What to Do When an Insolvent Company Owes You Money: UK Creditor Guide

Facing the insolvency of a company that owes you money can be daunting, but you are not alone. Established procedures exist to guide you through this challenging time.

This article helps you understand your rights as a creditor, how to claim the money you owe, and how to set realistic expectations about recovery. By following these steps, you can navigate the insolvency process more effectively and make informed decisions about your next steps.

What It Means When a Company Is Insolvent

Insolvency under UK law occurs when a company cannot pay its debts as they fall due or when its liabilities exceed its assets. For creditors, this signals a shift from a straightforward commercial relationship to a formal legal process. Understanding your position is crucial, as insolvency proceedings such as liquidation or administration dictate how claims are handled.

Once a company enters insolvency, all creditor claims must follow strict rules. Liquidation involves winding up the company and distributing its assets, while administration aims to rescue the business or achieve a better outcome for creditors than liquidation. Understanding these terms helps you navigate the process and clarify your rights. In essence, staying informed and acting promptly can significantly affect your recovery prospects.

Understanding the Creditor Hierarchy

Understanding the creditor hierarchy is essential for setting realistic expectations about repayment in the insolvency process. Creditors are grouped into secured, preferential, and unsecured categories, determining the order in which they are paid from the insolvent company’s assets.

1. Secured Creditors with a Fixed Charge: Banks or asset-based lenders often hold a fixed charge over specific assets like property or machinery and are paid first from the proceeds of selling these assets.
   
2. Preferential Creditors: This group includes employees owed wages and holiday pay. From 1 December 2020, HMRC also holds secondary preferential status for certain taxes, such as VAT and PAYE, meaning it is prioritised for these debts.
   
3. Secured Creditors with a Floating Charge: These creditors have claims over changing assets like stock. A portion of the funds from these assets is reserved for unsecured creditors via the prescribed part.
   
4. Unsecured Creditors: This broad category includes most trade suppliers and contractors. They rank last and frequently recover very little, as any remaining funds after repaying higher-ranking creditors are distributed here.
   
5. Connected Unsecured Creditors: These creditors still rank alongside other unsecured creditors and share distributions equally. Shareholders receive payment only if all creditor claims have been settled in full.

Knowing this hierarchy helps creditors evaluate their likelihood of repayment, particularly if they fall into the unsecured category, where returns may be limited.

How to Submit Your Claim (Proof of Debt)

A Proof of Debt (or Statement of Claim) is crucial for creditors when a company enters insolvency. It formally registers your claim against the insolvent company and allows you to participate in any asset distribution. Request a Proof of Debt form from the appointed insolvency practitioner or official receiver to submit your claim.

Completing this form requires close attention to detail. Include:

• Invoice references: List all relevant invoice numbers.  
• Amounts owed: Specify the due amount, including any interest or charges that accrued up to the date the company entered insolvency.  
• Contact details: Provide your name, address, and contact information.

Submit the form promptly to ensure your claim is considered. Timeliness and accuracy remain vital, although late claims may still be accepted if lodged before final distribution of funds.

Realistic Recovery Prospects and Dividends

For unsecured creditors, the likelihood of full repayment from an insolvent company is often low. Funds are distributed in the statutory order once the insolvency practitioner realises the company’s assets. Secured and preferential creditors receive payment first, with remaining funds allocated to unsecured creditors as dividends. Unfortunately, this dividend is frequently a small fraction of what is owed and can take months or even years to arrive.

Several factors can affect the dividend amount:

• Value of Assets: The total worth of the company’s assets that are available to distribute.  
• Insolvency Costs: Fees and expenses incurred during the insolvency process.  
• Senior-Ranking Debts: Amounts owed to secured and preferential creditors must be settled first.

Given these constraints, creditors must keep expectations realistic from the start, yet still exercise their right to submit a claim.

Practical Steps to Protect Your Interests

When dealing with an insolvent company, proactive measures can help protect your interests. Begin by checking official insolvency notices, typically published in the Gazette or on the administrator’s website. These notices confirm the insolvency status and provide details of the appointed insolvency practitioner.

1. Retention of Title Clauses: If you have supplied goods that remain unpaid, review any retention of title clauses in your agreements. These clauses may allow you to reclaim goods not paid for, provided they are still identifiable and in their original form.
   
2. Consider Credit Insurance: Looking forward, credit insurance will be considered a precaution. This type of cover can protect against future insolvencies but must be in place before financial difficulties arise. Policies vary widely, so ensure you understand the terms and limits of your coverage.
   
3. Seek Professional Guidance: Consult an insolvency practitioner if you are unsure about any aspect of the process. Their expertise can help you navigate the complexities of insolvency proceedings and maximise your chances of recovery. Acting swiftly and decisively is key to safeguarding your interests.

If your business is owed money by an insolvent company, our licensed insolvency practitioners and business rescue specialists can explain the claims process, outline your chances of recovery, and guide you on the best steps to protect your position. Call us free on 0800 074 6757 for confidential advice.

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