Dark Side of Liquidation

When a limited company enters liquidation, for whatever reason, revenue from the sale of the company’s assets is redistributed amongst creditors and shareholders in order of priority.  

The director’s powers cease and an insolvency practitioner (IP) takes over managing the company’s affairs. The director no longer has any control over the company or its assets. They have no choice but to trust the IP (liquidator) has creditors’ best interests at heart.

No single individual governs insolvency proceedings and this is where the dark side of liquidation comes to light. Liquidations have no time limit, their length is entirely dependent on the amount of work the IP undertakes.

IPs prefer longer liquidations

IPs work on an hourly basis and so the more there is to do the more money they make. Regrettably, some liquidators have been known to ‘increase their workload,’ which decreases the dividend available to creditors.

This prolongs the length of the liquidation and distances creditors from the process. As a result, less people will fight for their funds. The longer this goes on, the more likely creditors will become distracted by other issues.  

For example, a high percentage of investment creditors are elderly people who invest their life savings and pensions. What’s sad is that some of these clients will die before their dividend is distributed.

Few places to go

Generally in liquidations, the retrieval of lost funds is a priority for around 20% of investor and creditors. Sadly, there are very few places these unsecured creditors can go to seek redress, support and guidance.

To add insult to injury, creditors may receive emails warning of payment delays because: ‘…there’s more work to be done.‘ Some liquidators may waste time just to squeeze every last penny out of the liquidation process.

Furthermore, liquidators are often surrounded by lawyers who are also paid hourly and prefer to work on longer liquidation procedures.

The ratio between the amount IPs and lawyers charge and the amount of work they do is clearly an issue that needs further investigation. Or perhaps it’s time to introduce stricter regulations?