Replacing a Liquidator – It Ain’t Easy!

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Recent reforms under the Insolvency Law Reform Act intended to make the replacement of an External Administrator/Liquidator easier for creditors to achieve but in reality, it may have had the opposite effect.

In the past, liquidations instigated by the directors/shareholders required the appointee take the lead and put a resolution to creditors within 18 days of appointment that would allow either to confirm the liquidator or enable creditors to nominate and select an alternate.

Now, in the early stages, a liquidator is under no obligation to convene a meeting of creditors or to put a resolution regarding a replacement liquidator unless specifically directed by a sufficient percentage of creditors who know their rights, are proactive and understand the process.

It is true the reforms make replacement of a liquidator possible at any time during the winding up. However, while that may be useful where dissatisfaction with an incumbent liquidator’s performance exists, in reality, a replacement will rarely occur as the process and its associated costs are onerous and creditor interest tends to wane over time.

Assuming creditors know their rights, it is possible to replace a liquidator in the early stages of a liquidation – but it is a process that can be denied.

  1. If within the first 20 days after the resolution to liquidate is passed, less than 25%, but more than 5% in value of the creditors, in writing, direct the External Administrator to do so, the incumbent liquidator must convene a meeting of creditors.
  1. However, the External Administrator, acting in good faith, may form an opinion the request is unreasonable if:
  • Complying would substantially prejudice the interests of one or more creditors or a third party and that prejudice would outweigh the benefits of complying.
  • There is not sufficient available property (funds/assets) to comply.
  • A meeting dealing with the same matter has already been held or would be held within 15 business days after the direction is made.
  • The direction is vexatious.
  1. However, the incumbent forming that opinion cannot maintain that view as a request may become reasonable where:
  • Directing creditors agree to bear the cost of complying with the direction;
  • Directing creditors provide security for the cost of complying before the meeting is convened.

If creditors are sufficiently interested to overcome these hurdles, they will need to obtain and provide with their written direction

a) A Consent to Act; and

b) A Declaration of Independence, Relevant Relationships and Indemnities from the proposed alternate liquidator who may need to be satisfied as to how his fees and costs will be met in circumstances where there are limited funds available in the liquidation.

But fear not, if creditors fail to act in the first 20 business days after liquidation, they may still direct the incumbent to convene a meeting for the purpose of replacing the liquidator if;

  • At least 25% in value of creditors direct so in writing; or
  • Less than 25%, but more than 10% in value of creditors direct, and they provide security for the cost of holding the meeting before the meeting is convened.

Now if creditors get that far, they only need to worry about passing the resolution that requires 50% in number and 50% in value to vote in favour of the replacement.

  • If both are not achieved, the resolution will fail; and
  • There is no requirement that the incumbent use the casting vote

So, replacing a liquidator is possible, but it certainly ain’t easy!

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