The Role of Creditors in Corporate Insolvency Processes

A creditor of an insolvent company is a party to which, on the date it enters administration or liquidation, the insolvent company either owes money or is obliged to pay money in the future. 

What assets are available to meet creditor claims?

The appointed insolvency practitioner (IP) pays the general body of creditor claims from the proceeds of the realisation of the assets of the insolvent estate of the company in question. 

The insolvent estate of a company comprises all the property (both tangible and intangible) in which the company has a beneficial interest at the time it enters administration or liquidation or in which it obtains a beneficial interest during the course of its insolvency. 

Consequently, assets subject to valid retention of title claims or the company holds on trust for a third party do not fall within its insolvent estate. 

Typical assets that form part of a company’s insolvent estate include cash, land, buildings, plant and machinery, book debts, intellectual property and pre-emption rights. 

Creditors are categorised based on the nature of their claims, as follows:

Parties with proprietary claims to assets held by the insolvent company

A person who can show that it (rather than the insolvent company) has beneficial title to an asset is entitled to have the asset transferred to it. 

If the IP sells the asset, the person with the beneficial title to the asset is entitled to an account of the realisations made regarding the asset.  The IP may be reimbursed for the costs and expenses that the IP has incurred in selling the asset. 

Secured creditors with fixed charges

A creditor who holds a valid fixed charge over a company’s asset is entitled to the proceeds of the realisation of that asset in satisfaction of the liability due to that creditor from the company. 

The holder of such a fixed charge will suffer no deductions in an insolvency process from the realisation of the property secured by the fixed charge other than where there are prior ranking fixed charges over the same property or the charge holder agrees that the IP’s fees and expenses can be taken from the disposal of the property. 

Secured creditors with floating charges

A floating charge automatically crystallises on the insolvency date if it has not already been crystallised.  Generally, a floating charge converts to a fixed charge over the specific asset(s) on crystallisation. 

Generally speaking, the creditor is entitled to receive the proceeds of the realisation of the asset(s) subject to other payments which need to be made in the context of the insolvency process (in which case the charge will continue to be treated as a floating charge if that is what it was at the time of its creation).

Preferential creditors

Certain claims of some creditors are given “preferential” status in the distribution of the realisations of a company’s assets.  There are two types of preferential debts: ordinary and secondary. 

Ordinary preferential debts include contributions to pension schemes, employee wages and salaries for the four months before the company went into insolvency (the preferential element of such claims is currently capped at a maximum of £800 per person), holiday pay due to any employee whose contract has been terminated, EU levies or surcharges for coal and steel production, debts owed to the Financial Services Compensation Scheme and eligible deposits protected under the Financial Services Compensation Scheme. 

Secondary preferential debts include deposits not otherwise protected by the Financial Services Compensation Scheme and liabilities owed to HMRC for VAT, PAYE, NICs, student loan repayments and Construction Industry Scheme deductions. 

Unsecured creditors

An unsecured creditor has no security over any of the insolvent company’s assets with respect to the debt due to it or any form of preferential status as against other unsecured creditors. 

Unsecured creditors typically include suppliers, vendors, contractors and other service providers who have extended credit to the company without requiring any security or collateral. 

The amount that unsecured creditors receive depends upon the remaining funds left in the company’s insolvent estate after secured debts and other priority claims (as set out above) are settled, along with the costs and expenses of the appointed IP.  Unfortunately, it is often the case that unsecured creditors receive little or nothing by way of a dividend from the insolvent estate. 

Initiating insolvency proceedings

Creditors usually have the right to initiate insolvency proceedings.  For example:

• Any creditor can apply to the court for an administration order (or, where they are the holder of a qualifying floating charge, can appoint an IP as administrator out of court);
• A creditor can apply to the court for a company to be compulsorily wound up where it can be shown that the debtor company is unable to pay its debts;
• A creditor with the benefit of a fixed charge can appoint a Fixed Charge Receiver; and
• A mortgagee or chargee has the right to appoint a Law of Property Act (or LPA) Receiver. 

Forming a creditors’ committee

In an administration or liquidation process, creditors will be given the opportunity to form a creditors’ committee.  This committee represents the interests of the general body of creditors and acts as a liaison between the creditors and the IP dealing with the administration or the liquidation.  If the members of the creditors’ committee collaborate with each other, they can usually exert a measure of influence over the insolvency process and ensure that creditors’ concerns are addressed or at least taken into account by the appointed IP.  

Monitoring the progress of the insolvency process

Creditors should actively monitor the progression of the insolvency process.  Creditors should regularly review any progress reports, annual reports and financial statements (including those relating to receipts and payments) provided by the IP dealing with the process, attend meetings with other creditors and the IP, and where they can pose relevant questions to the IP.  By staying engaged, creditors can ensure that the IP acts in the best interests of all creditor stakeholders and adheres to all appropriate legal, professional and ethical standards.

Filing proofs of debt

Creditors must submit proofs of the debts owed to them to establish their right to repayment.  This involves detailing the amount owed and the nature of the debt, as well as providing any supporting documentation.  Failure to provide evidence of the debt correctly or within the stipulated time frame can result in a creditor not being entitled to any distribution from the insolvent estate. 

Challenging decisions and seeking to control and/or influence insolvency processes

Creditors of a company who are aggrieved by an act or decision of a liquidator have the right to seek directions from the court, such as to set aside transactions entered into between the liquidator and a third party.  The court may reverse the act or decision or set aside the relevant transaction where the liquidator has done something in bad faith or where what he has done was so unreasonable and absurd that no reasonable person would have done the same. 

Creditors, in certain circumstances, also have the power to remove IPs from office pursuant to the Insolvency Act 1986 and the Insolvency (England and Wales) Rules 2016.  This includes the removal of a liquidator, provisional liquidator, administrator, administrative receiver, CVA supervisor or nominee.