How do liquidators get paid when there is no money left in the company? By Joshua Pietras

Liquidators do a thankless job.  They are called in to salvage what is left of a company after it has failed.  Sometimes the company will have no assets at all, meaning there is nothing left to cover the liquidator’s fees.  Why on earth would anyone do this for a living?

Well, liquidators have a powerful weapon in their arsenal.  Under sections 292 and 293 of the Companies Act 1993, a liquidator can set aside an insolvent transaction or charge that has been entered into within six months before a creditor applied to put the company into liquidation or before the shareholders signed a resolution to put the company into liquidation. 

In the case of a related party transaction, the liquidator can set aside transactions or charges going back two years. 

For example, a building company is in financial strife, and its subbies are downing tools for not being paid.  The building company knows it is going to fold unless things improve, but it decides to repay the $100,000 shareholder’s current account to its owner anyway.  The company then goes into liquidation four months later.  The owner got his money out of the business, but all of the subbies remain unpaid.  That hardly seems fair. 

How does a liquidator actually go about unwinding this transaction?

All the liquidator needs to do is file a written notice with the High Court which sets out the transaction or charge that is to be set aside.  The liquidator must warn the person who receives the notice that the transaction or charge will automatically be set aside if they don’t lodge a written objection within 20 working days of being served. 

If the person who received the notice files an objection, that is not the end of the matter.   The liquidator could still seek to void the transaction by making an application to Court under s 295 of the Companies Act 1993, and seek other relief, such as an order requiring the person to pay money or restore property to the company. 

The person will then be given a chance to defend the application and may raise certain defences, such as the ‘running account defence’ or the statutory ‘good faith’ defence.  It will then up to a Judge to decide what should happen. 

If the High Court orders the person to pay money or restore property to the company, then the liquidator now has some funds to play with, or at least an asset to sell. 

Since the liquidator’s fees have priority over all other creditors, you can bet your bottom dollar that the liquidator is going to pay themselves first. 

And who can blame them.  Being a liquidator is risky business.  When liquidators accept these appointments, there is no guarantee they are going to be paid for their work.  It is only fair that they are rewarded for taking on these risks. 

However, one important qualification: it is really annoying when liquidators set aside your legal fees for acting for an insolvent company.  Please stop doing that!

EDITOR’S NOTE:  Joshua Pietras is a Senior Associate at Duncan Cotterill.  We have previously reported on an employment matter Joshua was involved in: Spoiler alert: Cameras in the Employment Court, 31 August (21 August 2023)