The insolvency rules that apply in England and Wales continue to throw up a few challenges. This article looks at one area that we have been asked about several times this year. Although we don’t claim to support Scottish legislation or procedures, there are now enough similarities between the England and Wales rules and the recently adopted Scottish rules to make this of interest to a lot of IPs. We have used England and Wales references throughout, but there are Scottish equivalents.
When assisting a company with the early stages of a proposed Creditors’ Voluntary Liquidation (CVL), getting a Statement of Affairs (SA) from a director can sometimes be hard work. This article looks at the impact of them not providing a SA if you have already arranged to have your appointment confirmed by deemed consent or a virtual meeting.
Rule 6.14(7) says that the directors “must” deliver the SA to creditors not later than on the business day before the decision date. Rule 6.14(13) says, “A director who is in default in seeking a decision on the nomination of a liquidator in accordance with this rule is guilty of an offence and is liable to a fine”, which means that it is also an offence. It seems unlikely that the offence would be pursued if the company did not enter CVL, so we tried to think what impact the “must” in rule 6.14(7) could have. On the one hand, it could have no impact at all on the validity of the decision procedure, in which case it would only give grounds for an offence under rule 6.14(13). That was certainly the approach taken by the Court in Cash Generator Ltd v Fortune, but that case involved failing to send notices of the decision procedure to some creditors, not failing to send out any notices at all. However, since a SA is required so that creditors can both see the financial position of the company and be in a position to contact other creditors to band together to object to a deemed consent procedure or requisition a physical meeting, it seems more likely that it may have been included so that a virtual meeting of creditors or deemed consent procedure cannot take place unless the SA has been submitted. That may be an extreme interpretation, so alternatively, it might have been included so that the decisions cannot be passed unless the SA has been submitted, which would allow a virtual meeting to be adjourned, but would still mean cancelling a deemed consent procedure before the decision date. Ultimately we will not know until this issue is considered in Court, but in the meantime the safest approach would be not to rely on failing to send the SA just being an offence.
If you do not think the director will in fact ever provide the SA, then we think that it prevents a CVL, no matter which entry route you use. If that is the case then the general meeting of members should not pass any resolutions or be adjourned. You should also write to creditors to cancel the decision procedure, but if it is too late to do so, then you will have to withdraw your consent to act to ensure that your “appointment” as liquidator is a nullity. You should then send a letter post decision date to all creditors indicating that in the absence of the director providing you with the SA you are not in a position to assist him in placing the company into liquidation and that creditors are free to take whatever action they consider appropriate. You should also write to the members and to the director, indicating that in the absence of the SA you will not be able to assist with the liquidation of the company.
However, if you think that the director will provide the SA, the approach you take will vary depending on whether the director had convened a virtual meeting or decision by deemed consent, and if it was a virtual meeting, how you interpret the effect of “must” in rule 6.14(7) above.
If the original decision was to be by a virtual meeting and you consider that it can be adjourned in the absence of the SA, you should adjourn both the general meeting and the virtual meeting to the same date, notifying the members and creditors of the change and the reasons for it. However, until rule 6.14(7) is clarified, we think that it would be safer to assume that “must” in rule 6.14(7) means that the meeting cannot be held without the SA and that, if it cannot be held, it cannot be adjourned.
If the original notices were for deemed consent, or if a virtual meeting was convened and you think that the reference to “must” in rule 6.14(7) prevents it being adjourned, then you can either adjourn the general meeting for 14 days, which should allow time to get the SA lodged and send out notices of a new deemed consent procedure or virtual meeting to the creditors, or cancel that meeting as well so that you would have to start the whole liquidation process again. You should send a letter to all creditors indicating that in the absence of the director providing you with a SA you could not proceed with the original decision procedure, but indicating that once the director has provided the SA you will give them notice of a new deemed consent procedure or virtual meeting. You should write to the members regarding the adjournment or cancellation of the general meeting as appropriate. You should also write to the director reminding him that you need a SA from him and of the timescale for him to provide it to you, explaining that if he does not provide it within that timescale then you will not be able to assist with the liquidation of the company.
There are always tensions between what the rules require and what you can get the director to do, but given the uncertainty that arises if a SA is not provided, you should draw the director’s attention to rule 6.14(13) at an early stage, and emphasise that once they have committed to CVL as a solution, the failure to provide the SA could be an offence. Even if we do not think that the potential offence would be prosecuted in most cases, it may provide a powerful inducement for the director to cooperate and save you uncertainty and cost later in the process.
