FAQs – CREDITIORS AND LIABILITIES
These FAQs are to assist official receivers in understanding the subject and should be read in conjunction with the more detailed guidance given in the main body of the Technical Manual chapter. Links to the relevant parts of the Technical Manual are given within the FAQs.
What is the difference between a creditor and a liability?
A liability is a sum of money (a debt) or some other indirectly financial obligation which is due to another person. That person is generally referred to as a creditor.
Is creditor defined in the legislation?
There is no statutory definition of a creditor in relation to the winding up of a company, but in relation to bankruptcy it is defined as a person to whom any of the bankruptcy debts is owed (see paragraph 40.3).
What is covered by the definition of debt in respect of a company?
A ‘debt’ in relation to the winding up of a company means any of the following (see paragraph 40.5):
You mention ‘relevant date’ in respect of company debts, what is this date?
The relevant date for the purposes of the definition of a company debt is the date the company goes into liquidation unless the petition was presented on or after 6 April 2010, and the company was in administration immediately prior to the date of liquidation, in which case the relevant date is the date that the company entered administration (see paragraph 40.6).
What are the debts of a bankruptcy?
Bankruptcy debts are defined as (see paragraph 40.8):
What if a fixed amount cannot be put on the debts of an insolvent – would they still be debts in the insolvency?
A debt in a winding up or a bankruptcy is a debt whether the debt or liability is present or future or whether it is certain or contingent (see paragraph 40.9).
In this regard, there has recently been case-law that has changed the position regarding overpayments of state benefits and a potential liability under a costs order. In short, this means that those types of debts would be included in an insolvency (see paragraphs 40.44 and 71).
Are there any types of debts that would not be included in an insolvency?
There are. These are known as non-provable debts. Chapter 40 (Part 3) gives full details of those types of debts that are non-provable, but the main ones are:
Of course, debts incurred after the date of insolvency would also not be debts in the insolvency.
I see that fines are not a provable debt. Does this include penalties imposed by authorities?
A number of authorities have the power to impose penalties for minor transgressions of the law, such as illegal parking, littering, disorder and rail fare evasion (see paragraphs 40.36 to 40.41).
Such penalties are not considered to be fines and would be provable debts.
If the debts are not provable, does that mean that the bankrupt will not be released from the obligation to pay the debt on discharge?
Yes, and in addition to those debts that are non-provable not being released on discharge there is a category of debts that are provable (meaning that the creditor can participate in the bankruptcy) but are not released on discharge. The main categories of these debts are:
What are preferential debts?
The general rule in formal insolvency is that all unsecured creditors are paid in fair proportions of the debt that they are owed. For example, 40p for every £ owed.
Preferential debts are however, as the name suggests, those debts paid in preference to the general body of unsecured creditors (see Part 4). The types of creditors that qualified to have debts considered as preferential was significantly reduced in 2003 and they generally consist now of only outstanding contributions to occupational pension schemes and outstanding remuneration of employees. Both of these are subject to limits as regards the period of arrears that can be considered preferential.
I thought that secured creditors also have priority in insolvency?
They do, but only in respect of the assets over which they hold security. Take, for example, a bankrupt’s property worth £200,000 with a mortgage outstanding of £125,000. The mortgagee may sell the property and repay the mortgage, but the surplus of around £75,000 (depending on costs) must be paid into the bankruptcy estate for distribution to the unsecured creditors (see paragraph 40.105).
If, in that example, the mortgagee was owed £250,000 they would still be able to sell the property and repay as much of the mortgage as possible from the sale proceeds, with the amount then outstanding (known as a ‘shortfall’) joining the other unsecured creditors for repayment from any other assets in the bankrupt’s estate.
Can any other parties ‘jump the queue’, as it were?
Where, before a company goes into liquidation or a bankruptcy order is made, there have been mutual credits, mutual debts or other mutual dealings between the insolvent and any creditor of the insolvent the sums due from one party to the other must be set-off. The balance, if any, is provable as a debt in the bankruptcy (see Part 7).
By way of summary example, therefore, if a creditor owes an insolvent £1,000 and the insolvent owes that same creditor £1,500, the two amounts will be set-off and the provable debt would be £500, being the difference between £1,500 and £1,000.
Can a creditor claim interest on their debt in a liquidation?
Where a debt proved in the liquidation bears interest, that interest is provable as part of the debt except in so far as it is payable in respect of any period after the date that the company went into liquidation (or the date of administration where that immediately preceded the liquidation).
Where interest on the debt was not previously reserved or agreed and where the debt was due in writing and payable at a certain time, interest may be claimed from that date to the date of liquidation (or the date of administration where that immediately preceded the liquidation).
Where the debt is due otherwise, interest may only be claimed if, before the date of the liquidation, a demand for payment of the debt was made in writing and notice given that interest would be payable from the date of demand. In that case, interest may only be claimed for the period from the date of demand to the date of liquidation (or the date of administration where that immediately preceded the liquidation) (see paragraph 40.153).
Can a creditor claim interest on their debt in a bankruptcy?
Where a debt proved in the bankruptcy bears interest, that interest is provable as part of the debt except in so far as it is payable in respect of any period after the date of the bankruptcy order, even where the interest was not previously reserved or agreed.
Where the debt was due in writing and payable at a certain time, interest may be claimed from that date to the date of the bankruptcy order.
Where the debt is due otherwise, interest may only be claimed if, before the presentation of the bankruptcy petition, a demand for payment of the debt was made in writing and notice given that interest would be payable from the date of demand. In that case, interest may only be claimed for the period from the date of demand to the date of the bankruptcy order (see paragraph 40.154).
What about post-order interest?
Any surplus remaining on the estate after the payment of preferential debts and ordinary unsecured creditors must be applied in paying interest on those debts that have been outstanding since the date that the company went into liquidation or the date of the bankruptcy order. Post-insolvency interest ranks equally whether it applies to preferential or non-preferential creditors (see paragraph 40.157).
What is the rate of interest that a creditor can claim on the outstanding debt?
Unless where previously agreed, the interest rate chargeable can be no more than that set in the legislation, currently 8% per annum (see paragraph 40.158