When a company you trade with runs into financial trouble, it can quickly put pressure on your own business. Understanding your rights and options as a creditor is vital to protecting your cashflow and minimising risk.
If you’re reading this because a company you deal with is in financial difficulty, our insolvency solicitors can help. We’ll explain your rights as a creditor, the options available to you, and the steps you can take to safeguard your business. Whether you need advice on recovering debts, negotiating new terms or responding to an insolvency process, we’re here to support you.
Jump to:
- What are the early warning signs that a company may be facing financial difficulty?
- How do I check if a company has entered into formal insolvency proceedings?
- What is the priority order for payment of creditors of a company in a formal insolvency situation?
- Who are secured creditors?
- Is it possible to recover money owed if a company is dissolved or liquidated?
- How can I submit a claim as a creditor in an insolvency process?
- What happens after I submit my claim?
- Summary
What are the early warning signs that a company may be facing financial difficulty?
Early warning signs that a company is experiencing financial difficulty can include late or missed payments to suppliers, creditors, or employees, and frequent requests to extend payment terms or increase credit limits. Changes in a company’s usual trading patterns, such as a sudden drop in orders or revenue, are also cause for concern. Other indicators may include key staff departures, late filing of company accounts, or news of County Court Judgments or winding up petitions. You may also notice a lack of communication or a reluctance to engage in dialogue. If you become aware of any of these warning signs, it is wise to monitor your exposure and consider seeking legal advice to protect your position.
How do I check if a company has entered into formal insolvency proceedings?
You can check if a company has entered into formal insolvency proceedings by searching the public insolvency registers, such as The Gazette (the UK’s official public record), or checking Companies House for notices relating to administration, liquidation, or company voluntary arrangements.
Insolvency practitioners acting for the company may contact creditors directly to notify them of the insolvency process. If you suspect a company is insolvent but have not received formal notification, it is advisable to carry out these searches or seek professional advice for further guidance.
What is the priority order for payment of creditors of a company in a formal insolvency situation?
A formal insolvency situation will commonly be either a liquidation (or winding up), an administration or receivership. There are other procedures such as a company voluntary arrangement or a scheme of arrangement, but these treat creditors in a different way.
Whatever the insolvency process, the position of creditors remains largely the same. In very simple terms creditors will usually be paid out in the following priority order, and what is received will depend on how much money comes in from the assets of the company:
- secured creditors
- the costs and expenses of the formal insolvency process
- preferential creditors – which are some employment costs, and now some tax such as PAYE, NIC and VAT
- a ‘prescribed part’ set aside for unsecured creditors up to a certain financial limit
- amounts owed to floating charge holders
- unsecured debts – which will rank ‘pari passu’, or equally between the unsecured creditors
- statutory interest on all debts
- postponed liabilities – ie unprovable debts
- any surplus is then returned to shareholders
Who are secured creditors?
A secured creditor is a creditor that has provided credit which has been secured by an asset or assets owned by the company. For example, a bank could be a secured creditor providing an overdraft with security over premises owned by a company.
Depending on what you are providing, it is worth trying to obtain security before you supply if possible. Any security must be properly registered and documented, and might fall below other secured creditors in date order. Taking security will still place you above unsecured creditors and increase your likelihood of a return.
Another way of retaining security is to incorporate a valid ‘Retention of Title’ clause (ROT) into your supply contract. A well drafted ROT clause may prove to be the difference between recovery of your goods in full, or standing in line with other unsecured creditors for little or no recovery at all.
Is it possible to recover money owed if a company is dissolved or liquidated?
Once a company has been dissolved or has entered into liquidation, recovering money owed can be challenging. In a liquidation, the appointed insolvency practitioner will realise the company’s assets and distribute any available funds to creditors according to the statutory order of priority. Unsecured creditors often receive only a fraction of what they are owed and sometimes nothing at all once higher priority claims have been settled. After a company is dissolved following liquidation, it ceases to exist as a legal entity, and the chances of making further recoveries are extremely limited. If you are owed money by a company in this situation, it is advisable to submit a claim promptly during the insolvency process and seek legal advice on your options.
How can I submit a claim as a creditor in an insolvency process?
To submit a claim as a creditor in an insolvency process, you will need to complete a proof of debt form and provide details of the amount owed, along with any relevant supporting documentation such as invoices or statements. This form is usually sent to you by the appointed insolvency practitioner, but can also be requested directly if necessary. Once completed, the form and evidence should be returned to the insolvency practitioner by the specified deadline. It is important to follow any instructions carefully and keep copies for your records.
What happens after I submit my claim?
Once your proof of debt form has been submitted, the insolvency practitioner will review your claim and assess its validity against the company’s accounting records. If any discrepancies or queries arise, you may be contacted for further information or clarification.
The practitioner will then decide whether to accept, reject or admit your claim in part, and will notify you of the outcome. Accepted claims are added to the official list of creditors, which is used to determine how any available funds will be distributed. If a distribution is made, you will receive payment in line with the statutory order of priority.
If your claim is rejected or only partially admitted, you should be given reasons and you may have the opportunity to challenge the decision or provide additional evidence.
Summary
If you are a creditor of a company who you suspect is insolvent, or you have been notified is in formal insolvency, we can help. In addition, if you would like some advice on how to protect yourself as a creditor before providing credit or supplies to a customer, then speak with one of our insolvency solicitors today.
