When a liquidator is appointed to a company, a key task is to identify, value and recover assets. Where that asset is, say, a car that is not subject to finance, selling it at auction is a straightforward process. However, a large chunk of value is often reflected in book debts, or an overdrawn director’s loan.

Recovering book debts relies to a great extent on the quality of documentation in the liquidator’s possession i.e. are there agreed purchase orders, signed delivery slips, properly completed sales invoices and evidence of customer acceptance of the goods. If the documentation is lacking, recovery prospects are reduced and, of course, the dark side of human nature seems to come to the fore by customers denying all knowledge of a debt unless it can be clearly demonstrated/validated. The fact that the liquidator is not continuing to trade with the customer means that there is no benefit in threatening to stop future supplies, and it is not uncommon to have to contact the customer many times before a response is received.

A similar situation can arise when taking steps to recover an overdrawn director’s loan account because entries will be questioned and all sorts of reasons offered for non payment.

The asset recovery process requires time and resources from the liquidator and his staff which inevitably costs money and tends to mean that a pragmatic/economic view is often taken about small amounts i.e. is it worth it overall ?

Of course, as the figure becomes larger, a more robust view is taken, particularly if it seems clear that the debtor is seeking to avoid payment merely because a liquidator is in office and may have little cash within the liquidated estate to appoint specialists to help such as a surveyor, debt collector or lawyer. Part of the decision process will be the perceived chance of successful recovery when matched against the costs involved. For example, if creditors have the choice of a dividend of, say, 50p in the £ against the chance of full recovery in a year or so but with the risk that a lost case will diminish dividend prospects to, say, 10p in the £, it is not unreasonable for them to consider that a payment now at a certain rate is better than speculating on the outcome of the liquidator’s challenge.

On occasion, creditors will express the view that they are happy to accept less as long as whoever is being pursued is embroiled in expensive proceedings and may well lose the battle, but the liquidator’s task is to remove emotion from a corporate action and assess the merits of success.

What happens when a liquidator has a supporting file of documents and considers that there is a good chance of success but has no cash within the liquidated estate to raise an action ?

One option is to risk his own time and to engage a lawyer, surveyor etc. who will work on a no win/no fee basis. That stance will often persuade a debtor to pay because he can see that the liquidator has documentation to support his position and is prepared to commit to the recovery process. The initial bold and belligerent debtor response can become muted.

Another option is to purchase after-the-event insurance which allows the liquidator to cover his costs up to a certain figure in the event of a failed court action. As one might imagine, the premium for such cover is based upon the perceived risks of the case by the underwriter, and if the premium only covers the liquidator’s costs, he will need to take a view on the potential sum payable to the debtor’s legal team in the event of a total loss. The reality is that a liquidator is naturally cautious because it is creditors’ money that is at risk and thus, when he instigates court action it tends to reflect a positive assessment of recovery prospects.

The next option is to engage the services of a specialist litigation funder, and there are a few around, who will pay for the court case, accept the risk of loss, and charge a fee based upon how much is recovered. Again, in terms of customer reaction, when they see that a large well-funded organisation is backing the liquidator, that may be sufficient to persuade settlement. If not, the liquidator’s main focus at the outset is to seek to persuade the funder that the debt is supportable. Of course, in any of these situations, the liquidator must also take a view on the likelihood of the customer being in a position to pay once the debt has been agreed i.e. no point in a successful outcome if there is no cash to collect.

At all stages in whatever debt recovery process is being adopted, the liquidator will be alert to the possibility of a negotiated settlement because, whilst there are options that allow debt recovery, a court process can be fraught with risk and expense. All in a day’s work in the liquidator’s world.

The views in this article are those of Michael J M Reid, licensed insolvency practitioner and partner of Meston Reid & Co, chartered accountants, Aberdeen.  They do not purport to represent those of the firm in general.