What Should a Creditor Do When a Company Becomes Insolvent?
You are a creditor of a company which is unable to pay its debt, or which had already gone into insolvency. What should you do to recover your debt? This article sets out the steps to take to recover debts from your debtor company.
If the Company is Still Solvent
You may petition to wind it up to realise your debts. You can achieve this by submitting a winding up petition either through a:
- Creditor’s winding up: a company may decide to opt for a creditors’ voluntary winding up if its directors believe that it cannot, by reason of its liabilities, continue its business. After the management initiated the winding up, you (and other creditors) have the right to approve the resolution for winding up and have control over the process of liquidation.
- Compulsory winding up: the creditors of the company decide to apply for a winding up of the business because the insolvent company’s management is unwilling to wind up its business or there is a high risk of dissipation of the company’s assets.
How to Initiate a Compulsory Winding Up
To initiate a compulsory winding up, you must first be a creditor (including contingent or prospective creditors) of the company. Second, you must establish that the company is unable to pay its debts.
There are 3 ways to prove a company’s insolvency:
- The company failed to pay a certain sum exceeding $10,000 within 3 weeks of a statutory demand for this sum being served to the company’s registered address;
- Execution of a judgment in favour of you has yet to be paid; or
- The company cannot meet its liability on short notice or that there is a deficit of its liabilities against its assets.
If the Company is Already Insolvent
If the company has already gone into insolvency, you will need to submit proof of your debt (i.e. a “proof of debt”) to the company. However, there is no guarantee that you can retrieve the full debt owed as there are any creditors like you claiming against the insolvent company.
What is a Proof of Debt?
All claims in insolvent liquidation are provable against the insolvent company. If your claim is not provable, you will not receive payment.
After the company goes into liquidation, the liquidator will write to you and advertise the liquidation. Then, you will need to file proof of debt within 3 months after the winding up order is made. Present debt, future debt (debt which will certainly become due in future) or contingent debt (debt which will materialise out of an existing legal obligation on an event which may or may not occur) as at liquidation date or interests up to the liquidation date are all provable.
The liquidator will then examine and adjudicate on all proofs of debt received, – and will admit, reject or require more evidence with regard to these proofs.
If your claim is rejected, you may appeal to court. If more evidence is required and you fail to provide it to the satisfaction of the liquidator, your claim may thereby be rejected or downsized.
Effect of Winding Up
Once the court makes a winding up order, you cannot institute or continue any legal proceedings against the company without the permission from the court. This is to facilitate an equal and organised distribution of the insolvent company’s assets amongst the unsecured creditors.
Permission from the court to pursue an action against the insolvent company may be granted to:
- To repossess one’s own property; or
- To exercise a remedy over the company’s property (an example will be a landlord creditor seeking to seize property in default of rent payment).
Secured creditors are not affected by this stay and are free to claim assets which are secured to their debts.
If You Need to Recover Debts from a Company
A debt recovery lawyer can advise you on steps to take to secure your position as a secured creditor through proper drafting. They can also advise you on the steps to take as an unsecured creditor.
When a company goes insolvent, it makes a huge difference whether you are a secured or unsecured creditor. If you are a secured creditor, you need not worry about not being able to recover your debt as it will be encumbered to the company’s asset, and your interest in that asset will not be divested even in insolvency.
To this end, consulting a lawyer prior to a high risk investment might help to mitigate some insolvency risk involved in the transaction.
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