If you are a creditor of an insolvent company or a bankruptcy, Oliver Elliot can help you address your claim and concerns arising with creditors insolvency advice.
Creditors Insolvency Advice is a guide that explains the insolvency process, giving you information on the depth of our knowledge.
Oliver Elliot could help you with your case. Insolvency is a state of being unable to pay your debts when they fall due or alternatively having an excess of liabilities over and above your assets.
This Creditors Insolvency Advice is for creditors seeking effective engagement and returns in Insolvency Proceedings. Why have we written this guide? We have written this guide because of our values and our duty to creditors to make insolvency work for creditors. One of The Oliver Elliot Values is integrity. What is integrity? Integrity is not quite honesty; you know it when you see it but it is difficult to define. It is however not just what you say but what you do. At the heart of The Oliver Elliot Approach is transparency, being open with creditors.
In this creditors insolvency advice guide we will consider some key facts that every creditors should know so that they can be properly informed and engage in the insolvency process, thereby hope to get better returns. The five key facts are:
This creditors insolvency advice guide will explain the civil recovery actions available to Insolvency Practitioners dealing with companies. The role of an Insolvency Practitioner is not merely to realise disclosed assets, but to identity and discover them. Assets removed or distanced from creditors may require civil recovery actions through litigation to get them back.
The most typical types of insolvency litigation actions that can be used by an Insolvency Practitioner to recover money from Directors, often to improve returns to creditor are:
- Transactions at an Undervalue
- Transactions Defrauding Creditors
- Wrongful Trading
- Fraudulent Trading
- Unlawful Dividends
What is a Transactions at an Undervalue?
No creditors insolvency advice guide would be complete without mention of Transactions at an Undervalue. Transactions at an Undervalue are transactions within 2 years of the relevant insolvent date (in the case of bankruptcy that period can extend to 5 years) which appear to be for less than their money’s worth. Such transactions can be set aside by the officeholder of the insolvent estate for the benefit of creditors.
Typically such transactions will involve transfers of money or property to connected and or associated parties. The applicable statutory provisions are Section 238 of the Insolvency Act 1986 and Section 339 of the Insolvency Act 1986.
These are transactions within 2 years of the relevant insolvent date (in the case of bankruptcy that period can extend to 5 years) which appear to be for less than their money’s worth. Such transactions can be set aside by the officeholder of the insolvent estate for the benefit of creditors.
Typically such transactions will involve transfers of money or property to connected and or associated parties. The applicable statutory provisions are Section 238 of the Insolvency Act 1986 and Section 339 of the Insolvency Act 1986.
What is a Preference?
No creditors insolvency advice guide would be complete without mention of Preferences. Preferences are transactions within 2 years of the relevant insolvent date which appear to have put someone in a better position than which they ought to have been and influenced by a desire to prefer them.
Such transactions can be set aside by the officeholder of the insolvent estate for the benefit of creditors if certain insolvency and other criteria are met. Typically such transactions will involve transfers of money or property to connected and or associated parties.
What are Transactions Defrauding Creditors?
These are transactions that have no limitation period undertaken to put assets beyond the reach of creditors at an undervalue.
Such transactions can be set aside by the officeholder of the insolvent estate for the benefit of creditors if certain insolvency and other criteria are met. The applicable statutory provision is Section 423 of the Insolvency Act 1986.
What is Misfeasance?
Misfeasance and Breach of Duty or breach of trust can arise because Directors owe fiduciary duties to their companies. The duty is that amongst other things of loyalty, not to secretly profit and to act in good faith in the best interests of the company.
What happens if you are in breach of duty or trust?
No creditors insolvency advice guide would be complete without mention of misfeasance. If a director has misapplied or retained any property of the company then on an application to court as to that fact a director can be compelled to repay, restore or account for the money or property of the company and thereby contribute via payment of compensation towards the assets of the company for the loss and or damage caused.
The availability of a remedy to address misfesasance is set out in Section 212 of the Insolvency Act 1986. A claim under this section can be brought by a company in liquidation through its liquidator.
This can commonly arise where Directors personally have benefitted at the expense of their companies. In a misfeasance claim whereit is proved that a director is himself the recipient of a benefit from the company, the evidential burden is then on him to prove that the payment was proper as was set out in the case of Hellard & Anor (Liquidators of HLC Environmental Projects Ltd) v Carvalho  EWHC 2876 (Ch).
“The underlying principle is that directors are not free to take action which puts at real (as opposed to remote) risk the creditors’ prospects of being paid, without first having considered their interests rather than those of the company and its shareholders. If, on the other hand, a company is going to be able to pay its creditors in any event, ex hypothesi there need be no such constraint on the directors. Exactly when the risk to creditors’ interests becomes real for these purposes will ultimately have to be judged on a case by case basis. Different verbal formulations may fit more comfortably with different factual circumstances.”
What is Wrongful Trading?
No creditors insolvency advice guide would be complete without mention of Wrongful Trading. Wrongful Trading is trading whilst insolvent without having reasonable prospect of avoiding insolvent liquidation. However, a Director is not necessarily liable for such loss caused if he or she took every step to minimise the loss.
Two things need to happen therefore for a Director to be liable to creditors upon a company going into insolvent liquidation in such circumstances: 1) there needs to be a loss to creditors after the date at which the wrongful trading commenced and 2) the loss suffered by creditors was not minimised.
In most cases the company in question is already insolvent at the point when the foreseability of insolvency is deemed inevitable but it need not be.
A company that is not insolvent can still inevitably go into liquidation. An example would be a change of market conditions that leads to a company having no future.
With that in mind it is not inconceivable that a solvent company could be the focus subsequently of a wrongful trading claim by a liquidator but it would be the exception rather than the rule.
What is Fraudulent Trading?
Fraudulent Trading is the intention of defrauding creditors. It is the action by a director of a company of carrying out its business with the discrete intention of defrauding its creditors.
If found to have acted in such a manner a director will be liable to contribute to the assets of the company as the court thinks fit as set out in Section 213 of the Insolvency Act 1986.
Fraudulent Trading also arises if trading is undertaken for a fraudulent purpose.
This is more serious than Wrongful Trading because generally there is an element of dishonesty shown.
Wrongful trading is a less serious and more common offence, which can lead to a custodial sentence, director disqualification and financial penalties.
Directors involved in a Creditors Voluntary Liquidation or a compulsory liquidation process are always questioned by the liquidator as he or she must conduct an investigation and send a report to the Secretary of State on director conduct leading up to the company’s insolvency.
If fraudulent trading is suspected, directors have acted deliberately to avoid payment of company liabilities by continuing to trade, accepting supplier credit or taking payment on credit from customers knowing that orders will be unfulfilled prior to liquidation. Selling company assets for “undervalue” or lower than their market value prior to the liquidation is also considered suspect by the liquidator.
What are Unlawful Dividends?
Unlawful and illegal dividends by Directors are dividends that are declared at a point when the company does not have sufficient distributable reserves. The consequences of this for an insolvent company is that the Director will be unable to ratify the breach of duty and liable to repay the dividends back to the company.
A dividend must be declared with reference to relevant accounts. This is a mandatory requirement in the Companies Act 2006. A dividend cannot be an after thought i.e. something that is processed after the year end for accounting purposes to justify a Director’s receipt of company money. You must declare the dividend first and then you can draw it, not backdate it into the accounts after the year end to justify monies a Director has extracted during the year.
The perils of backdating dividends should not be underestimated for Directors.
Profits made by a limited company are distributed to shareholders through the declaration of dividends. Quite often, for example in the case of owner managed businesses, the directors and shareholders of the company are the same. In such businesses, directors might take a minimum salary and pay the rest of their remuneration by way of dividend.
For some time, this has been a tax-efficient means for directors to be remunerated. However, before a company is able to pay a dividend, two main criteria must be met: sufficient distributable reserves (profits) and the reference to the ‘relevant accounts’ referred to above.
If the two main criteria are met, the company then needs to comply with certain formalities before the dividend is paid.
If companies fail to comply with the above requirements, the dividend will be unlawful and should usually be repaid.
Sometimes unlawful dividends are paid to shareholders when the directors incorrectly determine what available profits the company may have. This could be due to a mixture of poor record keeping or inaccurate accounts.
Dividends paid when the company is insolvent or becomes insolvent as a result of that payment are likely to be unlawful. In the event of the company’s insolvency, recovery claims inevitably will be brought by the insolvency officeholder against the shareholders and the directors.
You have got to be in it to win it! The first question is do you want better returns from Insolvency Proceedings? If you do then join the team. Join the Insolvency Practitioner on his journey of discovery and asset realisation because he or she needs you.
At Oliver Elliot we believe that a lack of engagement from creditors in the process is one of the significant factors that can lead to poorer returns for creditors. If creditors are not engaged and their input is missing to enable scrutiny of the conduct of the Directors for example (via provision of information to the Insolvency Practitioner), then returns to creditors can be adversely affected.
If creditors are not engaged because they are accepting of low returns, then it is perhaps to be expected that the standard for a so-called ‘good result’ might be a low one. If on the other hand creditors are engaged, proactive, informed, involved and demanding of the Insolvency Practitioner then standards are more likely to rise with the likelihood of better returns following.
Can Creditors Get Involved in the Insolvency Process?
Of course you can. Creditor engagement applies right across the board; it is not something just to apply to the Insolvency Practitioner but also with other creditors which can be invaluable. As a creditor you can get involved in many ways such as providing information about your detailed knowledge of the relevant facts.
Insolvency Practitioners have considerable compliance obligations which may well have no economic benefit for creditors. These obligations do ensure that certain standards are met, particularly where transparency for creditors in concerned. However, the ‘name of the game’ is ultimately not whether an Insolvency Practitioner can demonstrate adherence to the compliance obligations (that is assumed will be the case), it is by producing good and better returns to creditors.
Whilst insolvencies will always arise, far too many insolvency procedures occur because of conduct by Directors and Bankrupts who have attempted to avoid their creditors and acted improperly. It is these types of insolvency proceedings that is the focus of this Creditors Insolvency Guide. It is those cases where the Insolvency Practitioner can really make a difference to creditors and the returns.
Why are Creditors Important to the Successful Outcome?
Believe it or not but you along with every other creditor is very important to the success or otherwise of the Insolvency Practitioner’s administration of the insolvent estate. It makes no difference whether it is a Liquidation, Administration, Bankruptcy or some other insolvency procedure such as a Company Voluntary Arrangement (“CVA”) or Individual Voluntary Arrangement (“IVA”). One example is that if there are incomplete records (a common feature in insolvency proceedings) then if creditors do not come forward and claim because of a disinterested approach to paperwork for instance, the Insolvency Practitioner may simply be unaware of material numbers of creditor claims.
If the Insolvency practitioner is unaware of creditor claims then for example only, he or she may be unaware of the extent of the overall creditor deficiency and this could for instance hamper the level of compensation sought in legal recovery proceedings.
Such legal proceedings for example only might involve claims for Wrongful Trading, Fraudulent Trading and Misfeasance. Such a simple matter as engagement and completion of paperwork could lead to the creditors not receiving the appropriate returns via a dividend because the Insolvency Practitioner might not have all the information to provide and evidence to the Court.
Why Should Creditors Join the Insolvency Practitioner in a Team Effort?
You should consider joining the Insolvency Practitioner as part of a team effort because ask yourself the question: what is your USP for your business and how did you succeed in developing it? What do you do to ensure your continuing success and thereby avoid being at risk of insolvency? You presumably will have some direct hands on involvement in your business.
Insolvency proceedings are a team effort like any business situation; it is just under the independent and professional control of the Insolvency Practitioner because the Insolvency Practitioner has a duty to the creditors as a whole, not to any creditor individually. If the Insolvency Practitioner had a duty to creditors individually then the risk is he or she might favour a particular creditor. This is prohibited under the principles of how insolvency procedures are deployed for creditors. It ensures that there is a level playing field.
You do not have to join the Insolvency Practitioner in a team effort but it is in the interests of yourself and the creditors as a whole to do so and make a contribution.
What Creditors Insolvency Advice is there for Dissatisfied Creditors?
Creditors need to know what to do when they feel that they are not being adequately included in insolvency proceedings. It can be a frustrating situation and there are likely to be cases when creditors do feel that they are not adequately included in the process.
The first thing to do is to go back to basic principles and consider one of the fundamental principles of The Oliver Elliot Approach. This is the requirement for Tenacity; being efficient, vigorous and unbiased in the execution of the Insolvency Practitioner’s duties. A great many creditors become disengaged over time from the insolvency process. A creditor who in a proper manner is tenacious and persistent, should be heard by the Insolvency Practitioner. Their involvement and engagement will be noted.
An engaged and enthusiastic creditor might be a time consuming matter for the Insolvency Practitioner but it is you right as a creditor to ask questions and to be transparently included in the process. There will always be the argument that too much involvement from one creditor will eat into the other creditors’ returns. It may do so but only if this engagement is very material indeed. Only if a creditor’s approach is particularly disruptive and unfair (which is not that common), then Oliver Elliot does not consider that creditors need to have a level of engagement set at the minimum statutory annual reporting level.
Creditors who have suffered financial loss should have more engagement than a report that is provided on each anniversary of the Insolvency Practitioner’s appointment. The Oliver Elliot Approach strives to ensure an inclusive approach is adopted at all times for all creditors.
If you as a creditor feel that you are not included or even would go so far as to consider you are being excluded then you have a number of things that you can do.
There are a number of steps that you can take all the way up to looking to remove and replace the Insolvency Practitioner. We will now go through some of these key steps.
Ultimately if your relationship with the Insolvency Practitioner has broken down and you want to replace the Insolvency Practitioner then you can do so. Insolvency procedures are generally under the control of the creditors as a whole and it would be unusual for the Court to override creditors wishes.
Although conceivably a delicate matter this is potentially one of the most effective ways for creditors to ascertain improved engagement in the insolvency process and get better returns. How you might ask is that likely if you remove someone?
This will either be because the risk of being replaced may well in itself lead to the Insolvency Practitioner being more engaging or because the replacement Insolvency Practitioner will hopefully recognise the standards that you expect him or her to meet once appointed.
How do creditors replace the Insolvency Practitioner? Creditors can remove and replace the Insolvency Practitioner by a simple request. The Insolvency (England and Wales) Rules 2016 has a procedure to enable this to be done.
An Insolvency Practitioner who has lost the support of the creditors as a whole should expeditiously comply with such a request when it is made in good faith for proper reasons.
Creditors can make use of this procedure set out in Rule 15.18 of the Insolvency (England and Wales) Rules 2016 to ask the Insolvency Practitioner to leave office and appoint another Insolvency Practitioner in their place that has the support of creditors.
The request for a requisitioned decision must include a statement of the purpose of the proposed decision and either—
(a)a statement of the requesting creditor’s claim or contributory’s value, together with—
(i)a list of the creditors or contributories concurring with the request and of the amounts of their respective claims or values, and
(ii)confirmation of concurrence from each creditor or contributory concurring; or
(b)a statement of the requesting creditor’s debt or contributory’s value and that that alone is sufficient without the concurrence of other creditors or contributories.
However, if the Insolvency Practitioner is reluctant to leave office there are a couple of hurdles for creditors to vault. One is that you need to ensure that you and the other creditors supporting the request amount to not less than 25% by value of all creditors. If you do not meet the 25% threshold then get in touch with other creditors to get them to support you.
The other obstacle to deal with is the matter of a deposit to cover the expenses of the removal procedure. This is set out in Rule 15.19 of the Insolvency (England and Wales) Rules 2016 as follows:
The convener must, not later than 14 days from receipt of a request for a requisitioned decision, provide the requesting creditor with itemised details of the sum to be deposited as security for payment of the expenses of such procedure.
(2) The convener is not obliged to initiate the decision procedure or deemed consent procedure (where applicable) until either—
(a)the convener has received the required sum; or
(b)the period of 14 days has expired without the convener having informed the requesting creditor or contributory of the sum required to be deposited as security.
So what happens if the deposit to cover expenses for the removal procedure is thought to be very high? Well it is worth remembering that the deposit is a just a deposit; it is not an entitlement for the Insolvency Practitioner to keep without approval from creditors. It will usually be unattractive for the Insolvency Practitioner to have to apply to Court for such approval, so it ought to be possible for creditors to strike a reasonable balance so that the procedure can be deployed.
At some point the Insolvency Practitioner will send an estimate to creditors as to the level of fees and the proposed basis of their remuneration. More often that not the Insolvency Practitioner will seek to be remunerated on a time costs basis. If the estimate is deemed insufficient the Insolvency Practitioner cannot take additional fees without going back to creditors to get further approval for any proposed increase.
Creditors who are dissatisfied for any reason with the Insolvency Practitioner may have a number of opportunities to look into the level of fees and consider if they are prepared to approve them. As mentioned previously it is about being engaged so that you know what is going on and your rights as a creditor. An Insolvency Practitioner is very unlikely to want to stay in office if he or she cannot be remunerated because creditors will not approve their fees.
Excessive Remuneration and Expenses
Creditors’ rights – Rules 18.9 and 18.34 of the Insolvency (England & Wales) Rules 2016 – Rule 18.34
Creditors Rights in Insolvency – Remuneration and expenses: application to court by a creditor or member on grounds that remuneration or expenses are excessive
(a) the remuneration charged by the office-holder is in all the circumstances excessive;
(b) the basis fixed for the office-holder’s remuneration under rules 18.16, 18.18, 18.19, 18.20 and 18.21 (as applicable) is inappropriate; or
(c) the expenses incurred by the office-holder are in all the circumstances excessive.
(2) The following may make such an application for one or more of the orders set out in rule 18.36 or 18.37 as applicable-
(a) a secured creditor,
(b) an unsecured creditor with either-
(i) the concurrence of at least 10% in value of the unsecured creditors (including that creditor), or
(ii) the permission of the court, or
(c) in a members’ voluntary winding up-
(i) members of the company with at least 10% of the total voting rights of all the members having the right to vote at general meetings of the company, or
(ii) a member of the company with the permission of the court.
(3) The application by a creditor or member must be made no later than eight weeks after receipt by the applicant of the progress report under rule 18.3, or final report or account under rule 18.14 which first reports the charging of the remuneration or the incurring of the expenses in question (“the relevant report”).
Any comprehensive creditors insolvency advice guide would need to include the ability to challenge Insolvency Practitioner’s fees as a topic. Creditors have extensive rights including but not limited to the express right set out in legislation to challenge the Insolvency Practitioner’s fees and to demand further information on the level of those fees. This is set out in Rules 18.9 and 18.34 of the Insolvency (England and Wales) Rules 2016.
Generally an Insolvency Practitioner is unlikely to wish to have their fees subject to a formal challenge because it is a very time consuming process indeed. In addition, it is unlikely that the Insolvency Practitioner will be able to recover all of the costs and expenses associated with a formal challenge.
Creditors who are unhappy with an Insolvency Practitioner’s work can therefore consider if they want to seek further information about the level of the fees and if they want to levy a formal challenge.
Creditors’ rights – Rules 18.9 and 18.34 of the Insolvency (England & Wales) Rules 2016 Insolvency (England & Wales) – Rule 18.9
(1) The following may make a written request to the office-holder for further information about remuneration or expenses (other than pre-administration costs in an administration) set out in a progress report under rule 18.4(1)(b), (c) or (d) or a final report under rule 18.14-
(a) a secured creditor;
(b) an unsecured creditor with the concurrence of at least 5% in value of the unsecured creditors (including the creditor in question);
(c) members of the company in a members’ voluntary winding up with at least 5% of the total voting rights of all the members having the right to vote at general meetings of the company;
(d) any unsecured creditor with the permission of the court; or
(e) any member of the company in a members’ voluntary winding up with the permission of the court.
(2) A request, or an application to the court for permission, by such a person or persons must be made or filed with the court (as applicable) within 21 days of receipt of the report by the person, or by the last of them in the case of an application by more than one member or creditor.
(3) The office-holder must, within 14 days of receipt of such a request respond to the person or persons who requested the information by-
(a) providing all of the information requested;
(b) providing some of the information requested; or
(c) declining to provide the information requested.
(4) The office-holder may respond by providing only some of the information requested or decline to provide the information if-
(a) the time or cost of preparation of the information would be excessive; or
(b) disclosure of the information would be prejudicial to the conduct of the proceedings;
(c) disclosure of the information might reasonably be expected to lead to violence against any person; or
(d) the office-holder is subject to an obligation of confidentiality in relation to the information.
(5) An office-holder who does not provide all the information or declines to provide the information must inform the person or persons who requested the information of the reasons for so doing.
(6) A creditor, and a member of the company in a members’ voluntary winding up, who need not be the same as the creditor or members who requested the information, may apply to the court within 21 days of-
(a) the office-holder giving reasons for not providing all of the information requested; or
(b) the expiry of the 14 days within which an office-holder must respond to a request.
(7) The court may make such order as it thinks just on an application under paragraph (6).
A Creditors Committee is a formal group of three to five creditors who act for all creditors in overseeing and assisting the Insolvency Practitioner.
Creditors should be invited by the Insolvency Practitioner at an early stage to set up and be a member of a creditors committee. Take advantage of such an opportunity because it gives you real influence over how a case is to be handled. Collaborate with other creditors to ensure that you have a minimum of three committee members, otherwise no creditors committee can be formed and the opportunity may be lost.
Once a creditors committee is formed then you can have some real and even greater influence over the insolvency process, the fees of the Insolvency Practitioner and the right to review the Insolvency Practitioner’s record of the proceedings.
The Oliver Elliot Approach has its roots in the principle of integrity and transparency so we have provided this detailed Creditors Insolvency Advice guide. Creditors active engagement with the Insolvency Practitioner is to be very much encouraged.
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Disclaimer: Creditors Insolvency Advice
This article: Creditors Insolvency Advice is not legal advice and should not be relied upon as such. This article Creditors Insolvency Advice is provided for information purposes only. You can Contact Us on the specific facts of your case to obtain relevant advice via a Free Initial Consultation.