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What are creditors’ rights in a liquidation process?

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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 have certain rights. As far as secured creditors are concerned, a defined hierarchy for repayment allows them to be repaid ahead of other creditor groups.

There is often a general assumption that unsecured creditors have few rights during liquidation, but they can also influence proceedings and are entitled to be fully informed throughout the process.

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What are secured creditors’ rights in a liquidation process?

Secured creditors lead the ‘hierarchy’ for repayment once the costs of liquidation have been covered. Those with a fixed charge on one or more of a company’s assets are entitled to receive the funds from their sale in liquidation.

A fixed charge may have been granted to the bank, or an asset-based lender for example, with fixed charges often covering hard assets such as property, land, plant and machinery, and vehicles, as well as intangible assets including intellectual property and patents.

Secured and unsecured creditors both have the right to challenge the liquidator’s remuneration if they feel it is too high, and can do so by making a court application.

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Unsecured creditors’ rights during liquidation

Creditors’ meetings

Recent legislative changes have altered the requirement for a liquidator to automatically hold ‘in-person’ creditors’ meetings unless a specific number of unsecured creditors request it.

Ten percent of creditors, either by value or number, or 10 individual creditors, can request that such a meeting is held, otherwise proposals and notices can be sent via electronic means.

Appointment of liquidator

Creditors have the right to vote on the appointment of a liquidator during a Creditors’ Voluntary Liquidation, and although shareholders will already have made an appointment, creditors can choose a different liquidator if they wish.

Liquidation Committee

During compulsory and voluntary liquidation proceedings, unsecured creditors have the right to form a creditors’ liquidation committee. This usually consists of between three and five members, their role being to oversee the liquidation process on behalf of unsecured creditors as a group.

One of their initial duties is to agree the office-holder’s fee, but they also have the right to monitor the liquidator’s actions during the process. Committee members do not receive payment for their role, but are entitled to claim for their reasonable travelling expenses.

Further rights of the liquidation committee include:

  • Requesting a meeting with the liquidator at any stage of proceedings – meeting dates are often mutually agreed in advance, but if a member of the committee wishes to call a meeting that has not been pre-arranged, they have the right to do so.
  • Receiving regular reports from the liquidator to update them on proceedings - the disposal of property, for example. Interim and final liquidation accounts are also made available for view by the committee.

Goods belonging to the creditor

If the debtor company is in possession of goods belonging to a creditor, and the creditor can prove ownership, they have the right to make a claim for their return, or reimbursement via the liquidator.

Claiming interest on the debt

Unsecured creditors can claim interest on the debt up to the date of liquidation under certain circumstances. The creditor may have stated their intention to charge interest within the initial contract, for example, or provided notice in a reminder that interest will become due.

Repayment following liquidation

  • Unsecured creditors are the final group in the hierarchy to receive payment. Should they have to write off some or all of their debt and are also registered for VAT, they can claim VAT Bad Debt Relief up to six months following the end of the liquidation process.
  • There is a right of appeal should the liquidator refuse to pay a claim - the creditor should seek a compromise with the liquidator in the first instance, but can then apply for court adjudication on the matter within 21 days if no agreement is reached.

Need to speak to someone?

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Real Business Rescue can offer professional advice and guidance on liquidation procedures. With a network of 100+ UK offices offering free same-day appointments, we can quickly establish your needs and provide professional advice on the best options.

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