How does a Liquidator deal with a case of Insolvent Trading?

Transcript of video

Hi and welcome to the Insolvency Experts — I’m Steven Kugel

How does a Liquidator deal with a case of Insolvent Trading?

Well, on day 1 of the liquidation, a liquidator will send a series of demands for books and records and other information to the director and other persons including accountants and lawyers who may have been engaged by the company.

Once those records have been received, a liquidator will then examine them with a view to determining the reasons why the company failed and the date the company became insolvent.

Indicators of Insolvency

In this regard, a liquidator will look for typical indicators of insolvency including;

• was the company suffering continuing losses
• did it have unpaid taxes and other unpaid statutory obligations
• had the company been issuing dishonoured and/or post dated cheques
• did the company have special arrangements with its creditors and was it failing under those arrangements
• and the list goes on.

So there are a whole series of indicators apart from the various ledgers that will show when the company become insolvent.

Now if a liquidator can say when he believes the company became insolvent, it follows that he will then determine the damage that was caused to the company and the creditors past the time when a reasonable person in the position of the directors would have taken positive steps to ensure insolvent trading would not occur — such as ceasing to trade, investing funds, rescheduling debt or appointing a Voluntary Administrator.

As I have said in earlier episodes, the damage caused would be the worsening of the debt position from $150,000 in liabilities to $300,000 of liabilities at the time the company was placed into liquidation.

Of course, determining the damage caused is one thing but having done that, a liquidator has to make an assessment of the responsible director to determine whether any legal action taken will result in a recovery for the benefit of creditors.

The questions that must be answered is does the director have personal assets able to be attacked? Is he a good target and will the damage he has caused to the creditors be able to be visited upon him?

Now, assuming there has been insolvent trading, and assuming the director is a good target in terms of having assets able to be attacked, the liquidator has a few options available to him.

The liquidator can launch directly into an Insolvent trading claim through the court if a simple series of demands upon the director has not yielded a result.

However, a liquidator will be reluctant to take this course immediately for a number of reasons.

The first of these reasons will be that any court case is uncertain, lengthy in terms of time and very expensive. Any lawyer will tell you there are no certainties in Court and even the best case is capable of being lost.

Against this, the liquidator will understand that a director is able to raise certain defences to claims for insolvent trading such as;

• The director had a reasonable and actual expectation the company was solvent
• The director relied upon a competent person — an accountant for example
• The defence of some other good reason
• The director took all reasonable steps to stop the insolvency

Now I’m not saying these defences will succeed but they are available and can prolong and add real uncertainty and expense to a case.
So in the face of this uncertainty, a liquidator will look to improve the odds and limit the risk by considering the idea of a Public Examination.