The appointment and removal of liquidators

Section 583 of the Act provides that in a members’ winding up, the company in general meeting shall appoint one or more liquidators for the purpose of winding up the affairs and distributing the assets of the company. The steps leading up to that appointment are considered in the previous chapter. 27 All voluntary liquidators must give their prior written consent to the proposed appointment and a liquidator’s appointment is of no effect unless he gives his prior consent in writing. 28 A voluntary liquidator, such as a members’ liquidator, is obliged, within 14 days of his appointment, to deliver to the Registrar notice of the appointment and the Registrar is required to notify the Director of Corporate Enforcement. 29

While a liquidator has a statutory right to resign, 30 s 636(2) facilitates the removal of a members’ voluntary liquidator:

Subsequent to the appointment of a liquidator of a company under section 583 in a members’ voluntary winding up, the company, in general meeting, may, at a meeting convened for that purpose–

• (a) remove the liquidator;
• (b) appoint a liquidator to replace or act with the existing liquidator; or
• (c) appoint a liquidator to fill a vacancy in the office of liquidator.

In a members’ winding up which by definition means the company is solvent and all creditors will have their debts paid, the appointment and removal is exclusively the remit of the members. However, these powers of the members are expressly subject to any court order made on the application of any contributory or an existing liquidator. 31 Special notice provisions apply to a members’ general meeting to remove or appoint a replacement liquidator (ie, as provided for in s 636(2)(a) and (b)), and s 636(3)(a) provides that notwithstanding anything in Part 4, a general meeting of the company for those purposes can be convened on 10 days’ notice by any member (with the written authority of not less than 10% in number of the members) or an existing liquidator. A meeting to appoint a liquidator to fill a vacancy as mentioned in s 636(2)(c) can be convened on 10 days’ notice to the members by any member with the same written authority, an existing liquidator or any contributory: s 636(3)(b). 32 A liquidator appointed under s 636 is not required to notify the Registrar under s 592(1) of the Act. 33

The primary means of appointing a creditors’ voluntary liquidator is under s 588, at the creditors’ meeting held under s 587 of the Act, which has been considered in Ch 24, Winding Up Companies. 34 A voluntary liquidator, such as a creditors’ liquidator, is obliged, within 14 days of his appointment, to deliver to the Registrar notice of the appointment, and the Registrar is required to notify the Director of Corporate Enforcement. 35

Where it becomes necessary to remove, replace or fill a vacancy in the office of creditors’ liquidator, recourse can be had to s 637 of the Act which applies at any time subsequent to the appointment of a liquidator under s 588. Section 637(3) provides that in cases where s 637 applies, the creditors may, at a meeting convened for that purpose, by resolution of a majority, in value only, of the creditors present personally or by proxy and voting on the resolution, exercise the powers set out in s 637(4), namely:

• (a) remove the liquidator;
• (b) appoint a liquidator to replace or act with the existing liquidator; or
• (c) appoint a liquidator to fill a vacancy in the office of liquidator.

Creditors’ powers under s 637(3) are subject to any court order with regard to the matter on application to it by any creditor or an existing liquidator. 36 Where a meeting is called to exercise these powers, they should be convened on 10 days’ notice to the creditors by any creditor with the written authority of not less than 10% in value of the creditors or by an existing liquidator. 37 As observed in Re Panshire Ltd; Garcia and Panshire Ltd v Kilkenny and others 38 of the predecessor provisions, where a liquidator appointed in accordance with s 587 resigns, it is necessary to comply with the requirements of s 637 but it is not necessary to comply with the more detailed requirements of s 587 which only apply on the first appointment of a liquidator to a company. Whereas the procedures for a subsequent meeting to elect a liquidator was governed, previously, by the Rules of the Superior Courts, now the appropriate procedure to be followed is that set out in Chapter 13 of Part 11, considered below, save to the extent that its provisions are modified by s 637. 39 In Panshire, the former directors of the company who claimed to be creditors were not sent notice of the meeting to appoint a new liquidator appointed after the first liquidator (appointed at the creditors’ meeting) had resigned. Their application to challenge the appointment of the liquidator – brought over three and a half years after the second liquidator had been appointed – was rejected on the grounds that it ought to have been brought within a ‘reasonable period of time’; 40 Haughton J also found there was no general rule that a plea of estoppel could not be raised in a case of this nature and that to permit them to claim his appointment was invalid would be unconscionable. 41

Section 638(1) confers a general power on the High Court to remove any liquidator, including a liquidator appointed in any winding up, including therefore in a creditors’ winding up on the application of a member, creditor, liquidator or the ODCE or of its own motion ‘on cause shown’; the case law on the meaning of cause shown is considered below in the context of the removal of liquidators appointed by the court. 42

Creditors proposing to appoint a liquidator, whether under s 588 or s 637, would do well to remember the obligation to disclose interests imposed by s 649. Section 649(1) provides:

Where, at a meeting of the creditors, a resolution is proposed for the appointment of a liquidator, any creditor who has a connection with the proposed liquidator shall, before the resolution is put, make such connection known to the chairperson of the meeting who shall disclose that fact to the meeting, together with particulars thereof.

This obligation applies to representatives of creditors too. 43 The chairperson must also disclose any such connection as is mentioned in s 649(1). 44 A person will have a connection with a liquidator where he or she is a parent, spouse, civil partner, sibling or child of or employed by or a partner of the proposed liquidator: s 649(4).

Section 575 of the Act provides that for the purpose of conducting the proceedings in winding up a company, the High Court may appoint a liquidator or liquidators. Where more than one liquidator is appointed, the order should declare whether any thing required by the Act to be authorised or done by the liquidators is to be done by all or any one or more of the persons appointed. 45 Moreover, an appointment shall be of no effect unless the liquidator has signified his written consent to the appointment. 46 While the source of the High Court’s power to appoint a liquidator consequential upon the making of a winding-up order is s 575, the High Court has a more general power to appoint (or remove) a liquidator in any winding up (ie, in a members’ or creditors’ winding up) under s 638(1)(a) on the motion of a member, creditor, liquidator or the Director of Corporate Enforcement. On the making of an order appointing a liquidator (other than a provisional liquidator) such officer of the court as may be prescribed shall forthwith cause the Registrar to be furnished with such particulars as may be prescribed by the order. 47

A liquidator appointed by the court can resign or be removed by the court. Section 638(1)(b) of the Act provides that a liquidator appointed by the court can, on cause shown, be removed by the court. 48 In Re Doherty Advertising Ltd 49 McGovern J found that a person who owed money to the company (ie a debtor of the company) had locus standi to have a liquidator removed, saying:

‘From the authorities opened to the court and the articles referred to I am satisfied that the applicant is not a person qualified to make the application for the removal of the liquidator in this case. While it could be said that the applicant may become a creditor if he repays the monies alleged to have been improperly obtained by him he is, at the time of this application, and for the purposes of this application, challenging the liquidator in a manner which puts his interests adverse to those of the creditors in the liquidation. I therefore hold that the applicant is not a person entitled to bring this application.

But in any event the applicant has not shown sufficient cause for the removal of the liquidator in this case. The burden of proof is on the applicant to have a liquidator removed. I am not satisfied that the applicant has discharged this burden by showing unfitness of the liquidator to act in this matter.’

It has been held by the common law judicial equivalent of the universal-wrench – the Privy Council – in Deloitte & Touche AG v Johnson, 50 a decision referred to by McGovern J, that the proper persons to make application are those who have an interest in the outcome of the liquidation. It was observed there that a contributory who was not a creditor could not apply to have a liquidator removed. In that case the applicants were a firm of accountants who had acted as auditors to a company in liquidation and who were being sued for negligence. Following various mergers of accountancy practices, the applicants alleged that the liquidators had a conflict of interest by reason of the fact that a firm of accountants whom the applicants claimed had failed to provide them with material information, had now merged with the liquidators’ firm. The Lords upheld the Cayman Islands’ Court of Appeal decision that the application be struck out. If there was a conflict, that was a matter for those who would be affected, namely, the company’s creditors. This case was cited by McGovern J in an application brought by a debtor (or alleged debtor) of a company to remove a liquidator. The question before the court was whether such a debtor could apply under the predecessor of s 638(1)(b) of the Act for the removal of a liquidator (in whom the creditors and contributories of a company appeared to have confidence) on the ground of a conflict of interest.

In the decision of the Federal Court of Australia in City & Suburban Pty Ltd v Smith, 51 it was stated of the court’s entitlement to remove a liquidator ‘on cause shown’ that:

‘It has long been accepted that the section and its predecessors were not confined to situations where it is established that there is personal unfitness, impropriety or breach of duty on the part of the liquidator. Cause is shown for removal whenever the court is satisfied that it is for the better conduct of the liquidation or, put another way, it is for the general advantage of those interested in the assets of the company that a liquidator be removed.’ 52

Fair play to a liquidator is secondary to the expediency of the liquidation. In Re Adam Eyton Ltd; ex p Charlesworth, 53 Bowen LJ said:

‘Of course, fair play to the liquidator himself is not to be left out of sight, but the measure of due cause is the substantial and real interest of the liquidation.’

In the Australian case of City & Suburban Pty Ltd v Smith it was held that cause had been shown to justify the removal of the liquidator where it had been established that:

• the liquidator had failed to conduct a proper investigation into allegations that the directors of the company had been in breach of their fiduciary duties;
• there were allegations that the liquidator had himself been in breach of his fiduciary duties to the company;
• there were allegations of over-delegation by the liquidator of his functions to his employees giving rise to his having an allegedly insufficient grasp of the issues involved in the liquidation; and
• the liquidator’s insensitivity to the committee of inspection.

In Re Trinity Products (Limerick) Ltd 54 it was reported in The Irish Times that Finlay Geoghegan J removed a court-appointed liquidator on the grounds that the fact that he was restricted as a director under the predecessor of s 819 of the Act and had been censured by the Institute of Chartered Accountants in Ireland had not been disclosed to the court. The learned judge was reported to have said that those facts alone did not automatically disqualify the person from being a liquidator, and it might well have been that on a full examination of all relevant facts the court would have appointed him. However, these were relevant facts that should have been considered by the court when deciding whether or not he was a fit and proper person to be appointed a liquidator.

In Re Ballyrider Ltd; Revenue Commissioners v Fitzpatrick 55 the Revenue Commissioners applied to court under the predecessor of s 638(1) to remove the liquidator for cause shown on the basis that he had charged excessive remuneration and incurred excessive legal costs; that he failed to call meetings of the committee of inspection when requested to do so by the creditors; that he failed to hold annual creditors’ meetings as required by law; that he had brought and maintained proceedings in circumstances where the creditors had advised and directed that this was not in the interests of the liquidation; and that the Revenue Commissioners no longer had confidence in him. There, Murphy J noted that the burden was on an applicant seeking to remove a liquidator, endorsed the comments of Millett J in Re Keypack Homecare Ltd 56 and cited with approval the dicta of the Federal Court of Australia in City & Suburban Pty Ltd v Smith. 57 Murphy J accepted that lawyers had been retained at excessive cost (10% of the purchase price of the property in sale), that there had been a failure by the liquidator to produce an itemised account of the work done by him so that it could be inspected by the committee of inspection and that the liquidator had issued proceedings without consulting with the committee of inspection. Murphy J granted the Revenue Commissioners the order they sought, finding that they had discharged the burden of proof by showing that the best interests of the liquidation required the removal of the liquidator. Murphy J concluded:

‘Had the respondent come before this Court with a detailed set of accounts showing his stewardship of this liquidation and a fixed plan for its winding up, the Court would probably have been slow to intervene. However, he has done neither and has chosen instead to invoke his legal right to act as he has done. The evidence suggests that he has a flawed understanding of the role and duties of a liquidator. The Court is satisfied for the reasons set out in this decision, that the applicant’s loss of confidence in the respondent’s conduct of this liquidation is both genuine and warranted. Furthermore, the Court is satisfied that the many issues arising in this liquidation set out above, cannot be properly resolved while the respondent remains as liquidator. The Court is influenced in its decision by the fact that the applicant is in a position to propose an alternative liquidator who can act promptly and cost effectively to conclude the liquidation. In reaching its decision the Court has also been mindful of the impact of removal on the liquidator’s professional standing and reputation as set out at (e) in the principles applying to removal identified in Re Buildlead Ltd (No 2) [(2006] 1 BCLC 9. In that regard the Court considers that any such damage stems directly from his own ineffectiveness in the conduct of this liquidation’.

The Revenue Commissioners did receive some criticism too, however, as Murphy J pointed out that some of the difficulties they encountered might have been avoided had they exercised their rights as a member of the committee of inspection with more vigour. 58

Although Murphy J exercised the power to remove the liquidator under s 277 of the Companies Act 1963 and not s 638(1)(b) of the Act (on account of the fact that at the date of the hearing, s 638 had not been commenced), she went on to make certain consequential orders 59 under s 638(2) of the Act at a subsequent hearing after the commencement of s 638. On appeal, 60 the consequential orders were set aside on the basis that the jurisdiction to make a consequential order under s 638(2) only arose where a court makes an order to remove or appoint a liquidator under s 638(1) and that in the instant case, the order to remove the liquidator has been made not under s 638(1) but its predecessor, s 277. Finlay Geoghegan J held that the High Court was in error on that point and ought to have made the consequential orders, were it minded to do so, under s 280 of the Companies Act 1963. 61

The substantive decision of Murphy J to remove Mr Fitzpatrick as liquidator was also appealed. On this point the Court of Appeal per Finlay Geoghegan J concluded that the correct legal principles had been applied to his removal which was ‘principally based upon her conclusion that he had not conducted the liquidation in an efficient and cost-effective manner and those provided good grounds for granting the relief sought.’ 62

Section 573 of the Act provides that the court may appoint a liquidator, provisionally, at any time after the presentation of a winding-up petition and before the first appointment of a liquidator. An application will usually be made by the petitioning creditor although it can be made by any person entitled by law to present a petition 63 who is concerned that, unless the assets of the company are immediately preserved, they are likely to be spirited away by the controllers of the company, or other anxious creditors, in disregard of the law of distribution on an insolvency. 64 However, where a provisional liquidator is appointed on foot of the petitioning creditor’s application, he will not represent that creditor alone and must act in the interests of all of the company’s creditors. 65 The appointment of a provisional liquidator is intrinsically detrimental 66 to a company and is a jurisdiction that will be exercised by the courts in the clearest of cases only.

The fears of the applicant must be supported by affidavit, showing ‘sufficient ground’. 67 It has been held that the appointment of a provisional liquidator has the effect of terminating automatically the authority of agents who had been appointed to act on the company’s behalf by its directors. 68 In this regard, the application for the appointment of a provisional liquidator may be seen as analogous to the application for a Mareva injunction by a plaintiff fearful that his litigation, if successful, could result in a pyrrhic victory. 69 Indeed, such an injunction may also be sought in a winding up so as to hold the threat of contempt of court over anyone who chooses to disregard the order. 70

The primary purpose of the appointment of a provisional liquidator is to ensure the preservation of corporate assets, and thus to enable the court-appointed liquidator to effect an orderly realisation and subsequent distribution of those assets. 71 This is the purpose of the winding-up order itself, and while s 596(1) provides that a liquidator is obliged on his appointment to take into his custody or under his control the seal, books, records of the company and all the property to which the company appears to be entitled, that provision does not apply to a provisional liquidator. The powers of a provisional liquidator to take possession of property are more circumscribed and Ord 74, r 14(3) provides that the order appointing a provisional liquidator must state the nature and a short description of the property of which the provisional liquidator is ordered to take possession and of his duties.

A provisional liquidator is displaced by the appointment of a liquidator, or he can be removed by order of the court where it refuses the petition to have the company wound up. In Re Kingscroft Insurance Co Ltd 72 it was held that upon the discharge of a provisional liquidator and the dismissal of the winding-up petition, any orders made against persons during the proceedings will also be discharged because the purpose behind the making of such ancillary orders no longer exists. The powers of provisional liquidators are considered below. 73

Re Coolfadda Developers Ltd 74 involved a novel application by a company to which a provisional liquidator had been appointed, to adjourn a winding up-petition and allow the continuation of the provisional liquidator to enable the company to complete building contracts. In the High Court, Laffoy J refused the application to adjourn the winding-up petition even though it had been claimed that the company would do better in an extended provisional liquidation than were it to go into official liquidation. The basis for this assertion was that returns to the company (and therefore, ultimately, its creditors) would be maximised were the employers on construction contracts with the company not in a position to terminate those contracts, as they would be able to do if a winding-up order was made. The refusal of the High Court to adjourn the winding-up petition was upheld by Denham J in the Supreme Court who held although there was jurisdiction in an exceptional case to adjourn, from time to time, a winding-up petition, such a jurisdiction would rarely arise. 75