Breeze&Wyles Fact Sheet 3 - What can you do when you hear that a debtor is insolvent?

More frequently, we are approached by clients who have “heard” that their debtor is insolvent. It might be that the business has heard this on the grapevine, or that they have heard informally from the debtor. Alternatively, a business might have received formal notification from an appointed insolvency practitioner.

Insolvency Jargon

There are a number of different types of corporate insolvency and a great deal of “jargon” which sometimes causes confusion for creditors. The most common phrases you will hear are “administration” and “liquidation”. This fact sheet focuses on these two areas of corporate insolvency.

Administration

If a business is in administration, it means that an administrator has been appointed to replace the directors for the purpose of “assessing” whether the Company can be rescued; whether the company or its assets should be sold; or whether the company should be wound up.

Whilst a Company is in administration, a moratorium exists which prevents creditors from pursuing a claim against the Company, without the authority of the Court or the administrator. The purpose of the moratorium is to protect the assets of the Company whilst the administrator is deciding whether the Company can be rescued or not. The moratorium lasts for the duration of the administration. The administration will come to an automatic end after 12 months unless the creditors, or Court, agree to a further extension of up to 6 months.

The administrator is an officer of the Court and as such, must act in the best interest of all creditors generally. Within 8 weeks of appointment, the administrator will make proposals to creditors, for achieving the purpose of administration. In the majority of cases, within 10 weeks of appointment, the administrator will also hold a meeting of the creditors. The purpose of the meeting is to enable the creditors the opportunity to vote in favour, or against, the administrator’s proposals.

What should you do if a debtor is placed in to administration?

Upon discovering that a debtor is in administration, you should ensure that the administrator is aware of the debt! It sounds obvious, but it is dangerous to assume that your debtor has recorded all unpaid invoices on its accounts package. Therefore, you should inform the administrator of the debt to ensure that you receive the administrator’s proposals and details of the creditors meeting.

If an administrator has been appointed, the appointment should be registered with Companies House. Therefore, if the debtor will not disclose details of the appointed administrator, you can find details of the administrator at Companies House.

Once you have proved your debt to the administrator, there is little else you can do pending conclusion of the administration. In reality, it is highly unlikely that unsecured creditors will receive any payment during the period of administration. If at the end of the administration, the administrator places the company in to liquidation, you might receive something towards the debt following the liquidator’s appointment. Whether you will receive a payment, and how much you receive, will however depend on whether there is any money “left in the pot” following payment to secured and preferential creditors.

You should of course take advice from your accountant regarding the impact on your accounting obligations, following the debtor’s administration.

Liquidation

A business may be wound up / placed in to liquidation, in one of three ways;

  1. By a shareholder resolution (this should only happen where a Company is solvent); Members Voluntary Liquidation;
  2. By creditors application to wind up a Company due to the Company’s inability to pay its debts; Creditors Voluntary Liquidation;
  3. By Order of the Court; Compulsory Liquidation

The liquidator will take control of the Company’s assets and his / her primary duty is to realise assets and distribute to the creditors according to a specific order of priority. 

In the case of a Compulsory Liquidation, the Official Receiver will be appointed to investigate the causes of the Company’s failure.  The Official Receiver will call a Meeting of Creditors within 4 months from the date of the winding up order. At least 21 days notice of the meeting must be given to the Court and to all Creditors. The notices issued will inform the creditors of the date by which a proof of debt and proxy must be lodged, in order for the creditor to vote at the meeting.

Once the distribution to creditors has been completed, the Company will be dissolved.

What should you do if a debtor is placed in to liquidation?

Upon discovering that a debtor is in liquidation, you should ensure that the liquidator is aware of the debt! It sounds obvious, but it is dangerous to presume that your debtor has recorded all unpaid invoices on its accounts package. You will need to lodge a formal proof of debt with the Liquidator if you are to be able to vote at the creditors meeting and / or receive any distribution throughout the liquidation process.

If a liquidator has been appointed, the appointment should be registered with Companies House. Therefore, if the debtor will not disclose details of the liquidator, you can find details of the liquidator at Companies House.

Whether you will receive a payment, and how much you will receive, will depend on how much is left once the liquidator has paid out debts in accordance with the statutory order of priority. 

You should of course take advice from your accountant regarding the impact on your accounting obligations, following the debtor’s administration.

Avoiding Insolvency

Whilst you will not completely avoid the risk of an insolvent debtor, you substantially increase the likelihood of your debtor becoming insolvent with every day that passes following non-payment of an invoice.  The key is to be proactive in your credit control process and to ensure that there is no unnecessary delay in appointing a Solicitor following exhaustion of your credit control process.

I would recommend that our low cost debt recovery service, which enables you to send a letter to a debtor threatening Court action for £2.00 plus VAT, be seen as an automatic extension of your debt recovery process. In other words, the moment your letter cycle has been exhausted, I would recommend that you instruct us to send a letter to your debtor, so that continued pressure is applied.

Many companies are juggling debts and paying those creditors that “shout the loudest”. Your debtor may however, get to the point where it can no longer juggle debts and therefore, insolvency is unavoidable. To limit this risk, I would recommend sending a letter before action / issuing Court proceedings, through our service, in order to add volume to encourage your debtor to prioritise your debt before it is too late.

To receive further fact sheets or for further information about our commercial debt recovery service, please contact Rita Wright of Breeze and Wyles Solicitors Ltd on 01992 558411 or rita.wright@breezeandwyles.co.uk

 
 
 
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