When a company is subject to formal insolvency proceedings there tends to be initial media interest in terms of jobs lost, particularly if there is a local slant, and a few weeks later another article will often appear regarding the level of debts and lack of assets, accompanied by the general comment about how debts of such magnitude can be created and why it is unfair that dividend prospects are negligible. Such is an unfortunate aspect of commercial life.

A catchy headline may suffice for some, but spare a thought for the creditors who have little option but to remain part of the liquidation process. Whilst there are occasions where some small-value creditors rattle the cage and express extreme annoyance at losing money or complain about nasty directors, the reality is that it is the larger creditors who tend to take more of an active interest in the eventual outcome. Equally, one might contend that if a creditor has spent fruitless months trying all sorts of methods to recover money and then learns that a liquidator has been appointed, interest tends to wane unless there is specific knowledge about a director’s inappropriate actions or assets that might be ring-fenced for such creditor e.g. a valid claim for retention of title.

Recognising the creditor indifference that a liquidator can encounter, but conscious that the system needs to continue, new liquidation rules came into force earlier this month which give creditors an option to become more involved in the process and if they wish, to absent themselves from the process until something useful crops up e.g. the possibility of receiving a dividend.

A new process in Scotland known as “deemed consent” means that, upon initial appointment, the liquidator can send information to every creditor advising that unless he hears to the contrary within a set timeframe, he will continue to act as liquidator rather than incur the expense of convening a formal meeting of creditors. When doing so, the new rules require the liquidator to send an estimated statement of the company’s financial affairs, together with full details of each creditor. This is a welcome development because, rather than waiting until a meeting of creditors before disclosing information, creditors can make an informed assessment as to whether or not they wish to attend a meeting, or simply advise the liquidator of any concerns that they would like him to investigate. Saves time when there is little financial return in prospect.

The rules also introduce the option, which has been available in England for some time, of a virtual meeting i.e. creditors can be advised of a date/time to join a meeting by either telephone or video link. The idea is to encourage creditor engagement by not forcing them to travel to a meeting, thereby making it easier to provide their feedback from the comfort of their own home/office.
Conscious of the possibility that a single yet vociferous creditor might demand a meeting, either in person or electronically, and create costs that could be avoided, the rules introduce the “10:10:10” concept which means that if a liquidator proposes that deemed consent will apply, it is only if 10% in value of creditors, 10 in number of creditors or at least 10 creditors reject such proposal that a meeting must be held. This is a welcome development but still allows creditor engagement if sufficient interest is shown.

For many years, administrators in Scotland have been able to provide a website portal for creditors to use in order to access information about a formal insolvency process. Happily, the new rules now extend this to liquidations. Accordingly, all information regarding an entire liquidation process can be made available online to creditors and, if creditors agree, all communication can be electronic.

Sensibly, the rules also allow a creditor to opt out of future communication which makes sense because who wants to keep receiving letters from a liquidator saying that no dividend will be paid. Indeed, creditors have been known to return small dividend cheques for, say, £5 with pointed comments about the liquidator earning a large fee and paying a derisory dividend to those who had been involved with the company for many years. Of course, the unfortunate reality is that a company is liquidated because there are insufficient assets and hence, it is a question of what level of dividend might be received rather than expect full recovery.
Creditors : are you interested or are you not?

Finally, the rules acknowledge that statutory interest of 15% is wholly unreasonable in the current economic climate. It has been reduced to 8%, which is the same as the current judicial rate of interest when a court decree is awarded.

Whether or not the new rules will encourage creditors to become more involved is open to question. On balance, one suspects that there will be little change to the overall attitude of “the company is bust and, as a creditor, I will simply wait for future communication from the liquidator in the hope that he might be able to send me some money”. Time will tell.

The views in this article are those of Michael J M Reid, licensed insolvency practitioner and partner of Meston Reid & Co, chartered accountants, Aberdeen. They do not purport to represent those of the firm in general.

April 2019