When a company goes into insolvency, it can have a knock-on effect on multiple people and businesses. If you or your business is owed money by a company that’s gone into liquidation or administration, or by an individual who’s been adjudged bankrupt, you are what’s known as a creditor in the insolvency process.
When you’re a creditor during the insolvency process, it’s important to stay engaged in the interest of potentially recovering your losses. Some people don’t engage with the process because they assume there’ll be no recovery, opt out of communications about the insolvency and write off the debt they’re owed. However, there may be valuable assets within the estate or claims against third parties that the liquidator, administrator or trustee in bankruptcy (‘office-holder’) can pursue. Ultimately, these assets (after costs) will be distributed to creditors in a specified order of priority. If you’re a creditor, it is in your interest to engage with the process.
In this blog, we’ll address some of the issues you may encounter as a creditor while providing some tips to help you navigate the insolvency process.
As a creditor, can I have a say in the insolvency process?
As a creditor, you may have the opportunity to vote on certain decisions during the insolvency process. These decisions can affect how the insolvency is managed, so it’s worth paying attention to any communications you receive from the office-holder.
In many cases, decisions are made through a creditor decision procedure. The office-holder will send you and other creditors details of the proposal, along with information on how to vote and the deadline for doing so.
Some decisions may instead be made using a process called deemed consent. This means the office-holder will notify you and the other creditors of the proposed decision, and it will automatically be approved unless creditors representing at least 10% of the total value of claims object before the stated deadline.
While it can be tempting to ignore these notices, they give you an opportunity to have a say in the insolvency process and how it is conducted.
When am I eligible to vote in a creditor decision procedure?
Not every creditor is eligible to vote in a creditor decision procedure. You’ll be eligible to vote in a creditor decision procedure if:
- you’re owed money by the insolvent entity;
- you’ve submitted a completed proof of debt form to the office-holder by the specified deadline; and
- The convenor or chair of the relevant decision procedure or meeting has admitted your proof of debt.
The value of your vote is usually linked to the amount you’re owed. If you’re a secured creditor, any debt covered by your security won’t count for voting purposes. This means you’ll usually only be able to vote in respect of any unsecured balance that remains outstanding.
What is a proof of debt and why do I need one?
A proof of debt is the formal document that tells the office-holder how much you’re owed. It should be submitted together with supporting evidence of the debt, such as invoices, contracts or statements.
If you’re a creditor, submitting a proof of debt is one of the most important steps you can take. Without it, you may not be able to vote on creditor decisions and you could miss out on any distribution made from the insolvent estate.
To avoid delays or complications, make sure your proof of debt and supporting documents are submitted by any deadlines set by the office-holder.
Together with the other creditors, can I choose the insolvency practitioner?
In some insolvency procedures, you and your fellow creditors may have a say in who is appointed to manage the case.
In out-of-court processes, such as administrations and voluntary liquidations, the company or individual entering insolvency will usually nominate a licensed insolvency practitioner to act as office-holder. Creditors are then given the opportunity to approve that appointment or, in some circumstances, propose an alternative insolvency practitioner.
Creditors may wish to support a different appointment if they believe another insolvency practitioner would be better placed to investigate the affairs of the insolvent entity or maximise returns for creditors.
Where a liquidation or bankruptcy order is made by the court, the Official Receiver is automatically appointed in the first instance. If you and your fellow creditors would prefer a different office-holder to take over the case, you’ll need to engage with the Official Receiver and follow the relevant process for proposing an alternative appointment.
What is a creditors’ committee?
Early in the insolvency process, as a creditor, you may be given the opportunity to establish a creditors’ committee. This is a small group of between three and five creditors that represents the interests of the wider creditor body. The committee works with the office-holder, providing oversight and assistance throughout the insolvency process.
One of the committee’s key responsibilities is reviewing and approving the office-holder’s fees and expenses. If no committee is established, approval of the office-holder’s remuneration will usually be sought from creditors through a decision procedure or, in some cases, the court.
As a creditor, you’ll be asked to vote on whether a committee should be formed and, if so, which creditors should be appointed to it.
How can I keep track of what’s happening?
As a creditor, you’ll usually receive regular updates throughout the insolvency process. These documents can help you understand the debtor’s financial position, what actions the office-holder is taking and whether you’re likely to see a return on the debt.
Many insolvency documents are also filed at Companies House, allowing you to access information about the case at any time.
The reports and information you receive will depend on the type of insolvency procedure:
- In a creditors’ voluntary liquidation or administration, the directors will prepare a statement of affairs setting out the company’s assets, liabilities and creditors.
- In a liquidation, the liquidator will provide you with annual progress reports, as well as a final report when the liquidation is brought to a close.
- In an administration, the administrator must circulate proposals explaining how they intend to manage the administration. You’ll be invited to approve these proposals. Administrators must then provide progress reports every six months.
- In a bankruptcy, the trustee in bankruptcy must send you an annual report on the progress of the estate.
If the Official Receiver is acting as office-holder, they’re not generally required to issue regular reports. However, creditors can contact the Official Receiver directly to request an update on the case.
Unless you’ve chosen to opt out of communications, it’s worth reading these updates carefully, as they can provide important information about potential recoveries and the progress of the insolvency.
When will I receive a payment
If there are funds available after the office-holder has realised the assets of the insolvent company or individual, as a creditor you may receive a distribution, sometimes referred to as a dividend.
The amount creditors receive is usually expressed as pence in the pound (p/£). For example, a dividend of 20p in the pound would mean a creditor owed £1,000 receives £200. The amount available will depend on the value of the assets recovered, the costs of the insolvency process and the order in which different categories of creditor are paid.
The timing of distributions varies depending on the insolvency procedure:
- In a creditors’ voluntary liquidation, the liquidator will generally declare a dividend once the company’s assets have been realised and there are funds available for distribution.
- In an administration, the administrator may make distributions to certain categories of creditor, but they are not always required to do so. In some cases, further steps may be needed before funds can be distributed to all creditors.
- In a bankruptcy, distributions are usually made when sufficient funds have been collected within the estate.
Before a distribution is made, you’ll be given notice and asked to submit any outstanding proofs of debt by a specified deadline. The office-holder will review the claims received and decide whether to accept or reject them for dividend purposes.
If your claim is rejected, the office-holder must explain why in writing. You’ve got the right to challenge that decision through the court, although strict time limits apply.
The bottom line
Being a creditor in an insolvency process can feel daunting, particularly if you’ve never encountered one before. However, staying engaged can help protect your interests and maximise your chances of recovering some or all of the money you’re owed.
Remember, the top tips for maximising your chances of a good result from the insolvency process are:
- Make sure you submit your proof of debt, together with any supporting evidence, by the relevant deadline.
- Keep an eye on communications from the office-holder, read any reports you receive and take note of opportunities to vote on creditor decisions.
- If a distribution is made, ensure the office-holder has your up-to-date contact and bank details so that any payment can be made without delay.
How Gorvins can help
If you’d like advice on your position as a creditor, or assistance navigating an insolvency process, our Insolvency and Litigation team can help.
Call us on 0161 930 5151, email enquiries@gorvins.com or complete our online enquiry form.