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What are the problems that can arise when an office-holder leaves one firm for another? Simon Moore offers practical guidance on how firms can retain or transfer appointments
Even though a significant proportion of licensed insolvency practitioners are partners in firms of accountants, the current legislative framework (the Insolvency Act 1986 sections 389(1) and 390(1)) provides that an appointment as a liquidator, administrator or trustee is personal to the individual accepting it, and is not an appointment of the firm where they happen, for the time being, to be a partner.
But what happens when an office-holder leaves one firm for another? Do their appointments stay or move with them? What steps, if any, can the original firm take to retain the appointments and transfer them away from the outgoing partner into the name of a remaining partner? Conversely, in the case of unremunerative appointments, can the outgoing office-holder be required, come what may, to take them along?
The answer to these questions can be found by analysing the key factors that the courts have taken into account when deciding the few transfer applications that have come before them.
The first consideration of the courts will be the interests of the creditors in the particular insolvency. The courts are not interested in the business perspectives of either the previous or the new firm, despite any employment-related contractual provision to the contrary that would appear to regulate the position. This is clear from a passage in Re Sankey Furniture Ltd, ex parte Harding (1995), in which Mr Harding wanted his appointments to be transferred, where Mr Justice Chadwick said: It is likely that the interests of creditors will be best served by leaving the administration of the debtors affairs where it is. But I have to consider whether it is so obviously in the interests of creditors in each individual liquidation or bankruptcy that there should be a substitution of office-holder within the relevant accountancy firm.
This view is reinforced by the remarks of Judge Blackbourne in Re A&C Supplies Ltd & ors (1998), where Mr Sutton was, on resigning, required to take compulsory absence from the office during his notice period. After describing largely ineffective attempts by the outgoing office-holder to access papers at his previous firm, the judge said: It is evident that, in the interests of creditors of the various insolvent estates involved, this is a state of affairs which ought not to be allowed to continue.
The courts have also given helpful indications as to the various factors taken into account in deciding whether a transfer is in the interests of creditors, including:
Knowledge of the staff. The importance of the knowledge of the various managers and supervisors handling the daily administration of the insolvency was recognised in both Re Equity Nominees Ltd (1999), in which Mr Dobell agreed he no longer had the resources or facilities to discharge his duties following his resignation, and Cork v Rolph (2000), where Mr Cork applied for his own removal following a change of firm. Creditors interests would be best served by the appointments being taken over by another office-holder at the original firm where these staff remained, otherwise the expense of new staff getting up to speed, and the disruption of moving papers and other records, would increase the expense of the insolvency
and delay its administration, neither
of which would be in the creditors interests.
How near the appointments are to closure. In both Sankey and Equity Nominees, the judge indicated strongly that the nearer an appointment was to closure, the less likely it was to be transferred. If little is required to complete the appointment, transfer at a late stage would not be in the creditors interests.
The resources available to the outgoing office-holder. In A&C Supplies, Equity Nominees and Cork v Rolph, for various reasons, the outgoing office-holder could not perform their responsibilities in relation to the conduct of the various insolvencies, either as they or the court would wish.
These factors were brought into play in the recent case of Mullins v Laughton & Ors (2002), in which Mr Mullins was excluded from his office by fellow partners but required by those same partners to continue with the conduct of some 200 unremunerative insolvencies. Mr Justice Neuberger said: Mr Mullins alleges that, having been required to leave the office precipitately, he had no facilities or supporting staff and no insurance, and it was therefore neither practical nor proper for him to remain the appointee in respect of, or be responsible for the management of, 200 insolvencies. From the point of view of managing the insolvencies, expediency would point firmly in favour of one or more of his former partners, with all [their] staff and resources, replacing him as appointee. All the more so, as [those] staff would have been responsible for much of the day-to-day running of the insolvencies, and they remained in place.
Charge-holders have a contractual right to appoint the office-holder of their choice. The courts have the power to remove an administrative receiver from office (Section 45(1) of the Insolvency Act), but not to appoint a replacement. That power rests with the debenture-holder.
The courts are reluctant to remove someone specifically selected by the appointor, but will if necessary (and did so in relation to 21 administrative receiverships in A&C Supplies), leaving it to the appointor to leave the appointment as single (if previously joint), to appoint someone else other than the outgoing office-holder, or apply to the courts if the outgoing office-holder is to be retained.
The following practical guidance should help limit potential legal hazards and assist in a smooth transition. In considering whether a transfer application should be made or resisted, remember the following:
The interests of creditors are paramount. The courts find arguments between a professional firm and a previous office-holder distasteful in principle. Taking the youve got, I want approach will not commend you to the judge.
Be sensible. Professional people should take steps to discuss and resolve appointment tra-nsfer disputes before app-roaching the courts. An application to the courts should be made either as a last resort or where it is clear that the interests of creditors require early protection.
Look at each individual insolvency separately. Who knows most about it, how long before closure, where are the relevant papers? If the appointment is joint, what role did the outgoing office-holder actually play? If there is a major creditor or a committee, what are its views on what is being suggested?
Ensure an orderly transfer of papers and knowledge in any notice period that the outgoing office-holder is serving. Some employment contracts or partnership deeds contain a provision that the outgoing office-holder should account to their previous firm for all fees generated by appointments taken with them. If discussions are not succeeding, point out to the outgoing office-holder that they have to make an assessment of the commerciality of taking their appointments with them, but having to account to the original firm for all fees earned.
Simon Moore is joint head of insolvency at Field Fisher Waterhouse
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