What Determines If Creditors Get Money Back From A Liquidation? As a creditor, you want to know the answer to this question. It is likely that you will have concerns about whether or not you will do so otherwise you would not be reading this article. This article aims to give you help about the range of facts that can affect matters.
- The key points affecting if creditors can get money back in a Liquidation are:
- Disclosed physical assets of the company and those that appear on the company’s historic balance sheets.
- Undisclosed assets of the company that might not have been disclosed by its Directors, including any transferred.
- Liquidator attitude to litigation risk.
- Wealth of the individual Directors of the company.
- Volume of creditors relative to the market value of the assets.
- Amounts owed by an individual creditor relative to the amount of the other creditors with whom recoveries have to be shared.
- Costs and expenses of the Liquidation.
Overview Of What Determines If Creditors Get Money Back
It is quite common for creditors to enquire of an Insolvency Practitioner what the chances are that they will get any money back in a Liquidation. Perhaps inevitably the Insolvency Practitioner might respond cautiously with the answer – “It depends.“. So what does it depend on?
The starting point as to what determines if creditors get money back in a Liquidation is the order of payment in insolvency cases. For company Liquidations this is set out in Rule 6.42 of the Insolvency (England and Wales) Rules 2016 for a Creditors Voluntary Liquidation and Rule 7.108 of the Insolvency (England and Wales) Rules 2016 for a Compulsory Liquidation.
These two rules set out the order in which the costs and expenses of the Liquidation have to be paid BEFORE making payments to creditors. These costs are payable as a priority and therefore the extent of those costs will impact on what monies creditors can get back from a Liquidation.
Once it has been determined if creditors will get money back from a Liquidation then it is the duty of the Liquidator to share the money out and this is explained in another article called “How Does A Liquidator Share The Assets?“.
Disclosed Assets In A Liquidation Can Determine If Creditors Get Money Back
The level of disclosed assets will play a significant role in determining what creditors will get from a Liquidation. These will be the assets (such as physical assets) that will be shown by the Directors in the Statement of Affairs in a Voluntary Liquidation published at Companies House.
In Compulsory Liquidation, a Director has to attend on the Official Receiver to disclose the assets in what is known as the Preliminary Information Questionnaire.
Physical assets will typically be assets such as buildings, furniture, equipment, petty cash and stock. The other assets will be very importantly cash in the company bank account and monies listed in the books and records of the company as owing, known as trade debtors.
Whilst it is an offence for a company Director to fail to fully disclose the available assets in a Liquidation to the Liquidator it is nevertheless something that can happen. As a result, an offence of such misconduct is recognised in Section 210 of the Insolvency Act 1986.
Both an administrator and a liquidator of an insolvent entity have a duty to investigate what assets there are (including potential claims against third parties including the directors) and what recoveries can be made.
Undisclosed assets can take many forms and relate to both physical assets and claims such as:
Liquidator Attitude To Litigation Risk
When there are undisclosed assets and claims capable of being brought against Directors, creditors may need to consider if those claims can and indeed will be still be brought.
A Liquidator’s personal attitude to risk can affect matters because not all Insolvency Practitioners wish to embark upon litigation. There is a risk with litigation and a Liquidator who brings claims will often do so with the risk of personal liability for the legal costs of the Directors if those claims are unsuccessful. There can also be reputational risk associated with bringing legal proceedings and being criticised by the Court for having done so.
If there are few or even no disclosed assets available to fund such legal proceedings, then given a Liquidator is not usually obliged to fund matters themselves, if creditors will not do so, then such claims may never be brought and the level of assets realisations could suffer.
Wealth Of Directors
Why is the wealth of the Directors relevant for returns to creditors in a company Liquidation? The reason is that if Directors are guilty of misconduct then personal liability in a company Liquidation can arise.
The expression that you ‘cannot get blood out of a stone‘ highlights the issue here. If as a result of a Liquidator’s investigations there are claims against the Directors such as those referred to above, then the ability of an individual Director to pay any Court judgment will inevitably impact on returns into the Liquidation.
Volume Of Creditors
The volume of creditors will indirectly play a part in the returns that creditors experience individually.
If you are one of just a few creditors, then the prospect of receiving real and meaningful amounts of money from a Liquidation may improve. However, it is simply one of the factors. Perhaps a better consideration might be the level of your claim in comparison with other creditors.
Amounts Owed By Creditors
Other than the amount of the assets realised, the amounts owed by creditors is crucial. But why is this the case?
The answer is if you are owed money by a company in Liquidation then you are paid a dividend in proportion to the size of your claim compared to the total amount owed to all creditors. So for example, if you are owed £100,000 and the other creditors are owed £900,000, the total level of creditors is £1,000,000 and as a result you will be entitled to 10% of the liquidated assets (after the costs of the Liquidation have been paid). This is however also subject to whatever needs to be paid first to secured or preferential creditors if any exist and have claimed in the Liquidation.
Therefore the proportion of a creditor’s claim relative to others will directly impact on the returns received, particularly in cases where a creditor is in effect watered down very substantially because other creditors are owed so much more money.
Costs And Expenses Of A Liquidation
Last but not least and of considerable importance to Insolvency Practitioners, their agents and instructed solicitors will be the costs and expenses of the Liquidation.
The costs and expenses of the Liquidation are paid before creditors can receive money from a Liquidation.
The fees of the Liquidator can and frequently do eat substantially into the funds that would otherwise be available for distribution to creditors. However, a Liquidator and their instructed agents or lawyers, have a right to be paid subject to the approval either of creditors or the Court.
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Disclaimer: What Determines If Creditors Get Money Back From A Liquidation?
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