Solvent liquidations: The benefits of an independent insolvency practitioner

By: Andrea Harris
Published in: Envoyage

Boutique fraud investigation, asset recovery and insolvency firm KRyS Global expanded into Europe with the opening of its Guernsey office on 1 October 2012. KRyS Global is a professional services firm committed to resolving complex cross border issues.

Clients benefit from the practical handson approach, along with the depth and
range of experience of its professionals, which ensures clients receive answers and remedies specifically suited to meet their needs and demands. KRyS Global has around 60 employees, including professional accountants, lawyers, certified fraud examiners and certified anti-money
laundering specialists, in offices in the Cayman Islands, the British Virgin Islands, the Bahamas, Bermuda and now Guernsey.

KRyS Global presented an informative session on solvent, or Member’s Voluntary Liquidations (‘MVL’) to members of Guernsey’s financial sector on 10 December 2012 at the Old Government House Hotel. The event was well attended and addressed key issues, such as:

• The growing trend in other jurisdictions for the appointment of an independent qualified insolvency practitioner (‘IP’) as the Voluntary Liquidator;
• The positive perception in the eyes of stakeholders where an independent party conducts the winding up; and
• The potential liabilities of directors or other related parties who accept an appointment as liquidator.

Directors’ liability

The presentation highlighted that, in the matter of Weavering Macro Fixed Income Fund Limited (In Liquidation) v Stefan Peterson and Hans Ekstrom (‘Weavering’) (a Cayman fund which was traded on the Irish Stock Exchange and went into liquidation in March 2009), the Grand Court of the Cayman
Islands found that the directors were guilty of wilful neglect or default and awarded damages against them of US$111 million. While the decision is subject to appeal, it reinforces the risk that directors may assume personal liability as a result of their actions.

Apart from protecting themselves from potential liability, the directors of an entity being wound up will also want the peace of mind that will bring closure to their involvement in the company and will favour a process which delivers that.

The benefits of appointing an IP were outlined and include:

• It demonstrates to stakeholders a transparent and responsible approach to the winding up;
• IPs have experience in identifying known and potential creditors to ensure their participation in the winding up, in the filing of statutory returns and reports, and undertaking investigations where necessary; and
• It mitigates the possibility of a company being reinstated so that directors can be pursued for their past conduct, as the investor or creditor seeking to pursue this course of action will need to show that there was not an opportunity to raise questions, seek information, or file a claim before the company was dissolved.

Several case studies highlighted the importance of appointing an IP as a Voluntary Liquidator. In one of these matters, an insurance company’s operations had ceased over five years prior, when the parent company decided it was time to ‘tidy up’ and dissolve the entity by appointing Voluntary Liquidators. A review of the records by KRyS Global showed that a contingent
liability of approximately US$300,000 for which knowledge existed. The Liquidators identified and considered the risks and ensured efforts were made to give the potential creditors knowledge of the liquidation.

Mitigating risk

Communications were received from a couple of potential creditors and the Liquidators were able to give them comfort on the process and mitigate any liability to the company. Had the Liquidators not provided the creditors with the opportunity to address their claim in the liquidation, the directors may have ultimately been held personally liable for any loss.

Another example involved a company that had been the victim of a significant fraud. The company had successfully recovered the stolen funds and the directors sought to wind up the company immediately after to mitigate any efforts by parties to clawback the money. Independent Liquidators were able to take steps to give notice to potential creditors and persuade them not to pursue their claims, thus meeting the directors’ objectives and documenting that reasonable efforts were made to call creditors. Had the Liquidators not drawn out the creditors and documented those efforts, the directors may have ultimately been held personally liable for any clawback.