In his latest Coffee Break Briefing webinar, Frettens’ own Insolvency Guru Malcolm Niekirk looked at agreeing creditor’s claims (for the second time).
In Part One, the two topics we covered were stopping litigation and valuing creditors’ claims for voting purposes.
In this part, I looked at valuing creditors’ claims for dividends and, arising out of that, contested claims, creditors’ appeals to your decision and disclaimers.
As before, the main focus is on voluntary liquidations. The rules are broadly similar across all insolvency procedures but there are differences in the detail, which can be important.
This is the summary of that briefing.
If you'd like to watch the webinar back, you can do so below, if not, read on for our summary...
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Valuing creditor’s claims for dividends
Before we go ahead, here’s some general points that are important to keep in mind.
- Some debts are not provable or eligible for a dividend at all
- The ‘small debts’ rule (under £1000) applies only to proving for dividends
- Creditors don’t have to submit proofs in MVLs, but you can ask for them
- Proofs don’t have to be on a ‘proof of debt’ form, but you need the content listed in r14.4
- Proofs can be withdrawn by the creditor and/or varied at any time by agreement
The procedure for agreeing creditors’ claims
There’s a statutory procedure that is triggered by your declaration of a dividend. There’s no requirement to agree creditors’ claims until you have a dividend to pay and, in fact, you wouldn’t normally spend any time assessing creditors’ claims for dividend until you were sure that there was a dividend available to pay to them.
Before declaring a dividend or distribution, you must:
- Gazette a notice; and
- Give notice to creditors who have not proved.
The notices must give a last date (for all creditors) for proving. It must be at least 21 days from the notice to creditors.
Within 14 days from that last date, you must:
- Admit claims (in whole or part); or
- Reject them; or
- Provide for them.
Fixing liability and quantum
When it comes to agreeing claims, there are three things you need to decide.
- Liability – Whether the creditor is actually a creditor at all
- You may admit or reject the proof (in whole or part)
- When rejecting any of it, you must give the creditor written reasons
- Quantum – How much is this creditor owed?
- Suppose the debt does not have a certain value (perhaps it’s contingent)?
- Then the liquidator must estimate its value
- The liquidator must revise the estimate on receiving new information
- Priority – Is this creditor only an ordinary unsecured creditor or do they have a higher claim in the liquidation, through some security or as a preferential creditor?
- The liquidator assesses what class the claim falls into
You are entitled to ask the creditor for evidence.
What about secured creditors?
Secured creditors, as you know, can prove only for the unsecured element of their debt. That’s all they’ll get paid a dividend on.
So, when they give you their proof of debt, they have to estimate the value of their security. Once they’ve done that, they can change the value they’ve given to their security, but they need agreement either from you or the court.
If the secured creditor sells their property, they must substitute their estimate for the actual realisation. That happens automatically. And they have got the right to surrender their security which, if done, will render them an unsecured creditor. Seems like an odd thing to do, but there are circumstances where security can be a burden!
If they don’t disclose their security in their proof of debt, they have the right to correct it, if it is an honest mistake.
What if the creditor undervalues their security in their proof of debt?
There are a couple of tools that you’ve got if you think that the secured creditor has put an artificially low value on their security.
Firstly, you can redeem the security for that figure, on 28 days’ notice. The creditor may alter the value, with permission (from you or the court).
Alternatively, you can insist that the creditor must sell the property.
Rent (and other periodical payments)
Another special case is creditors claiming rent or other periodical payments.
The creditor can claim unpaid pre-liquidation rent to the start of the liquidation. Claims can include unpaid post-liquidation rent, but only after it has fallen due, quarter by quarter, and only if not payable as a liquidation expense. The claim stops accruing when it ends. For example, if the lease:
- Is disclaimed by the liquidator; or
- Forfeited by the landlord; or
- Is ended by other means (e.g. surrender, or natural expiry, or assignment)
In a liquidation, it is often useful to end the lease if there is to be a dividend or distribution.
Other special cases (covered in the Insolvency (England and Wales) 2016 Rules)
There are also specific rules about:
- foreign currency claims;
- trade discounts;
- interest on claims;
- setting off balances and claims where the creditor is also a debtor; and
- double proof (to ensure that any given debt is claimed by only one creditor).
(If you want advice on any of these things; please give me a call on 01202 499255.)
Contested claims
There are three ways that a claim might be contested
- If there is litigation that continues, despite the moratorium which normally applies.
- Such litigation is likely to have started before your appointment
- You might be able to ask the court to stay the claim. (I covered this topic in part one, which can be read here).
- If there has been a court application for directions
- That could be either you or the creditor who applied to the court for directions
- The courts normally expect you to do the job of agreeing claims. So, they are reluctant to give directions to agree a claim (unless there’s a good reason).
- One good reason might be if it is an issue that affects several creditors
- If the creditor appeals your decision.
- This is what I discuss below
Creditor appeals
The statutory appeal procedure is usually a good way of resolving contested claims. It encourages pragmatism. Creditors usually prefer to cut a deal, rather than go to court.
Creditors have only 21 days to launch an appeal. It will often be clear, when you’re rejecting a claim, if the creditor is likely to launch an appeal. They will normally have written to you about the point in dispute.
There are other benefits to the statutory appeal procedure:
- The liquidator is not normally liable for the creditor’s legal costs
- Claims usually come late in the liquidation. Time usually softens the creditor’s anger. This makes it easier to negotiate a deal.
- By the time the dividend has been calculated, the actual amount at stake may not be worth arguing over
- (If paying 10p/£, a £30,000 disputed claim becomes a dispute over a £3,000 dividend).
These factors can often discourage creditors from making an appeal.
Remember, the liquidator must give written reasons when rejecting a claim. This triggers the creditor’s right to appeal. The creditor only has 21 days to apply to court. The court has a general discretion to extend time limits.
As the written reasons are the basis for the appeal, many liquidators like to take legal advice before they issue them, in cases where a creditor is likely to appeal.
Disclaimer
A liquidator may disclaim onerous property being:
- Any unprofitable contract; and
- Property that’s hard to sell; and
- Property that might require the payment of money, or require performance of an onerous act (in order to comply with terms and conditions).
The procedure for disclaimer
To disclaim a lease, contract, or property, you have to give notice. The Insolvency (England and Wales) Rules 2016 tell you what the notice must say, and who you should give it to.
You can disclaim something, even after you have taken possession of it, tried to sell it, or behaved as its owner.
You can lose the right to disclaim something after an interested party (e.g. the landlord) has given written notice, asking the liquidator to decide whether to disclaim. You then have only 28 days to decide to disclaim. After that, the liquidator can no longer disclaim it.
Once a property has been disclaimed
Once the property has been disclaimed the company’s interest in the property has ended, but that does not affect the rights or liabilities of any other party. So, for example, even after you have disclaimed a lease:
- The guarantor of the lease still owes the rent,
- The bank holding a mortgage on the property can still repossess it, and
- The landlord is still owed their (then) unpaid rent
Interested parties can apply for a vesting order. If granted, this substitutes them for the insolvent company, as owner of the property.
Periodical payments
In addition, once the property has been disclaimed, future periodical payments come to an end. For example:
- The landlord’s claim is for unpaid rent accruing to the date of the liquidation;
- The landlord can also claim, quarter by quarter, for post-liquidation rent
- But only up to the date the lease is ended by disclaimer
The landlord’s claim, from that date, to the contractual end date of the lease, is replaced by an (unliquidated) claim for damages for breach of contract. This can be very useful in an MVL where there is a lease running. (But it can be expensive.) It can also be useful where there is a pre-1995 lease, even one that’s been assigned. Older leases like that carry a continuing contingent liability (even after they have been assigned). There is a risk of ‘original tenant’ liability on the lease’s covenants.
Summary
This is Part 2 (of 2) of ‘agreeing creditor’s claims’, where we covered valuing for dividends, contested claims, creditor’s appeals and more.
The summary for Part 1, which looked at stopping litigation, and valuing for voting purposes, can be found here.
You can catch me live at my next Coffee Break Briefing on Monday 7th August, where I’ll look at post-appointment supplies – ipso facto clauses!
The link to book on will be sent to the list in due course. (If you’re not already on the list, you can sign up to emails here.)
Lastly, I’d like to remind you (again) to try out our tailored Retention of Title Flowchart here.
Specialist Insolvency Solicitors
If you have any questions after reading this article, please don’t hesitate to get in touch with our bright and experienced team.
Call us on 01202 499255, or fill out the form at the top of this page, for a free initial chat.
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