Voluntary liquidations: The benefits of retaining an insolvency practitioner

Read our article in the Cayman Financial Review Magazine, eversion 

There comes a time at the end of any company’s life, or such other time as may be stipulated in the articles and memorandum of association, when the directors of the company must decide whether to formally wind up the company.  

Historically the decision was whether one simply allowed a company to be struck off the registrar of companies for non-payment of fees, or whether the directors took a more proactive stance by seeking a formal strike-off or placing the company into voluntary liquidation. Various factors can go into such a decision.

It may be dependent on the nature of the business activities while the company was operating. It may also consider whether the company was involved in contentious or significant litigation. Another factor is cost.

A factor that somewhat underlies the decision is the directors’ own potential liability. When a company comes to its matured life and closes out, the directors similarly look for closure in their duties and responsibilities.

The various factors which a director will consider when deciding what is in the best interest of the company will also impact their own personal concern that after the company is completed with its business, they are not exposed to potential liability.

As such, a director will favour a process that provides the peace of mind that not only the company has been closed out in a formal process, but also that the risk of any personal liability is mitigated or disappears.

Recent developments in the Cayman Islands and British Virgin Islands have brought the question of whether a voluntary liquidation is appropriate and who is best equipped to conduct such a voluntary liquidation more into focus.

The case of Weavering Macro Fixed Income Fund Limited (In Liquidation) v Stefan Peterson and Hans Ekstrom (“Weavering”) involved a Cayman fund that was traded on the Irish stock exchange and which went into liquidation in March 2009.

The Grand Court of the Cayman Islands found, in 2011, that the directors were guilty of wilful neglect or default and awarded damages against them of US$111 million. While the decision is subject to appeal, the Weavering decision reinforces the risk that directors may assume personal liability as a result of being a director of the company.

While it is clear that a voluntary liquidation does not change whether a director acted properly in the conduct of his duties, it can, to the extent a director had complied with his duties, make it more difficult once a company is dissolved from being reinstated and the directors pursued on a personal basis.

In the BVI there is an approved amendment to the BVI Business Companies Act requiring the appointment of an independent voluntary liquidator, and not a director or officer of the company as before.

While the author of this article does not know what prompted the legislative writers in BVI to consider this amendment, it is evident that it directed to the need for the voluntary liquidator to be independent and objective in conducting a formal winding up of the company.

Given that the BVI is a leader in the offshore world in terms of the number of legal entities incorporated, one has to wonder whether it may only be a matter of time before other jurisdictions follow suit.

In the Cayman Islands, there has been, for some months now, much discussion among the various professional bodies about whether the Cayman Islands Monetary Authority may require the appointment of an independent voluntary liquidator and/or a qualified insolvency practitioner over regulated entities.

This too seems to arise from a concern that having someone more independent and qualified will provide greater comfort in the conduct of such liquidations and the reliance that the regulator may place on such a process as part of its regulatory framework

Directors who are contemplating what may be the most appropriate way to close out a company when the business of the company is complete will want to take heed to these developments. One of the options that directors may wish to consider is the appointment of an insolvency practitioner as the voluntary liquidator.

Insolvency practitioners not only can provide voluntary liquidation services on a cost-effective basis but also with their experience and qualifications can provide greater comfort that the process has been right and that the risk of reinstating the company and pursuing claims against directors on a personal basis is mitigated and reduced.

The appointment of an independent insolvency practitioner to liquidate the solvent entity will, in a post-Weavering world, demonstrate the directors to be seen to be doing their duty to the best of their abilities and circumstances with respect to the winding up.

Qualifications and attributes of IPs

The appointment of an insolvency practitioner as voluntary liquidator can provide critical benefits to the process. By virtue of their independence the insolvency practitioner mitigates the possibility of a company being reinstated so that directors can be pursued for their past conduct. This will provide the directors with greater certainty and peace of mind that their exposure has been reduced and mitigated.

By using qualified professionals with experience in insolvency matters the process will be done correctly, again diminishing the likelihood of a reinstatement and providing value to the directors.

Insolvency professionals will have experience in identifying known and potential creditors who should be given notice of the winding up and call for creditors. To the extent claims come in, insolvency practitioners have experience in reviewing claims and adjudicating them. It may be that from this process the company will save costs in the amounts being claimed by third party service providers.

An insolvency practitioner will also have systems and staff in place to deal with the intricacies of the filing deadlines and the investigations and research that needs to occur. This is specifically important if there is a tight timeframe in which the liquidation needs to complete so to avoid future registration fees and other costs or obligations.

The appointment of an independent insolvency practitioner demonstrates a transparent and responsible approach to the winding up of the company.

Benefits of appointing an IP

An insolvency practitioner has the training and experience to know what to look for and how to proceed with a thorough and detailed review of the company, its dealings and the rules and regulations it must comply with in the manner of its winding up. An experienced insolvency practitioner can also do so on a cost-effective basis.

There is often severe fee pressure brought to bear on the solvent liquidation. Especially where the company may have been dormant for some time, business has ceased or there may be little cash remaining. Bringing their experience to bear an insolvency practitioner can very quickly and relatively cheaply process a voluntary liquidation.

An insolvency practitioner will have a checklist of information that he needs before he can commence the liquidation. His checklist will assist the insolvency practitioner in assessing the areas of risk that need to be looked at and the steps that may need to be taken either up-front or during the course of the liquidation to address those risks and make the liquidation as seamless and cost-effective as possible. An ounce of prevention up front can lead to avoiding unnecessary delays or costs in the future.

One factor the insolvency practitioner will be particularly interested in is whether the company is regulated and whether it has any outstanding regulatory obligations, for example audited accounts.

If yes, this will have cost implications or may increase the amount of work required by the voluntary liquidators to provide the regulator comfort that the operation of the company is not being conducted in a manner that is adverse to the interests of creditors and other stakeholders.

The issue here may be whether it is easier to have the auditor conduct an audit that covers these concerns or have the voluntary liquidator perform certain agreed upon procedures to gain such assurance.

A further factor the insolvency practitioner will want to better understand is what assets remain in the company and how best to realise them. Are there physical assets that need to be sold, distributed in specie or otherwise disposed of?

Is the asset register up to date and are the values contained therein current and realisable?

Are there financial assets? Investments, loans? Are they intercompany? Are there directors’ loans? All of these questions reflect the potential complexity of the liquidation and are all the more reason to have an independent qualified practitioner appointed.

Lastly the insolvency practitioner will want a proper appreciation of the potential population of known or possible creditors. What are the known creditors? Are there any contingent liabilities? Is there any litigation in the pipeline or threatened? This information may not be contained in the company accounts and potential liabilities need to be followed up on.

Commonplace, voluntary liquidators will advertise their appointment and the notice for calling creditors in the local gazettes in the Cayman Islands or BVI. Insolvency practitioners, based on their experiences on large and complex liquidations, can assess whether advertising in the gazettes is sufficient or whether it may be more appropriate to also advertise in other mediums. Insolvency practitioners will also ensure that at least a party is known, it receives notice of the winding up and the notice to call creditors.

Conclusion

In a post-Weavering business world the advantages of formally winding up a company and appointing an independent voluntary liquidator, rather than deciding to allow the company to strike off for non-payment of fees or seek a formal strike-off, can far outweigh the perceived additional cost.

A voluntary liquidation will reduce and mitigate the risks of director liability in the light of Weavering. A voluntary liquidation will bring closure and finality to the company and similar comfort to the directors in their personal capacities. Liabilities – past, present and potential – are crystallised, confirmed and discharged.

Directors can rest at night knowing that a past liability or problem will not easily surface in the future and should it do so, that they have demonstrated that they took all appropriate steps to mitigate and reduce that risk. And by appointing an insolvency practitioner the directors can take comfort in the knowledge that they have retained professionals with the qualifications and experience in winding up companies and addressing known and potential liabilities.

The appointment of an insolvency practitioner can ensure that the winding up is done properly, by persons independent of the entity, giving the directors the peace of mind that they have closure when the business completes.

 

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Declan Magennis

Declan is a senior manager at BDO CRI (Cayman) Ltd. After five years working in restructuring and insolvency with Grant Thornton in Dublin he relocated to Cayman to work with KRyS Global for three years before moving to BDO. Declan is a committee member of RISA (Recovery & Insolvency Specialists Association Cayman).
 

Declan Magennis
Senior Manager
BDO Cayman Islands
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Governors Square
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Cayman Islands

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E:  dmagennis@bdo.ky
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BDO

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