Contractor's Question
I've received a creditor's notice as the software client I was supplying is going into liquidation and owes me two months of unsettled invoices.
Invitation to attend a creditors' meeting
The notice is written in double-speak but appears to invite me to attend the creditor's meeting. Is the quickest outcome to attend the meeting, and then stick with the liquidator that has been appointed? Apparently, I will get to vote on the suggested liquidator.
In addition, as a contractor supplying the liquidating business (through my own limited company), would I be an unsecured creditor? The notice states there is no guarantee of preferred creditors getting their money.
The creditor pecking order is against contractors
So, should I just not bother attending the meeting at all because there will be no money left for unsecured creditors like me, because we're too far down the pecking order?
Is it also true that if I email the 'contact' person at the liquidation firm asking for advice — to try and understand my options — this will effectively reduce the pot of money that is available to us creditors?
Expert's Answer
When a company goes into liquidation, all company creditors are informed and invited to cast their votes at a creditors' meeting.
Get ready to vote
If a majority (by debt value) votes in favour of the liquidation, the liquidation proceeds. Creditors also have a say on whether to retain the licensed insolvency practitioner appointed by the company or appoint their own.
You can vote on supporting the proposed insolvency practitioner (or not).
What really determines the speed of the liquidation process
If company creditors decide to replace the insolvency practitioner with one of their choosing, this wouldn't ordinarily slow down the liquidation process — the speed of which is determined by how proactive the insolvency practitioners are.
It's worth noting that if an alternative liquidator is nominated by creditors, they will want some comfort as to how they are going to be paid before acting as liquidator.
Breaking down the creditor hierarchy
When a company goes into liquidation, company creditors are paid in a priority order as set out by the Insolvency Act 1986. If company directors show preferential treatment to creditors outside of the hierarchy, the legal repercussions are serious.
Company creditors are separated into different classes — secured, preferential and unsecured.
The liquidator feeds payments to each class of creditors in an orderly manner until the funds run out, so the further down the pecking order you are, the smaller your chances of receiving a payout.
When do contractors and other unsecured creditors get paid?
Secured creditors are paid first, preferential creditors are paid second, and unsecured creditors are paid third.
Trade suppliers and contractors are classed as unsecured creditors and therefore, paid after secured creditors and preferential creditors, respectively.
See the Statement of Affairs, regardless of your attendance at the creditor meeting
There's no guarantee that unsecured creditors will be paid; this is wholly dependent on the financial position of the company in liquidation.
At the creditors' meeting, a 'statement of affairs' summarising the financial position of the company is presented which can shed light on whether you're likely to be paid. This document is available to all creditors, regardless of class, and will be made publicly available at a later stage on Companies House.
While attending the creditors' meeting won't increase your chances of receiving a payout, it provides context and 'paints a picture' of the events leading up to the liquidation.
When an email deprives creditors of funds, potentially…
When a company enters liquidation, company creditors are informed, and the liquidator's details are distributed.
Creditors can often feel in limbo while waiting for further instructions from the liquidator, which is why they may turn to the liquidator for professional advice.
However, you ask whether the advice is free or paid for by the company in liquidation (thereby reducing the funds to be paid to contractors and other creditors)?
The answer depends entirely on the basis on which the liquidator's remuneration is being calculated.
Liquidators and liquidation: final thoughts
Technically, if the liquidator is remunerated on a time-cost basis, as opposed to a fixed-fee or percentage of realisations, then yes — the more time spent advising creditors, the higher the fee, which means less funds available for creditors.
If the liquidation is high-profile and the creditor base runs into the hundreds and thousands, these costs are usually factored in by the company in liquidation. Good luck!
The Expert was Chris Lawton, a licensed insolvency practitioner at company liquidation specialists UK Liquidators.
