Insolvency often spells disaster for a creditor. There is often no knowledge about the problems being faced by the insolvent entity and very often supplies are made by creditors right up to a few days before the insolvency takes place. In many cases the insolvent will have been at some pains to hide their financial difficulties, hoping that there may be a way out, before the weight of creditors, or perhaps just one creditor, finally brings the debtor down and with it, its house of cards. The result is that whereas before the insolvency the creditors were getting something, the payments suddenly stop. For many creditors this can mean ruin and for any creditor a loss. This page deals with what a creditor of an insolvent business may be able to do if he finds that an Insolvency Practitioner now controls the business through Administration, or liquidation. Does the creditor have to wait in line to be paid along with all the other creditors of the insolvent or can he take steps based on his rights, to get to the front of the queue? Act quickly In order to have a real chance of recovery of goods or payment, a creditor should act as soon as it knows about the insolvency. Allowing an insolvency process to continue without taking action to compel the Insolvency Practitioner to pay, or return goods, can prevent later attempts to recover goods and/or payment. Terms of business (TOB) Whether or not a creditor can seek his own direct remedy, will depend on a number of factors. The most important factor will be the terms on which the creditor supplied the insolvent, the nature of the insolvent business and whether it is likely that the business, or parts of it could be sold. Do the creditors TOB state that the contract will terminate on an insolvency event taking place? There is much to look for in a creditors TOB which can help if a customer becomes insolvent so it is important to trade on the right terms. There is no substitute for properly drafted terms of business which need to take account of the nature of the creditors business. Retention of title (ROT) Did the creditor retain ownership of its supplies? This can be done even though the goods have been sold if ownership of the goods does not pass until payment has been received in full. Notice of retained ownership of goods should be given to the Insolvency Practitioner who controls the insolvency process as soon as possible especially if it is likely the creditors goods may be mixed with another creditors goods as part of the process of manufacturing a finished product. A creditor in this position should insist on an early inspection of its goods to identify what is there so they may be kept separate or agreement reached over their use. Lease

Were the goods subject to a lease? If so it may be possible to apply to the court to force the business to maintain the lease payments in return for keeping the goods for the use of the company even though there is a moratorium in place to prevent creditors taking their goods back. Licence Are the goods subject to a licence for their operation or onward sale? This would be typical of many computer supplies where software is required to run the computer equipment or functions of a business. If so it may be possible to terminate the licence and prevent the business from using the software any further, unless it is paid for. Administration An Administrator will often go into a business for the purpose of finding a buyer for the business, or to realise more for the business than may be achieved if the business is liquidated. An administrator may want to sell the business quickly. It is important that he knows about a creditor’s claim to ownership of goods or licence, so that he does not sell it and pay the proceeds into a general pot for the benefit of all the creditors, not just the creditor they belong to. An Administrator may need to keep goods which are subject to lease or licence, so the business can continue to operate without cessation in order to obtain the best price for it. If the Insolvency Practitioner needs a creditor’s goods, the creditor should insist on payment or return if the creditor’s terms of business allow this. An Administrator who retains goods against the supplier’s wishes, may have to account for them as one of his expenses, which will entitle the creditor to be paid ahead of other creditors. A creditor who sits by and allows the Administrator to use the goods but doesnot insist on payment or return, will be in a worse position than a creditor who forces the Administrator to agree to the terms of retaining them. There is a real and valuable distinction between allowing a supply to continue as it was prior to the Administration and forcing the Administrator to agree terms. The former may mean no payment while the latter will more often mean that creditor can be paid from the time the Administrator takes office. A creditor should not assume just because his goods or services are being used by an Administrator, the Administrator will have to pay for them. This page has been written from a practical point to help understand some of the issues that may affect creditors. Unfortunately the law behind it is complicated. There are many different factors to take into account, if you need to know where you stand legally, please contact Gavin Pickering. Published - May 2012This article is provided for general information only. Please do not make any decision on the basis of this article alone without taking specific advice from us. stevensdrake will only be responsible for the advice we give which is specific to you.