10 February 2023

High Court orders joint liquidator appointment after the largest creditor in a CVA is found to have appointed its desired liquidator under a fabricated debt

This week the Chancery Division made an order appointing a joint liquidator after it was found that the largest creditor in a liquidation appointed its desired liquidator pursuant to an invalid debt.

The applicant is a fintech company which advanced funds to a funeral plans business by way of a receivables agreement. The company defaulted and the applicant obtained default judgment for the full amount claimed.

From July 2022 funeral plans businesses had to be regulated by the FCA. The company did not obtain FCA approval and subsequently entered into voluntary liquidation. Its largest creditor appointed its desired liquidator at the creditors meeting. The creditors debt was for “unpaid commissions”.

The applicant had serious concerns regarding the veracity of the creditor’s debt as the management of both the liquidated company and the creditor were, at material times, the same individuals and because the security was provided at a time when the company most likely knew it would become insolvent.

An application was issued under rule 15.35 of the Insolvency Rules seeking the following relief against the creditor and the liquidator as respondents: that the decision of the liquidator to admit the proof of debt of the creditor be reversed, that the decision to appoint the liquidator be reversed and that the applicants chosen liquidator be appointed instead or in the alternative that a further creditors meeting be called for the purposes of nominating a liquidator or that the applicants chosen liquidator be jointly appointed.

The evidence put forward revealed that the trust holding the plan holders’ funds was transferring monies to the company without there being any apparent mechanism in place to calculate how much was due and that large sums were being sent offshore for “lead generation” even after the company ceased trading and was on the brink of insolvency.

ICC Judge Prentis found: (1) that the creditor’s proof of debt for the ”unpaid commissions” was invalid; (2) that the transactions resulting in the balance of the debt raised real questions; (3) that there were deep concerns as to the company’s use of various funds given its financial state at the time; (4) that the liquidator only provided an account and surprisingly did not raise any concerns over what Judge Prentis called some “astonishing” things; and (5) that the Court had the requisite jurisdiction under the Insolvency Rules to appoint a joint liquidator and that the most beneficial course to creditors was to do just that.

Daniel Lewis of Wilberforce Chambers represented the applicant, instructed by Richard Spector and Aurelia Matonis of Spector Constant & Williams.