Summary
- Liquidation and administration affect how creditors pursue debts and whether they can take separate enforcement action.
- Security rights and the legal order of priority influence how much creditors recover.
- Creditors should submit evidence of their claims to the person handling the insolvency and meet any distribution deadlines.
- This guide explains debt recovery options for businesses with insolvent company debtors in England and Wales.
- LegalVision’s debt recovery lawyers advise businesses on proving unpaid debts, assessing recovery options and responding to insolvency proceedings.
Tips for Businesses
Create a dated file containing invoices, contracts, delivery records and payment correspondence. Reconcile the outstanding balance against credit notes and partial payments. Diarise deadlines in insolvency notices and retain proof of submission. Ask the case handler to confirm receipt of your claim. Speak to a corporate lawyer at LegalVision about documenting your claim against an insolvent company.
A company’s insolvency can limit your business’s ability to recover unpaid invoices or loans. For suppliers and other business creditors, the next step depends on whether the company has entered formal insolvency proceedings. Security over assets and the funds available also affect your prospects of repayment. In England and Wales, creditors need to identify who handles the insolvency and provide evidence supporting their claims. This article explains recovery options, creditor priorities and practical steps for submitting a debt claim.
Has Your Debtor Entered Insolvency Proceedings?
The first thing to determine is if your debtor is insolvent. If they are insolvent, special remedies are available to that company’s creditors. But, at the same time, there are specific measures you cannot take against an insolvent company, even if it owes you money.
To determine if your debtor is insolvent, you can undertake a Companies House search of the company. If a third party, such as another creditor or the company’s directors, have obtained an insolvency petition, Companies House will typically indicate this. For smaller businesses, you should look for an entry that says either an administrator or liquidator has been appointed.
What Happens If There Is a Notice?
If you see such a notice, you need to register as soon as possible with the court that you are a creditor of the company. If you do not register in time, you may be unable to recover your debt.
What Happens If There Is No Notice?
If there is no notice on Companies House, that does not mean the company is not insolvent. It could be that no one else has initiated an insolvency procedure against the company. If this is the case, you may want to initiate the process by filing an application with the court.
How to Submit Your Debt Claim
Once a company enters liquidation or administration, identify the official receiver or insolvency practitioner handling the case. Companies House records can help you find the relevant contact.
Tell the case handler that your business has an outstanding claim, even if nobody has contacted you. Ask how to submit the claim and whether the case handler requires a proof of debt. A proof of debt records the amount you claim and the basis for that claim.
Gather the contract, unpaid invoices, delivery records and correspondence acknowledging the debt. Reconcile the balance against any payments or credit notes before submitting the documents. For example, a supplier should explain which deliveries each unpaid invoice covers, rather than send an unexplained account balance.
In a liquidation, the liquidator assesses claims before distributing available funds through the company winding-up process. Submission alone does not guarantee acceptance or payment.
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Initiating Insolvency Proceedings Against Your Debtor
The two common insolvency procedures for smaller companies are liquidation and administration. You need to apply to the court to begin either process. However, provided you are owed a substantial sum, you may instruct an insolvency solicitor experienced in advising creditors. They can advise you on which process may maximise your chances of recovering your debt.
In either case, you must convince the court that the company is properly insolvent. You can usually satisfy this by serving a statutory demand form or obtaining a court judgment against the company. Again, an insolvency lawyer skilled in creditor work can advise.
A Word About Security
Security refers to certain creditors’ special right over a debtor’s assets. The law refers to a creditor with security as a secured creditor.
Security is most common for bank loans. For instance, say a borrower grants the bank security over some or all of its assets in exchange for obtaining a loan from the bank. It is comparatively rare for non-bank creditors to have security over a debtor’s assets.
However, under certain circumstances, other creditors, such as trade suppliers, may obtain security due to the operation of the law or favourable contracts.
If you have security, you may have an automatic right to enforce your security rights against the secured asset. The benefit is that you may not need to join an insolvency proceeding as a creditor to recover the debt. In practice, however, you should consult with an insolvency lawyer. After all, enforcing security is not always easy and may expose you to considerable liability.
Effects of Insolvency Proceedings
If you, another creditor or the company initiates insolvency proceedings, it has three significant effects.
1. Moratorium
In most cases, the court orders a moratorium, meaning no one else can commence any other court action against the debtor. This includes you. The purpose of a moratorium is to give the company some breathing room to get its affairs in order. It also seeks to minimise the resources the court must expend on fielding claims from different creditors.
“Treat evidence gathering as a recovery step, even when the debtor accepts that the invoices remain unpaid. The person handling the insolvency needs a clear basis for assessing your claim, and an unexplained account balance can leave avoidable questions.”
2. Insolvency Practitioner
For both administrations and liquidations, the court will appoint or approve the appointment of an insolvency practitioner who will take over the company’s management.
Under both proceedings, the insolvency practitioner will try and maximise the outcome of the proceedings in favour of the creditors. For liquidation, the insolvency practitioner typically sells off all the company’s assets. It then uses the proceeds to repay the creditors according to the order of priority.
In an administration, the insolvency practitioner may try and rescue the business so it can keep trading. For instance, it may sell the business and use some of the proceeds to repay the creditors. Alternatively, it may offer some creditors equity in the business in exchange for writing off their debt.
3. Order of Priority and Pari Passu
The law will not permit you to obtain a more favourable outcome than other creditors of the same class. The law calls this the principle of pari passu. The legal order of priority dictates your class.
While there are as many as seven legal classes of creditors under the order of priority, the most significant distinction is between secured and unsecured creditors. Therefore, unless you have some form of security over the company’s assets, you will rank at the bottom of the order of priority. You will rank “pari passu” with other unsecured creditors.
Even though you cannot bring a claim against the debtor company yourself once the process is underway, you can instruct a lawyer.
Options for Creditors Victimised by Fraud
If one or more creditors is a victim of fraud, the insolvency practitioner can take additional steps. In particular, it can order specific individuals within the company to personally contribute to its assets. Sometimes, the insolvency practitioner can set aside some or all of this additional money for defrauded creditors.
Key Takeaways
If you are a creditor of a now insolvent business, you may wonder how you will recover your money. The law has a variety of processes it can order companies into. For most businesses, the most common insolvency procedures are administrations and liquidations. In both cases, the court will appoint an insolvency practitioner to manage the company’s affairs to repay the creditors. The law requires the insolvency practitioner to repay creditors according to the order of priority. Usually, there are not enough assets to repay all the creditors, especially unsecured creditors, which are the most common. Therefore, you may wish to instruct an insolvency practitioner who can represent you and the other creditors to ensure you receive as much as possible.
If you need help with retrieving a debt from an insolvent company, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
What is liquidation?
Liquidation involves a liquidator taking control of a company, selling its assets and distributing available funds according to legal priorities. The process brings the company’s affairs to an end. Creditors may receive only part of their debt, or nothing, depending on the available assets.
What is the order of priority?
The order of priority determines how creditors share a company’s assets during insolvency. Security rights and the type of debt affect ranking. Ordinary unsecured creditors generally rank behind preferential creditors and share available funds proportionately. Shareholders rank last.
What is a proof of debt?
A proof of debt records a creditor’s claim against a company and explains the debt. In liquidation, the liquidator assesses the claim and may accept all or part of the amount, or reject the claim. Submitting a claim does not guarantee repayment.
What documents should my business keep to support a debt claim?
Keep contracts, agreed changes to payment terms, unpaid invoices, delivery records, account statements and correspondence about the debt. These records help establish the amount the company owes and why your business has a claim.
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