Insolvency meetings, priority of payments and interest
Payments in insolvencies are made in the following priority:
- Fixed charge holders. The distribution is made net of the costs of realisation
- Insolvency practitioners’ fees.
- Preferential creditors. HMRC are no longer a preferential creditor after 13/09/2003. The two main preferential creditors are employee claims for arrears of pay and holiday pay. If these costs have been met by the Redundancy Payments Office, they stand in place of the employees as a preferential creditor.
- Creditors with a floating charge.
- Unsecured creditors.
- Share capital.
Payments to creditors are usually expressed as a number of pence in the pound.
If a person or company is insolvent, it is the creditors’ interests that come first. As a result the creditors are consulted in every stage of the insolvency process.
Creditors meetings are a formal route for creditors to question directors and insolvency individuals. They provide an excellent opportunity to discuss and make the insolvency practitioner aware of areas of concern. The practitioner has a duty to investigate any matter brought to his attention, unless he considers the request to be frivolous or unreasonable.
Meetings can be attended in person, or by proxy in favour of a representative or the chairman of the meeting.
For a creditor to attend and vote in a creditors meeting, he must be able to demonstrate that he is a creditor. The formal claim on the insolvency is made on a proof of debt form.
Many small companies do not submit proof of debt forms, as they are under the impression that no distributions are ever made in insolvencies as the insolvency practitioners and banks receive all of the distributions.
From the 15 September 2003, the ‘crown’ gave up their rights as a preferential creditor. The change was introduced in order to provide a more consistent approach to all of the creditors.
Following on from the order of distribution to creditors, the removal of the crown will result in greater funds being available to the holder of a fixed charge holder, i.e. the banks.
As a compromise, the prescribed part legislation was introduced. The calculation involves making a distribution of part of the cash to unsecured creditors that would have been paid to the floating charge holder. The calculation is as follows:
- No payment if the total distribution is less than £10,000
- 50% of the first £10,000 of distribution
- 20% of the balance up to a total of £600,000
Follow the introduction, there is a better prospect or receiving a dividend. This is only possible if a proof of debt form is completed. It is very easy to complete, and requires a name, address, amount of claim and a signature.
Many insolvency firms offer a service where they will advise on completing proof of debts and proxy forms free of charge. They will often attend creditors meeting on their behalf. If a practitioner can canvass sufficient support of creditors, he can be appointed instead of the convening practitioner.
Voluntary arrangements need a majority in value terms of 75% of those who vote to be accepted. If a creditor does not vote, he is still bound by the arrangement. For a creditor to have a say in the proceedings he must vote.
Unfortunately, the paperwork associated with a voluntary arrangement is lengthy and can be complicated. Creditors should approach insolvency practitioners or insolvency lawyers if they are unsure of the implications on them being approved.
In all insolvencies, the creditors can vote for their choice of insolvency practitioner. In large cases, it is only the large insolvency firms that have the resources to take the appointments.
For smaller cases, a smaller insolvency firm can often provide a better service and greater return to creditors. Their costs are usually significantly less.
Creditors are entitled to claim interest on their debt up until the date of insolvency.
The Late Payment of Commercial Debts (Interest) Act 1998 provides the right to claim interest on commercial debts for goods and services when payment is made after the agreed credit period, or 30 days if no credit period has been agreed.
The interest rate is currently set at 8% above the Bank of England base rate.
Interest under these provisions should be admitted in calculating creditors’ claims for both voting and dividend purposes. This will ensure that in the event of a dividend being paid, it will maximise the creditors’ return.
Post insolvency interest is only paid when there are sufficient funds available to pay all of the insolvency debts and costs. Interest is paid in accordance with the Judgments Act 1838 at the rate in force on the day the insolvency order was made. This currently stands at 8%.
There have been many bankruptcy cases, where the debtor has sought to annul the bankruptcy. When successful, it has the result of cancelling the bankruptcy. The order is made by the court, which need to be satisfied that all of the bankruptcy costs, expenses and interest have been paid.
Prior to the change in legislation in respect of a bankrupt’s home, there was no three year limit for the trustee to take action. There were many properties where there was no equity at the date of the bankruptcy order, but as a result of significant property price increases, there was sufficient equity in order to pay all of the creditors in full plus interest. Many of these cases had bankruptcy orders made in the early 1990’s, and the interest element repayable to creditors exceeds the original claim.