Duties and Obligations of a Liquidator

Explain and discuss the duties and obligations of a liquidator of a limited liability company which has been wound up upon an order by the Court.

Introduction

Background

The relevant provisions relating to the local law concerning insolvency are found mainly in the Companies Act (chapter 386 of the Laws of Malta) and the Commercial Code. The Maltese Insolvency law regime distinguishes between bankruptcies of a person or a commercial partnership other than a company. Bankruptcy of a person or a commercial partnership other than a company, is regulated by the Commercial Code (sections 477 et seq of Chapter 13 of the Laws of Malta), while company insolvency is regulated in Title II of Part V of the Companies Act, Chapter 386. Moreover as from 1st June 2003, the Set-off and Netting on Insolvency Act regulates the set-off and netting on bankruptcy and insolvency.

Insolvency proceedings may be initiated when a company is unable to meet its obligations, for instance the inability to pay its debts. Insolvency proceedings can take various forms. This includes namely:

When the company by extraordinary resolution resolves to go through a dissolution and voluntary winding up;

When the company by extraordinary resolution resolves to go through a dissolution and winding up by the court;

The court may on application, issue a winding up order if it finds that the company is unable to pay its debts.

Company insolvency

Insolvency Proceedings

The Companies Act deals with the ‘Dissolution and Consequential Winding up of Companies in Part V Title II.

As stated above, the Act provides for 3 modes of insolvency proceedings. This assignment will focus on the winding up of limited liability companies wound up upon an order by the Court.

The company may be dissolved and consequently wound up by the court if the business of the company is suspended for an uninterrupted period of 12 months or if the company is unable to pay its debts (s.214 (2a) of CA). In various instances, by way of protection, companies opt for a dissolution and winding up by Court for the reason that although all provisions are applicable, however all actions against the company or its property require leave of the court after the winding up order is issued.

Consequences of Insolvency

On appointment of the liquidator, the powers of the officers of the company cease and pass on to the liquidator.

The Liquidator

Undoubtedly, the liquidator acts as a key figure in the liquidation process and this office and its implications is the focus that is going to be dealt with in this assignment. It will include the duties and obligations impose upon the liquidator under the present law.

The liquidator is the main participant in insolvency proceedings. He is responsible for the management of the company and its assets during the period of winding up, and he has its legal and judicial representation. In a Court winding up, the Court may appoint a liquidator or a provisional administrator having a number of assigned duties discussed below.

Duties of the Liquidator under the Companies Act

Chapter III - Liquidators in a winding up by the court

Various duties are imposed on liquidators by the Companies Act and these may be conveniently divided into the following categories:

duties of notice;

duty to keep certain financial and administrative records;

duty to hold certain meetings;

duty to provide information;

duty to examine the conduct of officers of the company;

duty to get in and distribute the property of the company.

Duties of notice

The first duty assigned to a liquidator is that of giving notice of his appointment. Section 235(1) provides that where in a compulsory winding up a person other than the Official Receiver is appointed Liquidator, such person shall not be capable of acting as liquidator until he has notified his appointment to the Registrar and given satisfactory security, if any, for the good performance of his functions. Likewise, in a voluntary winding up the liquidator must, within fourteen days from his appointment, deliver to the Registrar, for registration, a notice of his appointment. Moreover; all letters, invoices or orders issued must describe the company as undergoing liquidation.

Duty to keep certain financial and administrative records

The liquidator is obliged to keep proper books of account and administrative records. In terms of Section 240 the liquidator in a compulsory winding up must keep proper books in which he is to record all minutes of proceedings at meetings and in which he is to record all minutes of proceedings at meetings and in which he is to put down all other matters which may be prescribed by the Court or Act. These books may also be inspected by any creditor or contributory subject to the Court’s control. (Section 257).

Ian Fletcher, when examining sections 143(2) of the Insolvency Act which is similar to what the Act contains, states what the books and records which must be kept are. These are divided into:

Administrative records; and

Financial records.

Moreover, once a person has been appointed liquidator in a compulsory winding up, he is to notify the Registrar of any bank accounts he shall use whenever he receives or effects payments in the name and on behalf of the company and he is prohibited from receiving or making any payments before he has made this notification. The liquidator must deposit amounts received by him into the account notified to the Registrar and he may not retain for more than ten days any sum exceeding LM200 or such other amount as he may have been authorized to retain by the Registrar. In case of default, he shall be liable to pay interest on the excess and to the payment of any expenses caused by his default. In addition, he shall forfeit a part of his remuneration (which part shall be established by court) and shall be removed from office.

The liquidator, especially where the company is being wound up by court order, must be very scrupulous in the upkeep of these accounts. Section 242 requires the liquidator to send to the Registrar an account of his receipts and payments, at such times as may be prescribed but not less than twice a year during the tenure of his office. The Registrar may order the auditing of the account at the company’s expense. When this occurs, the liquidator must furnish the auditor with all the information the latter may require as well as he must enable the auditor to inspect the books and accounts kept by the liquidator.

Duty to hold certain meetings

Liquidators in a voluntary liquidation must call a General Meeting of the company if the winding up continues for more than one year and they are also bound to call a General Meeting of the company at each succeeding period of twelve months or at the first convenient date within three months form the end of the period of twelve months or within such longer period as the Registrar may allow. During this meeting the liquidator is to lay an account of his acts and dealings and of the conduct of the liquidation procedure during the preceding twelve months, in which he must include a summary of receipts and expenditure (s.237/238). Moreover, on the completion of the winding up process, the voluntary liquidator must call a final meeting of the members and in a creditor’s winding up, even a meeting of the creditors, and lay before them an account and explanation of the winding up process (274/284). If such a meeting is not held the liquidator is liable to a penalty since he has breached his statutory duties. This final Meeting of the company’s creditors must also be called by the liquidator in a compulsory winding up ‘if it appears to him that for all practical purposes the winding up is complete.’ (S244(1) of CA and S146 of English insolvency act)

Duty of providing information

This duty is owed to the creditors and contributories, to the Official Receiver and where the winding up continues for more than one year to the Registrar.

Liquidators are to inform creditors and contributories of the development of the winding up procedure. This is done by the holding of a number of meetings. We have seen that the liquidator is bound to hold meetings at the beginning of the liquidation procedure and at the end of this process. Moreover, in the case of a voluntary winding up, a meeting must be held if the liquidation takes more than one year to complete. Creditors and contributories may also requisition meetings. However, this general power is only available in a Compulsory winding up and may be exercised when the creditors or contributories so resolve or where a request is made in writing by one tenth in value of the creditors and contributories. (S239(2) CA 168 (2) of insolvency act).

In a compulsory winding up the liquidator also owes this duty to the Official Receiver. In fact, Section 235 (1) provides that where a person other than the Official Receiver is appointed liquidator, the appointee shall give the Official Receiver all the information and access to and facilities for inspecting the books and documents of the company and all the aid that may be required so as to enable this officer to perform his duties under the Act.

In a compulsory winding up the registrar may require a liquidator to answer any inquiry in relation to any winding up in which he is involved. Where the winding up takes longer than one year to complete, liquidators are bound to report on the conduct of the liquidation to the Registrar (S.322 CA). This report must be written in the form of a statement, sent not later than thirty days after the expiration of the period of twelve months from the commencement of the liquidation and thereafter at least every six months until the winding up is concluded.

In addition there may be occasions on which the liquidator will be obliged to give information on behalf of the company in the course of legal proceedings in which the company may be involved. The liquidator is under a duty to take all the proper steps to ascertain the correct answers where he does not have such answers from his own knowledge.

Duty to examine the conduct of officers of the company

The liquidator has a duty to investigate the conduct of the company’s past and present officers and to consider whether they are guilty of any wrongful conduct in managing the company’s affairs. The liquidator may obtain all information which he reasonably requires in the course of winding up and consequently all officers of the company are bound to inform him of any relevant issues and in case of default they will be committing an offence.

Criminal proceedings may be taken against any officer of the company who in the twelve months prior to the deemed date of dissolution, had concealed assets or documents or disposed of assets or otherwise acted in a fraudulent manner. In civil proceedings these officers may be found responsible to pay back to the company any monies due to the company or even damages. The law also provides for proceedings in case of wrongful trading by directors and fraudulent trading by any officer of the company.

Duty to recover and realize the company’s assets

The fundamental duty of the liquidator is that of the recovery and realization of the assets and all his powers are designed to ensure the effective discharge of this duty. The liquidator must recover the assets of the company for the benefit of the creditors and ultimately the members, and he must realize the same so as to effect the best possible distribution.

The Companies Act clarifies the steps which the liquidator is to take in order to fulfill this duty.

On his appointment, the liquidator should obtain possession of all books, documents, papers, money and other property of the company which may be in the hands of any person. (S237).

The liquidator must ensure that the amount of assets available for distribution is the maximum. Therefore, he must recover any debts which are due to the company. He may also commence and continue proceedings in the name of the company and may also compromise such proceedings.

Once al the property of the company has been recovered the liquidator must realize the assets of the company. Where the liquidator effects a realization of the company’s assets by way of a sale, he may act in the name of the company and execute or sign all the documents which may be necessary.

The next step requires the liquidator to pay the company’s creditors. Section 249 states that in a compulsory winding up the Court shall cause the assets of the company to be collected and to be applied in the discharge of the company’s liabilities. In practice, this duty is fulfilled by the liquidator and not by the court as a result of section 263 which enables the liquidator to perform these functions.

Above all the liquidator must make sure that payments are made in accordance with the rules of priority, that payment is only effected when claims have been proved and that no proved claims are omitted because otherwise he will be personally responsible for non-payment.

Where the assets are insufficient to satisfy the company’s liabilities the liquidator must distribute the proceeds by way of dividend between those creditors who have proved their debts and each creditor is paid in accordance with his order of priority and in proportion to the amount due to him.

Finally, in terms of Section 324 the liquidator is obliged to keep the books of the company for a period of ten years from the date of the striking off of the company’s name from the Registrar.

A FINAL NOTE

Undoubtedly the company’s act sets both the powers and the duties of the liquidator and clarifies the liquidator’s position. Indeed it renders the office holder accountable towards the company, creditors and the Court.