This guide has been produced to help members of creditors committees to be aware of duties, functions, the rights and the procedural rules relating to committee business if they wish to establish a committee in order to represent the interests of the creditors as a whole, not just interest of individual.
The principal functions of the committee are to sanction the exercise of certain of the trustee or liquidator’s powers and to fix his remuneration.
In addition to its statutory functions the committee may also serve to assist the trustee/ liquidator generally and act as a sounding board for him to obtain views on matters pertaining to the bankruptcy or liquidation.
In liquidation, in most cases, the liquidation committee will consist entirely of creditors of the insolvent company.
The trustee is required to report to the committee on matters relating to the bankruptcy and to submit copies of his accounts when required.. Meetings are generally held when determined by the trustee/ liquidator and voting is by majority in number. Votes may also be taken by post.
Committee members are not entitled to remuneration, but they may be reimbursed for reasonable travelling expenses incurred on committee business.
Although the trustee/liquidator should normally have regard to the views of the creditors committee, he may always refer matters of contention to a general meeting of creditors or to the court. It has been held, in a liquidation case, that the court has a residual discretion not to follow the wishes of a committee where the special circumstances of the case warrant it.
Function Of The Creditors Committee
It is for the committee or the court to give the trustee or, possibly liquidator, sanction of bring, institute or defend any action or legal proceedings relating to the property under his control. In this case, where legal proceeding are proposed the committee should consider probable benefit to the estate before giving permission. If permission is given, the committee should ensure that it is kept informed of the progress of the proceedings in case it should become necessary to consider their discontinuance.
The trustee/liquidator may, with the permission of the committee, divide in its existing form among the company’s creditors, according to its estimated value, any property which from its peculiar nature or other special circumstances cannot be readily or advantageously sold. Where the trustee/liquidator has done anything which requires the committee’s permission without having first obtained it, the committee or the court may, for the purpose of enabling him to meet his expenses out of the estate, ratify what he has done. However, it should not do so unless it is satisfied that the trustee/liquidator has acted in a case of urgency and has sought its ratification without undue delay.
Acts are required to be noted to the committee where the trustee/liquidator;
- Disposes of any property comprised in the bankrupt’s estate/company (in liquidation) to any associates.
- Employs a solicitor.
There is no statutory requirement for the committee or the creditors to approve the drawing of expenses or disbursements, however, where the trustee/liquidator proposes to recover costs which, whilst being in the capture of expenses or disbursements, may include an element of shared or allocated costs (such as room hire, document storage or communication facilities provided by the trustee/liquidator’s own firm), they must be disclosed and be authorised by those responsible for approving his remuneration. Such expenses must be directly incurred on the case and subject to a reasonable method of calculation and allocation.
Where any costs, charges or expenses are payable out of an estate i.e. agent’s or legal fees, the trustee/liquidator may agree them with the person entitled to payment. However if the committee resolves that any such costs should be determined by the court, the trustee/liquidator must required the person entitled to payment to deliver their bill of costs for assessment, in this cases these type of charges do not preclude the trustee from making payments of account against and undertaking from the payee to repay any amount which proves, on assessment, to have been overpaid.
The trustee/ liquidator is required to have in place security for the proper performance of his functions and it is the duty of the committee to review the adequacy of the trustee’s/liquidator’s security from time to time.
In a Creditors’ Voluntary Liquidation (CVL) where the whole or part of the business or property of the liquidation company is proposed to be transferred or sold to another company, the liquidator may receive shares, policies or other like interests in the transferee company for distribution among the members / shareholders of the transferor company, subject to:
- A special resolution of the company conferring appropriate authority on the liquidator, and
- The sanction of the liquidation committee or the court.
In addition, in a CVL any reasonable and necessary expenses of preparing the statement of affairs and convening the creditors’ meeting held under section 98 of the Insolvency Act may be paid out of the company’s assets as and expense of the liquidation. Such payment may be made either before or after the commencement of thee liquidation, but where it is made after the commencement the following provisions apply:
- The Liquidator must give the liquidation committee at least 7 days’ notice if he was appointed at the section 98 meeting and intends to make such a payment.
- The Liquidator may not make such a payment to himself of any associate of his otherwise than with the approval of the liquidation committee, the creditors or the court.
Trustee’s/Liquidator’s obligations to Committee
The trustee/liquidator has a duty to report to the committee all such matters as appear to him to be, or as they have indicated to him as being, of concern to them with respect to the bankruptcy/liquidation. The trustee/liquidator need not comply with any request for information where it appears to him that the request is frivolous or unreasonable, or the cost of complying would be excessive having regard to the relative importance of the information, or there are insufficient funds in the estate to enable him to comply.
Where the committee has come into being more than 28 days after the appointment of the trustee/liquidator he must report to the members in summary form what actions he has taken since his appointment and answer such questions as they may put to him regarding his conduct and actions. A person who becomes a member of the committee at any time after its first establishment is not entitled to require a report to him by the trustee/liquidator, otherwise than in summary form, of any matters previously arising. Nothing in these provisions disentitles the committee or any member of it from access to the trustee’s records of the bankruptcy, or from seeking an explanation of any matter within the committee’s responsibility.
However, in liquidation documents passing between the liquidator and the Department of Trade and Industry concerning possible disqualification of directors are not documents which are within any of the statutory rights of the liquidator committee to inspect, or in respect of which the committee can put questions to the liquidator and ask him to report to them.
The trustee/liquidator should, at their first meeting with him, discuss with committee members their requirements for reports and obtain their directions. He should also discuss with committee members at that meeting the types of matters which they wish have to have reported to them so that matters of particular concern to them are identified.
Trustee’s/ Liquidation’s Accounts
The trustee/liquidator must prepare and keep financial records in relation to the bankruptcy/liquidation, and such supporting documents as are necessary to explain the receipts and payments entered in the records, including an explanation of the source of any receipts and the destination of any payments, and must obtain and keep the bank statements related to any local bank accounts in the name of the bankrupt.
If the bankrupt’s/company business is carried on, a separate trading account, where appropriate, details of all local bank account transactions. The total weekly amounts of trading receipts and payments must be incorporated into the financial records and must be submitted to the committee as required for inspection, and if the contents are not satisfied by the committee it may so inform the Secretary of State, giving the reasons for its dissatisfaction.
Establishment of the committee
The committee is established and can act if only the trustee/liquidator has issued a certificate of its due constitution, and certificate is issued only if at least three of the persons elected to be members of the committee have agreed to act. Such agreement may be given by the creditor’s proxy-holder at the meeting establishing the committee, unless the proxy specifically precludes such agreement being given.
The acts of the committee are valid not withstanding any defect in the appointment, election or qualifications of any committee member or the representative of any committee member.
In a compulsory liquidation not preceded by an administration the committee will be established by general meetings of the company’s creditors and contributories. The committee must consist of at least three, not more than five, creditors, and in cases where the winding up is on grounds other than insolvency it may also have up to three contributory members.
However, if the winding up order is made immediately on the discharge of an administration order and the court orders, that the person acting as administration be appointed liquidator, then any committee established for the purposes of the administration continues in being as the liquidation committee and there is no need to establish another committee, provided that the number of members at the date of winding up order is not less than three. Furthermore, if any creditors’ debt is fully secured immediately before the winding up order he could cease to be a member.
Where the winding up order is made on grounds other than insolvency, the liquidator must convene a meeting of contributories to give them the opportunity to appoint contributory members of the committee.
In a CVL the creditors in general meeting may appoint a committee of not more than five persons, If so shareholders of the company may in general meeting appoint up to a further five persons to the committee. The creditors may, however, resolve to exclude any of the shareholder’s nominees from the committee unless the court directs otherwise. The court may appoint someone other than the rejected nominee to the committee in his stead. The minimum number of the committee is three. Any creditors’ committee in an administration will become the liquidation committee where a CVL is immediately preceded by an administration.
The creditor’s committee must generally consist of three to five people, all the members of the committee must be creditors of the Bankrupt or in liquidation consist of creditors and contributors apart from those whose debt are fully secured, so long as:
- He has lodged a proof of his debt.
- His proof has neither been wholly disallowed for voting purposes not been wholly rejected for the purposes of distribution or dividend, and also
- He has agreed to act as a member of the committee.
It is the creditors or contributories themselves who are the members of the committee, not the individuals who represent them.
A member of the committee may be represented by another person duly authorized by him, such a representative must hold a letter of authority ( Proxy) entitling him so to act (either generally or specifically) signed by or on behalf of the committee member, unless it contains a statement of contrary. The chairman of any meeting of the committee may call on a person claiming to act as a committee member’s representative to produce his letter of authority, and may exclude him if it appears that his authority is deficient.
In liquidation, no person may be a member as both a creditor and a contributory. Furthermore, if the company being wound up is a recognised bank, a representative of the Deposit Protection Board may exercise the right to be a member of the committee, and if the company is a financial institution, representative on the Financial Services Authority and the Financial Service Compensation Scheme may exercise this right are to be regarded as additional creditor members of the committee.
No member of committee may be represented by:
- A body corporate.
- An undischarged bankrupt
- A person who is subject to a bankruptcy restrictions order or undertaking, or
- A disqualified director.
A representative may not act for more than one or two committee members on the same committee. In addition, where the representative of a committee member signs any document on the member’s behalf, the fact that he so signs must be stated below his signature.
A member of the creditor’s committee may resign by notice in writing delivered to the trustee/ liquidator. He is also terminated automatically if:
- He becomes bankrupt, or
- At three consecutive meetings of the committee he is neither present nor represented ( unless at the third of those meetings it is resolved that this rule is not to be applied in his case), or
- He ceases to be, or is found never to have been, a creditor.
However, if the cause of termination is the member’s bankruptcy, his trustee in his bankruptcy is replaced as the member.
In addition, a member of the committee may be removed by resolution at a meeting of creditors, provided at least 14 days’ notice has been given of the intention to move that resolution.
If there is a vacancy in the membership of the committee, provided that the number of membership does not fall below three, it needs not be filled if the trustee/liquidator and majority of the remaining committee members so agree. If another member is to be appointed he can be appointed by resolution passed at a duly convened meeting of creditors after at least 14 days’ notice of the resolution has given or by the trustee (provided the majority of the remaining committee members agree to the appointment and the creditor consents to act).
Composition of committee when creditors paid in full
If the liquidator issues a certificate that the creditors of the company have been paid in full with interest, the creditor members of the committee cease to be members of the committee.
The chairman at any meeting of the committee will be the trustee/liquidator, or a person appointed by him in writing to act, who must be qualified to act as an insolvency practitioner in relation to the insolvent or an employee of the trustee/liquidator or of his firm who is experienced in insolvency matters.
A meeting of the committee is duly constituted if due notice of it has been given to all members and at least two members are present or represented.
The committee will meet where and when determined by the trustee/liquidator, subject to:
- First meeting, which must be called within 3 months of the appointment or committee’s establishment ( whichever is the later )
- Subsequent meetings, which must be called by trustee/liquidator for a specified date, if the committee has previously resolved that a meeting be held on that date. Or, if it is requested by a member of the committee or his representative, the meeting must then be held within 21 days of the request being received by the trustee.
Notice of venue
The trustee must give 7 day’s notice in writing of the venue of any meeting to every member of the committee or representative, unless this requirement has been waived by or on behalf of any member, such waiver may be signified either at or before the meeting.
Information from administrator/administrative receiver
In administration and administrative receivership where the committee resolves to require the attendance of the administrator/administrative receiver under section para 57 sch B / 49(2) of the Insolvency Act 1986, he must be given at least 7 day’s notice in writing, signed by majority of the current members of the committee. A member’s representative may sign for him.
The meeting at which the administrator/administrative receiver’s attendance is required must be fixed by the committee for a business day, and held at such time and place as he determines.
Where he so attends, the members of the committee may elect any one of their number to be chairman of the meeting in place of the administrator/administrative receiver or his nominee.
Voting rights and resolutions
At any meeting of the committee each member (whether present himself or by his representative) has one vote, and a resolution is passed when a majority of the members present or represented have voted in favour of it.
Records of meetings
Every resolution passed must be recorded in writing, either separately or as part of the minutes of the meeting. The record must be signed by the chairman and kept with the records of the bankruptcy.
It is possible for resolutions to be passed by post. The office-holder must send to every member (or his representative designated for the purpose) a copy of any proposed resolution on which a decision is sought, which must be set out in such a way that agreement with, or dissent from, each separate resolution may be indicated by the recipient on the copy so sent.
However, any member of the committee may, within 7 business days from the date of the office-holder sending out a resolution, require the office-holder to summon a meeting of the committee to consider the matters raised by the resolution. In the absence of such a request the resolution is deemed to have been carried in the committee if and when the office-holder is notified in writing by a majority of the members or creditor members in the case of a compulsory liquidation) that they concur with it. Thus, a copy of every resolution passed and a note that the concurrence of the committee was obtained, must be kept with the records of the bankruptcy.
Charges for copy documents
Where the office-holder is requested by a member of the committee to supply copies of any documents, he is entitled to make a charge as follows:
15 pence per A4 or A5 page and 30 pence per A3 page.
Expenses of committee members
Any reasonable travelling expenses directly incurred by committee members or their representatives either in attending meetings or the committee or otherwise on the committee’s business will be paid by the office-holder out of the insolvent estate in the due order of priority.
In administration/administrative receivership however, such expenses will not be paid in respect of any meeting of the committee held within six weeks/three months of a previous meeting, unless the meeting in question is summoned at the instance of the office-holder.
Dealings by committee members and others
The position of all committee members is fiduciary and they must be careful not to expose themselves to a conflict between their duty as members of the committee and their personal interest.
Accordingly in bankruptcy/liquidation no member of the committee, or his representative, or any person who is an associate of a committee member or any person who has been a committee member at any time in the previous twelve months, can enter into a transaction whereby he-
- Receives out of the insolvent estate any payment for services given or goods supplied in connection with the administration of the insolvency, or
- Obtains any profit from the administration of the insolvency, or
- Acquires any asset forming part of the estate,
- He first obtains the leave of the court to the transaction, or
- He enters into the transaction as a matter of urgency or by way of performance of a contract in force before the commencement of insolvency and he obtains the leave of the court, having applied for such leave without undue delay, or
- He enters into transaction with the prior sanction of the committee where the committee is satisfied (after full disclosure of the circumstances) that he will be giving full value in the transaction.
Where a resolution is proposed in the committee that sanction be given to such a transaction, no member of the committee, and no representative of a member, can vote on the resolution if he is to participate if he is participate directly or indirectly in the transaction.
The cost of obtaining the leave of the court is not payable out of the insolvent estate unless the court so orders.
If circumstances may occasionally arise, where a legal action or dealing involving a member of the committee or a person connected with him make it inappropriate for him to attend discussion on the subject in the committee, a committee’s member may asked not to attend a meeting, or part of a meeting, at which the matter is discussed.
In administration/administrative receivership, membership of the committee does not prevent a person from dealing with the company while the administrator/receiver is acting, provided that any transaction in the course of such a dealings are in good faith and for value.
The court may, on the application of any interested party, set aside any transaction in contrary to the above requirement, and may give directions for compensating the company for any loss incurred in consequence.