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Understanding the role of a creditor
As someone who might be owed money one of the first questions you may ask yourself is am I a creditor in this liquidation? You are a creditor if the company owes you money. You may be owed money because you:
- supplied goods or services to the company.
- made loans to the company.
- paid for goods or services that you have not received.
- are an employee owed money for unpaid wages and other entitlements.
A ‘contingent creditor’ is owed money by the company if a certain event occurs (e.g. if they succeed in a legal claim against a company).
Creditors will either be secured or unsecured. A secured creditor holds a security interest, such as a mortgage/charge, in some or all the company’s assets, to secure a debt owed by the company. Lenders might require a security interest in company assets when they provide a loan. Conversely an unsecured creditor does not hold a security interest in the company’s assets. Unsecured creditors can be preferential which predominantly relates to employee wage arrears and holiday pay.
Since December 2020, HMRC became a second-tier preferential creditor for unpaid taxes including VAT, PAYE and employers NI deductions. Unsecured creditors can be non-preferential which includes all other types of creditors, including trade & expense creditors. Creditor’s Voluntary Liquidation is the most common type of insolvency, below is an overview of the process and the deadlines that will need to be met.
Initial Notice of Liquidation
Following the decision of the director(s) to commence the Liquidation process, shareholders will be asked to pass resolutions to wind up the company and appoint a liquidator at an EGM or by the written resolution procedure. Creditors will be invited to participate in a decision procedure.
The company’s creditors will receive a minimum three days’ notice of the decision procedure however in most cases more notice is given.
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. This initial pack of documents can appear to be quite daunting to the untrained eye. The notice will outline the specific details of the type of procedure and deadlines for the return of any documents before the decision date. There are some key documents to look out for in the pack, the notice that contains deadlines and contact information, a proof of debt to register your claim and in some cases a voting form / proxy to enable you to vote on specific resolutions put forward by the incumbent insolvency practitioner.
One of the key documents you will need to complete to register your claim is the proof of debt form which is the document on which a creditor submits details of their claim. This form is a simple document to complete but again if you are unaccustomed to completing them on a regular basis it may seem a little daunting.
To substantiate the claim in the proof of debt form it is a good idea to provide supporting documentation by way of statement, sales invoices, or delivery notes. If the claim differs significantly from that held in the companies’ books you may be asked for further information. It is often the case that the figures differ slightly and at this initial stage you do not need to worry about that as you will have plenty of time to substantiate your claim throughout the liquidation process.
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.
The Small Business Enterprise and Employment Act 2015 removed physical meetings as the default mechanism for obtaining decisions from creditors. Instead, insolvency practitioners are now required to use decision making procedures or the deemed consent procedure.
The removal of the physical meeting as the default option in the case of a voluntary liquidation was taken because most creditors meetings saw only the appointed insolvency practitioner and the director of the insolvent company attendance. Physical creditors meetings also incurred specific costs and time which not only slowed down the pace of the liquidation, but also made it more expensive.
The procedure known as the deemed consent procedure is now used by the vast majority of Insolvency Practitioners as there is a general belief that it expedites the process. If there are no objections or concerns from the creditor then the company will automatically enter liquidation at 23.59pm on the decision date without the need for a meeting.
Alternatively, a virtual meeting of creditors may be called. Virtual meetings are called in a similar way to physical meetings. The insolvency practitioner must give notice of their intention to call a virtual meeting along with details of the proposed decision, the date of the meeting, the platform to be used and any passwords or access codes of the creditors, this is where a meeting is held by means of a conference or video call. This has the advantage of creditors being able to attend and be heard at the meeting without having to travel to a physical meeting.
A virtual meeting of creditors must also be advertised in the London Gazette, as a physical meeting would be, and involves proxy forms, which can be delivered anytime up to the start of the meeting. Proofs of debt will also need to be delivered to the insolvency practitioner usually by 4pm the day before the meeting. All the deadlines will be clearly set out in the notice. As this is a meeting so proxies will be required. The Insolvency Service have commented that they see virtual meetings operating in practice as physical meetings do, with most creditors using proxies.
With both the Deemed Consent and virtual meeting process a creditor has the right to summon a physical meeting of creditors. In order to object, you are required to meet a certain threshold, albeit with the Pandemic such a meeting is unlikely but not impossible with the appropriate social distancing in place.
Creditors usually have five business days after the delivery of the notice of the decision-making procedure to deliver their request for a meeting by either value or number, or ten individual creditors can request that a meeting of creditors is held. Objections to the decision process must be submitted to the convenor, in writing along with a proof of debt.
The convenor is then responsible for checking whether any requests for a physical meeting have been made and whether they meet any one of the thresholds set out above.
If the required value of creditors does object, the procedure will terminate without the decision having been made and the office holder is then required to seek a decision from creditors using an alternative decision procedure. It should be noted that deemed consent cannot be used to seek a decision where that process has already been objected to. The convenor must then send the notice summoning the physical meeting not later than three business days after one of the thresholds has been met.
Creditors wanting to vote but not attend a physical meeting in person will be required to submit proxies. Creditors may be permitted to attend a physical meeting remotely if they are unable to attend. It should be noted that deemed consent cannot be used to seek the approval of remuneration (fee) of a liquidator.
The Meeting of Creditors
Prior to the Decision Date or the effective date of Liquidation, creditors will also be provided with a document called an Estimated Statement of Affairs of the Company. This is a document that sets out the financial position of the company, detailing its assets and liabilities and overall deficiency.
In addition to the statement of affairs a report of the directors will be made available which provides statutory information, a history of the company including reasons for its failure, historic accounting information, the Statement of Affairs and a deficiency account. The deficiency account tries to reconcile the position as per the last accounts to the deficiency shown in the Statement of Affairs.
Most creditors base their questions on the content of the above reports along with the experience they have had whilst trading with the company that’s going into liquidation.
Where there is a virtual or physical meeting, the following will be discussed:
- A general introduction as to those present at the meeting.
- Information as to whether the proposed liquidator has had any relationship prior to this liquidation with the company, it must be disclosed to the creditors.
- The creditors will be presented with the director’s report and Statement of Affairs.
- The creditors are invited to ask any questions of the director(s)
- The creditors may ask the liquidator to investigate any specific areas.
- The creditors are entitled to nominate a different liquidator.
- The creditors are entitled to form a liquidation committee.
- If no liquidation committee is formed, creditors will agree to a number of other resolutions including the liquidator’s remuneration.
A creditor is entitled to ask the company’s director any questions. However, they must be relevant to the liquidation and the company. If the liquidator deems the question inappropriate, they can intervene. The creditors’ conduct is expected to be always professional; threats of violence or bad language are likely to lead to a creditor being dismissed from the meeting.
In some cases, a creditor or group of creditors may choose to have their insolvency practitioner, solicitor or other professional in attendance at the meeting to ask any questions on their behalf. The director of the company is also entitled to have their solicitor present.
At least one director of the company must be present and will be responsible for chairing the meeting. In practice, it is usually the liquidator that conducts the meeting on behalf of the company.
The meeting is usually no longer than 40-50 minutes. However, should there be complex issues to resolve from the discussion, or the creditors have a lot of questions, it can be much longer.
At the formal part of the meeting voting takes place on whether to accept the resolutions put forward i.e. the appointment of a specific liquidator to alternative, with a majority (by value of debt) being required to pass the resolution. Once the resolutions have been agreed and approved, and the director has signed the relevant documents, the creditors’ meeting is closed.
Dealing with insolvent debt can be difficult and, in 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.
Our Creditor services team at Restart BTi can assist with the entire claims process. We will lodge your initial claim, deal with any queries, and make sure 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 can represent clients at meetings or on committees and will ensure that the difficult questions are asked to 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.
Our bespoke case management system, Divisi, ensures that we proactively monitor your insolvency portfolio, providing transparent reporting via our web-based portal.
This service is offered to our clients at no charge so if you want to remove the burden of managing your insolvency documentation and enhance your dividend prospects, then please contact Paul Hughes on 01246 959388 for further information.