Tuesday, 15 January 2013 13:44

The Creditors Guide to Insolvency

Will I get the money my company is owed?

This is the question we hear most often from clients that find they unpaid invoices due from an insolvent business.  This short guide, written by our very own Daryl Bennett, is intended to answer this most important question.

But to answer this question first we need to understand exactly what is meant by the term insolvency, Sid Home our resident Credit Management expert explains.

What is Insolvency?

The dictionary definition of insolvency is “When a company can no longer meet its debt obligations with another firm or institution.”  This deceptively simple statement can have a devastating effect for a creditor.

There are a number of different types of insolvency, broadly speaking these are divided into two types dependent on the type of business involved: -

A) Individuals and partnerships.

B) Limited liability organisations.

Individuals and Partnerships

There are three main insolvency types for this sector.  These are:

  1. Bankruptcy.
  2. Individual voluntary arrangement (IVA).
  3. Informal debt management plan.

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A) Bankruptcy

Most applications for bankruptcy are instigated by the debtor, this will take the form of a petition on the grounds that the debtor is unable to clear their liabilities.

Alternatively a creditor may issue a written demand for payment (a statutory demand) and then make an application to the court to begin bankruptcy proceedings.  If the proceedings are defended a hearing will take place, and dependent on the outcome the court may adjudge the individual bankrupt.  Bankruptcy proceedings can not be instigated for an amount less than £750.00 excluding interest.  Instigating bankruptcy proceedings to recover outstanding funds is generally not recommended as they can be both expensive and time consuming.

Once bankruptcy has been confirmed by the court, the official receiver becomes receiver of all the debtor’s assets.

Subsequently, the official receiver will undertake an investigation to gain an understanding of the reasons for the insolvency.  A statement of affairs is then created and distributed to the creditors.

Normally within 12 weeks of the bankruptcy order, a meeting of creditors is called.  However, this does not normally happen unless it is likely that a professional third party trustee will be appointed.

It is the official receivers job to not only gain a full understanding of the reasons for the insolvency but also to realise the bankrupts assets so that a dividend can be paid to the creditors.

Creditors will be expected to make a claim to the official receiver or licensed insolvency practitioner dealing with the bankruptcy, who will then investigate your claim and if agreed it will then theoretically rank for a dividend to be paid at the end of the insolvency.

The level of this dividend paid is calculated after deduction of costs incurred by the insolvency practitioner or official receiver along with any secured of preferential creditors claims. In practice however, the amount of funds remaining after costs and secured payments have been cleared often mean that no dividend will be paid.

Request a copy of this free guide written by Sid Home MICM by clicking here.

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