Insolvency procedures involving companies are complex and generally take a long time to complete. There is plenty of jargon which adds to the confusion, whereas all that an unsecured creditor usually wants to know is how to make a claim for the monies owed to him by the company, to whom the claim should be made, how long it will take to decide the claim and whether there is a possibility of recovering any monies from a company which is obviously experiencing financial difficulties.
Administration is a process under which a company that is in financial trouble will either be reorganised, or have its assets sold for the benefit of the creditors. The principal aim of the administrator (who takes over the control of the company from its directors) is to try to rescue the company so that it may continue to trade, although, in practice, such an outcome is rare. Liquidation, on the other hand, will always end in the dissolution of the ailing company – it is a process under which the assets of the company are sold and distributed to the creditors.
Administrators and liquidators are obliged to send a notice of their appointment to every creditor of the company of whom they are aware. However, there may well be creditors of whom the administrator or liquidator will not be aware and this may particularly be the case where unsecured creditors are involved, ie creditors who do not hold any security for the monies owed by the company.
Receiving a notice of appointment from the administrator or liquidator does not mean that the debt has been acknowledged or accepted – a creditor is required to complete what is known as a ‘Proof of Debt’ form to make a formal claim against the company (see below).
How to make a claim
Proof of Debt forms can be obtained from the administrator or liquidator. The unsecured creditor should complete the form to provide the required information in writing, including:
- the creditor’s name and address;
- the total amount of the claim, including any VAT and any outstanding interest as at the date the company went into administration/liquidation;
- details of any documents supporting the debt - it is not necessary to attach these documents with the Proof of Debt form but the administrator/liquidator may ask for these (at a later stage) to substantiate the claim; and
- details of how and when the debt was incurred.
To whom the claim should be made
An unsecured creditor must send the completed Proof of Debt form to the administrator or liquidator, who will then proceed to consider the merits of the claim.
How long it will take to decide the claim
This is difficult to predict as much will depend upon the particular circumstances of the company in administration/liquidation and the nature of the claim. A complex claim for a significant amount of money might be hotly disputed. A dilapidations claim might be the subject of lengthy negotiations.
From the creditor’s point of view, it is important that a continuous dialogue is maintained with the administrator or liquidator so that the existence of the claim is known and it is not simply forgotten. Never assume that silence means that a claim is being considered!
Whether there is a possibility of recovering any monies
Once all claims have been considered, the question that the administrator or liquidator has to consider is what assets are available (if any) to pay the unsecured creditors of the company.
In an administration or liquidation, funds are paid in the following order of priority:
- debts secured over the company’s assets or by fixed charges;
- the fees and expenses of the administration/liquidation;
- preferential debts;
- floating charges;
- unsecured creditors; and
- shareholders (if there is any surplus).
As can be seen from the above, unsecured creditors rank relatively low in priority in the order of distribution in an administration or liquidation. It is therefore not unusual for unsecured creditors to be paid on a pro-rata basis and if there are too few assets, unsecured creditors might not receive any monies at all.
If you are a creditor who has concerns about the financial situation of the debtor company, you should, as a first step, contact Companies House (www.companieshouse.gov.uk) to establish whether insolvency proceedings have commenced in respect of the company and if so, obtain the contact details of the administrator or liquidator who has been appointed.