On our most recent podcast, aimed specifically at credit controllers, experts from our Creditor Services team discussed what credit controllers should predominantly look out for when in receipt of insolvency paperwork. Listen to our podcast or read our summary of points below to find out more.
On receipt of the insolvency paperwork
Credit control teams should be looking at the quantum and timing of a possible return to unsecured creditors.
Priority of payments in a company insolvency
The priority of payments in a company insolvency determines where creditors rank in terms of likely return. Broadly, the usual priority is as follows:
- Secured creditors – with a fixed charge
- Insolvency Practitioners fees and expenses
- Preferential creditors – the employees of the company who are owed arrears of wages and holiday pay up to certain statutory limits.
- Secondary preferential creditors*
- Prescribed part creditors (where applicable)
- Secured creditors – with a floating charge
- Unsecured creditors
*It is important to note that from 1 December 2020, HM Revenue & Customs regained their preferential status for specific debts which include VAT, PAYE, NIC, student loan repayments and Construction Industry Scheme (CIS) deductions.
Different types of insolvency paperwork
Below we have touched on the three most common types:
Circulated to creditors within 6-8 weeks of the company entering administration, seeking a decision on the proposals and in most instances, the Administrators’ time costs. The proposals are often extensive and credit controllers should be reviewing the estimated outcome statement and whether any dividend to unsecured creditors is likely.
Company Voluntary Arrangement (CVA) proposals
Circulated by the proposed Insolvency Practitioner seeking to be the Supervisor (the company must be insolvent or contingently insolvent to propose a CVA and must be overseen by an Insolvency Practitioner). Similarly to the Administrators’ proposals, these are also fairly extensive documents. Credit controllers should be looking at the financial forecast for the company, the comparison between an insolvency scenario versus a CVA and the estimated timing/quantum of contributions to unsecured creditors. In a CVA, a meeting of the company’s creditors will always be called.
Creditors’ Voluntary Liquidation (CVL)
The paperwork is circulated by the proposed Insolvency Practitioner (chosen by the company’s director(s)) and are often referred to as a ‘Statement of Insolvency Practice 6’ (SIP6) report. They contain details of the company’s failure and the director(s) ‘Statement of Affairs’, which is a snapshot of the company’s financial position along with potential amounts owed to its creditors. Credit controllers should be looking for any reference of a ‘decision date’.
Decision procedures and request for meetings
Decision procedures are often used by the Insolvency Practitioner to ratify their appointment. The most common (except in a CVA) is a ‘deemed consent’ procedure to seek appointment. The Insolvency Practitioner will provide their SIP6 report and the director(s) Statement of Affairs along with a ‘decision date’. Should creditors not object to the report or proposed Insolvency Practitioner by that date, the appointment is ‘deemed’ to be effective. That is, unless, there are sufficient creditors in which to request a physical meeting known as the ‘10/10/10’ rule.
The ‘10/10/10’ rule allows creditors to call a physical meeting to potentially request a different Insolvency Practitioner or ask questions of the directors. Creditors can seek to call a physical meeting if they meet the following criteria:
- 10% in value of creditors.
- 10% in number of creditors.
- 10 creditors.
The exception to the rule is a Compulsory Liquidation or Bankruptcy where an Official Receiver is appointed by order of the court. Creditors who hold 25% or more of total creditors can request the Official Receiver to commence a decision process to have their choice of liquidator appointed. If over 50% then a Secretary of State appointment can be requested.
In a CVA, unsecured creditors often vote on the CVA proposals either in person or by proxy. For the CVA to proceed it must satisfy the two criteria below:
- More than 75% of creditors (by value of claim) must approve the CVA
- No more than 50% of unconnected creditors are voting against the CVA
However, even if the CVA is approved, creditors may within 28 days of the filing of the Chairperson’s report, challenge the CVA on two potential grounds: unfair prejudice or material irregularity.
Voting and registering a claim
As advised above, creditor controllers should be ensuring their vote is counted and checking they meet the criteria for a physical meeting if dissatisfied with the information received. Time is often of the essence and we would always recommend prompt submission of proxy and claim forms. Credit controllers should be conscious that when submitting a proxy form, they also lodge details of their debt with any supporting documentation.
For further information, please listen to our latest podcast at the top of this page. Alternatively, to discuss any queries you may have, please visit our dedicated Creditor Services page or contact the authors of this article: