If your business is owed money by a company that has become insolvent, it is important to understand your position. At South Bank Legal, we regularly advise clients on creditors’ rights in liquidation and administration, helping them take the right steps to recover what they can.
All insolvency proceedings in England and Wales are governed by the Insolvency Act 1986. However, the outcome for creditors depends on the process used and the type of creditor involved.
What happens when a company becomes insolvent?
When a company cannot pay its debts, it may enter a formal process such as:
- Compulsory liquidation (started through the court)
- Creditors voluntary liquidation (started by directors but controlled by creditors)
- The administration process (focused on rescue)
- Company voluntary arrangements (CVAs)
At South Bank Legal, we help creditors understand which route has been taken and what it means for recovery.
Understanding the type of creditor
Your rights depend heavily on your type of creditor. Not all creditors are treated equally.
Secured creditor
A secured creditor has security over company assets. This may include:
- Fixed charges over specific assets like property
- Floating charges over assets such as stock or cash
Secured creditors are usually paid first from the sale of those assets.
Preferential creditors
Preferential creditors include employees owed wages and holiday pay. Since changes introduced in December 2020, HMRC is also treated as a preferential creditor for certain debts.
Unsecured creditor
An unsecured creditor does not hold security. This group includes trade creditors, suppliers, and contractors.
Unfortunately, unsecured creditors are often last in line and may receive limited payment.
The hierarchy of creditor claims
The hierarchy of creditor payments determines who gets paid first during insolvency.
The order is generally:
- Secured creditors with fixed charges
- Costs of the insolvency (including insolvency practitioners)
- Preferential creditors
- Secured creditors with floating charges
- Unsecured creditors
- Shareholders
At South Bank Legal, we advise clients on where they sit in this hierarchy and what recovery may be realistic.
Creditors’ rights in liquidation
Liquidation means the company will close and its assets will be sold. This can happen through compulsory liquidation or creditors voluntary liquidation.
Your rights as a creditor
In liquidation, creditors have important rights, including:
- Voting on the appointment of a liquidator
- Receiving regular progress reports
- Submitting a proof of debt
- Challenging unfair or suspicious transactions
- Asking questions about how assets are handled
In a creditors voluntary liquidation, creditors have greater influence over decisions. South Bank Legal can support you in making sure your voice is heard.
Creditors’ rights in administration
The administration process is designed to give a company breathing space. The aim is often business rescue or achieving a better result than liquidation.
What administration means for creditors
Once a company enters administration:
- An administrator (licensed insolvency practitioner) is appointed
- A legal pause stops creditor enforcement action
- A strategy is put in place to deal with debts
Your rights in administration
Although administrators take control, creditors still have rights:
- To receive proposals within 21 days
- To vote on those proposals
- To receive ongoing progress reports
- To challenge decisions if necessary
Compared to liquidation, there is less direct control for creditors, but opportunities still exist to influence outcomes. South Bank Legal can guide you through this process.
Company Voluntary Arrangements (CVAs)
A company voluntary arrangement (CVA) allows a company to repay its debts over time while continuing to trade.
In company voluntary arrangements, creditors vote on whether to accept the proposal. If 75% (by value) agree, it becomes binding.
For trade creditors, this can sometimes lead to a better return than liquidation. However, each case needs careful review, and our team at South Bank Legal can advise on whether to support or challenge a CVA.
Liquidation vs administration: What is the difference?
Understanding the difference between these processes is key when assessing creditors’ rights in liquidation and creditors’ rights in administration.
Liquidation
- The company closes
- Assets are sold
- Creditors are paid in order
- Often results in lower returns for unsecured creditors
Administration
- Focus on business rescue
- Protection from legal action
- Managed by an administrator
- May lead to a CVA, sale, or liquidation
How South Bank Legal Can Help
If you are owed money, early advice can make a significant difference. At South Bank Legal, we support creditors by:
- Explaining your position in the hierarchy of creditor claims
- Reviewing your status as a secured creditor or unsecured creditor
- Advising on floating charges and fixed charges
- Helping you respond to progress reports and proposals
- Challenging unfair decisions or transactions
- Supporting you through all insolvency proceedings
Frequently asked questions
Can creditors force a company into liquidation?
Yes. A creditor can apply to the court for compulsory liquidation if a company cannot pay its debts. This usually involves serving a statutory demand and waiting at least 21 days before taking further action.
Can interest still be added to debts during insolvency?
In most insolvency proceedings, interest on unsecured debts stops accruing from the date the company enters liquidation or administration. However, if enough funds are available after all debts are paid, interest may be added back.
What happens if a director has acted improperly?
If there is evidence of wrongful or fraudulent trading, insolvency practitioners can investigate the conduct of directors. In some cases, creditors may benefit if claims are brought to recover funds for the company.
Can a creditor recover goods already supplied?
In some situations, creditors may rely on retention of title clauses to recover goods that have not yet been paid for. This depends on the terms of the contract and whether the goods can be clearly identified.
Do creditors need a solicitor during insolvency proceedings?
While not required, legal advice can be very helpful. At South Bank Legal, we assist creditors in understanding their rights, reviewing documents, and taking action to improve recovery outcomes.
Michael Czechyra is a senior commercial solicitor and the founder and Managing Director of South Bank Legal, a commercial law firm in Central London.
Michael primarily acts for business clients in corporate and commercial transactions and disputes, focussing on fintech startups, mergers and acquisitions, commercial contract drafting, as well as assisting with insolvency matters on behalf of technology companies and service providers, intellectual property issues, and complex business disputes.
Michael is known for his practical approach, his accessibility and his ability to meet his client’s timelines. His clients have included global corporations, private equity investors, financial institutions and trading firms, political parties and a national competition and consumer law regulator.
Michael has practised as a commercial solicitor since 1998. Prior to founding South Bank Legal, Michael held various senior and board positions at City of London law firms for several years.