Four ways to recover debt from an insolvent company

Just because a company has or is about to enter an insolvency process does not necessarily mean that all is lost.

I have been involved in a number of recent cases in which Harrison Drury has successfully recovered debts owed by insolvent companies. Here I share some tips, drawing on some of these recent experiences.

Influence the insolvency process

Liquidators and administrators have extensive powers and duties to investigate a company’s affairs and in some cases to pursue its directors. As liquidations and administrations are ultimately creditor-driven processes, it should always be borne in mind that major creditors in particular can influence and hold to account such office holders and, in some circumstances, even replace or appoint them.

In a recent case, our client, the main contractor in a construction project, won an adjudication award against the developer. However, this wasn’t paid and we were instructed to advise on enforcement of the award. While this is normally done by applying to court for summary judgment, there were concerns over the financial position of the developer and we instead advised the client to threaten winding-up proceedings by issuing a statutory demand for payment.

The developer initially disputed the debt and also intimated a counterclaim. However, it then engaged insolvency practitioners to assist in calling a creditors’ meeting with a view to placing itself into Creditors’ Voluntary Liquidation. However, we were concerned about the prospect of the developer appointing its liquidator of choice and advised our client to stand firm on its threat to issue winding-up proceedings. Following this we intended to assist our client, as the largest creditor, to appoint a liquidator of its choosing who, among other things, could explore potential claims against the developer’s directors. Before it became necessary to issue winding-up proceedings, a settlement equivalent to just over two thirds of the adjudication award was reached.

Claim against an insolvent company’s insurers

The Third Parties (Rights Against Insurers) Act 1930 – due to be replaced by Third Parties (Rights against Insurers) Act 2010 –  has the effect of transferring an insured’s rights to claim under a policy to a relevant third party upon a company or individual becoming subject to certain insolvency processes.

We recently acted for a contractor in a civil engineering project and issued court proceedings against a supplier of equipment which caused losses to our client. The claim was heavily contested but while we were confident of our client’s case, the supplier went into liquidation part way through the proceedings. We claimed from the defendant’s insurers pursuant to the 1930 Act, but the insurers not only disputed liability for the incident, but also alleged that the claim was not covered by the policy and that the indemnity limit was, in any event, insufficient to cover the claim. In spite of this, through negotiation, we were able to agree a settlement of around half of the value of the claim.

Obtain and enforce judgment

Consideration should always be given to obtaining and enforcing a judgment against a company in circumstances where it is believed to have some assets, even if the debtor is unable to pay all of its debts. In exceptional cases, where there is a risk of funds being dissipated, and particularly where fraud is suspected, consideration may also be given to applying for freezing orders.

In a recent case, our client had bought equipment from China via a French supplier, but this was undelivered and the supplier became uncontactable amid fears that its director had absconded with most of the company’s funds. However, the client had paid for the equipment into a Belgian bank account and was able to ascertain that around half of this remained in the account.

Making use of our international contacts, having been instructed on a Friday afternoon, we were able to obtain a freezing order against the account the following Monday. We then applied for summary judgment against the French supplier, through the French courts, and, after applying for a declaration of enforceability of the French judgment in Belgium, were subsequently able to procure the release of the funds in the account for our client. While this case was complicated by the multi-jurisdictional aspects, similar steps could have been taken in England and Wales.

Submit a ‘Proof of Debt’

This may seem like an obvious thing to do, but it is always worth submitting a Proof of Debt to a liquidator or administrator and ensuring that it is completed correctly. For example, we recently acted for a landlord of a former Blockbuster store. The client’s previous solicitors hadn’t completed the form properly such that the claim hadn’t been registered at all. The administrators then allocated the debt to the wrong group company with fewer assets, which would have resulted in a dividend of only 5p in the pound being paid. After demonstrating which company had been the tenant we recovered an interim dividend on behalf of the client. While the dividend was 18p in the pound, landlords can recover an element of the future rent until the end of the lease and also sums for dilapidations, as a result of which we recovered a significant sum in circumstances where there were no arrears as of the date of administration.

What are the other options?

While legal proceedings may be pursued against a company in a formal insolvency process, subject to some restrictions, it is rarely cost-effective to pursue such a claim, because unless you have a proprietary right or security over the company’s assets, your claim will rank equally with those of other unsecured creditors. Of course, if you do in fact have valid security over the company’s assets, it’s far more likely that you will be able to recover what you are owed, though as a floating charge holder you would only be entitled to receive the net proceeds from a sale of the assets, once certain other creditors had been paid.

However, there are some other circumstances in which you may claim other than merely as an unsecured creditor.

Retention of Title claims

If you have supplied goods to the debtor company under a contract with a valid retention of title clause, you may be able to establish that you still have title to those goods, providing that, amongst other factors, the contract was entered into before the goods were supplied, there are goods that have not been paid for and they can physically be identified. We have recovered goods subject to such clauses in several cases where companies or their liquidators or administrators have initially refused to release them.

Personal liability of directors other than to liquidators and administrators

If a director has given a personal guarantee or has contracted personally, they will incur a personal liability. In exceptional circumstances, they may also be personally liable where they have made fraudulent misrepresentations, where a limited company is just a sham or where assets have been fraudulently transferred away from their company.

Pursuing claims against insolvent companies and relevant third parties is a complex process with which there are significant risks and hurdles to be overcome. At Harrison Drury, we make it possible to achieve the best outcomes for creditors of insolvent companies by taking a detailed but pragmatic look at each case and fully understanding our client’s objectives.

For more information, or to discuss any aspect insolvency litigation and debt recovery, please call James Robbins on 01772 258321. James specialises in dispute resolution and business recovery at Harrison Drury solicitors in Preston. The firm also has solicitors in Clitheroe, Lancaster, Garstang and Kendal.