Nothing really happens to the Director? does it? Lessons for Liquidators and targeted Directors.
NDP acted for Joint Liquidators and used sections 234–237 of the Insolvency Act 1986 (IA86) to compel Directors who repeatedly failed to co‑operate with the Liquidators’ requests.
The Court granted the orders sought, including examinations under oath, and ultimately issued an arrest warrant for a Director who ignored the Court’s directions.
This case study shows how these statutory powers enable Liquidators to obtain information, recover records and enforce compliance where Directors refuse to engage.
Background to this case – sections 234–237 IA86
As a result of the repeated failures by the Directors of a liquidated company to engage with NDP’s Liquidator client, we made for the Liquidator an application to Court pursuant to sections 234-237 of the IA86 seeking the examination of the Director under Oath before the Court (a daunting prospect) and also Orders for delivery up of assets and company books and records by the Director.
Orders were successfully obtained and subsequently resulted in an Arrest Warrant being issued against the non-compliant Director.
In this case study, we detail the steps taken in our issuing an application pursuant to section 234-237 IA86 against Directors who failed to co-operate with an office holder.
What a Liquidator’s sections 234–237 IA86 application does
Sections 234-237 IA86 provide critical tools that enable office holders (e.g. Liquidators) to recover assets, obtain information and investigate the affairs of liquidated companies, as part of wider insolvency litigation and insolvency claims work.
The powers conferred to office holders within these sections remain throughout their appointment, although they become particularly prevalent when Directors fail to co-operate.
Each section – albeit they are typically applied concurrently – confers separate powers to an office holder and are considered separately below.
Who can be targeted under sections 234–237 IA86?
Section 234 IA86 enables an office holder to apply to the Court for an Order requiring the delivery up of property, books, papers, or records to which the company is or appears to be entitled to.
These powers are capable of use against officers of the company (Directors) as well as third parties, such as Solicitors, Accountants and others.
Section 235 IA86 imposes a duty on both current and former officers of the company, employees and other individuals involved in the company’s formation and/or management, to co-operate with an office holder.
Section 236 IA86 allows an office holder to apply to the Court for relief against any individual who may possess information or property relevant to the company’s affairs, business, property or dealings.
This includes, but is not limited to, officers, creditors or any other person capable of providing insight into the company’s affairs and dealings.
This Court may order that such individual produce documents, submit written accounts or appear for Examination under Oath before the Court.
Section 237 IA86 sets out the enforcement mechanisms available for Orders made pursuant to sections 234-236 IA86.
This includes the power to order examination of individuals under Oath in front of a Judge and compel compliance with Court Orders.
Should an individual fail to comply with the summons or any order under section 236 IA86, the Court may issue a Warrant for their arrest or seizure of assets – on which see below.
Considering the above and the link between each section, it is clear to see why such applications are powerful tools – such applications often also include claims for costs of the application from the Director – such costs can be significant.
Details of this case
The NDP team of specialist insolvency litigation solicitors was instructed by the Joint Liquidators of a company to investigate potential claims against the company’s Directors.
Prior to NDP’s involvement, several written requests had been made of the Directors by the Liquidators although most, if not all, had gone unanswered.
The majority of the requests made of the Directors were related to the substantial number of payments made to the Directors from the company and for which explanations and contemporaneous documents were required from them, a common trigger for misfeasance and recovery claims.
Issuing the sections 234–237 IA86 application
NDP sent 4 letters to the Directors over a period of 6 weeks. No responses having been provided, it was clear that the Directors would not comply, absent a Court Order compelling them to do so.
An application pursuant to sections 234-237 IA86 was issued supporting the Liquidators’ Witness Statement in support and draft Order clearly setting out what information/documentation was required from the Directors.
It was served on the Directors, with a hearing date to determine the Liquidators’ application.
Consequence of non-compliance with Court Orders for the Directors
The application was listed and heard shortly after by a Judge and an Order made in the terms sought by NDP (on behalf of the Joint Liquidators).
The Directors did not attend and were not represented.
The Court ordered deadlines by which the Directors were to comply. In addition to this, Examinations under Oath were listed for both Directors.
One of the Directors failed to attend the examination. On the Liquidators further application, a Warrant for the Directors arrest was issued. Failing to attend such an examination is behaviour which can overlap with director misconduct and disqualification risk.
Hello, hello, hello! Arrest of the Director.
The defaulting Director received a visit at home from the Police.
He was arrested, driven to Birmingham by them and kept in the cells overnight.
He appeared before the Judge the following morning, apologised for his failures and agreed to (and did) provide answers to the Liquidators, in meeting with us that day.
Costs
The entire section 234-237 application process can be expensive, given the multiple hearings required, although it is possible in such cases for Cost Orders to be made against the Directors (as here) in circumstances where there has been a blatant failure to co-operate with an office holder throughout.
Key messages for Liquidators and Directors
- Directors should take requests of them by Liquidators very seriously and respond to them promptly. Failure to do so runs the very real risk of an application being issued (seeking to compel compliance) and a hefty costs liability to the Applicant Liquidator.
- Liquidators must make precise, contained and relevant applications, if the Court is to grant them relief. ‘Fishing expeditions’ by the Liquidators will not be tolerated by the Court. Widely drafted applications are susceptible to successful attack by the Director.
- The recent decision of the High Court in Webb & another (as Liquidators of Eversholt Rail (365) EWHC 101 (Ch)) has established the following key principles:
- Liquidators must demonstrate that the information sought is reasonable required – even where they have little or no knowledge of the company’s affairs.
- A broad request by a Liquidator may be reasonable in appropriate circumstances, but…The Liquidator must demonstrate to the satisfaction of the Court that the categories of documents sought are reasonably required and that the burden imposed on the parties holding the documents is proportionate.
The Liquidator must demonstrate to the satisfaction of the Court that the categories of documents sought are reasonably required and that the burden imposed on the parties holding the documents is proportionate.
Liquidators must carefully define the scope of a section 236 request or run the risk of their application being refused by the Court, with their being ordered to pay the costs of the targeted party (we recently obtained an Order for Costs against a Liquidator for our client, in such circumstances).
FAQ: Sections 234–237 IA86 for Liquidators
What do sections 234–237 IA86 allow a Liquidator to do?
They allow a Liquidator to compel Directors and others to deliver up records, provide information, attend examination and comply with statutory duties.
Can a Director be arrested for ignoring a section 236 order?
Yes. If a Director fails to comply with a Court order under section 236, the Court may issue a warrant for arrest. That is what happened in this case.
Why would a Liquidator instruct NDP?
Because NDP can issue targeted, proportionate applications, obtain orders quickly and escalate to enforcement where Directors refuse to co‑operate.
Are these applications expensive?
They can be, but where Directors have blatantly failed to co‑operate, the Court can order them to pay the Liquidator’s costs.
Will the Court allow broad or speculative requests?
No. Following Webb, Liquidators must show that each category of information is reasonably required and proportionate.
