What happens when a debtor enters liquidation?
When a company runs out of cash and enters liquidation, how will the debts owed to your business be repaid? As businesses suffer a challenging fate in light of the energy crisis and the aftermath of the coronavirus pandemic, insolvency is a likely prospect for many businesses with a shortfall of cash and limited resources at their disposal.
While some company directors will return to the drawing board and explore ways to replenish company cash flow, a proportion may likely hang on until there’s no cash left. Therefore, creditors need to be able to track when a supplier becomes insolvent or enters financial difficulty.
How can I check if a supplier is insolvent?
If a business becomes insolvent, this information will be made publicly available, such as in the Gazette.
- The Gazette: The Gazette is an official public record for company insolvencies. Once a company is deemed insolvent and enters a formal insolvency procedure, a notice will be issued.
- Business monitoring software: Monitoring business health through intelligent software, such as Red Flag Alert, provides access to insolvency ratings which show whether a business is in decline, in the firing line of any legal action from creditors or on track to becoming insolvent. This information can help foresee if a debt will likely go unpaid because of poor liquidity.
This information is vital so creditors can submit their claim to the insolvency practitioner at the appropriate time.
What happens when a supplier becomes insolvent?
If a supplier becomes insolvent, the debts will die with the business once company assets are sold to generate funds for creditors and distributed in full. The Insolvency Act 1986 establishes an order of priority of payment of debts which starts with the liquidator, secured creditors with a fixed charge, and ends with unsecured creditors.
The likelihood of repayment depends on the class of creditor. For example, as unsecured creditors rank at the bottom of the hierarchy, there’s a greater risk of the debt going unpaid. Once the pot is empty, any remaining debts will be written off which means remaining creditors will likely go unpaid.
During company liquidation, an insolvency practitioner assumes the role of liquidator which includes identifying assets that can be realised, distributing funds, winding up the company and dissolving the company, resulting in its removal from the Companies House register.
What happens if I’m owed money?
If you’re owed money by a business that is on track to liquidate and cease to exist as a legal entity, contact the licensed insolvency practitioner in the first instance to log your claim. They will request a proof of debt form, evidence to support your claim and details on whether you provided goods or services.
If there’s a retention of title clause in place, inform the insolvency practitioner so they can consider whether the debt can be paid or goods returned, otherwise, you’ll likely be classed as an unsecured creditor.
A retention of title clause is an agreement between the supplier and customer that the goods will remain the property of the supplier until payment is made. There are different types of retention of title clauses that are enforceable under varied terms and conditions, so it’s important to seek specialist advice when addressing a retention of title clause.
Business must diversify risk across their client base, so if a key customer becomes insolvent, the business is protected from the loss in income. For more information on what happens when a debtor enters liquidation, speak with a licensed insolvency practitioner.
