CHAPTER 4 - CREDITORS VOLUNTARY LIQUIDATION
4.18 ACTION AGAINST DIRECTORS AND OTHERS
In certain circumstances the following persons may be liable to pay compensation to a company for losses or damage suffered or personally liable for the payment of company debts:
present or past directors and officers of a company;
persons who have taken part in the promotion;
administration, management and winding up of a company; and
other persons not involved in a company in those ways.
Creditors stand to gain from these provisions either directly, by payment to them of their debts, or indirectly by participating in a distribution of the amount received by the liquidator.
Depending on the exact provision applicable, action to make directors, etc., liable can be taken by creditors or by the liquidator (or the Commission).
4.18.1 Action by Creditors
A creditor's decision on whether or not to take action under any of the following laws should be influenced by the liquidator's findings.
Creditors, therefore, should ensure the liquidator investigates these areas, advises them whether any person appears to be liable and, if so, supplies them with all pertinent information. If a public examination of the company's affairs is conducted (see 126.96.36.199), crucial information might be obtained at the court hearing or from a transcript of proceedings.
1. Insolvent trading
Any director or person who has taken part in the management of a company which goes into liquidation may be liable for payment of certain debts under provisions called the insolvent trading or reckless trading provisions. These are examined in detail in Chapter 13. They make directors (and "managers") personally liable where they have been running up unpayable debts to the company's suppliers.
This avenue for recovery should be explored by every creditor who is owed a medium to large debt incurred by the company at a time when the company might have been insolvent. Naturally the creditor should be reasonably confident that the director or "manager" who is to be sued has the means to pay should the creditor succeed. In this regard it should be noted that the creditor most likely to recover will be the one who is first to get a judgement.
The pertinent information which the liquidator should be asked to supply would include:
the name(s) of the person(s) who may be liable;
the suspect transaction(s); and
the date on which the company became insolvent.
2. Dividends from capital
This is a similar avenue, which creditors should explore (or get the liquidator to explore) if the company has paid dividends to shareholders. It arises from a requirement that dividends only be paid from profits (or a "share premium reserve"). In other words, if a company has not made profits (or has no "share premium reserve") it must not pay dividends. To enforce this restriction the law not only imposes a criminal liability on directors (or executive officers) who wilfully allow a breach to occur, but also makes them liable to creditors. The extent of this personal liability is the amount by which the dividends exceed the profits. Recovery action can be taken by creditors, or be taken by the liquidator suing on behalf of the creditors.
In private companies shareholders often take their profits as salaries rather than dividends. So, in theory at least, a court could deem such salaries to be dividends and apply the law which requires them to be paid from profit. But it seems no case on this point has been brought before the courts. Nevertheless, the following decisions - in a case brought by a liquidator, alleging that directors had misapplied money of the company by paying excessive salaries when there were no profits - might help a suitable case succeed:
(a) A salary, when paid to a shareholder/director who works for the company, will not be regarded as a dividend unless it is "so blatantly excessive or unreasonable as to compel the conclusion that the payments were not really remuneration but gratuitous distributions to a shareholder out of capital dressed up as remuneration".
(b) But when paid to a shareholder/director who does not work for the company ("does not contribute to the company's prosperity"), a salary in excess of a "modest weekly sum" could not be regarded "as being anything more than a disguised gift out of capital".
3. Misconduct and wrongful acts
The penalty for acts of fraud, negligence, default, breach of trust and breach of duty may include liability to transfer assets or pay compensation to the company. These provisions - which reach beyond directors, officers and persons involved in the promotion, administration, management or winding up of the company - are discussed at 188.8.131.52.
Creditors are not expressly mentioned in the Companies Code as being entitled to take action under these provisions. But where the liquidator declines to do so, it seems a creditor might be able to obtain the necessary authority from the Commission. Action under these provisions usually stems from a "public examination" (see 184.108.40.206).
4.18.2 Action by the Commission or the Liquidator
The liquidator of a company is required - by Section 418 of the Companies Code - to make out and lodge a report with the Commission if it appears to him/her that an offence may have been committed by an officer or shareholder, or that there may have been a misapplication of company property or negligence, default, breach of duty or breach of trust in relation to the company. For a detailed explanation of Section 418 reports see Chapter 13. Such reports are confidential and inspection by creditors and others is prohibited.
If the liquidator fails to lodge such a report when the signs suggest that he/she should, creditors (and other persons interested in the winding up) may ask the court to direct the liquidator to do so.
When the Commission gets a Section 418 report it decides, first, whether or not to investigate the alleged offences, and then whether or not it should bring criminal proceedings. If it decides not to prosecute, the liquidator must decide whether he/she will take up the cudgel. If he/she does the costs and expenses incurred by the liquidator in those proceedings will be payable out of the assets of the company, although the Commission may agree to pay part with its funds.
Although the Commission or, in certain circumstances, the liquidator can bring criminal proceedings against any director or officer who might have committed an offence, this does not, except in the cases examined below, result in any return of funds to the company or creditors. The cases where creditors can get a tangible benefit from prosecution are insolvent trading, fraudulent trading and breach of duty.
(A) Insolvent Trading
Insolvent trading (see 4.18.1 and Chapter 13) is an offence attracting both a criminal penalty and a civil liability to the creditor(s) upon whose unpaid debt(s) the offence is founded.
Successful prosecution of the criminal offence opens the door to the culprit's personal wealth in two ways. First, the law provides that a certificate of conviction can be obtained from the court. This certificate, used as evidence in recovery action against the offender, almost guarantees a win for the victim (the creditor). Alternatively, the court may, if asked by the Commission or the victim, declare the offender personally responsible for payment of the whole or part of the debt.
(B) Fraudulent Conduct
Creditors can achieve a benefit in much the same way from prosecution of an offence called fraudulent conduct. The offence may arise when a company does any act (including making a contract or entering into a transaction) with intent to defraud creditors or for any other fraudulent purpose. Any person who was knowingly concerned in the doing of such an act is guilty of an offence. Upon conviction the court may issue a certificate of conviction. This can then be used as evidence in an application to the court to make offender personally responsible for payment of the debts of the company. Such application may be made by either the liquidator or a creditor authorized by the Commission. Any amount the court orders the offender to pay goes to the company; but, indirectly, much of it would go to creditors in the form of a distribution by the liquidator.
Insolvent trading and fraudulent conduct are offences that may be closely related, as the fairly common scheme portrayed in Chapter 13, Special Subjects and Issues, illustrates. For creditors who have been intentionally defrauded it might be better to take proceedings for insolvent trading (see 4.18.1) rather than relying on the laws relating to fraudulent conduct, for those laws only lead to personal responsibility if the Commission or the liquidator first obtains a criminal conviction. But see also the text later in this chapter on public examinations (---).
(C) Breach of duty
The breach of a duty provision of the Companies Code (see below) is a crime for which there are fairly stiff penalties. In addition, on conviction the officer responsible may be ordered to pay compensation to the company if the company has sustained a loss. Even if there is no conviction, the company (or, if being wound up, the liquidator) can sue the officer to recover the loss or damage suffered and any profit the officer made, or any other person made, as a result of the breach. Of course any compensation won by a liquidator would be distributed amongst creditors.
Under the Companies Code, "officers" - which term includes not only directors but also the secretary, the executive officer, and an insolvency administrator - of a company have a duty:
(a) to act honestly;
(b) to exercise a reasonable degree of care and diligence;
(c) not to make improper use of their positions, or of information acquired by virtue of their positions:
(1) to gain an advantage for themselves; or
(2) to gain an advantage for any other person; or
(3) to cause detriment to the company.
(The duties not to make improper use of position or information are also imposed on employees of the company.)
Under common law, directors of a company owe the company duties of good faith (to act in what they honestly believe to be in the interests of the company), loyalty, skill and care. A decision made by a director in breach of his/her duties of good faith or loyalty is voidable (may be set aside). If a director fails to exercise skill and care, the company (the liquidator) can sue the director for damages for the loss sustained by the company as a result.
As can be seen by comparing the two previous paragraphs, most, if not all of the common law duties have been adopted by the Companies Code. Nevertheless they can still be utilised.
Until recently it was thought that in making decisions directors could forget about the interests of creditors. But it now appears that a director who disregards those interests when the company is suffering financial instability might commit a breach of good faith.
2. Profits on sales
Another path to the personal wealth of people behind the company is offered to the liquidator by clauses which attack purchases and sales of property from and to related parties. The legislation targets purchases at overvalue and sales at undervalue. For example, a company might have sold property worth $500,000 to a related party (see definition below) for $300,000. If so, the liquidator can recover $200,000 from the related party. Or if the company paid $500,000 to a related party for an asset worth only $300,000, the liquidator can recover $200,000 from the related party.
Creditors sometimes know of or hear rumours about such shady deals. Since often they are not properly recorded in the company's books and are thus not evident to the liquidator, it is clearly in their interests for creditors to inform the liquidator.
The related parties who might be caught in this net are shown in the following illustration:
Generally speaking the "promoters" of a company are those who have taken part, other than as professional advisers, in the formation (creation, establishment) of that company. They might have been signatories to a prospectus issued in connection with an invitation to purchase shares in the company. Or they might have acted as agents or trustees for the proposed company.
In company law the word "relative" means a spouse, parent, son, daughter, grandparent, grandchild, brother and sister of the person.
Liquidators can sometimes recover money from officers of the company through legislation that applies where certain payments or other dispositions of company property are made and they have the effect of discharging an officer of the company from a liability, such as a contingent liability under a guarantee. If two other conditions exist - that is, if the disposition was made within the period of six months before commencement of winding up and if it conferred a preference (over other creditors) upon a creditor - the liquidator can recover from that officer an amount equal to the payment or the value of the relevant property (as the case requires).
4. Misconduct and wrongful acts
If the court is satisfied that a person - it can be any person - is guilty of fraud, negligence, default, breach of trust or breach of duty in relation to a company, and the company has suffered, or is likely to suffer, loss or damage as a result, the court may make such orders as it thinks fit. Typically those orders include an order directing the person to pay money or transfer property to the company (a property order), or an order directing the person to pay to the company the amount of loss or damage (a compensation order), or both.
The liquidator, or the Commission, can ask the court to make these orders. Creditors are not expressly authorised to apply, but see 220.127.116.11.
Orders cannot be made until the court has held an inquiry at which the suspect was given the chance to give evidence, call witnesses to give evidence and adduce other evidence.
Normally the inquiry that is held is a "public examination". A public examination is an inquiry into the actions, activities, conduct and/or affairs of a company. The inquiry - which usually takes place in the Supreme Court and is supervised by a judge or Master of that court - is open to the public unless the court considers that, by reason of special circumstances, it should be held in private.
Creditors' rights at the examination are minimal. Naturally, if the examination is held in open court (as most are) creditors can go along, listen and take notes; but to take an active part - for example, to put questions to the person(s) being examined - creditors need the consent of the court. If a written record or transcript of an examination is made they can inspect it, but only with the leave of the court. (A written record of questions put to and answers given by a person could be of value to creditors as it may be used by them in evidence in civil proceedings against that person.)
The liquidator, or the Commission, can ask the court to conduct a public examination where it appears that a person involved in the affairs of the company may have been guilty of fraud, negligence, default, breach of trust, breach of duty or other misconduct in relation to that company; or where it appears that a person may be capable of giving information about the affairs of the company.
From the creditors' point of view the most desirable outcome from a public examination is a property order or compensation order by the court.
A creditor may, if specifically authorized by the Commission, apply to the court for the public examination of a person. However the Commission would grant such authority only in exceptional circumstances. It is not likely to do so if the liquidator planned to apply. Nor would it unless the creditor made out a solid and compelling case, and was prepared to pay the costs of the examination.
Clearly, for creditors who believe an examination should be held and/or property or compensation orders sought, the best approach is to put that view to the liquidator and, if necessary, convince him/her to apply. If the liquidator does not have the necessary funds, creditors might need to make advances and/or give indemnities to the liquidator (see 4.17.3). Either way - whether the liquidator has funds or not - creditors whose only gaol is the recovery of money should first be reasonably confident the examination will achieve that result. Naturally, for the venture to be profitable the amount recovered must exceed the costs, which can be very high. Even a fairly simple examination, say one lasting 2 days and examining 3 or 4 people, is likely to cost the company in legal fees and liquidator's remuneration from $15,000 to $30,000. Therefore, before embarking on this course creditors might wish to obtain from the liquidator an estimate of costs and a legal opinion on the prospects for success (bearing in mind that success may also come from the use in other proceedings of evidence obtained at the examination).
Creditors with a streak of altruism or vengeance should be aware that as well as obtaining property and/or compensation orders, the public examination might lead to a banning order. These can be sought where a director, secretary or executive officer of the company has acted dishonestly or failed to exercise a reasonable degree of care and diligence in the performance of his/her duties. The liquidator, the Commission or a creditor may apply. Such an order prohibits the director, etc., from being a director or promoter, or from taking part in the management of, a company. There is no minimum or maximum period set for the ban, that being left to the court's discretion.
5. Banning orders
In concluding this section it is worth noting three other punitive provisions aimed at directors and "managers" of companies. (In this context the word "manager" means a person who has been concerned in, or taken part in, the management of a corporation.) The penalty imposed by each of these laws is a ban on the director or manager being a director or manager for a period of up to 5 years, the aim being to protect the community from someone regarded as a menace.
The first is one which might cause creditors to throw their weight behind a prosecution for insolvent trading or fraudulent conduct (see 18.104.22.168). It provides that a person who is convicted of such an offence (or of certain other offences) is automatically banned from being a director, promoter or manager of any corporation unless he/she obtains the court's permission.
The second is a provision aimed at directors and managers who have been directors or managers of 2 or more companies which became insolvent at least partly because of poor management. On an application by the Commission the court may make a prohibition order against the relevant directors and managers.
Finally, the same type of order may be made by the Commission in cases where a person has been a director of two or more companies that have been wound up with unsecured creditors receiving no more than 50 cents in the dollar.
4.19 SUPERVISING THE LIQUIDATOR
This section and the next (Discipline of the Liquidator, 4.17) survey a number of ways that creditors can supervise the liquidator and, where necessary, motivate, coerce, correct, restrain or reprimand him/her.
In a perfect world such action would never be necessary. And by and large liquidators can be relied upon to do an adequate job. But the standard of their work sometimes leaves a lot to be desired, particularly during an economic slump or recession when there are plenty of corporate failures and personal bankruptcies. (Many liquidators are also trustees in bankruptcy.)
If a liquidator has too much work, the jobs under his/her control might suffer through lack of his/her personal involvement, inadequate supervision of staff and the use of inexperienced
staff. All factors can result in costly behaviour, such as:
mistakes and bad decisions;
reluctance or failure to pursue debts;
reports that are superficial, perfunctory or late;
delays in payment of dividends to creditors; and
poor standards of investigation or no investigation at all.
The importance of a thorough and expert investigation should not be underestimated. It often results in the discovery of assets of considerable value and the recovery of substantial amounts from directors and others (see 4.18, Action Against Directors).
4.19.2 Liquidators reports and letters
Liquidators are not legally obliged to send unsolicited reports to creditors, although most of them do. If there is a committee of inspection, the liquidator may make reports to it instead.
To be of use to creditors a liquidator's report should contain:
A summary of the liquidator's receipts and payments.
A comparison of amounts received with the realizable value of assets as estimated by the directors.
An estimate of the likely dividend to creditors.
Advice as to the liquidator's fee to date.
A brief history of the company, describing its trading activities and disclosing its profits and losses.
The liquidators opinion on why the company failed.
An outline of investigations carried out and the results.
If creditors do not receive reports like this and would like to, or if they need any other information about the liquidation, they should send a written request to the liquidator. In most cases the liquidator will reply, either directly or by way of a report to all creditors. It should be noted that at the annual meetings (see 4.14) the liquidator will give creditors an account of his acts and dealings and can be expected to answer questions put to him/her by creditors.
4.19.3 Accounts of Receipts and Payments
Every six months after appointment and until he/she ceases to act, the liquidator is required to lodge with the Commission a prescribed form containing an account of receipts and payments for the period and a statement of the position in the winding up. Once lodged a copy is available for inspection by any person at the Commission's office on payment of the search fee (presently $7.00). Creditors also have the right to inspect a copy free of charge at the liquidator's office (see 4.16.6, Inspection of Books and Records). After an account has been made up the liquidator is required to advise creditors of this in the next report, notice of meeting or notice of dividend he/she dispatches.
In Chapter 13 the reader will find an example of a liquidator's account with notes explaining the meaning and purpose of some of the information.
The Commission has the power to audit a liquidator's account and statement, but this action is rarely taken. Normally there would need to be grave concerns about the accuracy of an account or serious doubts about the propriety of a liquidator's behaviour. If an audit is conducted the auditor will examine the liquidator's books and records, question him/her and may also inquire into the state and value of the assets. At the end, the auditor prepares a report, a copy of which goes to the liquidator. Creditors can inspect this report at the liquidator's office or, like any member of the public, at the Commission's office.
4.19.4 Documents filed with the Commission
Apart from accounts of receipts and payments, the liquidator files the following documents with the Commission (all of which may be inspected at the Commission's office on payment of the statutory fee, or free of charge at the liquidator's office):
Notice of appointment of liquidator and his/her address.
Notice of any change in the liquidator's address.
Minutes of all meetings.
Return of holding of final meeting, with a copy of the final account.
In addition, the directors file with the Commission the following (copies of) documents relating to the winding up:
Notice of meeting, summary of affairs and list of creditors.
Report as to Affairs.
Resolution for winding up.
4.19.5 Details of work done
Ordinarily a liquidator only supplies creditors with a brief summary of work done. Even this might not be provided if his/her fees have been approved prior to being incurred (see 4.10 Liquidator's remuneration).
The justification for this practice is cost. Compiling a detailed description usually takes a lot of time; and unless there is serious concern about the level of fees nothing is gained by such an exercise.
Nevertheless, most liquidators do keep detailed time sheets which enable them, if required, to show:
the time the liquidator and each class of assistant (e.g., managers, supervisors and clerks) has spent on the job;
what work was done; and
how much time was spent on the various tasks.
If asked by the committee of inspection, a majority of creditors or the Commission, a liquidator would probably compile and disseminate some or all of these details. But he/she is not likely to do it for a single creditor, especially in a complex winding up. That creditor would probably need to apply to the court to review the amount of the liquidator's remuneration (see
4.19.6 Inspection of Books and Records
In a liquidation there are two sets of books relating to the company's affairs:
the books of the company; and
the books of the liquidator.
The books of the company are those which have been kept (created, maintained) by the company up to the date of appointment of a liquidator. The books of the liquidator are those which he/she is
required to create and maintain.
The distinction is important when looking at the right of creditors to inspect those records. Books kept by the liquidator may be inspected by creditors unless the court otherwise orders. But books kept by the company cannot be inspected by creditors without the court's permission. This restriction can hinder creditors who want to take action against a director (see Insolvent Trading 4.13.2) as some of the books might be needed to show that the company was insolvent when the debt was incurred. For more on this see Chapter 13, Action against Directors.
Unless something goes seriously wrong with the liquidation, creditors will not need to inspect the liquidator's books. But if they do, what can they expect to find?
The legal requirements are that the liquidator keep books in which are made:
entries "that are necessary and proper in order to give a complete and correct record of his/her administration of the company's affairs"; and
minutes of proceedings at meetings.
Transforming these requirements into the normal practice, a liquidator's books would include, at a minimum:
record of persons present at meetings,
minute book, and
proof of debt register (or list of creditors' claims);
and, depending on the nature of the company's assets:
plant and equipment register,
inventory lists, and
register of leases and hire-purchase contracts.
In addition, if the liquidator causes the company to carry on business, he/she is required to keep the sorts of books and records that are usually kept by companies operating in that line of business.
Every liquidator would also have: time sheets (see 4.16.5, Details of Work Done); correspondence files; payment vouchers; working papers; and records of telephone calls, informal meetings and interviews. However it is doubtful whether these records can be inspected by creditors because they would not normally be regarded as books.
Creditors should remember that the liquidator can seek an order from the court barring a creditor, or creditors, from inspecting books. The court would probably grant such an order if convinced that inspection of the book(s) would obstruct or endanger the effective conduct of the liquidation.
4.20 DISCIPLINE OF THE LIQUIDATOR
This section looks at the rights, devices and tactics that creditors can resort to if they need to motivate, coerce, correct, restrain or reprimand the liquidator. It starts with the easiest and most common - writing to the liquidator - and ends with the ultimate sanction - his/her removal from office.
4.20.1 Writing to the liquidator
It is stating the obvious to say that any creditor with a suggestion, query or complaint about a winding up should first of all put it to the liquidator. Many queries or complaints arise through a misunderstanding; and more often than not the liquidator's response will answer or address the matter satisfactorily. If it doesn't - or if no reply is received after a reminder or follow up letter - the creditor should make use of one or more of the other methods described below.
For convenience the word "dispute(s)" is used in this chapter to denote suggestions, queries or complaints that have not been treated or resolved to the satisfaction of the creditor.
4.20.2 Calling a meeting of creditors
If a committee of inspection has been formed, creditors should take their disputes to their representative on the committee. The representative can raise the matter with the liquidator and/or, if necessary, have a meeting of the committee convened. The meeting can examine the dispute, make a decision and tell the liquidator what it thinks he/she should do.
However, this procedure might not conclude the issue, for although the liquidator must take notice of directions given by the committee, he/she cannot be compelled to comply with its wishes. If the liquidator rejects the committee's instructions, what happens next depends largely on the nature of the dispute.
If, for example, the committee advised the liquidator to drop a certain legal action, the liquidator might convene a meeting of creditors to get their views (which will override those of the committee). If creditors at that meeting agree with the committee, the liquidator might then comply. Alternatively, he/she might ask the court for directions. (Incidentally, creditors may tell the liquidator to apply for directions or may themselves apply - see 4.18, Applications to Court.) But if, for example, the committee had directed the liquidator to compensate the company for alleged losses resulting from his/her negligence, the liquidator is likely to do nothing, perhaps preferring that the dispute be resolved by a trial in court.
If there is no committee of inspection, the most effective way a creditor can enlist the support of other creditors is through a properly constituted meeting of creditors. The liquidator might agree to convene such a meeting if he/she thinks the dispute can or should be decided in that way. If not, the creditor can force the liquidator to convene a meeting by getting the backing of at least one-tenth in value of creditors and sending a written request to the liquidator (see Precedent Letters and Forms for an example). As a last resort a creditor may ask the court to order that a meeting be held.
It should be noted that the liquidator must convene meetings at such times as the creditors by resolution direct. This requirement could be usefully employed if a scheduled meeting - for example, an annual meeting - was due to be held soon after a dispute with a liquidator arose.
4.20.3 Determination by the court
Where a liquidator refuses to comply with a direction by creditors - or whenever there is an issue which cannot be resolved - creditors should consider asking the court to give a ruling. See 4.18, Applications to the Court, for further comment.
4.20.4 A review of the liquidator's acts or decisions
Any creditor (or other person) aggrieved by any act, omission or decision of a liquidator may appeal to the court.
However, the court will be reluctant to interfere with the liquidator's decisions, and will do so only if it appears a decision is unreasonable and absurd. Also, the court will not concern itself with decisions that are of no real significance in the affairs of the company.
It has been said that the complainant (the creditor) must show the court that the liquidator has:
(a) acted fraudulently; or (b) acted contrary to law and justice,
(c) failed to take into account relevant questions or matters,
(d) taken into account irrelevant questions or matters, or
(e) acted or failed to act as no reasonable and responsible person should.[ ]
If the creditor fails to make out a case for interference with the liquidator's decision, the court may order the creditor to pay the liquidator's legal costs.
At the end of the hearing the court may confirm, reverse or modify the disputed act or decision, or remedy the omission, and may make such orders or give such directions as it thinks fit.
4.20.5 Complaints to authorities
Any creditor (or other person) who is dissatisfied with or aggrieved by a liquidator's conduct may lodge a complaint with the court or the Commission. If the court or the Commission believes the complaint has merit, it will hold an official inquiry. During the inquiry the court may investigate the liquidator's books and examine him/her (or any other person) on oath.
The same conditions apply to a complaint as apply to a request for a review (see 4.17.4). However it is quite common and acceptable for creditors to lodge with the Commission complaints which might not be serious enough to take to the court. But normally a complaint to the Commission is only made after other less formal processes have failed.
After an inquiry the court may take such action as it thinks fit. If, in the Commission's opinion, the liquidator is guilty of misfeasance (a wrongful act), neglect or omission, the court may order the liquidator to make good any loss the company has sustained.
Minor disputes with the liquidator - such as his/her failure to answer correspondence - might be capable of resolution through a complaint to one or more of the professional organisations to which the liquidator belongs. Most are members of one or more of the following:
the Institute of Chartered Accountants in Australia (ICA);
the Australian Society of Certified Practising Accountants (ASCPA);
the Insolvency Practitioners Association of Australia (IPAA).
Both ICA and ASCPA have rules of ethical conduct that members must obey. If a member fails to observe the rules, or is otherwise guilty of conduct which is likely to bring discredit upon the profession, the ICA or ASCPA (as the case may be) can impose sanctions. They range from a reprimand through to exclusion from membership, depending on the seriousness of the breach.
Complaints to the ICA and ASCPA should be put in writing and sent to the State Director of the organisation (see Contacts, at the end of this book). Although not essential initially, it would be wise to support the complaint with relevant statutory declarations and other material. The State Director and the Executive Director will decide whether there are grounds for investigation. If there are, the complaint will go to an investigation committee. When the investigation is complete and a finding made, the person who made the complaint will be told of the finding and of any sanction imposed.
The other professional association mentioned above - the IPAA - also has rules of conduct for members (see Ethics of Insolvency Practitioners, Chapter 13). However, compared with the other two the IPAA is less proficient and resolute.
4.20.6 A review of the liquidator's remuneration
Any creditor can ask the court to review the liquidator's remuneration. Usually the creditor's aim is to have the amount of remuneration reduced. But the facility could be used just to make certain the amount is reasonable.
Where creditors have made a decision early in the winding up to fix the remuneration at intervals after receiving a report (and perhaps an account) from the liquidator, disputes about remuneration are rare. But they are common where creditors fix remuneration by reference to a scale of hourly rates with no monetary limit, since the actual amount drawn often comes as a shock. (See Liquidator's Remuneration, 4.10, for a discussion on fixing remuneration.)
A creditor who applies for a review of the liquidator's remuneration will probably be required to identify - from records and material supplied to the court by the liquidator - those areas where the creditor believes excessive charges occurred. The following list of loosely established principles and practices will serve as a guide in such an exercise. Some guidance can also be found in the comments on Liquidator's Duties, Chapter 13.
Liquidators employ staff with varying degrees of knowledge, skill and experience. The greater the knowledge, etc. of a staff member the higher is his or her salary; and consequently - where remuneration of the liquidator is based on time - the higher the hourly charge to the company's estate for his or her time (see Fees for Insolvency Administrators, Chapter 13).
The standard hierarchy amongst the liquidator's support staff is:
Senior Grade 1
Senior Grade 2
Intermediate Grade 1
Intermediate Grade 2
Senior secretary and computer operator
Typist and word processor operator
The liquidator's role is to make decisions. (Although he/she is responsible for all decisions, usually the less important ones are made by senior support staff.) All ancillary tasks should be delegated to a Manager, who in turn should delegate to subordinates those jobs that do not require the Manager's level of expertise.
The Manager is the liquidator's second-in-command. Apart from delegating work to the appropriate staff, he/she tries to ensure that work is done efficiently, systematically and, of course, lawfully. He/she also vets documents, correspondence and forms submitted to the liquidator for approval or signing, and generally advises the liquidator.
Ideally each individual task in an administration should be allocated to the staff member whose knowledge and skill is sufficient, but not more than is needed, to carry out that task. Obviously to enable this to be done the liquidator needs to employ a broad range of trained staff.
Support staff must have sufficient proficiency and training to carry out the tasks assigned to them. Their work must be carefully directed, supervised and reviewed.
The various tasks which are carried out by the liquidator (with the help of his/her staff) must be done as economically as possible.
To enable the liquidator to provide a description of all work done the liquidator and each member of staff prepares daily time sheets. On these they record the names of "clients", a brief description of the nature of the work done and the time occupied. An example of a completed time sheet can be found in Chapter 14, Statutory and Other Forms Explained.
From these daily time sheets a monthly summary is prepared for each "client". The summary gives the total time worked by the liquidator and by each member of staff and the charge for that time (calculated by multiplying hours worked by the hourly remuneration rates approved by creditors). As a rule the summary contains no description of work done.
If a task has to be done more than once because of errors by support staff or the liquidator, the liquidator is probably not entitled to charge more than once for the time spent on that task (although in practice he/she usually does).
No charge should be made for:
This is because the labour cost in performing these tasks has been taken into account in arriving at the IPAA scale of fees. In other words, these costs are an overhead or general expense incurred in carrying on a business of public accounting, and the scale of fees - i.e. the "cost" of each person's time - calculated by the IPAA includes a loading for such overhead expenses. (The same is probably true of scales set by Supreme Courts.) So if a direct charge to the administration is made, the administration (and, in effect, creditors) will have been charged twice for the same expense.
4.20.7 A review of liquidator's disbursements or out-of-pocket expenses
All proper costs, charges and expenses of the winding up and incidental to the winding up (including the liquidator's remuneration) are payable out of the property of the company. As explained elsewhere, in regard to liquidator's remuneration this law is subject to the proviso that the amount to be paid is determined by creditors. But no such restriction is placed on the payment of other costs, charges and expenses (collectively referred to in this discussion as costs).
Most of these other costs are paid to parties who are not related to or associated with the liquidator or his/her firm; for example, solicitors, auctioneers and suppliers.
But some costs are paid to the liquidator and/or his/her firm. These are often referred to as disbursements or out-of-pocket expenses because they have been paid initially by the liquidator
or his/her firm. Examples of this type of cost are:
STD and overseas telephone calls;
To be proper charges in a particular liquidation disbursements must be directly attributable to that liquidation. Also, disbursements must not have already been "paid" (or recovered) by having been included, as overhead expenses, in calculation of the scale of fees used by the liquidator.
This second point, which is often overlooked, deserves further explanation. The IPAA, in arriving at hourly rates that it recommends liquidators charge, takes into account costs associated with occupancy of an office by the liquidator or his/her firm and general overhead costs necessarily incurred in carrying on a business of public accounting. Occupancy costs include rent, light, power, cleaning, maintenance, insurance and local telephone charges. General overhead costs include interest on borrowed funds, staff training, rent or depreciation of office equipment, promotion expenses and wages of administrative staff. Having made a charge for such costs through the hourly remuneration rate, a liquidator who also charges them to an administration as disbursements is "double dipping".
Although this practice rarely occurs consciously, it happens frequently in subtle ways. For example, the unit charge for photocopies might include not only the cost of paper but also an amount for use of the photocopying machine. As the cost to the liquidator of rent or depreciation of the machine is included in the fee he or she charges, inclusion of the same cost as a disbursement means the company has paid twice. The same sort of loading may occur with STD phone calls or postage stamps. Indeed, whenever a charge is added to the basic cost of an item, the company (and, hence, creditors of that company) are probably paying for something twice.
With the almost universal shift from typewriters to word processors (computers), some thorny questions have arisen about what associated costs may be charged to administrations and how these should be calculated . There is little doubt that the cost (purchase price) of floppy discs used to store correspondence, reports, financial statements, etc. concerning an administration may be charged to that administration. But what about the cost (rent or depreciation) of the computers? Here some liquidators treat a computer as a member of staff: they devise an hourly rate for it, record its time on each administration and charge those administrations accordingly. Others treat the rent or depreciation as an overhead expense.
Which approach is correct depends largely on how the scale of the liquidator's remuneration is calculated. If computer rent or depreciation is loaded into that scale it should not be charged as a disbursement.
But even when the cost of a computer may be charged as a disbursement, the hourly rate should not include an element of profit. In other words, the total amount charged for the computer should not result in the liquidator recouping more than its cost. The principal behind this assertion is that the liquidator's "profit" should be confined to his remuneration.
There are a number of other areas in relation to disbursements where the practises of some liquidator's have been questioned. These include:
A liquidator will usually place advertisements in newspapers if he/she is about to hold an auction of company property or if workers or staff are needed to fill vacancies in the company's business. Naturally the costs of such advertisements are payable out of company property. But what if a significant part of the advertisement is occupied by the name and logo of the liquidator's firm? In all probability this has been done not for the good of the company but to promote and publicize the firm. If so, and if the full cost of the advertisement has been paid by the company, that publicity has been obtained at the expense of the company's creditors.
Often a liquidator (or his/her firm) makes available when required for creditors' meetings a room, such as a boardroom, in his/her office. In the past - and perhaps even today - some liquidators would charge the company a fee for use of that room. The IPAA considers that because this service does not involve the liquidator in a disbursement to an unrelated third party, such charges are not appropriate.
As with meeting rooms, the IPAA considers that it is not appropriate for a liquidator to charge a company a fee for storage of its records unless a disbursement is made to an unrelated third party. This means that no charge should be made when the company's records are stored in the liquidator's office. If the liquidator rents a separate area and stores the records of several companies there, it would seem that the cost should be apportioned to those companies on the basis of space occupied.
These comments highlight a number of areas where the disbursements charged by liquidators might not be legitimate. But unlike liquidator's remuneration there is no specific provision in insolvency law for creditors to obtain an official review of those disbursements. However, in cases where grave concerns exist, and creditors are unable to clear up those concerns by informal means or by meetings, it might be possible to persuade the Commission to audit the liquidator's books and records (see Account of Receipts and Payment, 4.19.3).
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