CREDITORS AND LIABILITIES – GENERAL AND LEGISLATIVE BACKGROUND
Where a winding-up order or a bankruptcy order is made against an insolvent, the creditors (see paragraphs 40.3 to 40.4) of that insolvent lose, in essence, the right to pursue that insolvent or the insolvent’s property in respect of the debts (see paragraphs 40.5 to 40.8) due [note 1] [note 2] (see Chapter 9). In return, creditors acquire a right to a share in any divided payable from the administration of the insolvent estate.
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 (see paragraph 40.8) is owed [note 3].
‘Creditor’ is generally defined as ‘one to whom another person owes money’ [note 4].
Unsecured creditors are creditors who do not have security for the debt. Secured creditors (see Part 2) have security over property of the borrower. A creditor may be both secured and unsecured where the security does not cover the whole amount due.
Creditors may have preferential status (meaning they are paid in preference to the general body of unsecured creditors) (see Part 4). Unsecured creditors whose debts do not have preferential status and are not postponed (see paragraph 40.93) rank equally for dividends in accordance with their admitted claims [note 5] [note 6]. This is one of the basic principles of the insolvency legislation to ensure an orderly distribution of assets.
In respect of a company, or a trading bankrupt, the main creditors are likely to be for trade debts and debts to the crown and for non-trading bankrupts the bulk of the debt is likely to be in respect of consumer credit and utilities.
A ‘debt’ in relation to the winding up of a company means any of the following [note 7]:
The relevant date for the purposes of the definition of a company debt (see paragraph 40.5) 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 [note 8].
There is no special definition of debts in relation to a partnership insolvency and the definition applied to companies (see paragraph 40.5) or bankruptcy (see paragraph 40.8) would apply, depending on the type of order to which the insolvent was subject (see Chapter 53, Part 6).
Bankruptcy debts are defined as [note 9]:
A debt in a winding up or a bankruptcy is a debt whether the debt or liability is present or future, whether it is certain or contingent or whether its amount is fixed or liquidated, or is capable of being ascertained by fixed rules or as a matter of opinion [note 11] [note 12].
Liability is defined as a liability to pay or money’s worth, including any liability under an enactment, any liability for breach of trust, any liability in contract, tort (see paragraph 40.65 to 40.66) or bailment and any liability arising out of an obligation to make restitution [note 13].
As will be seen from the preceding paragraphs, the majority of debts incurred by the insolvent will be provable debts. In particular, the legislation provides that, subject to certain debts being not provable, all claims by creditors are provable as debts against the company or, as may be the case, the bankrupt, whether they are present or future, certain or contingent, ascertained or sounding only in damages [note 14].
A petition for winding up or bankruptcy may not be based on a statute barred debt (see paragraphs 45.20 and 45.85b) [note 16] [note 17]See also paragraph 40.95 regarding the effect of limitation so far as regards whether a debt is provable.
It should also be noted that a limitation period will continue to run through the period of bankruptcy . This is likely to be of importance in relation to those debts that are not released on discharge, such as debts incurred through fraud (see paragraph 40.178) [note 18] and in particular where the official receiver is considering a suspension of the bankrupt’s discharge as this may prevent the possibility of recovery of those debts (see paragraph 22.26A).
A debt or right to make a claim can be assigned (sold) and, if that happens, the assignee has the same rights as the original owner – to present a winding-up petition, for example (see paragraph 45.18).
Assignments can be by deed or by operation of law. To be valid, an assignment under deed (which is the manner in which a debt would normally be assigned) must be in writing [note 19].
Once a creditor has sold a debt to another party, the assignee should thereafter be considered the creditor for dividend purposes and any proof of debt submitted by the original creditor should be ignored unless the assignee has not submitted a proof of debt, in which case the original proof of debt can be considered to be on behalf of the assignee.
Assignment should not be confused with the appointment of a collection agent, who do not adopt the debt as their own but, instead, attempt to collect the debt for a fee.
Following the provisions of European law [note 20] and UK law [note 21], foreign creditors have equal right to participate in insolvency proceedings on-going in England and Wales. A claim from a non-EU creditor may be rejected on the basis that it would not be a provable debt under British insolvency law [note 22].
See also paragraph 40.89 regarding EU family maintenance debts.
See paragraph 40.35 for guidance of foreign revenue (tax) debts.
Foreign debts (see paragraph 40.13) are to be converted into sterling at the exchange rate prevailing at the date of liquidation or bankruptcy order [note 23] [note 24]. Daily currency exchange rates can be obtained from the following web-site:
The Bank of England maintains a record of historical exchange rates:
See also paragraph 40.35 regarding foreign revenue (tax) debts.
Where a company is being wound up, or a bankruptcy order has been made, a person claiming to be a creditor and wishing to recover his/her debt in whole or in part must, subject to any order of the court [note 25] [note 26], submit his/her claim in writing (which can include in electronic form), to the liquidator, official receiver as receiver and manager, or trustee [note 27] [note 28].
Certain debts are not provable in bankruptcy proceedings (see Part 3).
If the liquidator or trustee rejects a claim in whole or in part, he/she shall prepare a written statement of the reasons for doing so, and send it as soon as reasonably practicable to the creditor [note 31] [note 32].
If the creditor is dissatisfied with the liquidator or trustee’s decision with respect to his/her proof (including any decision on the question of preference), he/she may apply to the court, within 21 days of the written statement, for the decision to be reversed or varied [note 33] [note 34].
In a company case, where the petition was presented on or after 6 April 2010, and such an application is made by a contributory, the court must not disallow the proof unless the contributory shows that there is, or that it is likely that there will be, a surplus of assets to which the company would be entitled (or would be but for the amount claimed in the proof [note 35].
The rule against double proof arises from the principle that, in relation to an insolvent estate, there ought not to be two dividends in respect of the same debt [note 36] [note 37]. This has some practical effects as regards the extent to which principle creditors and guarantors can prove in proceedings and further guidance on this is in paragraphs 40.30 and 40.30a.
Unless the court orders otherwise [note 38] [note 39], the costs of proving, such as the provision of documents in support of the proof, are to be borne by the creditor [note 40] [note 41]. The liquidator’s or trustee’s costs in estimating the quantum (amount) of a debt (see paragraph 21) are an expense of the liquidation or bankruptcy [note 42] [note 43].
Any liability must have a value, including contingent liabilities (see paragraph 40.9). The official receiver as liquidator or trustee must estimate the value of any debt which, by reason of it being subject to any contingency for any reason, does not bear a certain value. The estimated amount, subject to any revision if circumstances change, is the amount provable [note 44] [note 45] and should be included in any statement of affairs prepared (see Chapter 12).
The official receiver as liquidator or trustee cannot withhold money from the estate as an investment or in a suspense account to answer contingent claims as they arise.
The official receiver, as liquidator, must advise the creditor of his/her estimate of the valuation of the claim [note 46].
There is no statutory guidance as to the basis on which the contingent liabilities should be valued (see paragraph 40.20). The responsibility for estimating the value of the claim is, in the first instance, placed on the chairman of a meeting of creditors for voting purposes, and then the liquidator or trustee for dividend purposes [note 49] [note 50] [note 51] [note 52]. It may save protracted correspondence if the official receiver as chairman of the meeting, liquidator or trustee seeks to have the creditor provide his/her own calculation of the claim, together with supporting evidence, and this calculation can then be assessed by the official receiver.
If an employer becomes insolvent, certain debts owing to employees may be paid by the Secretary of State from the National Insurance Fund (see Chapter 76, Part 2). The most common of these debts are arrears of pay, holiday pay and pay in lieu of notice.
When such payments have been made to employees, the Secretary of State assumes the rights of each employee for the debt paid and becomes a single creditor of the insolvent employer, enjoying preferential status as appropriate (see paragraph 40.101), and the employee’s participation in the insolvency in respect of the debt paid is ended [note 53] [note 54] [note 55].
The Secretary of State is, in relation to the claims to which he/she is subrogated, entitled to priority over other preferential claims of the employee in respect of wages/holiday pay (see paragraphs 40.99 to 40.100).
Where a creditor’s claim includes amounts advanced to the company or bankrupt for the purposes of paying employees’ remuneration and holiday pay (see paragraph 40.101), the right to be treated preferentially (see Part 4) that the employee would have had had his/her debt not been paid by the creditor would pass to the creditor.
Such advances are often made by banks through the operation of an overdraft facility. For subrogation to apply, it is not necessary for the person making the advance to know a particular advance was made for the purpose of paying remuneration, provided he/she was aware that some of the advances he/she was making were for that purpose. In the case of a bank, this will nearly always be the case and it will then be necessary to identify which parts of the overdraft were applied to remuneration when calculating the preferential element (see paragraph 40.101) [note 56].
The maximum that the creditor can claim as preferential is the lower of:
There can be difficulties in terms of distribution where creditors do not prove in surplus cases. Guidance on this is in Chapter 36A, paragraphs 36A.52 to 36A.53.
Where a debt is incurred after the commencement of the insolvency proceedings (which is more likely in a bankruptcy case), it is not a provable debt [note 57] [note 58]. If it is to be paid at all by the liquidator or trustee, it is either as an expense properly incurred in the insolvency proceedings (see Chapter 36, Part 4) or payable out of any surplus remaining after the provable debts have been paid in full [note 59].
Where the debt is not considered a properly incurred expense, in bankruptcy it will usually fall to the bankrupt to pay out of future income, but in a winding up the creditor will have no remedy. The liquidator may pay the debt (to facilitate the sale of a property, for example), but is not compelled to do so.