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What to do if a Customer Goes into Administration Owing You Money


Sometimes even with the best credit control procedures in place a company may suffer a customer going into administration. Many companies would see this bad debt as a complete write-off, but it is still worth stating your claim in case there are any funds for a small pay out.

It remains the case that prevention is the best cure. Pro-active credit control will minimise your chances of getting caught by a bad debt and this service is now available on an outsourced basis. If you have an past-terms invoice with any customer, then the sooner you recover it the less chance you have of being caught out with the customer going into administration, so it’s well worth considering seeking help from a professional debt recovery service to bring the money in quickly and potentially at no cost to you.

This guide aims to help you understand your rights as a creditor and details what to do to give yourself the best chance of getting at least something back.

In what circumstances does a company find itself in administration?

When a company is facing financial difficulties it may be placed into administration, where the affairs, business and property of the company will be managed by an appointed outside person ('the administrator'). The administrator must be a licensed insolvency practitioner ('IP').

How can a company be placed into administration?

A company can be placed into administration without the need to go to court by the company, its directors, or by the holders of a floating charge over the company. Other creditors must petition the court to appoint an administrator.

What is the purpose of administration?

The primary goal of the administrator is to act in the interests of all creditors by trying to rescue the company as a going concern. This could involve making spending cuts, selling parts of the business or selling the whole business. The administrator has 12 months to attempt any rescue, though this can be extended with agreement from the creditors or permission from the court.

If this is not possible then they must work to maximise the funds recovered for the creditors as a whole by winding up (liquidating) the business. A liquidator is appointed (which may be the same as the administrator) and assets and property of the business are sold off to make a distribution to creditors.

What are the powers of an administrator?

An administrator is an officer of the court and their powers are very broad. They include powers to carry on the company's business and realise (sell off) its assets. The administrator displaces the company's board of directors from its management function and has the power to remove or appoint directors. They must prepare proposals for approval by the creditors setting out how they intend to achieve the purpose of administration.

What should I do if I hear a customer has gone into administration owing me money?

You may have heard on the grapevine that your customer has gone into administration so it’s a good idea to get your facts straight first before you do anything. A quick call to your customer could confirm this. If you cannot get hold of them then a search under their company registration number on the London Gazette website will show any recent activity.

Once you are sure that they are in administration, contact the appointed administrator and advise them that you are a creditor, they will then send you out a form to complete. Again, you can find out who the administrator is from your client, Companies House or the London Gazette.

If you believe that you own something in the company’s possession and have a 'Retention of Title' clause in your Terms and Conditions then contact the administrator as soon as possible with full proof of ownership and be prepared to identify what you are claiming. This clause basically means that the seller (you) retains legal ownership of the goods until payment is received from the buyer (customer). It is a very useful tool to have in your Terms and Conditions so may be worth checking whether you have it in yours, or adding it if not.

You need to act promptly and state your case so that the administrator can examine your claim carefully before deciding whether to release the goods in question, pay you for them or otherwise. If you leave it too late then the administrator is within their rights to assume that the goods belong to the company and they could be sold to raise funds. They have no liability to pro-actively honour your clause – it’s down to you to notify them.

Another useful tip to remember is that six months after writing off a debt in your accounts, you can claim VAT Bad Debt Relief from HM Customs and Excise for the VAT you have paid. Click here for more information on this.

How is it decided how much creditors are paid?

Some creditors rank more highly than others, and are paid in a strict order of precedence. There are four main types of creditor:

  • Secured creditors have security registered at Companies House. When they have a fixed charge over assets of the business, the secured creditor will be paid out of the sale proceeds from those specific assets, after the costs of selling have been deducted. When they have a floating charge over an asset, the secured creditor will be paid out of the net proceeds from selling those assets, but only after any preferential creditors have been paid in full and a chunk of money (called the prescribed part - see below) has been set aside for the unsecured creditors.
  • Preferential creditors primarily consist of employees (their wages and accrued holiday pay for example). Preferential creditors rank ahead of all other creditors when assets without a fixed charge registered are sold.
  • Unsecured creditors are all other non-secured and non-preferential creditors. These are usually the normal “trade” creditors. They rank below Preferential and Secured creditors, with the exception of when the prescribed part is applicable (see below).
  • Shareholders are the last class of creditor to receive a distribution and they will only receive a distribution after everyone else has been paid in full

What is the Prescribed Part?

The Prescribed part is the right given to unsecured creditors under the Insolvency Act 1986, to receive a 'carved-out' dividend from funds otherwise payable to secured debenture holders. It is calculated as 50% of the first £10,000 and 20% thereafter of the monies available for the holder of a floating charge and is subject to a cap of £600,000.

The 'Prescribed Part' funds must not be used for any other purposes, nor can they be used to pay a secured creditor in respect of an ‘unsecured’ element. If you are an ‘unsecured creditor’ then it is worth looking at the report sent from the administrator’s detailing the Prescribed Part to check that you are getting your full entitlement and that the liquidator is not using it meet their other costs.

In the past there has been suggestions of misuse of funds. They cannot legally be used to pay general liquidation costs or any other costs that are not directly related to agreeing claims and distributing funds.

Will unsecured creditors be paid the money owed to them?

Debts owing to unsecured creditors are frozen at the date of the administrator's appointment. If the outcome of the administration is survival of the company, the management of the business and assets can be returned to the directors on the conclusion of the administration. The directors and staff of the company will then deal with unsecured creditors' claims. So if you have not registered a claim with the administrator and the company is saved, then your debt is not assumed by the re-launched company, and you’ll have to write off the full amount.

If instead the company is liquidated, then there may be a pay out depending on how much money can be raised from sale of assets. Of course, the administrator and liquidator looks after their own (not insubstantial) fees first, so if you're an unsecured creditor, you’ll only get something if there’s money left after these costs are paid, and the secured and preferential creditors are paid in full.

While the dividend to unsecured creditors is often nothing, or only a few pence in the pound, it's still well worth the small amount of form-filling required to register any but the smallest debts with an administrator - you just never know – yours could be one of the small number of cases where a larger dividend is possible.

How is the administrator's fee determined?

The creditors' committee (if there is one) agrees the administrator's fee. Otherwise, it can be fixed by the creditors or the court. Although the fee can be fixed as a percentage of the value of the property dealt with, it is normally based on the following factors: the time spent by the administrator and staff; the complexity of the case; any exceptional responsibility borne by the administrator; the effectiveness with which the administrator carries out his duties; and the value and nature of the company's assets.

As an unsecured creditor, what information am I entitled to?

The administrator must notify all known creditors of his appointment as soon as reasonably practicable, and must send a copy of his proposals for achieving the purpose of administration to all creditors within eight weeks of his appointment. A meeting of all creditors must then normally be held within ten weeks of the date the company went into administration in order to consider the administrator's proposals.

However, there is no need for the administrator to hold a meeting if he has stated in his proposals that

  • the company has sufficient property to enable all creditors to be paid in full
  • the company has insufficient property to enable a distribution to be made to unsecured creditors except out of the reserved fund which may have to be set aside out of floating charge assets
  • neither of the first two purposes of administration can be achieved

However, he must hold a meeting if requested by creditors whose debts amount to at least 10% of the total debts of the company. After approval of the administrator's proposals, a report on the progress of the administration is sent to all creditors every six months and at the end of the administration.

Is the Administrator bound by contracts entered into by the company prior to his appointment?

The Administrator's duties are outlined above, and may find it impractical to have the company perform certain contracts entered into prior to his appointment, although he will have to take into account any financial implications of breaches of the company's contracts. Is the administrator liable for sums due under contracts entered into by the company subsequent to his appointment? An administrator is not personally liable for contracts entered into as administrator, but normally the administrator will pay for goods or services provided subsequent to his appointment, as an expense of the administration.

Can a creditor initiate or continue legal actions against a company in administration?

No. Any petition for the winding up of the company will be dismissed or suspended if the company is in administration. In addition, except with the consent of the administrator or the permission of the court: the company's property or goods are protected from repossession under any sale or hire agreement; and premises let to the company are protected against a landlord exercising a right of forfeiture.

How does administration come to an end?

An administration may come to an end automatically after one year – but this period may be extended with the agreement of the creditors or the permission of the court if more time is needed. On conclusion of an administration the company may be returned to the control of its directors and management or more commonly the company may be placed into liquidation.

Conclusion

The process of administration is lengthy, and as an unsecured creditor, the chances are high that you won’t get much of your unpaid invoice back at the end of it. It really is far better to avoid getting caught out in the first place. Act quickly on any overdue payments, and keep an eye out for the signs that a customer might be getting into financial difficulty and elevate those invoices for collection using a debt recovery service.


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