Insolvency Entitlement Order

Proof of Debts

This note sets out the procedure for creditor’s claims and the priority of entitlement to the proceeds of sale of an insolvent debtor’s assets. The rules in bankruptcy and company liquidation are broadly similar. The reference to “insolvency officer” refers to a liquidator, the Official Receiver or bankruptcy trustee, depending on the type of insolvency procedure involved. The insolvency officer may be may be a court official or a private insolvency practitioner. Both the court official and the private insolvency practitioner will have legal duties to the court and under law.

The insolvency officer must send a “proof of debt” form to every creditor so that he may prove the liability or debt which the insolvent debtor owes them.   The form includes certain details of the creditor, the amount of the debt, VAT, particulars of security held etc.  The amount of the creditor’s debt will usually be fixed at the date when the debtor goes into insolvency.

A debt may arise after insolvency by reason of obligations incurred before that date. Creditors may also apply to prove for interest.   Claims against an insolvent debtor for civil wrongs may be proved. Debts may be present or future, contingent fixed or liquidated or capable of being ascertained.

The creditor is only entitled to vote in a meeting of creditors, if he has lodged the proof of his debt in time.  When debts are unspecified and unascertained, the creditor is not entitled to vote in creditors’ meetings unless it is agreed that an estimated minimum value is put on the debt. Insolvency officers must estimate the value of any debts, which may be contingent or which do not bear a certain value.

If creditors do not wish to attend meetings, they can usually lodge a proxy form to allow another person to vote on their behalf. The chairman is entitled to admit or reject proof of debt and entitlement to vote.

Interest may be payable on the debt. Contractual interest may be due. There is a statutory right to interest for late payment, under the Late Payment of Commercial Debts Interest Act in the UK.  The UK rate is 8% over the base rate.   Separately the rate of interest on Judgements is specified currently (early 2009) at 8%.

Certain types of debt

Foreign currency debts must be translated into sterling. Discounts must be allowed and deducted. Where a debt is of a periodical nature, sums due up to the date insolvency can be proved.

A secured creditor may realise its security and may prove for any shortfall / balance. Alternatively, it can surrender its security and prove for the whole debt. Alternatively, it can estimate the value of the property and prove for the balance as an unsecured creditor. See our chapter on the effect of insolvency on secured creditors.

Future debts are proved by discounting at a discount rate provided by the rules. Where a debtor goes into insolvency and there are mutual credits or debits with a creditor, there may be a “set off” and the balance is provable in the insolvency.

Arrears of rent and rent due for the current period can be claimed. Unspecified amounts due for breach of covenant, can be proved. The Landlord must attempt to minimise his loss.

Preferential Creditors are paid in priority to other creditors out of floating charge assets. Preferential creditors include holiday pay and wage arrears in the four months prior to winding up to a maximum of £800.00 per employee. The former “crown preference” for tax and VAT was removed in 2003.

Creditors’ Dividends

Where an insolvency officer has sufficient funds to hand, he is obliged, subject to retaining funds to cover necessary expenses, to pay a dividend in respect of debts which have been proved.  An insolvency officer must give notice of his intention to declare and distribute a dividend, to all creditors known to him who have not proved their debt. This must state the last date for proving debts.

An insolvency officer must deal with each creditor’s proof of debts. If an insolvency officer rejects a proof, he must give a written statement to the creditor and give the reason for rejecting the claim. The creditor may be entitled to apply to Court within 21 days, if dissatisfied.

A notice of a dividend must be given to all creditors. The notice must contain information to enable the creditors to comprehend the calculation of the amount paid. This should include the amounts realised in assets sales, payments and expenses made and incurred in the course of insolvency, the total amounts to be distributed and whether and if so, what further dividends may be expected.

When calculating dividends, the insolvency officer must make provision for debts due to persons who may not have been able to establish their proofs and to determine their debts in time and to disputed debts.

A creditor who has not proved his debt before the declaration of a dividend is not entitled to undo the distribution. Further monies available for future dividends may be used to pay outstanding dividend payments before payment of future dividends. Certain dividends must be paid to the Insolvency Services Account.

The rules of priority of entitlement to dividends are laid down by law. There are as follows:

• secured creditors holding fixed charges;
• the expenses of the winding up, including the insolvency officer’s remuneration;
• preferential creditors (see above);
• creditors secured by a floating charge (see below);
• ordinary unsecured creditors;
• debts due to its members e.g. dividends or profit;
• shareholders capital.

Fixed charge secured creditors are only entitled to be paid out of the proceeds of their security. If security is by way of a floating charge, preferential debts must be paid first.

Floating Charge Holders

Where a floating charge is created after the 15th September 2003, certain rules apply which have no equivalent in Ireland.  Where a company goes into insolvency, enters administration or appoints a receiver, a prescribed part of the “net property” available must go to the unsecured creditors.

The “net property” is what would have been available for floating charge holders (i.e. floating charge realisations less expenses and preferential creditors).  The prescribed part is 50% on the first £10,000.00 of property plus 20% of the balance up to a maximum of £600,000.00. In practice, the ordinary unsecured creditors will never get £600,000.00 because the cost of making the distribution must be subtracted from the prescribed part itself.

The prescribed part rules do not apply where the property concerned is less than £10,000.00 in value, if the administrator believes that the cost of distribution outweighs the benefits.

If the net property is £10,000.00 or more, the administrator may apply to Court for an order that the prescribed part rules should not apply. Where an insolvency officer proposes a CVA or other arrangement, he can disapply the prescribed part rule. Unsecured creditors will have a vote on the proposal.