New reforms are great, but who protects unsecured creditors?

In a controversial speech to the  Insolvency Practitioner’s Association  earlier this year, Court of Appeal judge Lord Justice Jackson (best-known for his 2010 report into civil litigation costs) made several recommendations, which Justice Secretary Michael Gove has already begun to implement.

As a result, from 1 April 2016, unsuccessful defendants will no longer be held liable to pay the opposing side’s – all too often exorbitant – uplift charges in insolvency cases that involve Conditional Fee Arrangements (CFA) and After the Event (ATE) insurance.

The move brings the industry in line with other forms of litigation, and will curtail the exploits of some liquidators who for many years have enriched themselves by wielding the threat of CFAs and ATEs to extract money from unsuspecting small business-owners.

While Gove’s reforms are definitely a step in the right direction, there is still much work to be done. For example, where is the legislation to protect unsecured creditors from gluttonous liquidators who commonly have no interest in the insolvency proceedings, other than to fatten their own pockets?

It’s important to understand that to a carnivorous liquidator, a failed company is like a slaughtered animal. Just as wild predators eat and gather up as much flesh as possible from the carcass of a slaughtered animal; when a company fails, liquidators try to preserve the assets and turn them into cash, which they retain as payment for their fees and expenses.

How unsecured creditors should deal with liquidators

So what can unsecured creditors do to protect themselves from unscrupulous liquidators during insolvency proceedings? Firstly, they must form a creditors’ committee.

In accordance with section 98 of the Insolvency Act 1986, for a company to be placed into a creditors’ voluntary liquidation, a creditors’ meeting must be convened.

Creditors have greater control over these proceedings if they have formed a committee before this meeting where they will agree to put the company into liquidation, and set the liquidator’s remuneration.

Creditors should always attend these meetings or give their proxies to a company such as Insolvency & Law to attend on their behalf. That way, we can say to the liquidator things like: “Rather than charging an hourly rate, you’re going to do this job for a fixed fee or a percentage of realisation”.

If there are any assets to be realised, by capping the liquidator’s remuneration, we can ensure that creditors end up with something. Few creditors realise how much power they really have, but the fact is; they set the liquidator’s fee.

Creditors have the power because they employ the liquidator, but what usually happens is the liquidator turns around, shafts the creditor, and leaves them with nothing.

The more creditors disengage from the insolvency process is the greater control they give to the liquidator. And that’s why it’s important to form a committee and remain engaged because every vote a creditor fails to take part in ultimately becomes a silent vote in favour of the liquidator.

Has one of your debtors gone into administration or liquidation? If you need help convening a creditors meeting  contact us now- 0207 504 1300