidation is the ultimate recommendation made to the company's creditors.
What factors will the Court consider in determining whether to appoint the administrator as liquidator instead of the petitioning creditor's proposed liquidator?
The Court will consider the general overriding principle – whether it is in the best interests of the company's creditors.
In determining the interests of creditors in this context, the Court will have regard to certain guiding principles which we set out below.
Independence and appearance of independence
Liquidators must not only be independent of the company but must also be seen to be independent.
The Court will consider whether there may be a reasonable apprehension by any of the creditors that the liquidator lacks impartiality by reason of their prior association with the company or its directors.
For example, in circumstances where the administrator was appointed by the company's director, creditors may perceive that the administrator, acting as liquidator, would not carry out their investigations into the company objectively or pursue voidable transactions.
Tips for the administrator
- It is not sufficient for an administrator to rely on the declaration of relevant relationships and independence annexed to the first report to prove independence.
- Information as to how the administrator became appointed and their dealings with the company or its director prior to their appointment will be a relevant consideration for the Court.
- Where the administrator has set out in their s439A report their investigations into the conduct of the director, as well as potential voidable transaction claims available against the director, this may assist in demonstrating that the administrator is independent.
Costs
Provided independence is not in issue, the Court will select an option that is likely to involve less cost in the liquidation.
Understandably, there can be cost savings if an administrator, having already investigated the affairs of the company, is appointed liquidator.
This is because, if the petitioning creditor's liquidator were appointed, any work already performed by the administrator would need to be repeated, which would in turn result in increased costs to the detriment of creditors.
However, this may be mitigated where most of the investigations of the administrator have been recorded in their s439A report, which would be available to the petitioning creditor's liquidator.
The petitioning creditor's liquidator may seek to argue that in relying on this report there would be limited if any duplication of work required.
Tips for the administrator
- Consideration should be given to any work performed by the administrator which would not be available in the s439A report for an alternate liquidator, and which would need to be repeated.
- The ongoing costs of the liquidation and charge-out rates of the insolvency practitioners are another relevant consideration.
Choice of the liquidator
The Court has previously applied the guiding principle that liquidators should be chosen by the creditors and not the directors of the company.
However, the Court has recently rejected that notion as a general proposition and has confirmed that the guiding principle must be what would be consistent with the overall best interests of the winding-up, including the interests of creditors.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
