Professional Negligence and Liability

Chapter 20



20.1 Under the Insolvency Act 1986 and the Insolvency Rules 2016,1 there are a number of regimes for insolvent or near-insolvent companies2: company voluntary arrangement, administration, administrative receivership and liquidation (compulsory and voluntary). Just as companies are creatures of statute, so, too, the law and procedure governing the insolvency and dissolution of companies is prescribed by statute. Under each regime, an individual (“the office-holder”3), or more than one, is appointed, whether by the court or otherwise, to perform functions specified by the Act. 20.2 The functions and duties of the office-holder will depend upon the office to which he4 is appointed. For example, a liquidator’s function is, in broad terms, to get in, realise and distribute the company’s assets to its creditors. An administrator, by contrast, is primarily concerned with either a rescue of the company or a better realisation of its assets rather than distribution. In all the insolvency regimes, the office-holder takes control of assets, not for his own benefit, but for those entitled under the relevant statutory regime.5 20.3 Prior to the Insolvency Act 1986,6 which made significant reforms to the law of insolvency, there were few statutory restrictions on who might be appointed as an office-holder.7 Where the court was involved in the appointment, it could appoint any fit person,8 but in other cases (for example, voluntary liquidations) there was no supervision or regulation.9 The Insolvency Act 1986 introduced a code by which only licensed individuals called “insolvency practitioners” can act as office-holders.10 20.4 The insolvency practitioner is a statutory creature, fulfilling a variety of offices themselves laid down by statute. Thus, an insolvency practitioner operates in a particularly tightly controlled and regulated environment. 20.5 At the same time, the practical role and legal position of an office-holder may be complex and multi-faceted. This is especially so where he may have to manage an ongoing business. In dealing with such a business, an office-holder occupies a position not dissimilar to that of a director of a company.11 As such, he may owe fiduciary duties and statutory duties. On many occasions he will be acting as agent of the company. In this chapter, we analyse the sources and nature of an office-holder’s duties and the remedies to which they may give rise. 20.6 The material in this chapter largely deals with the duties of office-holders thematically rather than by reference to each of the individual offices in turn. This has the benefit of emphasising the similarities between the duties owed by, for example, liquidators and administrators. At the same time, it creates a danger that the significant contrasts between the various insolvency regimes will be obscured. It should be emphasised that the nature and extent of an office-holder’s duties will depend on the office that he holds. A summary of the insolvency regimes is contained in Part II of this chapter. 20.7 The law of insolvency remains an area which is subject to debate and modification. The extent to which the Human Rights Act 1998 is having an impact on insolvency regimes remains a source of debate.12 The Insolvency Act 2000 enacted amendments to the procedure relating to, in particular, company voluntary arrangements.13 Amendments to the insolvency regime were also introduced by the Enterprise Act 2002 which came into force on 15 September 2003.14 Part 10 of that Act made significant amendments both to corporate and personal insolvency law. For example, the provisions in the Insolvency Act 1986 relating to administration were entirely replaced, and administrative receivership was abolished save for in limited circumstances.15 Most recently, the Corporate Insolvency and Governance Act 2020 introduced both temporary measures to assist companies in the wake of Covid-19, as well as permanent measures such as the ability for cross-class cram down, the prohibition of the enforcement of ipso facto clauses and the introduction of a moratorium for businesses looking to restructure. With regards to the latter, a new role of “monitor” has also been introduced to assess, amongst other things, whether it is likely that a moratorium will result in the rescue of the company as a going concern whilst the directors of the company retain day-to-day control and management.16 Further, European law, despite the UK having now left the EU, remains relevant in the insolvency field, although the precise workings of the future relationship in an insolvency context remains to be seen.17


20.8 As we have already indicated, the Insolvency Act lays down a number of corporate insolvency regimes. In this section we briefly summarise those regimes (with references to the more important provisions of the Insolvency Act 1986).

1. Liquidation

20.9 Liquidation (or winding up) is the regime by which a liquidator (or more than one) collects in and realises a company’s assets, and distributes the proceeds to creditors and (if there is a surplus) to members in accordance with the scheme laid down by statute. There are three types of liquidation:
  • (1) Compulsory liquidation: a compulsory liquidation follows the making of a winding-up order by the court (sections 122 to 130).18 Specific provision is made for the winding up of foreign companies by the court (sections 220 to 229).
  • (2) Creditors’ voluntary liquidation: a creditors’ voluntary liquidation is an insolvent liquidation commenced by resolution of the company in general meeting and approved at a creditors’ meeting (sections 84 to 90 and 98 to 104).
  • (3) Members’ voluntary liquidation: a members’ voluntary liquidation is a solvent liquidation commenced by a resolution of the company in general meeting (sections 84 to 96).
20.10 Under the Insolvency Act 1986, the principal statutory obligations of both the compulsory and the voluntary liquidator are to get in the company’s assets, realise those assets and distribute the proceeds pari passu to creditors and members in accordance with the statutory scheme.19 The main statutory provisions are as follows:
  • (1) Section 143 (which deals with compulsory liquidators) provides:

“The functions of the liquidator of a company which is being wound up by the court are to secure that the assets of the company are got in, realised and distributed to the company’s creditors and, if there is a surplus, to the person entitled to it.”

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