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Does another business owe money to your business? Does the business refuse to pay, even after you issued a statutory demand letter? In some cases, the other business, which the law refers to as your debtor, may be insolvent. Accordingly, you may have special rights against the insolvent company. This article will look at what options are available to you if an insolvent business owes your business money.
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.
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.
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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.
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
Liquidation is a form of insolvency proceeding where an insolvency practitioner (a liquidator) takes control of the company. It then sells off the company’s assets and uses the proceeds to repay the creditors according to the order of priority. Once all the assets are sold, it shuts the company down.
The order of priority is how the law ranks which creditors should get first dibs on the company’s assets. Secured creditors are at the top, whereas shareholders are at the bottom. Unsecured creditors sit in between.
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