CPAA Insight: Blood out of Stones? Debtors that can't pay

Brought to you by ACPA

The following article appeared in the November 2012 edition of CPAA's magazine, Practising Accountant.

Blood out of stones?

Richard Harrison of Laytons Solicitors LLP follows up last edition’s article on cashflow

We have previously looked at dealing with debtors who won’t pay. Now we must consider what happens when they seemingly can’t pay.

This is the field of insolvency where options may be limited but must nevertheless be considered carefully. There are two ways in which you might be faced with the prospect of insolvency when you are pursuing what is rightfully due to you.

You may decide to use the option referred to in the previous article: the statutory demand under the 1986 Insolvency Act. 

This can be highly effective: if there is no real dispute, and the company does not want to be wound up, it will have no alternative but to pay. Equally, if it has a genuine dispute, it can drag you into some very expensive proceedings for an injunction.

But what happens if the demand is ignored? This means that you have evidence that the company is insolvent and you can petition the court for it to be wound up. 

Compulsory liquidation

The consequence of a winding up order is that the Official Receiver will act as liquidator (or a private insolvency practitioner take over) to gather and share assets amongst creditors. The catch is that the amount owed to the body of unpaid creditors could vastly exceed the assets realised. 

The key is the realisability of assets. The real point of getting a liquidator involved is to make use of extensive powers to realise more of the company’s assets than might at first sight be apparent.

A liquidator has power to recover payments made to preferential creditors and restore assets disposed of at an undervalue. He can recover unlawful payments and transfers. If ‘wrongful trading’ can be established, he can also seek to obtain contributions from directors and shadow directors. But the price of using the liquidator’s enhanced powers to swell the assets is that they have to be shared with all creditors.

Common insolvency situations

Creditors’ voluntary liquidation is where directors realise that they are at the point of no return and, possibly to avoid the risk of wrongful trading proceedings, appoint a liquidator themselves. 

Because they cannot certify solvency, it is open to the creditors at a subsequent meeting to appoint a liquidator. After that, the options are pretty much those which apply to compulsory liquidation: the creditors must decide whether to invest in recovering limited assets which they are going to have to share.

Administration  is dressed up as a procedure to rescue a company.  It offers the creditors a better recovery than might be available in liquidation. An administrator must aim to rescue the company as a going concern; achieve a better result for the company’s creditors as a whole than if the company were wound up; realise property and distribute to one or more secured or preferential creditors.  

They should perform functions in the interests of the company's creditors as a whole.

Administration has virtually replaced the old style receivership under which banks appointed receivers to sell off company assets. The reality is that an administrator will have done the job on a ‘pre-pack’ basis even before being appointed. 

If you find yourself confronted with one of these procedures in most cases your debt is unlikely to be recovered: to employ old but apt clichés, you can’t get blood out of a stone and there is no point in throwing good money after bad.

But in the right sort of  case, and with appropriate funding, the enhanced powers of liquidators and administrators to pursue dodgy directors may come in very handy indeed.

Richard Harrison is a litigation partner  at Laytons Solicitors LLP, London. The firm also has offices in Guildford and Manchester.

Call 0207 842 8000 or email [email protected].