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Creditors Rights

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Every year, thousands of insolvency notices are sent to creditors of companies that are subject to some sort of formal insolvency procedure. In our experience, these notices are either disregarded or treated with apathy due to the general perception that the insolvency of a customer will lead to a full debt write off and dividend rates are perceived to be poor. 

This article will focus on liquidation, the most common insolvency procedure. Since registered companies became available to the investing public, the Joint Stock Companies Winding-Up Act 1844 and all its successors contain a route for a company’s life to be brought to an end.

The basic purpose of liquidation is to conclude a company’s activities and to sell off assets ‘liquidate,’ turn chattels into ‘liquid assets’ or money to pay creditors, or shareholders if any value remains. Either the company (its shareholders or directors) can initiate the process through a “voluntary liquidation”, or the creditors can force it through a ‘compulsory liquidation.’ 

Over the years the insolvency profession has tried to introduce legislation and adopt practices to improve creditor engagement and reduce the costs of all insolvency processes. However, from our experience we do not believe that this has had the desired effect and presently we feel that creditor engagement is at an all-time low.

Creditors of insolvent estates should be aware that they have a meaningful role to play in the insolvency process which could significantly improve the prospects of any return to them.

What will I receive?

The first thing you are likely to receive when a company is looking to go into liquidation is a notice of a decision procedure by post. With this notice you are likely to receive details of the type of procedure and deadlines along with a proof of debt and voting form / proxy to enable you to participate in the insolvency process and lodge your claim. In our next article we will talk more about the mechanics of this process in relation to a liquidation.  

Recent legislative changes have altered the requirement for a liquidator to automatically hold ‘in-person’ creditors’ meetings unless a specific number of unsecured creditors request it. 

This procedure is called a deemed consent procedure which the vast majority of Insolvency Practitioners now use as there is a general belief that it expedites the process. In our view this procedure has further alienated creditors as they are unable to question a director at a meeting of creditors. 

At least 10% of creditors by number or value (or 10 individual creditors) can request that a meeting of creditors is held, otherwise proposals and notices can be sent via electronic means.

Prior to the decision date you will receive the statement of affair for the company which sets out its assets, liabilities and likely dividend prospects. This document should be received no later than one working day prior to the procedure. 

Appointment of liquidator

A liquidator is appointed firstly by shareholders however creditors have the right to appoint their own liquidator should sufficient support be obtained by other creditors. The liquidator is appointed by the majority of the creditors voting by the decision date. 

Creditors Committee

During any insolvency proceedings, unsecured creditors have the right to form a creditors’ committee. This usually consists of between three and five members.

Forming a committee can ensure that creditors have a ‘voice’ during the insolvency process. Creditors often feel that they are overlooked or that there is a veil of secrecy around the insolvency which prevents them from having any influence on the outcome.

The role of the committee is to oversee the insolvency process on behalf of unsecured creditors. The establishment of the committee and their participation in the process can address some of the concerns and ensure that proper consideration is given to their interests.  The committee is of particular use on more complicated insolvencies where there are matters for the office holder to investigate and its members can provide invaluable help to them by acting as a ‘sounding board’ for future decisions.

Committees often pass several resolutions one of which is in relation to agreeing the costs of the procedure. Creditors gain a better understanding of the process and costs when acting on a committee. 

●      Committee members do not receive payment for their role but are entitled to claim for their reasonable travelling expenses.

●      Committee members can request a meeting with the office holder at any stage of the proceedings, but these are usually agreed mutually in advance.

●      A committee member is also entitled to receive regular reports from the office holder to update them on their progress.

What other steps can I take to protect my position?

If you have supplied goods to the company and you have a ‘Retention of Title Clause’ within your terms of trade, you may be able to make a claim for their return which may reduce your overall exposure. 

Whilst this is a technical area, in summary, if you can identify goods on site that specifically relate to an outstanding invoice these can be reclaimed if they have not been irreversibly processed into another product. 

Other problems can arise when a creditor assumes that they have a right to reclaim unpaid stock, but the debtor company refuses to recognise the clause, or claims to have no knowledge of its existence.

It is good practice to contact the liquidator as soon as you are aware of the insolvency. You should send a copy of your terms of trade, a statement showing the extent of your debt, relevant invoices and other supporting documentation and enquire if any of your goods remain on site. 

If you have credit insurance, then your broker should be notified of the insolvency and you should ensure that you adhere to the policy conditions in order that a successful claim can be made. We have found that it is often the case that the insurer will require some sort of confirmation of debt from the office holder for the claim to succeed.

If you are registered for VAT, once the debt is over six months old you can reclaim the VAT element back from HMRC

Dividend Payments 

If there are sufficient assets to declare a dividend then there is specific hierarchy as follows: 

Fixed Charge Holder

First Tier Preferential Creditors – Employees

Second Tier Preferential Creditors – HMRC (Taxes Deducted at Source) 

Unsatisfied Floating Charge Holders

Non-Preferential Unsecured Creditors 

The vast majority of trade creditors will fall into the last category. If you did not submit your claim at the onset of the insolvency, you will be given one final opportunity to do so otherwise you will be excluded from the dividend.

If a liquidator formally rejects your claim, you should in the first instance try to seek a compromise with the liquidator. If no agreement is reached within 21 days, you will have to apply to the court for adjudication on the matter.

Creditor Services 

Dealing with insolvent debt can be difficult andin some cases, time-consuming. Having a business partner to support you through this process can make a huge difference to the success of your claim.

The creditor services team at Restart BTi can assist with the entire claims process. We will lodge your initial claim, deal with any queries and ensure that important deadlines are met. We will oversee fee approvals on your behalf and call on our own licensed Insolvency Practitioner when we feel that an independent review or investigation may be required.

We are delighted to represent clients at meetings or on committees and will ensure that the difficult questions are asked to make certain we endeavour to get the best possible outcome for our clients. With our wide network of support, we can engage with other creditors and seek further support to guarantee that your voice is heard.

This service is offered to Top Service clients at no charge so if you want to improve your dividend prospects and remove the burden of managing your insolvency documentation then please contact Paul Hughes on 01246 959388 for further information.

Contact our helpdesk team today on 01527 518800 to discuss how Top Service can support and help you protect your business. 

This article is produced in collaboration with Paul Hughes Director for Restart BTi Licensed Insolvency Practitioners