Proof Of Debt: Owing Creditors Money After Company Liquidation
During a company’s liquidation, the appointed insolvency practitioner aims to raise as much money as viable to repay creditors, but there may not be enough to reimburse everyone. A proof of debt form is one way that creditors can increase their chances of recouping some of the money owed to them.
The Insolvency Act 1986 establishes a legal hierarchy to compensate creditors throughout a company liquidation.
Therefore the appointed insolvency practitioner must pay every creditor group entirely, before distributing funds to the next one.
The creditor categories are, in this order:
- Secured creditors with a fixed charge
- Preferential creditors
- Secured creditors with a floating charge
- Unsecured creditors
- Shareholders
Creditor hierarchy during company liquidation
Let’s take a look at the groups in mode detail:
- Secured creditors with a fixed charge: They hold rights over specific company assets, such as equipment or property. Banks and leasing companies often fall into this category. Their secured position minimises risk, allowing them to claim ownership of assets if insolvency occurs.
- Preferential creditors: This group includes employees with unpaid salary and holiday pay claims. As per the Finance Act 2020, HMRC also ranks as a secondary preferential creditor.
- Secured creditors with a floating charge: They hold rights over non-constant assets like raw materials. Upon insolvency, their floating charge becomes fixed. For more details, read or guide on floating and fixed charges.
- Unsecured creditors: This group includes contractors, suppliers, and employees with claims beyond wages and holiday pay. It also includes informal loans from directors or staff.
- Shareholders: They only receive payment if all other groups have been fully compensated.
There is more information on the hierarchy in our guide exploring who gets paid first when a company goes into administration or liquidation.
What is a proof of debt form?
A proof of debt form is a document in insolvency proceedings that creditors can use to establish their claim against the company going through liquidation.
The form requires creditors to provide detailed information about their claim, including:
- The amount owed, including VAT and any interest
- A description of the debt and how it was incurred
- Details of any security held by the creditor
Creditors can submit the form for multiple debts.
They typically receive notice of a company’s insolvency, which specifies the period for submitting proof of debt. Creditors should submit the form to the appropriate insolvency practitioner.
The liquidator receiving the completed form can keep the creditor in question informed of any updates on their claim’s status.
However, in a company liquidation, often there is little money left – if any – to repay unsecured creditors, who as you can see above are low in the repayment hierarchy.
For more details, read our guide on unsecured and secured loans.
What is a retention of title clause?
A retention of title agreement is a way of increasing the prospects of a creditor getting their money back.
The intention of the clause is to allow the original seller to retain ownership over the goods in the event that the buying business cannot pay for them in full at a later date. But there are some circumstances whereby a retention of title clause is non-enforceable.
There are four different clauses:
- Simple or basic retention of title clause: A one-off clause relevant for an ad hoc transaction.
- All-monies clause: This applies to all transactions or orders between the seller and customer, giving the seller legal ownership over all goods until receiving payment for all of them.
- Proceeds of sale clause: This clause refers to goods that the buyer is likely to sell on.
- Mixed goods clause: This applies to the raw materials.
Our recent article on how the retention of title clause works covers this process in full.
Final thoughts: Creditors’ proof of debt
When a company faces financial difficulties and cannot meet its debt obligations on time, there are a few potential recovery options.
One solution involves an insolvency practitioner attempting to rescue the company through a company voluntary arrangement (CVA). This approach allows creditors to receive repayment over an extended period.
CVAs let businesses continue their operations while settling creditor debts in regular instalments, managed by an insolvency practitioner. This method helps improve cash flow and alleviate pressure from creditors.
However, if business recovery proves unfeasible, a creditors’ voluntary liquidation (CVL) is a better alternative to compulsory liquidation.
Creditors use a proof of debt form during insolvency proceedings to substantiate their claim against a company undergoing liquidation. This document serves as a formal declaration of the amount owed to the creditor by the insolvent business.
Insolvency practitioners use these forms to assess the total liabilities of the insolvent company, determine the order of creditor priority and calculate feasible repayments.
If your business is experiencing a challenging financial situation and will struggle to repay debts when they fall due, seek advice without delay, before things get worse.
The team at Hudson Weir are business rescue experts, highly qualified chartered accountants and insolvency practitioners. To find out more about how our team can help, please don’t hesitate to contact us.
