We discussed in our earlier article: Liquidators not doing their job properly might not get paid, that the Court has power to remove a liquidator not doing their job properly upon an application by a creditor or a contributory, or possibly a co-liquidator, under section 196(1) of the Companies Ordinance (Cap. 32) (“CO”) and to disallow their remuneration. In this article we discuss the causes as stated in section 196(1) of the CO which may lead to the removal of liquidators.

“On cause shown” as opposed to “if the Court shall think fit”

Section 196(1) CO reads:

"A provisional liquidator or liquidator appointed under section 193 or 194 may resign or, on cause shown, be removed by the court.”

It was held in Re Keypak Homecare Ltd  [1987] BCC 558 that the power of the Court to remove the provisional liquidator or liquidator “on cause shown” is not the same as “if the court shall think fit”.    The burden is on the application to show cause why the liquidator should be removed from office.  The words “on cause shown” have been established from the 19^th century English cases to point to ‘some unfitness’ in a wide sense of the term.  Provided that the Court is satisfied that removing the liquidators from office would be in the interests of the liquidation, there need not be shown any personal misconduct or unfitness of the liquidators. However, not all letdowns on the part of liquidators would necessarily lead to the consequence of being removed from office. For example, a failure to provide management accounts and regular reports of the liquidators’ activities is not, by itself, a justifiable cause for removal.

Conduct of the liquidators assessed objectively

The assessment of the conduct of the liquidators is an objective one. A liquidator should not be removed simply because his conduct had fallen short of the ideal in one or a few respects, since it would often be the case that in any liquidation which had proceeded for some time, that something could be identified as an example of a respect in which things could have been done better or more effectively. Particular facts of each case should also be considered, for example, any animosity and hostility between two camps of creditors would be taken into account, yet, it would not mean that every action or failure to act on the part of the liquidators would be necessarily excused.

Importance of communicating readily with interested parties

The Court in a recent decision in respect of several companies wound-up pursuant to a shareholders’ dispute indicated that one of the more important functions of the provisional liquidators was to carry on the business of the company in a way that would enable the parties to the dispute to be reasonably confident that none of the parties was benefiting at the other’s expense, and that payments and receipts were in order and properly monitored.  It is therefore necessary and appropriate for liquidators to readily communicate their decisions, and their reasons for them, to the parties to provide some level of confidence to them that their respective interests and concerns were taken into account by the liquidators.

Liquidators are also expected to promptly inform all creditors of any problem that they have identified, and of the means by which they propose to address the problem.  This would enable any dissatisfied creditors to raise such objections they may have to the proposals.  If objections are raised, the liquidators could take steps to address them, or to explore alternative solutions as a matter of urgency. 

When liquidators envisage a significant change to the way in which the business of the company was to be carried on, it is clearly necessary for them to carefully ensure the parties are given an opportunity to consider and comment on the course of action proposed.  By failing to consult or keep all creditors informed, the liquidators could be held to have acted in a way which would cause a dissatisfied creditor to reasonably lose confidence in them, or to give rise to a reasonable perception that they were biased, and indeed, to have reasonable grounds for considering them to be biased in favour of another creditor.

Even where the acts of the liquidators are justified commercially and no loss is caused to the company

While the course of action adopted by liquidators might be commercially justified (on the basis that such arrangement would eventually have to have been entered into in carrying on the business of the company, whether with a related party, such as, the major creditor, or an outside party), the decision to adopt the suggestion of the major creditor without first consulting the other creditors, or obtaining approval of the court (whether in advance or soon after the event), could also be considered a matter which would have justifiably led the dissatisfied creditor to lose confidence in the liquidators or to consider that they were biased in favour of the major creditor.

Further, it is not necessary for an applicant under section 196(1) CO to prove that the course of action taken by a provisional liquidator or liquidator has caused any loss to the company. Even if proved that the amount of additional expense over and above such expenses as would have to be incurred in making alternative arrangements is minimal or insignificant, the applicant could still succeed in showing cause to the Court to have the liquidators removed.

Where the true interests of the liquidation lay

Even where the Court finds that there are grounds to justify the removal of provisional liquidators or liquidators from office, the Court then has to weigh the removal of the liquidators against the disadvantages that might arise as a result of the removal.  Such disadvantages include the additional cost and expense that would result from the introduction of new liquidators, and any other disadvantages that might arise to the orderly conduct of the liquidation. In cases where the main task for the liquidators is to conclude the sale of the business of the company, there may not be any reason why new liquidators could not carry out that task. In those cases, if the Court has found there is justifiable loss of confidence in the liquidators by the creditors or contributories, it is very likely that the Court will adopt a robust approach to remove the liquidators.

Possible cost consequences against the removed liquidators

In some successful applications to remove the liquidators where the Court took the view that it is the liquidators who bear the brunt of responsibility for the application having to be made, the Court may make an order for costs against the liquidators personally, and they are not entitled to have those costs met out of the assets of the company.