It can be a challenging time for creditors when a company, that owes them money, has entered into a formal insolvency process. Quite often the creditors may not know where they stand in terms of recovering the money they are owed.
When (why) would a creditor need this service?
From time to time we instructed by creditors who are owed money from a company that has entered, or is about to enter into an insolvency process. Inevitably the creditor will have concerns about the prospect of recovering the sums owed to them from the insolvent company. In most cases an appointed insolvency practitioner will act in the bests interest of creditors. However, there are instances where creditors form the view that the insolvency practitioner is not acting in their best interests and may wish to explore their options of having the appointed insolvency practitioner replaced.
What are the types of creditors?
The different types of creditors are:
- Preferential; and
A secured creditor is anyone who has security (i.e. a charge or debenture) over some or all of the insolvent company’s assets. Upon insolvency, a secured creditor will usually be protected by virtue of their security, subject to it being materialised, provided that there is sufficient value in the asset held as security.
Preferential creditors are creditors who will be paid their debt in priority to unsecured creditors, subject to statutory limits. Where any sums are owed to the preferential creditor over this limit, then this part of the debt will become an unsecured debt. Employees of the insolvent company are usually preferential creditors. HMRC was previously treated as a preferential creditor but is now treated as an unsecured creditor.
An unsecured creditor is generally any creditor who holds no security for the debt and is not a preferential creditor.
What is the list of distribution?
The assets of the insolvent company will be distributed in accordance with the prescribed list of distribution. This is set by law as follows:
- Secured creditors with fixed charges;
- Expenses of the winding up (i.e. the Liquidator’s fees and his professional advisor’s fees);
- Preferential creditors (i.e. employees up to relevant statutory limit applicable at the time);
- Monies secured by a floating charge (subject to ring-fencing for unsecured creditors);
- Unsecured creditors; and
- If there is any surplus, the remainder is distributed to the shareholders of the company.
What if I am not satisfied with the Insolvency Practitioner?
If a creditor is not satisfied that a Liquidator or Administrator is carrying out their functions diligently then a creditor may be able to take steps to have them removed and replaced.
The easiest way to remove a Liquidator and/or Administrator from their position is for the majority of creditors to vote for their removal under s172 of the Insolvency Act 1986. If this cannot be achieved, a creditor may apply to the court for their removal but it should be noted that the threshold for the removal of a Liquidator or Administrator is quite high and the court will only do this in exceptional circumstances.
Is it expensive? What are the likely costs?
We will provide you with an estimate of costs at the outset based on the type of work required.
Our lawyers have extensive experience in advising clients who are creditors of struggling companies and will be able to provide you with bespoke and cost effective advice tailored to your circumstances.