As mentioned in last month’s article, it can take longer than anticipated to turn assets into cash. Then comes the challenge of the liquidator working out who is a valid creditor and hence, might be entitled to receive a dividend.
The term “might” is used because much may depend upon how a creditor is ranked i.e. who gets paid in what order. For example, certain former employee entitlements tend to rank first e.g. unpaid salary. Then comes a creditor with a floating charge, typically a Bank. Even if a floating charge exists, the liquidator will need to check that it is valid and when it was created because a charge created before September 2003 confers a higher dividend priority than one created after such date. If there is any cash left, ordinary creditors such as trade suppliers, utilities and HMRC ( although that is about to change ) receive a dividend pro-rata to the level of their claim. The last recipients of cash are shareholders.
Even when a pot of cash has accumulated and a dividend payment is in contemplation, the task of agreeing the value of each creditor’s claim can be fraught with difficulty. For example, a landlord may submit a claim for dilapidations and unpaid rent both before and after date of liquidation. If the lease has another 15 years to run, how does one calculate the claim if a dividend is to be paid now ?
Also, another creditor might have instigated court proceedings for a debt which includes damages and the liquidator will have to decide whether or not it is worth defending (and incurring costs) or allowing a claim to be established at a higher level than might be seen equitable to other creditors. HMRC may have commenced an investigation into a disguised remuneration plan or other tax planning scheme with the result that a substantial protective claim is in place, and the experienced liquidator will be well aware that dealing with such matter normally involves significant expense, speculation and delay.
What happens if a finance company repossesses an asset and appears to have sold it for under value, thereby creating a much larger claim than if the liquidator had sold the assets locally ?
Typically, HMRC will have issued assessments for unpaid taxes such as corporation tax, VAT, PAYE and NIC. After all, if HMRC have never been sent information by the company, how will they know how much to claim ? Depending upon the quality of accounting records available, the size of the HMRC claims and the level of potential dividend, the liquidator may seek to prepare accounts/returns up to date of liquidation which, of necessity will have to include estimates. The next task will be to seek agreement with HMRC on the tax liabilities, perhaps with a sense of commerciality rather than spend all of the available dividend cash producing “perfect” records.
As was mentioned in last month’s article, it is fortunate that every liquidation does not feature all of these challenges but the examples given are not uncommon. Accordingly, one can understand why agreeing all claims for dividend purposes is more than a five minute task.
As long as the liquidator keeps creditors advised of key developments, there should be understanding, albeit mixed with frustration, that matters are being progressed as best as possible.
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.
January 2020