What is the difference between an Insolvency Practitioner and a Liquidator?

The following article outlines the differences between an Insolvency Practitioner and a Liquidator. It includes a number of practical suggestions for situations that may occur when company directors find themselves in financial distress.  

WHAT IS THE DIFFERENCE BETWEEN AN INSOLVENCY PRACTITIONER AND A LIQUIDATOR?

An Insolvency Practitioner (IP) is someone who is licensed in the United Kingdom to act on behalf of companies and individuals when they are facing insolvency or acute financial distress. 

When an IP is appointed over a company in Creditors’ Voluntary Liquidation (“CVL”), Compulsory Liquidation (“WUC”) or Members’ Voluntary Liquidation (“MVL”) they are referred to as “the Liquidator”.

In a CVL or WUC, a liquidator takes control of a company when it enters into liquidation, usually because it can no longer pay its debts in full. A liquidator has to be a qualified Insolvency Practitioner with powers to undertake any activities required to wind up the company’s affairs. 

The directors give up control of the company to the liquidator on the day of liquidation, although their residual duties of care to the company remain. 

An MVL is a similar procedure but is used where the Company either has no creditors, or they can be repaid in full together with statutory interest. This is commonly used for the orderly wind-down of a company and may allow the company’s shareholders to benefit from Business Asset Disposal Relief 

WHAT IS AN INSOLVENCY PRACTITIONER?

In order to act as a liquidator in the United Kingdom an individual needs to hold an insolvency licence and needs to be an Insolvency Practitioner (IP). 

They also need to be authorised by an appropriate regulatory body. Chamberlain & Co is authorised by the Institute of Chartered Accountants in England & Wales (ICAEW). 

In real terms, there is no difference between a liquidator and an IP. The Insolvency Practitioner is a professional who needs to have sufficient experience working in the field and pass exams that include all forms of insolvency – both professional and personal. 

They also need to be fully conversant with the Insolvency Act, Insolvency Rules, Companies Act and many other relevant Acts of Parliament in existence and must keep themselves up to date with changes to the law, new legislation coming into effect, and conduct their activities accordingly 

Once an IP has qualified, they may request a licence from a regulatory body, such as the ICAEW, which will allow them to refer to themselves as an Insolvency Practitioner (IP). We have covered the full responsibilities of an Insolvency Practitioner in our guide which you can read.

In addition to IPs, the Insolvency Service also authorises people to act as Government Insolvency Practitioners – referred to as Official Receivers. By default, the Official Receiver is appointed over all companies which enter into WUC and all bankruptcies in England & Wales.

The Official Receiver may opt to refer these cases to private sector IP’s on their regional rota, although they will retain responsibility for reporting misconduct by bankrupts or company officers. 

WHAT IS THE AIM OF AN INSOLVENCY PRACTITIONER?

In a society where there is debt & lending, there will always be bad debt & default debtors. The role of the Insolvency Practitioner (IP) was created to deal with companies and individuals who are in default, hopefully with a view to returning them to solvency, but where this is not possible, to conclude their affairs in a fair and equitable manner.   

An IP assesses the situation of financially distressed individuals and companies and then discharges the relevant processes, as an office holder.  

Their core duty as a regulated individual is to make informed decisions over the affairs of the individual or company. The main aim is to maximise the assets available in order to recoup money to minimise the effect the bad debt will have on the company or individual’s creditors.  

They also have a responsibility to ensure clients are treated fairly and in an equitable manner. Frequently, an IP is required, and expected, to make commercial decisions to ensure the best outcome for creditors.

In practice, an IP will seek to assist companies and individuals with financial difficulties and has a legal obligation to provide best advice. They are required to consider all options available such as restructuring, refinancing and not just insolvency procedures. 

Currently, in England & Wales, the insolvency legislation is structured as a recovery process with the overarching aim being to return individuals / companies to solvency so as to preserve jobs, future revenue streams, taxation and similar. 

WHAT POWERS DO INSOLVENCY PRACTITIONERS HAVE? 

In an Individual Voluntary Arrangement or Company Voluntary Arrangement, an Insolvency Practitioner has their powers set out in the client’s proposal – subject to modifications requested by creditors and agreed with clients.  

Usually, these powers predominantly ensure that both parties abide by the terms of the proposal. The terms, together with any modifications, give directions to the IP (called the Supervisor) as to the actions they should take if the client or creditors do not abide by its terms.  

In all other insolvency processes, the IP has many powers which are dependent on the nature of the process. These powers are in service of three fundamental goals.

The first goal is to establish whether there is likely to be any benefit to creditors by trading in an insolvency procedure, whether that be a personal or corporate business. If so, the IP is able to run the business and settle operational costs arising during this period of trade, with a view to maximising profits where available to generate recoveries for creditors and preserve the value of the business. 

The next goal is to maximise the value of the assets within the estate. An IP can sell and dispose of assets to generate funds for the benefit of creditors. They also have the ability to bring legal action – the nature of which varies concerning the insolvency process chosen – with a view to challenging transactions that shouldn’t have taken place.

The final goal is to investigate the historic activities of the client. Any element of misconduct, including historic transactions, must be investigated by the IP to ensure that any transactions subject to challenge are challenged, to maximise funds recovered for creditors. An IP must also report any identified misconduct to the Insolvency Service which will consider whether disqualification or similar action is in the public interest. 

Whilst these are the key areas of power that are held by an IP, they also have a myriad of other powers, such as the ability to operate a client account and hold money on behalf of their clients, and authorise payments from these funds as required.

HOW DO INSOLVENCY PRACTITIONERS GET PAID? 

How IPs are paid is entirely dependent on the type of work they are doing. 

If providing a one-off piece of advice to a client regarding a specific issue, normally this will be on a fixed fee basis, or on a time spent basis. The type of fees will be agreed upon between the client and IP at the point of engagement. 

In a formal insolvency procedure, the fees are categorised into two elements:

• Pre-appointment fees – which is the time incurred working with the client prior to their formal appointment over their affairs; 
• Post appointment fees- the time incurred after they are appointed. 

An IP can agree pre-appointment fees directly with the client and may be paid these fees prior to their appointment. In this situation, the payment must be disclosed to the creditors. Where fees are not paid pre-appointment, they are usually taken in the first instance from asset realisations, and fee approval must be obtained from the appropriate body of creditors before fees can be drawn.

Most processes are operated on a time spent basis, also referred to as “time costs basis”, but under current legislation an estimate of time costs must be provided at the time of approval. This figure then operates as a cap on fees and cannot be exceeded until further approval from creditors is obtained.

Different fee structures can be agreed, such as a fixed fee, a percentage of realisations, or a mixture of different types of fees. 

Where there are no assets within an estate, it is common for the IP to agree a fee with the client, which the client will pay from their own personal funds.

WHAT IS A LIQUIDATOR?

A liquidator is an Insolvency Practitioner who has been appointed to a company that has entered into Voluntary Liquidation, Compulsory Liquidation or Members Liquidation.

WHAT IS THE AIM OF A LIQUIDATOR? 

In the case of a Members Voluntary Liquidation (MVL), liquidators seek to settle all outstanding liabilities and then distribute the remaining funds to shareholders after settling the liquidators’ agreed costs.

An MVL is used for solvent companies where the company is wound up as it is at the end of its useful life and is usually done for tax efficiency purposes and to assist with Business Asset Debt Relief Claims. 

This process provides comfort to company directors when closing a business as one of the roles of liquidators is to establish that the company’s tax affairs are concluded and obtain permission from HMRC to dissolve the company.  

In a compulsory or voluntary liquidation, the liquidator has two duties:

1. To sell or collect the company’s assets and convert them to cash that can be distributed to creditors after settlement of the costs and expenses of the liquidation.  
2. To investigate a company’s affairs to ensure any misconduct is reported to the Insolvency Service who will decide if it is in the public interest to bring further proceedings. This aspect is also used to identify any transactions that need to be challenged and/or overturned to bring proceeds back into the company for the benefit of creditors. 

Once the process is complete, liquidators will look to review all claims and dismiss any that are not properly evidenced and thereafter pay a dividend to creditors from remaining realisations after settlement of costs. 

WHAT DOES A LIQUIDATOR DO? 

We have covered the core duties of a Liquidator in the paragraph above, but the liquidator will also undertake other administrative tasks, such as managing a client account with each client’s funds. 

They also monitor the process of the winding up to ensure that work is carried out to the expected levels of professionalism and integrity. 

WHAT IS ANOTHER NAME FOR A LIQUIDATOR? 

Any liquidator has to be a qualified and registered Insolvency Practitioner before they are allowed to begin the liquidation process with any client. As such, a liquidator may also be referred to as an Insolvency Practitioner (IP). 

HOW ARE LIQUIDATORS PAID?

Payment for the work a liquidator undertakes can be in the form of a pre-agreed fixed sum, an hourly rate, or a percentage of the assets they realise. Alternatively, a combination of the foregoing can be used for different aspects of the work undertaken. This payment should be agreed upon at the creditors’ meeting or with the creditors’ committee.

The liquidator’s fees are either met by the client, or where possible, from proceeds generated from the disposal of the company’s assets. 

WHO DOES THE LIQUIDATOR OWE A DUTY TO? 

Ultimately the liquidator owes a duty to the company as they are the client. It is established under the prevailing legislation that where a company is solvent, its primary duty of care is to its shareholders. 

But in an insolvency, the primary duty of care is to the company’s creditors. The reality is that the liquidator has to look at each class of individual as a whole and be fair & equitable in all their dealings with those stakeholders. Whilst the company is the client to whom the duty is owed, any stakeholder in the right circumstances can bring a case of misconduct against the liquidator. 

Equally, creditors need to be pragmatic. The expectation is that an Insolvency Practitioner or liquidator will look at their work with a commercial view – and an IP would be rightly criticised for incurring costs pursuing an asset that would only be payable from proceeds of the sale of another asset. 

Ultimately a liquidator will do their best to ensure all stakeholders are treated with the appropriate respect and transparency that would be expected from a regulated professional.

WHAT IS THE DIFFERENCE BETWEEN A LIQUIDATOR AND A RECEIVER?

In England & Wales (other regions of the UK have different procedures) the term “receiver” commonly refers to an Administrative Receiver or a Law & Property Act Receiver. 

An Administrative Receivership is an insolvency procedure that was heavily utilised by fixed charge creditors, chiefly the banks. It was established to take control of a company where the secured creditor perceived there to be risk in recovering their lending. 

Current legislation states that any security document created on or after 15 September 2003, can no longer be used to appoint an Administrative Receiver. To be appointed Administrative Receiver, the document must pre-date this date. 

Ultimately, this is a procedure that is being used less frequently and is being naturally aged out, although it remains for secured creditors who have held appropriate security predating 15 September 2003.

A Law & Property Act Receivership is where a receiver is appointed over a specific asset i.e. a property that is mortgaged. Again, this is predominantly used by banks in order where a mortgage has entered into default. 

WHAT IS THE DIFFERENCE BETWEEN LIQUIDATION AND INSOLVENCY?

There is no main difference between the two, as liquidation is an insolvency process. 

CAN I LIQUIDATE A COMPANY WITHOUT AN INSOLVENCY PRACTITIONER? 

This depends on the circumstances. 

A director may apply to court to place their company into Compulsory Liquidation and a creditor can apply to court to place a debtor into Bankruptcy or a company into Compulsory Liquidation.  

If an order for a Bankruptcy or Compulsory Liquidation is made, then an Official Receiver will always be appointed in the first instance.

In a compulsory liquidation that is creditor-lead, the director may seek advice from an Insolvency Practitioner. If the liquidation is director-lead and has assets, the Official Receiver may appoint an Insolvency Practitioner on their rota to deal with those assets.  

All other forms of liquidation require the input of an Insolvency Practitioner. Our suggestion to directors who are considering liquidation is to take advice from an Insolvency Practitioner. As noted above, Chamberlain & Co provide a free one-hour consultation to anyone who is seeking our advice. 

We have seen people take steps to enter into insolvency without taking advice and the outcome has been considerably worse than if they had taken advice at the outset.

WHY IS IT BETTER TO ENTER A CREDITORS VOLUNTARY LIQUIDATION THAN WAIT FOR ENFORCED LIQUIDATION? 

It is not necessarily better to place a company into a Creditors Voluntary Liquidation than it is to be wound up in a Compulsory Liquidation. A practical reason for this is that the company and its directors may have no assets – and therefore in reality may not be able to pay for voluntary liquidation.  

However, the board of directors may wish to carefully consider the benefits of a voluntary liquidation as opposed to a compulsory one. 

In the first instance, it minimises risk to the directors as they have a duty of care to take action once they become aware of financial problems. These steps would be to consult a professional.

If action by the directors is not taken in a timely fashion – and it’s worth noting a compulsory liquidation can take several months to commence from the date the initial petition is lodged – during the intervening time a director may be exposed to claims that the company was allowed to trade whilst insolvent or possible misfeasance claims.  

It can also affect both a company’s and a director’s reputation. Whilst it is not definite that these instances will occur, it is best practice for directors to be proactive. 

If your company is in financial distress, consulting a professional such as an Insolvency Practitioner will minimise any problems and their help may realise assets more quickly. These highly experienced professionals will also liaise with creditors on the clients’ behalf and take over the running of the process. 

Understandably, both personal and company financial distress can be very distressing for the individual and/or company director and place them under significant pressure. 

By seeking prompt advice from an insolvency practitioner, you can be supported through this difficult process by experts who understand the pressures you are facing and have experience in working swiftly to deliver a strategy to resolve the issues you face. 

Chamberlain & co offers a free initial one-hour consultation which is discrete and can be held via telephone, face-to-face meeting, or through a digital medium such as Microsoft Teams. All matters are discussed confidentially, and the team is used to making discrete enquiries on a no-names basis when working with you to produce a strategy to resolve your issues. 

As with all insolvency practitioners, Chamberlain & Co are committed to delivering best advice in all scenarios, and the team’s work has been recognised regularly at the Yorkshire Accountancy Awards and Turnaround, Rescue and Insolvency Awards. 

For further information and impartial advice, feel free to give us a call on 0113 242 0808 or e-mail advice@chamberlain-co.co.uk