All you need to know about how to start the process
Once an insolvency procedure has started the process that is followed often depends on the particular circumstances of a case. This section outlines what might happen in a ‘typical’ insolvency, but it is always a good idea to maintain regular contact with the insolvency practitioner or Official Receiver that’s dealing with the insolvency in order to keep up-to-date. This is especially true in the early stages of an insolvency when important documents are sent out to creditors and important decisions are made.
In Scotland, all company insolvencies are dealt with by an insolvency practitioner (there is no Official Receiver). Some personal insolvencies are dealt with by the Accountant in Bankruptcy (AiB).
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The insolvency practitioner, Official Receiver, or AiB (all known as the ‘Office Holder’)
Your main point of contact in an insolvency procedure is the insolvency practitioner or Official Receiver or a designated member of their staff. In Scotland, it is the insolvency practitioner or the AiB
Insolvency practitioners The insolvency practitioner is appointed to take responsibility for the financial affairs of an insolvent business or individual. It is the insolvency practitioner’s job to see that an insolvent company or individual repays as much of their debts as possible back to their creditors. The insolvency practitioner is responsible to the creditors as a whole – not to the debtor, nor to any one particular creditor – though a legal ‘order of priority’ dictates that some creditors must be paid back before others. The insolvency practitioner’s fees are usually negotiated with and agreed by the creditors (in rare cases they can be determined in the courts and in Scotland it is common procedure for the courts to determine the fees in liquidations). In Scotland, the AiB determines most of the personal bankruptcy fees. The insolvency practitioner’s decisions about what to do with a company’s or individual’s assets will be based on what will get the best deal for creditors. With a company, for example, the insolvency practitioner may decide to allow the company to continue to trade whilst looking for a buyer, or they might decide to simply cease operations and sell the different assets of the company to raise money to pay back creditors – it depends both on what would bring more money back to creditors as a whole and what can realistically be achieved with the available resources. The insolvency practitioner can be seen as a ‘caretaker’ of a company. The value of the assets and business under the insolvency practitioner’s control is only what they are worth when the insolvency practitioner is appointed – they cannot be valued based on their future worth. Official Receivers You may also come across somebody called the ‘Official Receiver’. The Official Receivers are court-appointed civil servants employed by the Insolvency Service and fulfil some of the same functions as an insolvency practitioner, but they only deal with certain types of cases. An Official Receiver will normally handle the early stages of a bankruptcy or compulsory liquidation of a business. If there are significant assets that can be distributed amongst creditors in these cases, the case is usually passed to an insolvency practitioner. Creditors are allowed to request that cases be passed to an insolvency practitioner. Insolvency practitioners, Official Receivers and the AiB may all be referred to as an ‘Office Holder’ once they have been appointed in an insolvency (they are technically ‘Officers of the Court’).Accountant in Bankruptcy (“AiB”) The term 'AiB' or 'Accountant in Bankruptcy' is used by the offices of the AiB in different ways to refer to different functions that it performs, including for example as an Agency of the Scottish Government. For the purpose of this website, the "AiB" is referred to in respect of all its various roles and functions. The Accountant in Bankruptcy is the individual appointed by Scottish ministers. Their office oversees the work of insolvency practitioners dealing with personal insolvency in Scotland. Like the Official Receiver in England and Wales, the AiB fulfils some of the same functions as an insolvency practitioner, but only in respect of Scottish bankruptcy cases.
Where are my debts in the order of priority?
Because of this, the government has created an ‘order of priority’ that determines the order in which creditors are paid back their money (or at least, what money can be paid back).
This order prioritises major lenders, like banks. These types of lenders are further up the order of priority so that they feel confident continuing to lend to businesses. If there was very little chance that a bank would receive its money back in the event of one of its debtors becoming insolvent, the bank may be unwilling to lend to other businesses in the future.
It is very important that you understand where you stand in this order. The higher up the order you are, the more likely you are to receive more of your money back.
Preferential creditorsCertain types of creditor debts are given a legal priority in terms of repayment from an insolvency. These include the employees of an insolvent business, although only for certain debts: unpaid wages; holiday pay; and pension contributions – all subject to monetary limits. You might hear these creditors referred to as ‘prefs’.IMPORTANCEIf you do good work for good clients, it will lead to other good work for other good clients. If you do bad work for bad clients, it will lead to other bad work for other bad clients.'Secured' or 'fixed charge' creditorsUsually a bank. These are creditors whose lending is tied to a specific property or asset belonging to the business or individual. If a secured loan is not paid back, the lender can take control of the asset the loan has been ‘secured’ against and sell it. Banks are a typical secured creditor – mortgages are an example of a secured loan.IMPORTANCEThe costs and fees of the insolvencyAny costs the insolvency practitioner incurs in handling an insolvency (for example, legal fees or rent on a business’ premises) will fall into this category. The insolvency practitioner or Official Receiver’s fees are part of this category too.IMPORTANCEFloating charge creditorsThese secured creditors are similar to fixed charge creditors, except their lending isn’t tied to a specific asset but to a general type of asset. For example, a company might grant a fixed charge to its bank for a loan used to buy the business’ warehouse, but might grant floating charge over ‘all stock in the warehouse’ to another lender when it takes out an overdraft to buy stock and consumables. The floating charge lender has to accept that the exact goods (and their value) against which the loan is secured can vary over time.IMPORTANCEUnsecured creditorsThese are creditors who are owed money by a business or individual, but who do not have a ‘charge’ to protect what they are owed. Unsecured creditors normally make up the bulk of creditors in an insolvency (in number rather than the size of debts). This group includes trade suppliers, employees owed redundancy pay, any unsecured loans, and HM Revenue & Customs (unpaid taxes are an unsecured debt).IMPORTANCEShareholdersInterest payable on debts and shareholdersIMPORTANCE312456
There is no set timescale for dealing with an insolvency because each case has its own set of unique circumstances: it can take anything from six months (in a straightforward case) to a number of a years for a very complicated case.
According to the World Bank, the average length of time it takes to complete an insolvency procedure in the UK is one year. This is faster than other major global economies including the US, Germany and France.
As a creditor, your main involvement is likely to be in the first few weeks of an insolvency. During this time, there may be creditors’ meetings and you will receive information from an the ‘Office Holder’ and may be asked to vote on certain actions.
For more information on how an insolvency might progress, see here.