Company insolvency and the role of the liquidator as investigator - Walking the line between interrogation and co-operation
Posted on May 09, 2022← Back to Info Centre
Top of the agenda for most liquidators on being appointed in a winding up is getting a handle on the business of the company being liquidated and finding out what went wrong and where its assets are/what happened to them. In the vast majority of cases the business of the insolvent company to which a liquidator has been appointed will be completely unknown to them. There will be books and records and the company officers will have extensive knowledge to tap into, but what happens if those records and that knowledge aren’t/isn’t easily made available or, if the knowledge/documentation imparted simply raises more questions, or if there is potentially relevant knowledge held elsewhere, for example by auditors, or other agents which the company has employed over the years?
There are various statutory and fiduciary obligations placed on company officers and others to provide information/co-operate with liquidators in providing information which are not dealt with in this article. The focus of this piece is to discuss the statutory relief available to liquidators per section 206 Companies Act 1931 (act of Tynwald) to obtain company property (for example books and records) from officers or others connected with the company prior to its winding up. Section 206 reads (in part):
206 Power to summon persons suspected of having property of company
(1) The court may at any time after the appointment of a provisional liquidator or the making of a winding-up order, summon before it any officer of the company or person known or suspected to have in his possession any property of the company or supposed to be indebted to the company, or any person whom the court deems capable of giving information concerning the promotion, formation, trade, dealings, affairs or property of the company.
(2) The court may examine him on oath concerning the matters aforesaid, either by word of mouth or on written interrogatories, and may reduce his answers to writing and require him to sign them.
Some important points to note in respect of the wording of this provision are:
a.The power of the court to summon people is not restricted to officers of the company, but to anyone who “the Court deems capable of giving information [about] the company.”; and
b.It does not explicitly provide a liquidator with any power to demand information from such people; and
c. It provides the option of court examination by written interrogatories and answer thereto.
Of course, a liquidator will hope that they can obtain information without the need for an application under s.206. The easiest way to do that is perhaps to write to the person/entity with questions for answer, or to invite them for an interview but, per (b) above, there is nothing in s.206 by which a liquidator can compel a person/entity to comply with such a request, and there is no Isle of Man company law provision equivalent to s.235 Insolvency Act 1986 (act of Parliament) which places a statutory duty upon company officers and other individuals to co-operate with liquidators in similar terms to which s.206 requires them to co-operate with the Court.
What happens then if someone refuses to co-operate and fails to answer the liquidator’s questions/provide information? In that case a s.206 application seems unavoidable and the Manx case of FSA v New Earth Recycling and Renewables [14 January 2019] provides a useful summary of the law which is to be applied in determining such applications. Amongst the Court’s considerations are:
- The court has to balance the requirements of the liquidator against:
- possible oppression of the parties sought to be examined, bearing in mind that the purpose of the section is to enable a liquidator to reconstitute the knowledge the company should possess in order to discharge his duties to the creditors; and
- the fact that the case for making an order against an officer would usually be stronger than that against a third party; and
- the fact that oral examination is likely to be more oppressive than an order for production of documents.
- There must be a reasonable requirement for the information sought, and not, for example, an absolute need.
- In many cases the court will require the liquidator to make written enquiries, for example by questionnaire, before it makes an order.
- An application for the production of documents against accountants is not necessarily unreasonable because it is inconvenient for the accountant, or causes considerable work, or may make them vulnerable to future claims, but these are nevertheless relevant factors to be taken into account.
- The extent to which an applicant reasonably requires access to documents depends in part upon what documents are already available to them from the company's own records. Evidence addressing this should be given in the application for an order.
- The purpose of the power is not confined to obtaining general information about the company's affairs, but may be used to discover facts and documents relating to specific claims against specific persons which the liquidator has in contemplation. It is in itself no bar that the liquidator may have commenced, or may be about to commence, proceedings against the proposed witness or someone connected with them.
- If, by giving the information sought, a third party risks exposing himself to liability then that involves an element of oppression. This is not conclusive but will need to be balanced generally with the need for information.
Of particular interest to this discussion from the issues set out above is number 3, being the requirement for liquidators to put their questions in writing. Whilst therefore, as stated previously, s.206 confers no direct power on the liquidator to demand information, there is a prima facie expectation, through the development of jurisprudence, that a party will comply with liquidator’s reasonable request, assuming that such a request complies with the other principles outlined in the New Earth case.
Another point of note from issues summarised in New Earth is the requirement of reasonableness based on the extent to which documentation/information is already available to the liquidators. On being appointed a liquidator will be anxious to do what he can to find/protect assets for example, and whilst information about that might be gleaned from an extensive trawl through company documents, this might not be as efficient as asking the right people the right questions. Efficiency can be a reasonable ground for seeking assistance pursuant to s.206, for example where utilising alternative sources to analyse documents may take significantly longer or be more costly (see Re British & Commonwealth Holdings Plc (No.2)  Ch. 342 at 370–372).
On the issue of reasonableness, and considering its application the Court in New Earth stated:
“Tynwald has vested in liquidators this "extraordinary" and "sui generis" power, and the court should not hesitate to use it in a proper case, it might be said especially in a case such as this where so many investors have lost so much money. I remind myself that this is a case where liquidators were appointed in the interests of the public following the intervention of the Financial Services Authority in early June 2016. I accord considerable respect to the views of the Liquidators and appreciate their desire to gain a greater understanding of the thought processes of the directors.”.
A subjective analysis is therefore undertaken by the Court based on the unique facts it is presented with, although it seems that in cases where there has been a significant loss to investors in a company, then that fact will weigh heavily in the determination of the Court.
To the extent that aspects of the proposed information/questions delve into professional opinion, or seek to address a person’s conduct in a way which may set up a negligence action, the court may prevent such questioning on the basis that it is oppressive. A liquidator would need to make out a case as to the need for the information being reasonably required and generally show that its provision would not be bettering the position the company would have been in if it had not entered liquidation.
Damian Molyneux is a director of M&P Legal specialising in, amongst other things, liquidations. He can be contacted on email@example.com This article does not constitute legal advice, specific advice should be sought for individual circumstances.
Damian acknowledges (with thanks) the assistance of James Saunders of New Square Chambers.Back to top