What are creditors’ rights in a liquidation process?

Understanding the rights of both secured and unsecured creditors when a company is liquidated

In a voluntary or compulsory liquidation process, both secured and unsecured creditors possess specific entitlements. Secured creditors are prioritised for repayment over other creditor groups, following a set hierarchy.

It’s commonly assumed that unsecured creditors hold limited rights in liquidation. However, they can still impact proceedings and are entitled to full information throughout the process.

 

What rights do secured creditors have during liquidation?

After covering the costs of liquidation, secured creditors take precedence in the repayment ‘hierarchy’. Those holding a fixed charge on company assets are entitled to proceeds from their sale during liquidation.

A fixed charge might have been given to the bank or an asset-based lender, for instance. These charges typically encompass tangible assets like property, land, machinery, and vehicles, as well as intangible assets such as intellectual property and patents.

Both secured and unsecured creditors retain the right to contest the liquidator’s fees if they believe them to be excessive. They can initiate this process by submitting an application to the court.

 

What are the unsecured creditors’ rights during a company liquidation? 

1. Selecting a liquidator

In a Creditors’ Voluntary Liquidation, creditors hold the authority to vote on the appointment of a liquidator. While shareholders may have already made a selection, creditors can opt for a different liquidator if they prefer.

2. Meetings with Creditors

Changes in legislation now mean that a liquidator is not obliged to automatically convene ‘in-person’ meetings with creditors unless a certain number of unsecured creditors specifically request it.

If ten percent of creditors, either by value or number, or ten individual creditors, request such a meeting, it will be arranged. Otherwise, proposals and notices can be sent electronically.

3. Liquidation Committee

In both compulsory and voluntary liquidation, unsecured creditors can establish a creditors’ liquidation committee. Typically comprising three to five members, their duty is to supervise the liquidation process on behalf of unsecured creditors collectively.

One of their primary tasks is to approve the fee for the office-holder. Additionally, they have the authority to oversee the liquidator’s conduct throughout the process. Committee members do not receive compensation for their service but can request reimbursement for reasonable travel expenses.

Other rights of the liquidation committee include:

• Receive regular reports from the liquidator, providing updates on proceedings such as property disposals. For example, we can talk about accessing interim and final liquidation accounts for review.
• Seeking a meeting with the liquidator at any phase of the proceedings. Usually, meeting dates are agreed upon beforehand, but if a committee member wishes to convene a meeting not previously arranged, they possess the right to do so.

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4. Claiming interest on Debt

Under specific conditions, unsecured creditors can request interest on the debt up to the liquidation date. For instance, the creditor might have indicated their intent to charge interest in the original contract or given notice in a reminder that interest will accrue.

5. Goods Owned by Creditors

When the debtor company holds goods belonging to a creditor, and the creditor can prove ownership, they have the right to demand their return or seek reimbursement through the liquidator.

6. Repayment after Liquidation:

• Unsecured creditors are the last in line to receive payment in the hierarchy. If they need to write off some or all of their debt and are also VAT registered, they can apply for VAT Bad Debt Relief within six months after the liquidation concludes.
• If the liquidator declines to settle a claim, there’s a right to appeal. Initially, the creditor should attempt to reach a compromise with the liquidator. However, if no agreement is reached, the creditor can then request court adjudication within 21 days.

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Vanguard Insolvency provides expert advice and guidance on liquidation procedures. With over 100 UK offices, we offer complimentary same-day appointments to promptly assess your requirements and offer professional advice on the most suitable options.  

 

Read More:  

• What does folding a business mean
• What happens to a company after a liquidator is appointed
• What happens to your pension if your employer goes into liquidation
• What is a Director’s Conduct Report during liquidation
• What is the order of company creditors in liquidation