CHAPTER 4 - CREDITORS VOLUNTARY LIQUIDATION
4.13 REMUNERATION OF THE LIQUIDATOR
The committee of inspection or, if there is no such committee, the creditors, have the right to "fix" the remuneration to be paid to the liquidator. (In the following comments on remuneration the word "creditors" is used in place of the more precise but cumbersome phrase "the committee of inspection or, if there is no such committee, the creditors".)
The meaning of the word "fix" when used in this context is not clear. But in practice, in voluntary liquidations at least, it is assumed to mean:
To decide upon either the basis to be used for calculating the remuneration or the amount of the remuneration, or both the basis and the amount.
There are four steps in the decision which creditors make on remuneration:
Each of these is explained below. In considering them the reader should keep two points in mind:
(a) A registered liquidator is not likely to consent to nomination by creditors if he/she does not like the proposed basis of calculating his/her fees.
(b) If the liquidator believes that the amount fixed by creditors is unreasonably low, he/she might apply to the court to review the amount of his/her remuneration or might resign.
By far the most common method of calculation is time: i.e., the amount of time expended on the administration by the liquidator and his/her staff. This is the one almost invariably sought by liquidators in Australia.
The other method only occasionally adopted in Australia, although quite common in England, is commission: i.e., a percentage (or a range of percentages) on the value of assets realized. This method is favoured by some creditors because it links the liquidator's remuneration to "results achieved", meaning the amount realized. An example of how it works is given in the following section.
Naturally, for the time method hourly rates must be set. A scale is normally used, with the top rate being the liquidator's and lower rates for the people he/she employs as managers, supervisors, typists etc.
Liquidators usually seek the scale of hourly rates recommended from time to time by the association to which most of them belong: the Insolvency Practitioners Association of Australia (IPAA). At present the IPAA's recommended rate for liquidators in Melbourne is $ 213 an hour. For a complete list of the IPAA's scales throughout Australia see Fees for Insolvency Administrators, Chapter 13. It should be noted that some liquidators are prepared to accept less than these rates.
In Victoria another scale is recommended from time to time by the Chief Justice of the Supreme Court. The liquidator's rate on this scale is at present $ 147 an hour.
Where remuneration is by commission the percentage of the value of realizations can, within reason, be as low or as high as the creditors and the liquidator agree. What has to be borne in mind is the fact that the court may review the remuneration; and if it does it would probably not agree to an amount which greatly exceeds that which would result from using the time basis on an approved scale.
An example of percentages used under the commission method is the Table of Fees which was once payable to the official receiver and liquidator (a government official) in England. The table consisted of 3 parts, two of which are relevant here:
1. The following percentages of total assets realized or brought to credit (after deducting amounts spent in carrying on the business of the company):
On the first 1,000 or part thereof 6
On the next 1,500 or part thereof 5
On the next 2,500 or part thereof 4
On the next 5,000 or part thereof 3
On the next 90,000 or part thereof 2
Above 100,000 1
2. On the amounts distributed in dividends or paid to contributories, preferential creditors and debenture holders, half the above percentages.
Where the official receiver and liquidator realized property for a debenture holder or secured creditor, his fees were the same as 1. and 2. above, but paid out of the proceeds of such property.
Often this Table of Fees was adopted in creditors voluntary liquidations with modifications such as: "10% shall be substituted for 8%, 8% shall be substituted for 4% (etc.)".
Another guide to an appropriate percentage is the rate set in Property Law statutes in Australia (and in some mortgage debentures) and, thus, applicable to some receivers. This is 5% of moneys received/income collected. And in bankruptcy law a trustee has been allowed a rate of 5% of all moneys received.
Once a method and a rate or rates are chosen the next step is to consider whether or not a limit should be set. For example, creditors might agree that the liquidator be remunerated on a time basis using rates recommended by the IPAA, but stipulate that the amount is not to exceed $30,000.
In such a case, if the liquidator's fees exceeded $30,000 he/she could either write off the excess, ask the creditors to approve the additional amount or, if they refuse, apply to the court for a review.
This step should probably be the first, not the last. It is the decision about when creditors will fix the remuneration. In other words, creditors may decide to fix the remuneration at their first meeting (before the winding up gets under way), or every (say) six months, or towards the end of the liquidation (when most of the work has been done).
From the liquidator's point of view, a decision at the start of the winding up, particularly if no limit is imposed, enables him/her to draw fees immediately they are billed. But such a decision is suited more to the needs of the liquidator than to the benefit of creditors. Creditors might prefer to find out what the liquidator has done before approving payment.
In this regard creditors should note the opinions of the Australian Law Reform Commission (ALRC), which, in 1988, conducted an extensive inquiry into the insolvency laws. The ALRC recommended a scheme for approving remuneration which included a provision that:
" Remuneration may not be approved without full details being given to creditors of how it is calculated. These details must be provided to creditors 7 days before the meeting seeking their approval."
The ALRC opposed the concept of approving fees in advance of them being incurred:
" In the Commission's view prospective approval creates a risk of over servicing and denies creditors an opportunity of reaching an informed view as to whether the remuneration actually paid is justified."
Clearly, on this view, if remuneration is fixed at the first meeting of creditors - i.e., before the liquidator has done any work - it is not in the interests of creditors to agree to remuneration being drawn without any limit or review. Creditors will find that usually a liquidator will accept such conditions, even if he/she was not informed of them when he/she consented to act.
But liquidators are far less flexible about the method of calculating remuneration (time or percentage). Therefore, to obtain the consent of a liquidator to act, an unofficial decision or an understanding about the method should be made or exist even before the first meeting. If this is not done, it should be assumed that the liquidator will want to be remunerated on a time basis.
4.13.5 Summary and Suggested Resolutions
While in theory there are several ways in which a liquidator's remuneration can be calculated, in practice the method and rates used will be those acceptable to registered liquidators. Most of them will want to be remunerated on a time basis using the rates recommended by the Insolvency Practitioners Association.
Where creditors can have a significant say is in the timing of their approval. Ideally remuneration should not be approved until creditors have received a report from the liquidator and/or questioned him/her about the work done.
Unfortunately the procedure frequently followed is the antithesis of this ideal: creditors give the liquidator a "blank cheque" by agreeing at the initial meeting that he/she can henceforth calculate and draw his/her remuneration without the need for any further review or approval by creditors. Later, creditors sometimes find that the liquidator is drawing much more than they anticipated. But to review the liquidator's remuneration then, creditors might have to resort to an application to the court.
Below are suggested resolutions (for the time basis) which safeguard creditors' interests without unduly inconveniencing liquidators:
1. At the first meeting of the committee of inspection (or creditors, if there is no committee).
That the remuneration of the liquidator and his/her staff be calculated on a time basis using rates recommended from time to time by ---(a)--- but not exceeding $---(b)--- unless a subsequent meeting of the committee of inspection or creditors resolves to approve an additional amount, and the liquidator be authorised to make periodic payments of such remuneration as it accrues.
(a) = Insert the name of the organisation, eg. the Insolvency Practitioners Association of Australia.
(b) = The limit will depend on both the complexity and size of the liquidation and the desired frequency of meetings. In a small and simple winding up total remuneration might be no more than $10,000, in which case this figure could be set as the limit. At the other extreme the liquidator's fees might amount to $250,000, in which case creditors may like to set a limit of $50,000 and increase this as the need arises.
2. At subsequent meetings.
That the limit imposed on the amount of remuneration of the liquidator and his/her staff by ---(c)--- on ---(d)--- be increased to $ ---(e)--- but that in all other respects the fixing and payment of such remuneration remain the same as resolved on ---(f)--- by ---(c)---.
(c) = Insert "the Committee of Inspection" or "creditors" as the case requires.
(d) = Insert date of meeting.
(e) = Insert new limit.
(f) = Insert the date of the initial meeting.
A suitable resolution for a flat-rate commission basis would read:
That the remuneration of the liquidator for his/her services in the winding up be fixed at a sum equal to 5 per cent upon the amount of the assets recovered in the winding up during his/her period of office.
4.14 QUESTIONS TO DIRECTOR
A director and a secretary of the company must attend the meeting of creditors and disclose the affairs (activities, interests, pursuits) of the company and the circumstances (events, incidents, factors) leading up to the winding up. The penalty for failure to do so is a fine of $1000 or imprisonment for 3 months or both.
This requirement gives creditors both the right to ask about these matters and the right to receive from the director or secretary honest and comprehensive answers.
The run up to the meeting is the best time for creditors to consider whether there is anything they want to know about the company, and to jot down their questions. Those questions will tend to fall into two categories: general and specific.
A general question is one that could be asked of the directors of any failed company. For example:
What were the causes of the company's failure?
When did the directors first realise that the company might have to go into liquidation and what caused them to realise this?
Have any payments been made or property transferred or security given to creditors in preference to other creditors?
How much did the directors receive from the company in fees, salary, etc.?
Has any director, or any person connected with a director, acquired any of the company's assets?
Have any assets been sold or transferred to entities associated with the company or the directors or any members of their families?
A specific question is one that relates to facts or rumours about the particular company. For example, a creditor might have heard that money or property of the company has been misappropriated, or that a director or a member of his/her family has another business. Or a creditor might know of or have heard about assets which are not revealed in the company's Report as to Affairs, and the director and/or secretary may be asked to explain.
The meeting of creditors is a good time to bring these issues out into the open. Not only does it let creditors release some of their anger and give directors an opportunity to present their side of the story, but also it gives the liquidator a lead into his investigations, and by doing so might cut down the time he/she would otherwise spend on this aspect of the administration.
Speakers at the meeting should not make statements that are motivated by malice. Statements so made lose the protection of qualified privilege, thus leaving the speaker open to being sued for defamation. (See Chapter 13 - Defamation - for more on this issue.)
4.15 AT THE MEETING
The discussion so far and that which follows assumes that the members of the company will decide at their meeting to wind up the company (see 4.1). But what happens to the creditors' meeting if the members decide not to wind up the company? Or they fail to pass the resolution? Or if they adjourn their meeting (as permitted by the Companies Code)?
The answer to the first two questions is the same: the creditors' meeting cannot go ahead. Also, creditors will, immediately and automatically, have reinstated in law their rights to pursue all the ordinary debt collection remedies in respect of their debts or claims against the company. [This position stays the same even if, as sometimes occurs, the assembled creditors meet informally to discuss the situation, perhaps even agreeing to appoint an unofficial committee to represent creditors generally and consider any proposals by the directors to save the company. ]
But if the members' meeting has been adjourned to a later date, the creditors' meeting may either go ahead - in which case the resolutions passed will take effect immediately after the members decide to wind up the company - or itself be adjourned in accordance with the Code to a time after the adjourned members' meeting.
Because planning is the key to effective action, most of the rights creditors can utilise at their meeting have already been mentioned. Those rights are:
to vote (in person or by proxy);
to elect the chairperson;
to adjourn the meeting;
to question a director and secretary;
to appoint a liquidator;
to form a Committee of Inspection; and
to fix the liquidator's remuneration.
The first three of these are now examined in more detail.
4.15.1 Who may vote
There are two aspects to decisions about who may vote: relationship and quantum. Is the person who wants to vote a creditor of the company? How much is the creditor owed? Both aspects - relationship and quantum - will be considered by the chairperson of the meeting. He/she must decide who can vote on all motions put to the meeting, with the exception, of course, of the motion to appoint a chairperson. (See Election of a Chairperson later in this chapter for more on this.)
The need for the first restriction is obvious, and in most cases there is no argument about who is a creditor. But occasionally disputes arise. For example, it might be claimed that a particular debt was incurred by a director personally rather than in his/her capacity as an agent of the company. Or, if the debtor company is closely associated with other companies, it might be claimed that the debt was incurred by another company in the group, perhaps one with a similar name.
If the chairperson is convinced that a person who claims to be a creditor is not a creditor, he/she is required to refuse that person a vote. Similarly, if convinced that a person is a creditor, he/she is required to allow that person to vote. (Either way, these decisions can be appealed against to the court within 14 days after the decision.) If, however, the chairperson is in doubt, he/she is required to allow the would-be creditor to vote, subject to the vote being declared invalid in the event of an objection being sustained. For instance, the meeting might be adjourned so that evidence on the point in dispute can be assembled.
The second aspect of the decision on who may vote - quantum - is important because, as will be explained later, the tally of votes on a motion put to the meeting might have to take into consideration the amount of each creditors debt or claim.
Arguments about the amount owing are quite common. In fact, unless the creditor has a judgement debt - i.e., one heard and determined by a court - the chances of a difference of opinion between the debtor company and the creditor are fairly high. Even so, the amount in dispute will not, in most of these cases, be great.
Where most problems of quantum occur is with debts or claims that are unliquidated (i.e., not assessed or quantified) or contingent. A creditor with a debt or claim of this type is not allowed to vote unless a "just estimate" of its value has been made.
If the director (or, for that matter, another creditor) disagrees with the estimated amount of a debt or claim, the creditor could either stick with the estimate, reduce the amount to the director's estimate or negotiate an acceptable amount. (It should be borne in mind that this "just estimate" is for voting purposes only, not for dividend; although secured creditors might be bound by it - see Secured Creditors later in this chapter.)
If, after a figure is settled on by the creditor, the chairperson is convinced it is a "just estimate", he/she is required to allow the creditor to vote for that amount. If he/she is convinced the estimate is not just, he/she must refuse to allow the creditor to vote at all. If in doubt, he/she is required to allow the creditor to vote, subject to the same condition as was mentioned earlier.
The following chart shows how a creditor's debt or claim for voting purposes should be processed:
(OOPS! Chart missing at the moment)
4.15.2 Secured creditors
A word of warning to secured creditors:
(a) In calculating the amount of their claims, secured creditors are required to put a value on the asset or assets which constitute their security. If they do not, they will be deemed to have surrendered the asset/s to the liquidator for the benefit of creditors generally (unless the court is satisfied the omission arose through inadvertence).
(b) Care must be taken in assessing the value of the asset/s because a liquidator can, within 28 days after a secured creditor has voted, require the creditor to give up the asset/s on payment of the assessed value (unless the creditor gets in first and, with the leave of the liquidator, reassesses the value of the asset/s).
To make proceedings of the meeting valid there must be at least two creditors present (unless the company only has one creditor). This rule applies to all items on the agenda and other matters arising except the election of a chairperson, the proving of debts for voting purposes and the adjournment of the meeting. For these decisions only one creditor is required.
4.15.4 Taking a vote
The votes of creditors on any motion put to the meeting can be taken in one of two ways:
(a) on a show of hands; or
(b) through a poll.
The show-of-hands method must be used unless a poll is demanded (see later). A motion will be carried on a show of hands if a simple majority of those voting vote in favour and will be lost if they vote against. (Note: a holder of more than one proxy can only vote once - see later.) But if a poll is conducted a motion is carried only if a majority in number and value of those voting have voted in favour.
The difference can be illustrated if we assume there are the following 5 creditors present (in person or by different proxies) at a meeting and voting on a motion:
Amount of debt or claim
A 115,000 B 170,000 C 6,000 D 2,000 E 23,000
On a show of hands any three could pass a motion. For example, C,D and E. But on a poll, a motion could not be passed if B voted against it, because B holds the majority in value. By the same token, B would not be able to pass a resolution unless two other creditors voted with him, making it a majority in number also.
When voting on a show of hands the vote cast by a person who holds one or more proxies counts as one vote only. However, if a poll is demanded, each proxy which that person holds is counted.
A poll can be demanded by either the chairperson, at least two creditors or a person representing not less than 10% of the total voting rights of all creditors entitled to vote at the meeting. Normally a chairperson will call for a poll if he/she considers that the result of a poll will differ from that of a show of hands. (A poll can be demanded on the motion to elect a chairperson.)
The demand for a poll must be made before, or on, the declaration by the chairperson of the result of the show of hands.
Once a poll is demanded the chairperson decides how and when it will be taken, except where the motion being considered is the election of a chairperson or an adjournment of the meeting, in which cases the poll is to be taken immediately.
At no stage during the meeting is the chairperson entitled to have a vote of his/her own (a deliberative vote). This is because the meeting is of creditors and the chairperson, as such, is not a creditor. But where a vote - taken on number only (a show of hands) - is tied, the chairperson is entitled to a casting or deciding vote. It seems this right cannot be exercised where a vote is decided by a majority in number and value, because the chairperson's vote has no value.
4.15.5 Election of a chairperson
The meeting cannot start until a person is appointed to chair it. The basic role of this person is "to superintend all aspects of the meeting, exercise control as needed and generally enable those present to fulfil the function and purpose of the meeting in an orderly, lawful fashion".
Creditors have the right to appoint the chairperson. As already stated, the chairperson has the right to decide which creditors can vote. These two facts combined present an obvious dilemma: who decides who can vote in the election of a chairperson?
That question is not specifically addressed in the Companies Code beyond saying that to be eligible to vote a person must, naturally, be a creditor of the company and must have lodged (given, placed) particulars of his/her/its claim with the person convening the meeting. It appears the decision on who can vote, especially regarding the amount of the debt or claim, is left to the conscience of each creditor.
But certain consequences might flow from a creditor's decision on the amount of his/her/its debt or claim. For one thing, it is an offence attracting heavy penalties to make a false or misleading statement in a document required for the purposes of the Companies Code, and this would include a proof of debt form or particulars of a debt or claim. And also, as explained earlier, secured creditors may be required to give up their security (asset) on payment of the value they put on it.
4.15.6 Adjournment of the meeting
If, within 30 minutes after the meeting is scheduled to start, there are not at least two creditors present, or for some other reason the meeting is not sufficiently constituted, the meeting is automatically adjourned. Unless the chairperson decides otherwise, the meeting will be adjourned to the same day in the following week at the same time and place. The chairperson can choose another day, time and/or place, but the day must not be less than 7 or more than 21 days after the adjournment.
At any time during the meeting creditors can adjourn the meeting to another time and/or date and/or place. However, the meeting cannot be adjourned to a date later than 21 days after the date on which the meeting was originally to be held.
For creditors to adjourn the meeting a motion such as the following would need to be moved by a creditor and passed by a majority:
"I move that this meeting stand adjourned to (time) on (date) at (place)."
If the meeting is adjourned for more than 8 days, the company must publish a notice in a daily newspaper.
The chairperson may, with the consent of creditors, adjourn the meeting.
It should be noted that for an adjourned meeting a creditor can appoint a different proxy. However, if, as is usually the case, the original proxy form appoints a person to act at the original meeting "or at any adjournment of that meeting", the original proxy form should be revoked.
4.15.8 The common law
Often creditors who attend meetings do not know or fully understand their rights or the duties of the director and the chairperson. Hopefully the above digest of statutory requirements will help overcome that problem.
However the proper conduct of meetings and the ability of creditors to get the most out of them is also hampered by doubts and confusion amongst creditors regarding the common law of meetings, i.e. the law of meetings which has evolved through decisions by the courts and which, except where it conflicts with statutory law, applies to all meetings of all organisations.
For those creditors who have trouble in this area an outline of the common law of meetings may be found in chapter (????). It summarizes the established principles - with examples for creditors' meetings - in relation to:
motions and resolutions;
the right to speak;
defamation (which is addressed in more detail in chapter ????);
a mover and a seconder;
amending a motion;
withdrawing motions and amendments;
points of order; and
changing the chairperson.
4.16 DURING THE ADMINISTRATION
Creditors do not have to take an active part in the company's affairs after it is placed in liquidation. If there is a committee of inspection it will have the task of supervising and assisting the liquidator (although this does not mean individual creditors cannot or should not communicate directly with the liquidator if they feel the need to do so). If there is no committee, creditors might be asked by the liquidator to attend meetings for the purposes of granting extra powers, providing advice or assistance, approving remuneration, etc. In any case, the liquidator will call a meeting of creditors each year. A similar meeting, but including members of the company, will be called as soon as the affairs of the company are fully wound up.
Attendance at meetings, which may be in person or by proxy, is voluntary.
That is the broad picture. The rest of this chapter examines demands that the liquidator may make upon creditors; surveys rights and devices that creditors can use to recover money from directors and, if necessary, control, motivate or reprimand the liquidator; and looks at the committee of inspection, public examinations and termination of the winding up.
In reading what follows creditors should remember this: a liquidator is not liable to incur any expense in relation to the winding up of a company unless the company has sufficient available property to cover the expense. This rule does not relieve the liquidator of any obligation imposed by the Companies Code to lodge a document or report with the Commission. But it does mean that if a creditor wants the liquidator of an assetless company to incur a particular expense, that creditor can only force the liquidator to do so by persuading the court or the Commission to so direct the liquidator. And a court or Commission will only give this direction if the creditor agrees to indemnify (compensate) the liquidator in respect of the amount expended. The court or Commission may also require the creditor to put up assets to secure the promised indemnity.
4.17 REQUESTS BY THE LIQUIDATOR
4.17.1 Proof of debt
One thing creditors might be required to do is prove their debts. A detailed look at the procedure and creditors rights in this area will be found in Chapter 13.
However, the liquidator may admit a debt or claim without formal proof. Accordingly, there is no need to lodge a formal proof of debt unless the liquidator issues a formal written invitation or gives formal written notice of his/her intention to declare a dividend.
Creditors whose names and addresses appeared on the list that was dispatched with the first notice of meeting can be confident they will receive an invitation or notice if the liquidator requires formal proof. Of course, creditors who have since changed their addresses should advise the liquidator in writing and obtain confirmation that the liquidator's records have been altered.
Any creditors whose names and addresses were left off the list should write to the liquidator, advising him/her of the amount and nature of their claims and seeking confirmation that they have been added to the list of creditors. The consequences of failing to do so should be obvious: no dividends and no invitations to meetings.
4.17.2 Attend meetings
The liquidator may call meetings of creditors whenever he/she wants to consult with them or ascertain their wishes. The only meetings he/she is obliged to call are annual meetings, meetings he/she is directed to call by creditors and a final meeting.
The notice of meeting should include an agenda listing the issues to be discussed and resolved. Sometimes the notice will be accompanied by a letter or report by the liquidator describing the main features of those issues.
Creditors can attend meetings personally or by proxy or attorney (see 4.5). A blank proxy form must be attached to the notice of meeting.
Creditors who decide to give a proxy form to "the chairperson" or "the liquidator" should also consider whether they want the proxy to be general or specific. A general proxy means the holder (e.g., "the chairperson") can vote on any motion as he/she thinks fit. A specific proxy means the holder is instructed by the giver (the creditor) as to which way to vote: in practical terms, the giver deletes the word "general" from the form, thus making it a specific proxy, and in the space provided at the bottom of the form adds the words "to vote for" or "to vote against" beside each of the proposed resolutions (see Chapter 13).
Unfortunately for those who want to give a specific proxy, notices of meetings hardly ever contain details of the motions to be put. However, if an outline is given a specific proxy would still be effective. For example, if a notice simply says that the liquidator is seeking power to compromise (i.e., settle by mutual concession) a debt owing to the company, a specific proxy which said the creditor wanted to vote against this proposal would result in such a vote being cast. (For more on proxies see Chapter 13.)
Creditors and proxy holders who attend the meeting will have to sign an attendance sheet. They might also be asked to put the creditor's name and amount of debt on the sheet.
The manner of voting at all meetings, other than the final meeting, is by show of hands or, if demanded, by a poll that takes into account the value of votes (see 4.15.4). A vote taken at the final meeting is decided on a show of hands.
The chairperson of a meeting called by the liquidator shall be the liquidator or someone nominated by him/her.
As explained earlier (4.15.4), the chairperson is not entitled to a deliberative vote. But where a vote taken on a show of hands is tied, the chairperson is entitled to a deciding vote. No such right exists, it seems, where a vote is to be decided by a majority in number and value.
The chairperson decides how a poll will be conducted. A common procedure is to ask for a show of hands "for" the motion, tally up and record the number and value of all those votes (including proxies), and then repeat this exercise for the votes "against". At the end the chairperson announces the result - giving the number and value of votes cast each way - and declares that the resolution has been passed or, alternatively, that the motion has been lost.
Occasionally the traditional procedure for polls is adopted. For example, each person present and entitled to vote is given a voting paper. On the paper the person enters his/her name, the creditors name, the value of the vote and the vote "for" or "against". The papers are returned to the chairperson. Two scrutineers are appointed by creditors to count the votes, checking at the same time that they are valid and that there is no duplication. The chairperson then announces the result, as explained above. (NOTE: Those persons entitled to vote more than once - e.g., because they hold more than one proxy - would receive the necessary number of voting papers. A person can, of course, abstain from voting either way.)
These rules and customs apply for all meetings except, as already noted, the final meeting, where decisions are made on a show of hands because it is a joint meeting of creditors and members.
Usually the final meeting dissolves through lack of a quorum. This is because, by nature, it is called after the affairs of the company are fully wound up, by which stage nearly all creditors and members have lost interest, especially if they have already attended meetings and received reports.
Generally better attended are annual meetings. These must be called within 3 months after the end of the first year and within the same period after the end of each succeeding year. The main purpose of this meeting is to receive the liquidator's account (report, explanation) of his/her acts and dealings and of the conduct of the winding up during the year. (Naturally, creditors are entitled to question the liquidator about any aspect of the administration.)
But the annual meeting can achieve much more. For example, the liquidator might ask creditors to approve his/her remuneration and may ask creditors to pass other resolutions. And creditors too can put forward and pass motions on their own initiative. The right to propose and pass resolutions is, however, subject to the common law restriction that they be within the scope of the meeting (see ????).
Occasionally liquidators ask creditors to give them an indemnity against costs and expenses. In this context an indemnity is a promise by certain creditors to make good or compensate the liquidator for any loss resulting from certain acts done in the interests of creditors. The promise is normally made by way of a written indemnity agreement.
The need for an indemnity usually arises where there is property which the liquidator could recover through legal action, or property that needs to be protected or preserved, but there are insufficient funds and other assets available to cover the costs of taking the legal action or protecting or preserving the property.
Giving an indemnity can greatly improve a creditor's prospects of recovering his/her/its pre-liquidation debt or claim, because if the indemnified action succeeds, the court usually orders that, in return for the risks they took, indemnifying creditors shall be paid their debts out of the proceeds. The effect of such an order is illustrated below. However, it should be noted that the court need not follow this convention; it is free to make such orders as it deems just.
$ $ Gross proceeds of realization of property 50,000 Less: Relevant deductions (see Notes below): Liquidators remuneration 1,750 Solicitor's costs 1,500 Costs of auction 4,180 Freight 165 Insurance 100 Telephone and travelling 85 Stationery 20 7,800 Net proceeds 42,200
Less: Legal costs, remuneration and disbursements relating to the application to the court for this order that the net proceeds be distributed to indemnifying creditors
Costs of making distribution to indemnifying creditors
Net amount for distribution to indemnifying creditors
1. Unless specifically provided in the indemnity agreement, remuneration and costs incurred by the liquidator prior to the date of the indemnity are not deductible from the proceeds. Included in this restriction are the costs of investigating the possible action, getting an opinion from a solicitor and putting to creditors the request for indemnities.
2. Costs incurred subsequent to the indemnities with relation to another subject matter, not in the contemplation of indemnifying creditors, are not deductible.
Creditors who are asked to give an indemnity should get the following information from the liquidator and check it before making a decision:
Details of the proposed action, including a valuation of the property that the liquidator hopes to recover, protect or preserve.
Legal opinion on the basis for the proposed action and the chances of it succeeding.
An estimate of costs. These will comprise the liquidator's cost, the costs that may be awarded against the liquidator if the action fails and, if failure is likely to result in other liabilities - e.g., for damages - an estimate of that cost.
Creditors should also get an undertaking from the liquidator that if the action succeeds he/she will apply to the court for an order that the net proceeds from realization of the property be distributed in payment of the pre-liquidation debts of indemnifying creditors.
An indemnity might not involve the creditor in any payment. For example, if a legal action for the recovery of property was successful the cost would be paid from the proceeds of sale of the property. Only if the action fails are indemnifying creditors obliged to pay the costs incurred (i.e., "the relevant deductions").
Sometimes the liquidator will ask indemnifying creditors to make voluntary cash advances. These sums will be used to pay some of the costs incurred. If the action succeeds the advances are repaid. If it fails they will be offset against, and thus reduce, the amount the creditor making the advance is required to pay under the indemnity agreement.
In deciding whether to give an indemnity creditors must weigh-up the risk of a pay-out under the indemnity against the possible gain from a successful action.
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