When is it the right time to consider the replacement of a liquidator (or administrator)?
Before answering that, perhaps we first need to consider the relationship that exists between the credit and insolvency communities, which like step-siblings raised in different households, still share a lot of the same DNA. In the background (e.g. appointment types, investigation programs and compliance red tape as long as Mr Fantastic’s arm) is a commonality between creditors and liquidators that is often overlooked, underappreciated or misconstrued. We both want transparency … and to get paid. Unfortunately, in some cases when dealing with our customers, despite our best efforts at utilising our processes and systems, we get caught out with a “bad debt”. It just so happens that each one of those bad debt scenarios for creditors is only the beginning of the story for the liquidator. Or in other words, like ‘grandpa’s BBQ sausages”’ charcoaled beyond recognition, timing makes the relationship difficult to swallow. And it is worth noting that liquidators have, on occasion, been caught with bad debts as well.
In the majority of instances, both creditors and liquidators have had no hand in the demise of the corporation they are exposed to. Creditors have undertaken due diligence into the potential customer’s business and its management in order to determine the credit worthiness, as well as continued monitoring of the relationship to the extent permitted within the boundaries of commercial relationships and the law. Liquidators, similarly, have performed an initial assessment of the individuals who have sought their assistance, as well as an analysis of the financial circumstances of the company in question - within the regulatory guidelines that bind them. In both instances, the parties are rarely paid for this work, and the consequence of getting the assessment wrong can lead to disaster.
Likewise, once initiated, the relationship with the debtor is a difficult one to exit. A creditor has often scaled their business to meet the debtors demand for their goods or services and therefore would be required to find an alternative purchaser should the relationship be exited. Once appointed, the liquidator is unable to walk away from that appointment without a valid reason (such as ill health), and if required must find an alternate to accept the role in their stead.
Similarities aside, there exists the ability for creditors to make a determination on the continued appointment of a liquidator. Commonly, the initial stages of a debtor-initiated liquidation process will catch a creditor by surprise and whilst most sophisticated creditors understand the nature of the business lifecycle within the prevailing market conditions - i.e. we can’t control it all - it is never news that is cause for celebration. Indeed, anecdotally I have even heard that there may be an emotionally charged profanity or two directed at certain elements within the failed relationship. It is therefore unsurprising that there is an element of animosity at the initiation of the relationship between the creditor and the liquidator. After all, in a business sense, creditors have recognised that their relationship has soured and the liquidator is hopeful about the beginning of a new relationship.
Unfortunately, the circumstances and the regulatory requirements often mean that like trying to order anything from a Parisian waiter, there is simply a breakdown in effective communication. Therefore the question remains, when is it appropriate to replace a liquidator?
Like all elements within the role of a credit professional, it could be argued that the decision is based on a mixture of investigative know-how and intuitive genius. But, equally, it is just as good to have a bit of a checklist to fall back on. Below are some observations on when it may be appropriate to consider a replacement.
Do we have the votes?
In order to replace an incumbent liquidator, creditors must have a majority in number and value voting in favour of the motion at a duly convened meeting of creditors.
A meeting can be convened at the request of creditors:
- Within 20 business days of the liquidator’s appointment to a Creditors’ Voluntary Liquidation, if the request is from unrelated creditor/s representing at least 5% of the value of creditors.
- At any time if:
a. The creditor/s represent at least 25% of total creditors.
b. The creditor/s represent 10 to 25% of total creditors and they provide security for the cost of holding the meeting.
Have we raised our concerns with the liquidator?
As mentioned above, there is a clear timing mismatch. As such, it may take the liquidator a little longer to understand the full circumstances of the various relationships, including those areas of concern that are more apparent to creditors who have had a longer period of time to assess the behaviours of the key stakeholders within the business. Initiating communication verbally and/or in writing can be an invaluable resource to building a positive relationship with a liquidator.
Is the liquidator being transparent?
If the goal is to provide transparency in relation to the affairs of the debtor prior to the insolvency, has the liquidator been transparent in providing a response to any queries that you have raised as a creditor, bearing in mind the requirements of the law? [NB: Creditors do not have an automatic right to request the books and records of the debtor]
Is the “proof in the pudding”?
Is the output and quality of work consistent with the level of fees that are being applied to the liquidation process? How do you know? If there is doubt, then consider a conversation with fellow creditors, legal advisers or an alternate liquidator. If the doubt is shared, creditors can seek the appointment of a Reviewing Liquidator (costs borne by the debtor) by:
i. Applying to ASIC.
ii. Applying to court.
iii. Passing a resolution proposed by the liquidator at a meeting or by correspondence.
iv. One or more creditors without a proposal, provided the liquidator agrees with the appointment [NB: costs to be borne by the creditor in this situation]
Is funding required to undertake further investigation or actions?
If the liquation is without funds, creditors should consider the appetite to fund the work of a replacement liquidator or support a proposal from an external funder. In most instances, the claims brought by liquidators are complex and contested. Liquidators are unlikely to be able to achieve their objective without appropriate levels of funding.
Is the liquidator independent?
There is a lot of focus by regulators on the “perception” of independence. Rightly so, as creditors must be confident in the transparency of the process. However, it is important to note that the majority of liquidations are initiated by debtors, saving creditors the cost of enforcement. Given the available options for creditors to scrutinise the work of the incumbent liquidator, creditors should consider the merits of the incumbent liquidator, their credentials and previous experience before jumping to any conclusion on bias. It is unlikely that a liquidator will expose their livelihood by pushing the boundaries of their independence for a debtor.
In summary, like all business decisions, the decision to replace an incumbent liquidator should be balanced and not made emotionally. Perhaps the short-circuit for the credit professional and insolvency professional is to begin the relationship before the arrival of the debtor, so a positive relationship between step-siblings can be developed. As always, Insolvency Intel for Credit Managers, powered by Jirsch Sutherland, is available to AICM members to act as a sounding board on the practicalities faced by creditors in all types of insolvency appointments.
T: 1300 265 753
July 2019 - FNSCRD505 - Respond to corporate insolvency situations - FNS51520 Diploma of credit management