The company liquidation process (a creditor’s voluntary liquidation for insolvent companies) can be a long and winding road for company directors. While directors might get to appoint the liquidator, they don’t owe the directors or owners any legal duties, so it is best to pick an ethical and commercially-minded liquidator. If you pick a “salesman” liquidator you may find that they’ll try to “supersize” your liquidation. The size and culture of the liquidator’s firm should be carefully considered, because you will likely be dealing with them a lot. It is also important for directors to realise that the process of appointing a liquidator usually stinks, as there is often a lack of transparency and many conflicts of interest.
Why does it matter to pick the right liquidator?
- Although directors may appoint the liquidator in a creditor’s voluntary liquidation, (Read our blogpost: When is a voluntary liquidator appointed?) the liquidator has the legal duty to act for the creditors
- While the liquidation is running, the directors will be subject to investigations by the liquidator and they may be sued to recover funds or as punishment for breaching their duties to the company
- The liquidator may communicate with the media about the liquidation and the director’s conduct
- The liquidator has a legal duty to report impropriety to ASIC and/or the police
- It is highly unlikely that the liquidator can be removed by the directors – so selecting a liquidator is a decision that is probably irreversible
Take-away for directors: Overall, a company liquidation is stressful – so why pick someone unless they’re the best person for the job?
What is liquidation and when do you appoint a liquidator?
When a company is insolvent and the directors decide to cease trading, a voluntary liquidator should be appointed. To understand more about a voluntary liquidation read our blog post: When is a voluntary liquidator appointed?
If the directors put off appointing a liquidator for too long, they may increase their risk of facing the following consequences:
- A director’s penalty notice being issued by the ATO to pierce the corporate veil (read our blog post about DPNs for further information)
- Creditors taking action to wind up the company themselves and appointing their preferred liquidator: Read our blog post about applications to wind up a company in insolvency
- An action against the directors for breaching their legal duties by trading whilst insolvent: Read our blog post on Insolvent Trading to learn more
The process of choosing a liquidator usually stinks
Corporate liquidations can be highly profitable jobs for an insolvency practitioner. The partner hourly rates of liquidators are usually in the order of $750 (or more) and that’s before you consider the leverage model that results in billings from the multiple levels of accountants and administration staff working on the appointment. This means that it is a very attractive proposition for a liquidator to take an appointment where assets remain in the company (or at least claw-back claims) when they are appointed.
If a company director doesn’t already know a company liquidator, it is likely they will be introduced by a trusted adviser such as their accountant or solicitor. The result of this is that the insolvency market is completely driven by referrals and a sophisticated array of models for incentivising referrers. For small firm accountants, the incentive is likely to be cheap for the liquidator, and they may receive an invitation to the football or the races. Lawyers could receive lucrative legal work from a liquidator, but it is illegal for lawyers to receive cash payments. There are also armies of referrers that charge liquidators direct cash commissions for appointments and provide consulting services for directors.
Phoenix operators are also referrers to liquidators and their preferred model is to seek low cost liquidations with full knowledge that the liquidator will look to take legal action against their director clients. For more information on phoenix activity, watch an interview with our Principal, Ben Sewell: What is phoenix activity and how does the law (attempt to) regulate it?
Company directors should realise that company liquidation is an extremely competitive market and that virtually any liquidator could take their appointment. This means that they have the responsibility to carefully assess who they appoint in advance. If company directors get stuck with a liquidator that their accountant is “mates” with, the director may be inadvertently facilitating secret commissions and signing themselves up for a suboptimal appointment.
Take-away for directors: Understand that the process for referrals in the insolvency industry generally stinks and keep an eye out in case your professional adviser is preferring their own interests to yours.
Consideration 1: The size of the firm is important
The first consideration for choosing a liquidator is to work out the optimal firm size for the type of appointment.
What type of liquidator firms are there?
- Large-sized firms: firms with greater than 20 partners, big city offices and sophisticated support services
- Medium-sized firms: firms with more than 5 partners, large offices and limited support services
- Small firms and sole practitioners: firms with 1-3 partners, a single office and no support services
What are the capabilities of liquidator firms?
- Large-sized firms: Undertaking large liquidations for companies with more than 200 employees with IT and forensic accounting support
- Medium-sized firm: Undertaking small and medium sized appointments (companies with less than 200 employees) but without sophisticated IT and forensic accounting support
- Small firms and sole practitioners: Largely undertaking small business liquidations (less than 20 employees) but without the capability to deal with IT issues or forensic accounting issues
What are the ideal referrers for liquidator firms?
- Large-sized firms: Banks and private equity funds
- Medium-sized firms: Large accounting firms and large law firms
- Small firms and sole practitioners: Small accounting firms, small law firms and consultants
If you are a director of a large company (more than 200 employees) then you’ll probably need a large-sized firm for the simple reason that nothing will get done otherwise. For example, the task of organising a creditor’s meeting for creditors across Australia and overseas may mean that a firm without this capability will get stuck at the first hurdle and upset all of the creditors. The last thing that you want is for the body of creditors in a large liquidation to have any concerns that the liquidation isn’t being professionally run.
The key limitation is usually economic because the larger a liquidator’s firm is, the more expensive it will be to engage them. However, in larger liquidations, a larger firm may be necessary to get a better quality administration process and a faster result. In any liquidation, it is likely that the directors want the business closed down and to have their record of conduct given a “tick” by an investigating liquidator. Further, if the key creditor is a bank or large financier, they may require the appointment of a liquidator who is on their panel.
The key downside of a smaller liquidation firm is that they will be slower in achieving their deliverables. However, they will be a lot cheaper. If a company liquidation has less than $200,000 in assets then directors should look to a smaller firm or sole practitioner as being fit for purpose.
Take-away for directors: Appoint a firm that is the right size for the work that needs to be done in your liquidation.
Consideration 2: The culture of the firm
Organisational psychologists will tell us that culture is “hard-wired” into an organisation. This means that you can’t expect any organisation to change its values or methodology because you ask them to. Culture is something that permeates “top down” in an organisation, so the partners will give you the strongest indication of the firm’s overall culture. You’ll also need to work out ways to test the culture of the firm. Some ways to test their culture and values could include asking yourself:
- Do they offer you water in the board room?
- Do they show an interest in you?
- Do they contribute to society, e.g. by supporting a charity or through other CSR schemes? and
- Are family values important to them?
What company directors want to avoid is becoming captive to an unethical and rapacious firm that only values the income they will receive. That firm won’t only be impossible to deal with, but they will also look for ways to improperly maximise their fee income. There are plenty of examples of overcharging and suspicious conduct of liquidators that can be found on the blog Sydney Insolvency News.
Take-away for directors: Appoint a firm that has appropriate values.
Consideration 3: Price
Like in any business transaction, the price of the services on offer is a critical consideration. If possible, company directors may try to persuade a liquidator to take the appointment on the basis that they get paid from the liquidation of the assets in the company itself. If the company is assetless, then they may be asked for advance payments, or to promise to indemnify the liquidator for a sum between $5,000-$100,000.
The proposition that a liquidator will take on an appointment for a fixed fee is wrong and also misleading. It is misleading because no matter what is promised in advance the liquidators can later seek approval from creditors for a fee adjustment. Company directors need to keep in mind that liquidators don’t create profitable businesses through the number of $10,000 jobs they do, but through the jobs that generate fees in excess of $100,000.
Take-away for directors: See if you can find a liquidator that will take the appointment with no upfront fee.
Consideration 4: Experience is paramount
There are some insolvency firms that are staffed by a young and vibrant group of accountants. These are precisely the liquidation firms that any sensible company director should avoid. This is because they are focused on leverage through billing, but they have insufficient experience to accomplish difficult tasks. This can be frustrating for directors because they may want to meet with their appointee but instead, they are serviced by a young accountant with no strategic vision or tactical understanding of what needs to be done. How could a 25 year old accountant possibly understand a company liquidation?
Experience is essential for any team that supports a liquidator because the actual appointee’s time is limited. Their team can only gain confidence and skill through working on liquidations similar to your own. The same applies to the liquidator who is specifically appointed to your matter.
Take-away for directors: Only appoint experienced liquidators with good teams.
Consideration 5: Ethical and hard working
One type of liquidator to avoid is the “salesman” liquidator. This liquidator will spend more time lunching and drinking with referrers than doing actual work! They’ll probably be likeable and engaging, but they won’t be able to demonstrate a track record that you are comfortable with. Like a used car salesman this archetype will work hard to get the “sale” over the line and then pass you onto other members of their firm to do the actual work.
At one time it was accepted that successful liquidators would do only a couple of days of actual work a week and then spend the rest of their time cultivating referrers at long lunches and drinks functions. This writer’s opinion is that there is plenty of empirical evidence to support the proposition that there is a correlation between unethical conduct and drug and/or alcohol addictions.
Company directors should only engage hard working and ethical liquidators. This type of liquidator is the most likely to be able to negotiate successfully through the difficult liquidation process.
Take-away for directors: Engage only ethical and hardworking liquidators because they are more likely to follow through.
Consideration 6: Commercially minded
Liquidators need to make commercial decisions quickly.
The types of commercial decisions that liquidators need to make include:
- Determining the process for selling assets and the best price that can be obtained for those assets
- Whether to commence proceedings against creditors to recover unfair preference claims
- Whether it is feasible to commence insolvent trading actions or undertake any other claw-back actions against the directors
- Whether to reverse any pre-appointment transactions that the directors entered into (i.e. phoenix activity)
- How long to continue a liquidation and whether to initiate extensive investigations into the director’s conduct through examination hearings in open court
Directors have no interest in engaging an intransigent liquidator who undertakes actions that only have the benefit of increasing their chargeable hours without any tangible benefit for creditors or other stakeholders.
The cost of not engaging a commercially minded liquidator is that you may be caught up in the quests, meandering explorations, pet hates, arguments with the ATO and bitterness that is sometimes associated with those liquidators that aren’t commercially-minded.
Take-away for directors: Engage a commercially-minded liquidator.
Who to avoid: The incompetent liquidator
This commentary should also be read as including incompetent staff. The first negative indicator of incompetence is usually that the liquidator and their staff aren’t members of the CPA or CA professional accounting associations.
Sometimes directors think it is a good idea to appoint the most incompetent liquidator they can find. Usually this liquidator has failed in a larger firm and then decided to grind out a living at a small or medium-sized firm. The logic is that by appointing an incompetent liquidator they will avoid a thorough investigation that may turn up phoenix activity or antecedent transactions that can be clawed back. One example of this is when the director’s accountant “journals out” a director’s loan account as a method of helping the directors avoid being sued for a common debt claim.
The logic of appointing an incompetent liquidator is often persuasive for an 11th hour appointment but over time, the directors are guaranteed to be frustrated by this approach. The issue is that given the complexity and conflict that can arise in a liquidation, the last thing a director needs is a protracted liquidation with someone who frustrates all stakeholders. One example is where a liquidator tells a director that they have “never” sued anyone for insolvent trading. This may be true but the director can assume that the novelty will be attractive if they can put a claim together against their appointing director.
The reality is that liquidators very rarely sue directors for insolvent trading anyway, regardless of whether the liquidator is competent or not. For more information read our blog post: How does a liquidator decide whether to commence an insolvent trading claim?
Take-away for directors: Avoid a liquidator who is obviously incompetent.
Who to avoid: The corrupt liquidator
There is a long history of corrupt insolvency practitioners who take kick-backs in exchange for ignoring director misfeasance. There is also a long history of insolvency practitioners that illegally benefited from appointments by taking money or benefits from a company liquidation. The liquidator is in a trusted position and, other than relatively rare audits by ASIC, they are largely left to their own devices for company liquidations.
It is going to be virtually impossible to identify these corrupt insolvency practitioners from outward indicators. One negative indicator would be that they imply in conversation with a director that they will ignore a legitimate claim against a director such as a director’s loan account or an uncommercial transaction. They would also be obviously corrupt if they asked for a cash payment that would be kept “off the books” and therefore corruptly procured by the liquidator.
The logic behind appointing a corrupt liquidator may be that the directors believe this as the only means of avoiding personal liability for insolvent trading or uncommercial transactions.
Directors in Australia are generally protected by the ‘corporate veil’ so they are very unlikely to be sued by liquidators. There is also the safe harbour from insolvent trading so directors can attempt an informal restructure process if their company is insolvent. This means that directors can now legitimately attempt informal restructures in Australia before being forced into liquidation or voluntary administration. By the time the directors appoint a liquidator, they will have exhausted all other options or it will be after a pre-pack insolvency arrangement is completed.
The downside of a crooked liquidator is that they are just as likely to turn on the directors as they are to adhere to their pre-appointment promise to “look the other away”. A good example of this is the case of Pino Fiorentino (read ASIC press release 14-160MR). Mr Fiorentino was struck off after he was found to have failed to properly investigate phoenix transactions. An interesting finding from the investigation was that in spite not investigating the phoenix activity the liquidator sued his directors anyway.
Another example of a corrupt liquidator is the case of Stuart Ariff who was a liquidator convicted of fraud. He used funds from a company in liquidation for limousines, an international holiday at a luxury resort for his family, hairdressing bills, bottles of wine, computers, rent payments, and tickets to the State of Origin and NRL Grand Final.
Senator John Williams (aka Wacka), a warrior for insolvency reform expressed frustration about the insolvency industry and the lack of movement on complaints about liquidators by ASIC:
“Senator John Williams said that… each week, at least one complaint was made to his office about a dodgy liquidator. ‘Most of the complaints include details and proof of wrongdoings, but where’s ASIC? What’s it doing to clean up this industry?’ he said.”
[source AFR article 20 December 2011, Rome burns, ASIC shows bankrupt determination, by Adele Ferguson]
Take-away for directors: Don’t put your liquidation in the hands of a crooked liquidator because you’ll be stuck with them.
Who to avoid: Referral services
There are numerous online referral services that promise to manage the insolvency process and provide consulting services. If the sole service they deliver is to assist directors in appointing a liquidator, it is likely that they will add no real value and only increase the overall price of the services. There are plenty of liquidators in the market that will offer low cost or speculative appointments (if the company holds saleable assets) rendering the assistance of referral services superfluous.
If the service that is being sought is advice about risk to directors, then consulting a lawyer and the insolvency practitioner themselves would be a sensible first step.
There are also phoenix operators that offer to assist directors to defraud the ATO and then find compliant liquidators afterwards. The reality is that they appoint underfunded liquidators and dispose of the books and records that could assist the liquidator in conducting investigations. This is usually short-sighted and liquidators can now access assetless administration funding from ASIC to investigate the directors.
Take-away for directors: Don’t use a referral service because it will only add to the overall price without adding value.
How do you test whether you’ve picked the right liquidator?
If you’re satisfied that you have found an experienced, ethical, hardworking and appropriate liquidator you should conduct the following tests:
- Ask them to provide references from other directors of liquidated companies
- Ask them for case studies of companies like yours that they have liquidated
- Go through an experienced insolvency lawyer to test that they are genuine [Read our article: Insolvency lawyers, what do they do and how do you pick the right one?]