Should a Liquidator attend Court hearings?

At a glance

This note explores whether a Liquidator should seek permission not to attend Court hearings to determine an application for directions

It is common for Liquidators to issue applications for directions pursuant to s 168(3) of the Insolvency Act 1986 where, for instance, he/she is unable to make a determination.

In a recent case, we were involved in our client, Ian Robert of Kingston Smith & Partners LLP the Liquidator of a Company, sought a direction from the Court as to how he should make a final distribution. There was a dispute as to who the shareholders of the Company were. The Company register said the shares were held on a 50:50 basis. Shareholder A asserted a right to all of the shares because Shareholder B had purportedly entered into a loan agreement said to contain a provision that in the event Shareholder B defaulted on repayment, all of his shares in the Company pass to Shareholder A. Shareholder B meanwhile was declared bankrupt and never repaid the purported loan to Shareholder A. In his bankruptcy proceedings no reference was made to the loan agreement. The trustees in bankruptcy for Shareholder B, therefore, maintained that the Company register was correct.

Despite protracted discussions and multiple requests for proof of the loan arrangement nothing was produced by Shareholder A. The Liquidator therefore reluctantly issued an application and warned both shareholders that as a result any dividend payment would be reduced.

Upon determination, the Registrar concluded that the Company register was correct and declared the shares to be held on a 50:50 basis.

On the issue of costs, the Registrar awarded the Liquidator costs on an indemnity basis against Shareholder A – all very normal so far.

However, things then took an unusual and surprising turn.

The Registrar decided that the Liquidator could only have his legal costs up to a point – in this case the CMC and costs of preparing the bundle for hearing. Any costs incurred after this date including the costs of preparing for and attending the hearing of the application and subsequent handing down and hearing on costs could not be recovered against either (a) Shareholder A or (b) as a liquidation expense.

The rationale was said to be that the Liquidator should have known by the first CMC that his presence was not required because the main dispute was between the shareholders and he had already said he would abide by whatever decision was made. This is despite:

The Liquidator being the Applicant;
The parties regularly communicating with the Liquidator, including asking for the name of the Liquidator’s counsel ie clearly expecting him to attend;
The Liquidator having taken steps to reduce costs throughout;
No party having raised this as an issue before either hearing;
The Court issuing directions to file skeleton arguments and to attend both hearings and comment on the draft judgment;
The handing down hearing dealing with costs, on which, it turns out, we had plenty to say.
The Registrar finding that Shareholder A and Shareholder B (personally, and not the trustees in bankruptcy) had conducted the litigation dishonestly, Shareholder A had failed to explain contradictory evidence as to the loan and/or purported agreement and/or to provide any evidence at all on the purported loan, save for a bare assertion of its existence, to support her position.

The real impact of such an order is that the Liquidator, personally, is liable to pay the unrecoverable costs. This should, therefore, be a warning to both the insolvency and legal profession that the Court can be minded to restrict recovery of a Liquidator’s costs, even if incurred preparing for a hearing of his/her application.

If you would like to discuss the above further please do not hesitate to contact Nikola Lowry-Lee.

Memery Crystal’s award-winning Dispute Resolution Team were voted “Dispute Resolution Team of the Year” at the Legal Business Awards and “Litigation Team of the Year” at the Lawyer Awards in 2014.