Date 14 June 2010
Many companies and individuals who regularly instruct lawyers to recover monies owed to them take a close interest in the litigation that follows. However, many of these same creditors take little or no interest in recovery once they learn the company or person that owed them money has gone into a formal insolvency process, such as Liquidation, Administration, and Creditors Voluntary Arrangement (CVA) – for companies or Bankruptcy and Individual Voluntary Arrangement (IVA) for individuals.
It is a truism that the majority of creditors are either disillusioned due to prior bad experience or baffled by some of the insolvency regimes more arcane rules.
In many cases where a creditor has, for example, a debt of less than £5,000; on a practical level, there is little they can do to effect the outcome of formal insolvency. Given the potential recovery, it is commercially sensible not to spend too much time with a formal insolvency.
It is more often the case that for those who are owed a large debt (over £100,000), that some level of involvement in the insolvency process can reap a better result for the creditor.
Whilst the debt amounts used in this article are arbitrary, I hope they serve to illustrate the point that in many cases there is a difficult commercial balance to be had in deciding what to do next.
Here are some of my top tips for a creditor involved in a formal insolvency:
1. What kind of creditor are you? Find out!
Different “classes” of creditors have different rights. Usually the dividing line is between “unsecured” and “secured” i.e. did you have a registered charge/mortgage over the company’s assets? There are also “Strategic” and “Retention of Title” creditors who can usually expect a more direct and quicker recovery then other creditors (when their rights are properly asserted).
Broadly put, “Retention of Title” creditors have managed to retain an element of control over goods they have delivered to the company in insolvency.
“Strategic” creditors (such as hauliers) are often vital to the recovery of assets for the insolvent company.
This can be a difficult assessment, so take advice from an insolvency specialist at an early stage to avoid missing out.
2. What do you know about the directors?
In difficult and complex insolvencies it is often the case that a measure of pressure brought to bear by the insolvency practitioner on former directors about their personal liabilities can increase the chances of a settlement and raise funds for the creditors. If you know something of any breaches in duty by the former directors, then getting in touch with the insolvency practitioner will help them with their investigation into the company.
3. Always file a Proof of Debt.
Regardless of the level of debt, if you don’t claim you can’t blame anyone else for not recovering anything out of the insolvency. Many insolvencies result in a dividend and some creditors (admittedly few) even recover most or all of their debt.
4. Keep track and consider getting involved.
Again this depends upon the level of debt, but significant debtors can have an influence upon the conduct and course of the insolvency. The most influence is to be obtained through membership of the creditors committee (which is appointed at the creditors meeting). Creditors owed over £100,000 should take advice on their options and consider getting involved. Creditors’ reports set out the progress of the insolvency and give warning of meetings at which you will have the opportunity to question the insolvency practitioner on progress. Creditors Committee members have even more opportunity to do this through their position.
5. Don’t despair.
Insolvency is a complex area and can sometimes appear arbitrary and unfair to the creditors of an insolvent company, it needn’t be this way and in many cases insolvency rules are just a reflection of both common sense and the need to balance up the rights and requirements of insolvent companies, their creditors, former owners and the professionals appointed to administer them. Insolvency Practitioners have multiple duties but their key duty is always to the creditors. Always keep this in mind when raising a query with an Insolvency Practitioner.
If you would like more information or advice relating to a specific matter concerning Insolvency, please contact Robert Ryall on 01727 798100 or by email at robert.ryall@salaw.com
© SA LAW 2010
Every care is taken in the preparation of our articles. However, no responsibility can be accepted to any person who acts on the basis of information contained in them. You are recommended to obtain specific advice in respect of individual cases.