High Court decides that liquidator’s appointment was valid despite failure to give notice of deemed consent

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In Cash Generator Ltd v Fortune and others [2018] EWHC 674 (Ch), the court considered whether failure to comply with the process to nominate a liquidator required by section 100 of the Insolvency Act 1986 (the Act) and the Insolvency Rules 2016 (the Rules) invalidated the subsequent appointment of the liquidator.

The applicant, Cash Generator Ltd (Cash Generator), challenged the appointment of liquidators to three companies of which it claimed to be a creditor on the basis that it had not been given notice of the deemed consent procedure for the nomination of a liquidator to each of the companies as required by rule 6.14 of the Rules. Cash Generator claimed that this failure invalidated the appointment of the liquidators so that new office holders were required.

Cash Generator also claimed that the liquidators should be replaced because of alleged actions and omissions by the liquidators following their appointment.

The judge therefore had to consider whether the appointment of the liquidators was invalid and whether they should be removed so that their conduct could be investigated.

What did the court decide?

In considering the first issue, the judge noted that section 100 of the Act is expressed in mandatory terms in that it requires the directors of a company to seek nomination of a person to be liquidator from the company’s creditors. Rule 6.14 of the Rules says that notice of the deemed consent procedure must be given to creditors and the judge noted that the purpose of the provisions and the mandatory language used was to ensure that all creditors who can vote are involved in the process. However, the legislative background was slightly subtler. The deemed consent procedure was introduced for the purposes of promoting involvement rather than to make sure that all creditors participated.  Parliament’s purpose had been to achieve a speedy appointment of an insolvency practitioner nominated by creditors, not to incur uncertainty, delay and extra costs. There was always going to be the prospect of one or more creditors not being given notice of a proposed CVL for a number of reasons and it was reasonable to conclude that Parliament did not intend this to lead to an invalid appointment.

The consequence of failure to comply with the deemed consent procedure is that a director is guilty of an offence and can be fined. Neither the Act nor the Rules specify whether an appointment will be invalid if not all creditors are notified of the nomination process.

The judge concluded that while the Act created a binding statutory obligation, the consequence of non-compliance was not invalidity.

In relation to the second issue, Cash Generator claimed that there was need for an investigation into the liquidators’ actions and omissions after their appointment, particularly a pre-liquidation assignment of leases and a post-liquidation sale of stock. As those investigations concerned the conduct of the liquidators, new office holders should be appointed. The judge didn’t agree. He held that there was no basis for the removal of the liquidators as there was nothing to suggest that they would not carry out any investigations that they considered appropriate for the conduct of the liquidation. Crucially, the majority creditor, Her Majesty’s Revenue & Customs, did not support the removal.

WM comment

This decision should be welcomed by liquidators. It means that nominee liquidators need not worry about their appointment under the deemed consent procedure being declared invalid if a creditor is not sent notice of their nomination due to an oversight. Interestingly, the judge also issued a plea that the Rules are reconsidered saying that the rules that he had to refer to “were numerous, to be found in a variety of different places and feature so many requirements that they may be difficult to apply in practice”. Given that one of the aims of the Rules was to make them more user-friendly this is quite a telling remark and we shall have to wait and see whether it is acted upon.