What Are Creditors’ Rights During Insolvency Proceedings?
If your business is struggling to pay its debts when they fall due, it’s important to keep in mind – what are creditors’ rights during insolvency proceedings?
As a director of an insolvent company, your overriding duty moves from maximising profits for the owners to preventing further losses, with creditors’ repayments in mind.
The below is based on technical guidance for official receivers published by the Insolvency Service:
What are creditors’ rights? General overview
In addition to receiving repayment (if available) to a proven debt, creditors have a right to:
- Present a winding up petition: For more details, read our guide – what is a winding up petition?
- Receive a copy of the petition: Every creditor has a right to see a copy of this petition within two days of requesting it.
- Inspect proof of debt: For more details, read our guide on creditors’ proof of debt forms.
- Inspect the court file and records of the insolvent company: Creditors can obtain a file of insolvency proceedings and a court or official receiver may permit them to inspect the company’s books or records.
- Receive a list of creditors: Except for cases where Companies House has received a statement of affairs, they may receive a list of creditors and the amounts of their debts.
- Receive a report on the insolvent company’s affairs: After a winding up order, the official receiver must report to creditors on insolvency proceedings and the insolvent company’s affairs at least once.
- Request a meeting or decision-making process in relation to a liquidation: A creditors’ decision procedure usually takes place the same day as the shareholders’ meeting. Creditors need at least three business days’ notice, with virtual meetings advertised in the London Gazette.
- Request a public examination: Creditors with at least half the value of known claims (or contributories with three-quarters) may ask for a public examination.
- Apply to court regarding the acts of the liquidator: Creditors disagreeing with the liquidator’s decisions can ask the court to review them – confirming, modifying, or in rare cases, reversing these.
Creditors also have a right to a copy of the official receiver’s intention to apply for release as liquidator, with 21 days to object.
Creditors’ rights to take action
In certain circumstances, they may also have the right to take creditor action against an insolvent company.
For example:
- Commercial Rent Arrears Recovery (CRAR): CRAR measures can let landlords of commercial premises take control of businesses’ goods if they are behind on rental payments. There must be at the very least seven days of rent due before landlords may use CRAR.
- Warrant of control: If a creditor has taken out a county court judgement (CCJ) against a business to reclaim a debt but still not received payment, they may ask for this or a high court writ to be issued.
Both of these can result in bailiffs visiting the business in debt with a view to recouping the money due to creditors. Learn more about what bailiffs can take from a limited company in debt.
HMRC’s rights as a creditor
Not only does HMRC count as a creditor, with certain rights – as of 1 December 2020, for some types of debt, HMRC is a preferential creditor as per the Finance Act 2020. We’ll explain more about the hierarchy of creditors shortly.
Should a company’s debt with HMRC remain unresolved:
- There may be an in-person visit from an HMRC debt management officer or authorised third-party debt collection agency
- There are currently eight authorised agencies, according to the government
- The collector will seek the debt repayment via company funds, and if that’s not possible, they may seize assets
If the company must close down due to its debts, the Insolvency Act 1986 has established a hierarchy to compensate creditors throughout a company liquidation.
Creditor hierarchy in a company liquidation
The appointed insolvency practitioner must pay every creditor group in full before distributing funds to the next one.
This process prioritises creditors in the following order:
- Secured creditors with a fixed charge
- Preferential creditors
- Secured creditors with a floating charge
- Unsecured creditors
- Shareholders
For more details, read our guides on floating and fixed charges as well as unsecured and secured loans.
However, often there is little to no money left to repay the creditor groups near the bottom of this legal hierarchy. Learn more about the different creditor classes in our guide looking at who gets paid first when a company goes into liquidation.
Final thoughts: Implications for insolvent businesses
There are three ways to check when a company is insolvent. If it is, seek advice from an insolvency practitioner without delay to understand your responsibilities to creditors and business recovery options.
These options could include trying to rescue the company via a company voluntary arrangement (CVA) which lets you continue operations while settling creditor debts in regular instalments.
However, if business recovery is not feasible, a creditors’ voluntary liquidation (CVL) is a better alternative to compulsory liquidation.
If your business is in a challenging financial situation and will struggle to repay debts when they fall due, ask for help before things get worse.
The team here at Hudson Weir are business rescue experts, highly qualified chartered accountants and insolvency practitioners.
To find out more about how we can provide support, please don’t hesitate to contact us.
