We all have a pretty good
idea of what this phrase means, but what are the most common types of
insolvency that you might meet among your clients? As someone who is owed money
by a client who has ‘gone bust’, what does this mean for your business and what
can you do?
Types
of insolvency
There are a number of possible
insolvency procedures that may apply if a business has ‘gone bust’. If your
client is a company or a limited liability partnership (it has “Limited”,
“Ltd”, “PLC” or “LLP” at the end of its name) the most likely occurrence is
that it has entered administration,
liquidation or a company voluntary arrangement. If your client is a sole
trader or partnership, the insolvency more commonly will be that of an
individual, such as bankruptcy.
So many different terms for
what can seem to be the same thing; but each procedure means something
different for the business and its creditors. Depending on the first procedure
entered into, it is possible that a business may move between insolvency
procedures over time. Some common types of insolvency are:
- Administration
is a ‘rescue based’ procedure: the primary statutory purpose is to rescue
the business as a going concern. This may be done by the administrator
taking over the trading of the business and/ or by selling the valuable
part of the business and its assets to a new owner to raise money for
creditors. The administrator is
under a duty to consider the interests of the all the creditors when
making any decisions about the company or its assets.
- Liquidation
is a ‘terminal’ procedure: the business is being wound up, the assets
realised for the best possible price and the proceeds distributed to
creditors. A company may enter liquidation voluntarily upon the resolutions
of its shareholders and creditors (company voluntary liquidation, “CVL”)
or compulsorily by the order of the court upon a creditor’s petition
(compulsory liquidation, “CL”). In CVL, these resolutions will include the
appointment of a liquidator. The
Official Receiver is often first appointed liquidator in CL but may later
be replaced by an Insolvency Practitioner (“IP”) from a specialist firm.
You may also come across a members’ voluntary liquidation (“MVL”), which
whilst terminal is a solvent procedure.
- A
company voluntary arrangement
(“CVA”) is a contractual arrangement between the company and its creditors
for the payment of the company’s debts (or an agreed part) over an agreed
period of time. A supervisor is
appointed to monitor the company’s performance of the terms of the CVA.
- Bankruptcy
is the terminal procedure for individuals and, as for corporate entities,
can be commenced voluntarily by the debtor or by order of the court on the
application of the creditor. A trustee
in bankruptcy, possibly or initially the Official Receiver, is
appointed in respect of the bankrupt’s assets and affairs. Individuals may
also agree individual voluntary
arrangements with their creditors, as with companies this is a
contractual commitment to pay debts over time.
Notification and next steps
You
may first become aware that a client is in difficulty from the client itself.
If this is the case, ask who the IP appointed is, in order that you can inform
them of your interest as creditor. However, the administrator, liquidator or
trustee will be examining the records of the business to identify creditors and
will contact you on his appointment. This notification will tell you what type
of insolvency procedure applies or is being proposed (for example a CVL or CVA)
and what is your entitlement to vote.
If
there is an intended insolvency and you have an entitlement to vote for or
against it, the notification will include a proxy form for voting purposes and
a proof of debt form. The value of your vote will reflect the amount of the
debt you say you are owed. Be aware that there are strict deadlines for
responding to these notices. You may also have the ability to vote at different
stages during an insolvency process.
After
any insolvency appointment, you will only be entitled to share in any money
realised by the IP (a “dividend”) if you have submitted a proof debt form which then
will be used to establish the amount of your claim. When you receive a notice
of intended dividend, note again the specific deadlines for returning the
requested information in order to have a share in the dividend.
Be
aware that the interval between being notified of an insolvency procedure
commencing and being notified of an intended dividend can be extensive. As a
creditor you are entitled to regular periodic reports on the progress of the
conduct of the procedure and the likelihood of any dividend.
Creditor claims
The
primary concern when a client ‘goes bust’ is how are you going to get paid.
There
are well established rules for the ordering of different types of creditor
claims in an insolvency. Unsecured creditors, typically including suppliers
such as you, rank lowest in the order of payment and will only share in a
dividend after all other categories of creditor have been paid in full. Amongst
all unsecured creditors, everyone will have the same proportion of debt paid;
for example if the dividend is ‘5 pence in the pound’, you will receive 5 pence
for every pound you are owed.
This
dividend can be disappointing. Your recoveries may be enhanced if you have a
guarantee in respect of the client’s payments that you can enforce; if you can
set off any amounts you owe the client against the amount you are claiming, but
note there are special rules relating to set off in insolvency or if you hold
deposits that you can apply against outstanding payments.
If a
company is in administration, one thing you cannot do is start or continue
legal proceedings for the payment of any debts.
Some further thoughts
Does
your contract with the client continue in insolvency? Liquidation automatically
terminates a contract, but look at what your contract provides in respect of
other insolvency events.
If
you are supplying staff who are crucial to the continuation of a business in
administration you may find that the administrators are willing to continue
paying for them during the administration, but not for the period before. If
the administrators sell the business, you may be able to negotiate with the
purchaser that they take over your contract with the client and whether they would
be willing to pay for any arrears.
Do
you have insurance for bad debts that you can claim under?
What
happens to your contract with the worker? Are you still required to pay the
worker or the worker’s tax or national insurance contributions even if you are
not paid by the client? (Note that the Conduct of Employment Agencies and
Employment Businesses Regulations 2003 (‘the Regulations’) prohibit you from
withholding payment from temporary workers you supply to clients on the basis
that your client has not paid you, so this option will only be available if the
workers are entitled to and have ‘opted out’ of the Regulations.) Does the
worker receive benefits such as on-site accommodation, if this is withdrawn, do
you have any further responsibilities?
All
IP’s conduct is governed by the laws of the relevant insolvency procedure and
the rules of their regulatory body. If, however, you have any concerns about
any IP’s conduct of a matter, as a creditor you may be able to require the
conduct to be investigated.
Any questions?
If
you have received notification that a client has ‘gone bust’ and are unsure
what to do next or need any assistance with any claim against an insolvent
business, please feel free to contact someone in Francis Wilks and Jones LLP’s
insolvency team.
