Corporate insolvency in England and Wales:  What are the options for creditors?

A secured creditor will normally dictate the choice of insolvency procedure. Unsecured creditors can influence the choice if (i) there are no secured creditors, or (ii) the secured creditors decide not to exercise their rights under their security. 

The mechanisms for putting a company into insolvency differ, but most companies end up in administration or liquidation.

Administration

In administration, a company is protected from creditors enforcing their debts while an administrator takes over the management of the company. The administrator operates the company with a view to reorganising it or selling its assets. 

Administrators should only be appointed where the administration will achieve one of three purposes: 

1. Rescue the company as a going concern; 
2. Achieve a better outcome for creditors than would be achieved in a liquidation; or
3. Realise assets for secured/preferential creditors.

Administrators can be appointed out of court by the directors or by a secured creditor. Unsecured creditors must apply to the court to appoint administrators. The court will need to be satisfied one of the purposes can be achieved, and this will probably be difficult for a supplier creditor without access to up-to-date financial information.

In many cases administration leads to the sale of the company’s business as a going concern. When directors appoint administrators, creditors are unlikely to learn of the administration until after the sale. Creditors often consider the sale price low as against the turnover of the company. They may well find the price is so low that it is swallowed up in the costs of the administration. 

Unsecured creditors are given a chance to influence the process only when they are invited to vote on the administrators’ proposals and, unless the purpose is to realise assets for a secured creditor, they can replace the administrators. The sale can be challenged after the event by a claim the administrator breached their duty to achieve a proper price; however these claims are hard to prove. 

Liquidation

There are two types of liquidation: compulsory (by order of the court), or voluntary (by resolution of the company). 

A creditor owed an undisputed debt will normally pursue it by presenting a winding-up petition. If the court makes a winding-up order, the unsecured creditors will determine the choice of the liquidator.

Equally, if the directors (with shareholder approval) decide to put the company into liquidation the creditors vote to choose the liquidator. 

The liquidator will sell the company’s assets for the benefit of the creditors. Liquidators may find it more difficult to sell a business as a going concern as they lack some of the advantages enjoyed by administrators, but if it is simply a question of selling assets the outcome will be similar.

The choice 

This will depend on what the creditor knows about the debtor and how much the creditor is owed as against the size of the debtor’s business. In many instances a creditor should present a petition quickly if it believes its customer is in distress and looking at insolvency options. This may secure payment, and, if not, it will at least ensure the creditor is informed about the process.

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Nick is a Partner in the restructuring and insolvency team at Kingsley Napley in London. He has specialised in insolvency work since 2001. His expertise includes transactional work for insolvency practitioners (including pre-pack sales), disputes involving insolvency practitioners, and acting for creditors seeking to recover funds.