But what if it isn’t you that goes into liquidation, but one of your customers? Say your biggest account suddenly announced that they had gone bust - seemingly overnight – without paying your last invoice. What would you do?
Understanding Customer Liquidation
When a company is facing financial difficulties, it might be placed into liquidation. Unlike administration, the primary purpose of liquidation is to sell off the assets of the company and dissolve it. When a business goes into liquidation, their affairs, business and the property of their company are put under the management of the Official Receiver (OR) or a private insolvency practitioner (IP).
In liquidation, there is no looking to save the company as ongoing concern, so the process is usually much quicker. The liquidator in charge of the business will evaluate the company’s assets, make payment to the creditors from the sale of any remaining assets and dissolve the business completely. So if a customer of yours goes into liquidation while owing you money, you need to make sure you are on the list of creditors.
How Are Assets Distributed To Creditors?
The OR or IP, will be in charge of identifying company`s assets and creditors and distributing the assets of the insolvent company to the creditors. During this process, the OR or IP will also need to identify the type of creditors. Some creditors will rank more highly than others, and payments are made in order. Generally speaking, there are 6 main types of creditor:
- Secured Creditors: These creditors have security registered at Companies House. When they have a fixed charge over some of the assets of the business, the secured creditor will be paid out of the sale proceeds from those specific assets, once the cost of selling has been deducted.
- Preferential Creditors: Preferential creditors primarily consist of employees – their wages, accrued holiday and so on. This class of creditor ranks ahead of all other creditors when it comes to the sale of assets, apart from those with a fixed charge.
- Secured creditors with a floating charge. Assets subject to a floating charge often include stock, raw materials, work-in-progress, fixtures and fittings – basically any other assets not subject to a fixed charge. A secured creditor with a floating charge will be paid all net proceeds from the sale of those assets, after the preferential creditors have been paid.
- Unsecured Creditors: This is where all other non-secured and non-preferential creditors fall. This is usually where the majority of creditors are found, and will include standard clients and suppliers.
- Connected unsecured creditors Unsecured creditors associated with the company rank next. This might include spouses or other family members of the directors, or perhaps a member of staff who has lent money to the company on an unsecured basis.
- Shareholders: These are the last class of creditor to receive a distribution, and they will only receive their pay out after everyone else has been paid in full.
What Happens If You Hear Nothing?
Of course, there are times when customers go into liquidation and don’t notify their suppliers. It goes against best practice, but it does happen. I you suspect a customer has gone into insolvency, how do you handle approaching them to claim your share of their liquidated capital? Well, the first thing you need to do is confirm that they are actually insolvent. You can do this by:
- Searching Companies House for a declared company insolvency.
- Contacting the Insolvency Enquiry Line, either by calling 03006780015 or emailing them at email@example.com
- Checking the public notices sections of the The Gazette.
- Carrying out a search at a company information provider such as www.creditsafe.com
Once you have confirmed that they are, in fact, insolvent, you can contact them through the OR (official receiver) or IP (insolvency practitioner). You can then notify them that you are a creditor, and they will ask you to fill out a proof of debt form. From there, the process is the same as we detailed earlier.
If all of this is making your head hurt (and we wouldn’t blame you), there is another way. At Debtcol, we are happy to help businesses dealing with insolvent companies.
However, if at all possible try and collect what is owed to you before your customer becomes insolvent. Our team of experts handle the process of debt collection from businesses in a tactful, respectful but an effective manner.
With years of debt collection under or belts, we can help you with one off or multiple claims, ensuring the money you’re owed ends up in your pocket as fast as possible. For more information, please just get in touch with us today.