Centrebind Liquidations: Why They Are Not Provisional Liquidations

The expression “centrebind liquidation” sounds as though it describes a special form of court-controlled insolvency procedure.

It does not.

A centrebind is not a separate type of liquidation, and it is certainly not another name for provisional liquidation. It is a particular timing situation within a creditors’ voluntary liquidation, or CVL.

That distinction matters. If the two procedures are confused, almost everything that follows can be wrong. The company’s status, the liquidator’s appointment, the liquidator’s powers, the directors’ position, the creditors’ rights and the treatment of company assets are all different.

The correct starting point is this:

A centrebind arises when the members of a company pass a resolution placing the company into creditors’ voluntary liquidation and nominate a liquidator before the creditors have made their decision about who should act as liquidator.

The members’ nominee is already the liquidator during that intervening period. However, their ordinary powers are heavily restricted by section 166 of the Insolvency Act 1986.

That short interval, and the restriction applying during it, is what practitioners refer to as a centrebind.

This article deals with the law and procedure in England and Wales.

The CVL has already commenced

The first important point is that the company is already in liquidation.

Under section 86 of the Insolvency Act 1986, a voluntary winding up commences when the resolution for voluntary winding up is passed.

It does not wait for the creditors to approve it.

It does not depend upon a court order.

It does not remain a proposed or pending liquidation until the creditors have made their decision about the liquidator.

The members’ winding-up resolution starts the CVL. The creditors’ subsequent role is principally to decide who is to continue as liquidator, together with exercising their other statutory rights.

This is one of the most common points of confusion. Creditors do not vote on whether the CVL exists. By the time they make their decision about the liquidator, the company is already in liquidation.

How does a centrebind arise?

The process normally develops in the following way.

The directors conclude that the company should be placed into creditors’ voluntary liquidation. They arrange for the members to consider the necessary winding-up resolution and begin the statutory process for obtaining the creditors’ decision on the nomination of a liquidator.

The members then pass the winding-up resolution. At the same meeting, the company may nominate a licensed insolvency practitioner to act as liquidator under section 100 of the Insolvency Act 1986.

The CVL commences immediately upon the passing of the winding-up resolution. The company’s nominee becomes liquidator.

The creditors have not yet made their decision. There is therefore an intervening period during which the members’ nominee is liquidator but the creditors remain entitled to nominate that person or someone else.

That is the centrebind period.

Under rule 6.14 of the Insolvency (England and Wales) Rules 2016, the directors must seek the creditors’ decision on the nomination of a liquidator, normally using the deemed consent procedure or a virtual meeting.

The creditor decision date must ordinarily be:

• At least three business days after the relevant notice is delivered; and

• No later than 14 days after the winding-up resolution is passed.

Creditors can object to the deemed consent procedure and, where the statutory requirements are met, require a physical meeting.

Although the centrebind period will usually be short, important events can take place during it. Assets may need to be secured, stock may deteriorate, creditors may attempt enforcement, employees may need urgent information and the company’s records and digital systems may be at risk.

The liquidator therefore holds office, but does so under a deliberately restricted set of powers.

Why is it called a centrebind?

The expression comes from the case of Re Centrebind Ltd [1967] 1 WLR 377; [1966] 3 All ER 889.

The historical concern was that the members of an insolvent company could appoint their own liquidator before creditors had a proper opportunity to exercise their rights. The appointment was not treated as invalid merely because the creditor process had not been completed.

That created an obvious risk.

Directors and shareholders could install a friendly liquidator who might deal with the company’s assets before the creditors had an opportunity to replace that person or examine what had happened.

Company assets could potentially be sold to a connected business, transferred at an undervalue or otherwise dealt with before meaningful creditor scrutiny occurred.

The modern law addresses that risk in section 166. It does not pretend that the members’ appointment does not exist. Instead, it recognises the appointee as liquidator but restricts what that liquidator can do before the creditor nomination process has concluded.

That distinction is central to understanding the procedure.

A centrebind is not provisional liquidation

Provisional liquidation is a completely different procedure.

Under section 135 of the Insolvency Act 1986, the court may appoint a provisional liquidator after a winding-up petition has been presented and before the petition is finally determined.

A provisional liquidator:

• Is appointed by the court;

• Is appointed after the presentation of a winding-up petition;

• Acts before the court has finally decided whether to wind up the company;

• Performs the functions given to them by the court order; and

• Will usually be appointed where assets, records or evidence need urgent protection.

Whereas a centrebind liquidator:

• Is nominated by the company through its members;

• Takes office within a CVL;

• Acts after the winding-up resolution has already been passed;

• Does not require a winding-up petition or court appointment; and

• Has powers restricted by section 166 until the creditor nomination process ends.

Court involvement does not turn a centrebind liquidator into a provisional liquidator. A centrebind liquidator may apply to court for sanction to exercise a particular power, but they remain the liquidator in a creditors’ voluntary liquidation.

The two procedures have different starting points, legal foundations and purposes.

What is the legal status of the centrebind liquidator?

The members’ nominee is not merely a proposed liquidator, adviser or observer.

They are the liquidator.

The company is in liquidation and the office-holder owes the duties of a liquidator. Directors, officers and others with relevant information are required to cooperate with them.

The restriction is upon the liquidator’s powers, not upon the existence or validity of the appointment.

Section 166 provides that the powers conferred upon a voluntary liquidator by section 165 cannot ordinarily be exercised during the centrebind period unless the court sanctions their exercise.

The restriction ends when:

• The creditors nominate a person to be liquidator; or

• The creditor nomination procedure concludes without the creditors making a nomination.

Until then, the liquidator must identify the legal basis for every material action.

It is not enough to say that a proposed step would be commercially sensible or helpful. The question is whether it falls within one of the express statutory exceptions or has been sanctioned by the court.

What can the liquidator do without court sanction?

Section 166 preserves three important categories of power.

Taking custody or control

The liquidator may take into custody or under their control property to which the company is, or appears to be, entitled.

This allows the liquidator to take immediate practical control of the estate. Depending upon the circumstances, that may include:

• Securing the company’s premises;

• Changing locks and controlling access;

• Collecting keys;

• Taking possession of books and records;

• Securing laptops, phones and other electronic devices;

• Protecting accounting systems and cloud data;

• Notifying banks and insurers;

• Securing cash and company documents;

• Taking control of websites, domains and social media accounts; and

• Identifying intellectual property belonging to the company.

Taking control does not automatically establish that the company owns an asset. Leased assets, hired equipment, goods subject to retention of title, customer property, trust property and assets belonging to third parties must be identified and dealt with separately.  The power to take custody is not a power to appropriate someone else’s property.

Selling perishable or rapidly diminishing goods

The liquidator may dispose of perishable goods and other goods whose value is likely to diminish if they are not immediately disposed of.

The obvious examples are food, livestock, cut flowers and other genuinely perishable stock.

The exception can potentially apply more widely where there is clear evidence that an asset’s value will materially deteriorate unless an immediate sale takes place. However, it should not be stretched into a general power to sell the company’s business, machinery, vehicles or ordinary stock simply because a quick sale would be convenient.

The relevant questions include:

• What is the asset?

• Does the company own it?

• Why will its value diminish?

• How quickly will the reduction in value occur?

• Why can the sale not wait until the creditors have made their decision?

• Could insurance, storage, refrigeration, maintenance or security protect the asset instead?

• What valuation evidence is available?

• Has the market been tested as far as the time allows?

• Is the proposed purchaser connected to the directors, shareholders or liquidator?

• What charges, liens, licences or third-party claims affect the asset?

• What net benefit will the sale produce for creditors?

Urgency does not remove the need to obtain the best evidence of value reasonably available.

Protecting company assets

The liquidator may do other things that are necessary for the protection of the company’s assets.

This may include insuring assets, arranging security, preventing unauthorised access, moving assets to safe storage, maintaining essential utilities or taking limited action to stop an asset from being lost or damaged.

The important word is “necessary”.

An action is not necessarily permitted simply because it is desirable, useful or likely to improve the eventual outcome. There must be a proper connection between the proposed action and the protection of the company’s assets.

The protection power should not be treated as a back door through which the liquidator can exercise all the usual powers of a liquidator.

What normally requires court sanction?

Where a proposed act falls outside the three express exceptions, the liquidator should consider obtaining court sanction.

Examples may include:

• Selling the company’s business as a going concern;

• Selling ordinary machinery, vehicles or other non-perishable assets;

• Continuing to trade the business;

• Commencing or defending substantive legal proceedings;

• Compromising debts or claims;

• Borrowing money;

• Granting security over company assets;

• Assigning an insolvency claim or cause of action;

• Making a distribution to creditors; or

• Entering into a substantial connected-party transaction.

The court application should identify the precise power that the liquidator wishes to exercise. It should explain why the action cannot safely wait until the creditor decision has been made.

The evidence should address matters such as:

• The urgency;

• The proposed transaction;

• The value and ownership of the asset;

• Existing security;

• Alternative courses of action;

• The effect upon secured, preferential and unsecured creditors;

• The identity of the proposed purchaser;

• Any connection between the purchaser and the directors or shareholders;

• The valuation and marketing process;

• The proposed funding arrangements; and

• Any safeguards or reporting conditions that should apply.

Obtaining court sanction enlarges the liquidator’s powers for the relevant purpose. It does not create a provisional liquidation and it does not change the legal character of the appointment.

Connected-party sales require particular care

Connected-party transactions during a centrebind period are approached with exceptional caution.

The historical abuse that produced the statutory restriction involved friendly appointments and rapid transfers of assets to businesses associated with the company’s management.

A proposed sale to a director, shareholder, family member or connected company will therefore require close examination.

The liquidator should expect questions about:

• Independence;

• Prior advisory relationships;

• Marketing;

• Valuation;

• Alternative purchasers;

• The timing of the transaction;

• The proposed consideration;

• The source of the purchase funds;

• Whether creditors will be prejudiced; and

• Why the transaction cannot wait for the creditor decision.

The fact that a connected purchaser is the only party ready to act immediately does not, by itself, make the sale proper.

If the sale cannot clearly be justified under the narrow statutory exceptions, court sanction should be obtained.

What happens to the directors?

The appointment of a centrebind liquidator does not leave the directors in control of the company.

Under section 103 of the Insolvency Act 1986, the directors’ powers cease upon the appointment of a liquidator, except to the extent that the liquidation committee or, where there is no committee, the creditors sanction their continuation.

The liquidator cannot simply give ordinary management control back to the directors informally.

The directors remain in office, but they cannot continue to manage, trade, enter into contracts, operate the bank account, sell assets or instruct employees as though the liquidation had not started.

They do, however, retain important duties.

These include:

• Preparing and delivering the statutory statement of affairs;

• Providing accurate information about the company’s assets, liabilities and creditors;

• Taking the necessary steps to obtain the creditors’ decision on the liquidator;

• Reporting material transactions occurring between the statement-of-affairs date and the creditor decision date;

• Delivering company property, records and information to the liquidator;

• Preserving accounting data, emails, devices and electronic records;

• Attending upon the liquidator when reasonably required;

• Explaining transactions and movements of assets; and

• Cooperating fully with the liquidation and any subsequent investigation.

If the directors fail to comply with the requirements concerning the statement of affairs or the creditor nomination process, section 166 contains a specific mechanism requiring the liquidator to seek directions from the court within the statutory period.

The centrebind process does not protect the directors from investigation.

Transactions at an undervalue, preferences, misfeasance, breach of duty, wrongful trading, fraudulent trading, invalid charges and transactions defrauding creditors remain capable of investigation.

The fact that the members chose the initial liquidator does not make the liquidator the directors’ representative.

What is the creditors’ position?

The creditors do not decide whether the company should enter CVL. The members’ resolution has already done that.

The creditors decide who should act as liquidator.

If the creditors nominate a different insolvency practitioner, their nominee ordinarily prevails. Section 100 also provides a limited court application procedure where different people have been nominated by the company and the creditors.

Creditors are also entitled to information and scrutiny.

They should receive the statement of affairs within the statutory timetable. Where a virtual or physical meeting is held, the liquidator or appointed person must report on relevant exercises of the liquidator’s powers during the intervening period.

Creditors may also:

• Nominate another insolvency practitioner;

• Object to the deemed consent procedure;

• Require a physical meeting where the statutory threshold is met;

• Seek the formation of a liquidation committee;

• Examine transactions occurring during the centrebind period;

• Challenge the liquidator’s remuneration through the relevant procedures;

• Question asset sales or connected-party dealings; and

• Apply to court where an appropriate statutory route is available.

A centrebind does not create an administration-style moratorium.

Secured creditors generally retain their proprietary and enforcement rights, subject to the terms and validity of their security and any applicable court order. Execution creditors, landlords and retention-of-title claimants may also have rights requiring urgent consideration.

The appointment of a centrebind liquidator does not automatically stop every creditor action.

What happens to the company’s assets?

The company remains a legal person until it is eventually dissolved.

Its property does not become the liquidator’s personal property. Legal title generally remains with the company, subject to the liquidation regime. The liquidator takes custody and control of the estate and administers it for the statutory purposes of the liquidation.

Different asset categories require different treatment.

Cash and bank accounts

The liquidator should establish immediate control over the company’s cash and banking position. Banks will freeze existing mandates once notified of the liquidation.

Company funds will not be returned to the control of the directors.

Machinery, vehicles and ordinary stock

These assets should be secured, insured, catalogued and valued.

They should not be sold merely because a quick sale would be convenient. Unless the asset is genuinely perishable, likely to diminish in value without immediate disposal, or the sale is necessary to protect the estate, the ordinary sale power remains restricted.

Retention-of-title and third-party goods

The liquidator must investigate ownership.

The power to take custody or control does not convert third-party property into a company asset. Goods should not be sold unless ownership or authority has been established.

Charged assets

Fixed and floating charges remain relevant. The liquidator must identify the security, its validity, its priority, any crystallisation provisions and the extent of the net equity available for the estate.

Intellectual property and digital assets

Domains, software, source code, licences, websites, customer data, social media accounts and login credentials can be extremely valuable.

They should be secured immediately. Ownership, licence terms, confidentiality and data-protection obligations must then be examined.

Contracts and supply arrangements

Liquidation does not automatically rewrite every contract.

Termination rights, assignment provisions, trust arrangements, set-off, agency relationships and restrictions applying to certain insolvency-triggered termination clauses must all be reviewed.

Employees

The liquidator must establish whether employment has terminated, whether any employment is continuing lawfully and what urgent steps are required.

Continued trading or the retention of employees should not be assumed to fall automatically within the asset-protection exceptions.

Can the liquidator make payments?

The liquidator’s appointment does not provide a free-standing entitlement to draw remuneration.

Remuneration must be fixed through the statutory process, normally by the liquidation committee, the creditors or the court.

Properly incurred costs of protecting the estate may constitute liquidation expenses, but the liquidator must distinguish between:

• Remuneration;

• Post-appointment expenses;

• Pre-appointment costs;

• Payments needed to protect assets; and

• Distributions to creditors.

When does the centrebind period end?

The section 166 restriction ends when the creditors nominate a person to act as liquidator or when their nomination procedure concludes without a nomination.

There are then two main outcomes.

The same liquidator continues

If the creditors nominate the members’ nominee, or make no alternative nomination, that person continues as liquidator.

The centrebind restriction falls away. The liquidator then has the ordinary powers of a voluntary liquidator, subject to the other controls applying within the liquidation.

A different liquidator takes over

If the creditors nominate someone else, the creditors’ nominee becomes liquidator, subject to any permitted court application.

The outgoing liquidator must provide a prompt and complete handover. This should include:

• Assets and funds;

• Books and records;

• Decisions taken;

• Valuations;

• Legal advice;

• Details of transactions;

• Court applications and orders;

• Communications with creditors;

• Security information; and

• Unresolved risks.

Delay in the creditor process does not expand the members’ nominee’s powers. The restrictions continue until the statutory endpoint is reached.

What if there is also a winding-up petition?

A winding-up petition is not required for a centrebind to exist.

However, if a petition has already been presented, it creates a separate and potentially serious layer of legal risk.

The timing becomes critical.

If the voluntary winding-up resolution was passed before the petition was presented, the position differs from a case in which the petition was presented first.

Where the petition predates the CVL resolution, post-petition dealings may create issues under section 127, including the potential avoidance of dispositions if the court later makes a winding-up order.

A proposed sale or payment may therefore require both:

• Sanction under section 166; and

• A validation order or other protection relating to the pending petition.

Those are separate questions. Obtaining one order does not necessarily answer the other.

If the court eventually makes a winding-up order, the Official Receiver will ordinarily become liquidator until another person takes office under the compulsory liquidation regime. The voluntary liquidator must then account and hand over.

A pending petition must therefore be analysed separately. It is not part of the definition of centrebind and does not turn the centrebind liquidator into a provisional liquidator.

The three facts that should always be stated first

Whenever a centrebind question arises, the answer should begin with three points:

1. The company is already in creditors’ voluntary liquidation.

2. The members’ nominee is already the liquidator.

3. The liquidator’s ordinary powers are restricted by section 166 until the creditors have made, or are deemed to have made, their decision about the liquidator.

Everything else follows from those three facts.

The liquidator can secure and protect the company’s estate. They can deal with genuinely perishable or rapidly diminishing goods. They can apply to court where wider powers are urgently required.

What they cannot do is treat the centrebind period as an opportunity to exercise unrestricted liquidation powers before creditors have had their say.

That is precisely the danger the legislation is designed to prevent.

A centrebind can be a useful and entirely lawful part of a CVL. However, it creates a short period in which the liquidator holds office while operating within carefully defined limits.

Directors, creditors, advisers and liquidators must therefore pay close attention to the timing, the proposed action, the nature of the assets, the creditor decision process and any pending winding-up petition.

Getting the classification wrong at the outset can lead to the wrong advice on almost every important issue that follows.

If you need any advie on whether a centrebind is appropriate for your company, call me on 07813102014.