You have been notified that a debtor has gone into insolvency. What rights do you as a creditor have to challenge the steps being taken by the trustee in bankruptcy or liquidator?

Where a creditor has concerns regarding an office holder’s actions in an insolvency procedure, the first step should always be to raise the issue with the office holder directly, or through any creditors’ committee that may have been appointed.

Where, however, a creditor remains dissatisfied, the provisions of the Insolvency Act 1986 (“the Act”) and the Insolvency Rules 1986 (“the Rules”) set out how and in what circumstances a creditor can challenge office holders’ decisions or the level of fees charged, and when applications can be made to remove office holders.

Compulsory Liquidation

A liquidation committee may be appointed (consisting of at least 3, and not more than 5 creditors) which receives reports from the liquidator, approves the liquidator’s remuneration, and sanctions the exercise of certain of the liquidator’s powers (s141, r4.152).

Where no liquidation committee exists, the liquidator’s fees are can be agreed by the creditors, failing which they will be fixed in accordance with a statutory scale or fixed by the Court.

Any secured creditor, or any unsecured creditor with either the concurrence of at least 10% in value of the creditors or the permission of the court, may apply to the court to claim that a liquidator’s remuneration is excessive (rule 4.131).

A liquidator may be removed from office by an order of the court (on application under s108) or by a general meeting of the company’s creditors summoned for that purpose (s172(2)). The voting of the general meeting is by majority in value (r 4.63)

Such a meeting shall be summoned by the liquidator where the liquidator thinks fit, or the Court so directs, or the meeting is requested by not less than 25% in value of the creditors (s172(3)). The Court will not direct that such a meeting be held unless it is satisfied that it is in the best interests of the liquidation to do so.

Creditors’ Voluntary Liquidation

A liquidation committee may be appointed (consisting of not more than 5 creditors) which receives reports from the liquidator, approves the liquidator’s remuneration, and sanctions the exercise of certain of the liquidator’s powers (s101).

Where no liquidation committee exists, the liquidator’s fees are can be agreed by the creditors, failing which they will be fixed in accordance with a statutory scale or fixed by the Court.

Any secured creditor, or any unsecured creditor with either the concurrence of at least 10% in value of the creditors or the permission of the court, may apply to the court to claim that a Liquidator’s remuneration is excessive (r4.131).

A liquidator may be removed from office by an order of the court (on application under s108) or by a general meeting of the company’s creditors summoned for that purpose (s171(2)). The voting of the general meeting is by majority in value (r4.63)

Such a meeting shall be summoned by the liquidator where requested by 25% in value of the creditors, excluding those connected with it (r 4.114).

Administration

A creditors’ committee may be appointed (consisting of 3- 5 creditors) which receives reports from the Administrator and approves the Administrator’s remuneration (r 2.50).

Where no creditors’ committee exists, the Administrator’s fees may be agreed by the creditors, failing which they will be fixed by the Court.

Any secured creditor, or any unsecured creditor with either the concurrence of at least 10% in value of the unsecured creditors or the permission of the court, may apply to the court to claim that an Administrator’s remuneration is excessive (r.2.109(1)).

The Act provides creditors with the ability to apply to review an Administrator’s conduct, but the Courts will not readily interfere with the actions of an Administrator, unless a decision has been based on a wrong appreciation of the law or is conspicuously unfair to a particular creditor.

A creditor can apply for an order under paragraph 74(1) of Schedule B1 to the Act on the basis that the Administrator’s conduct has unfairly harmed his interests, or that the Administrator is failing to perform his functions as quickly or efficiently as reasonably practicable.

In extreme circumstances, the Court may, on an application under paragraph 88 of Schedule B1, remove the Administrator from office.

Creditors can also apply under paragraph 75 of Schedule B1 on the basis of any misfeasance by the Administrator.

Bankruptcy

A creditors’ committee may be appointed (consisting of 3- 5 creditors) which receives reports from the Trustee, approves the Trustee’s remuneration, and sanctions the exercise of certain of the Trustee’s powers (s301, r6.150).

Where no creditors’ committee exists, the trustee’s fees may be agreed by the creditors, failing which they will be fixed in accordance with a statutory scale or fixed by the Court.

Any secured creditor, or any unsecured creditor with either the concurrence of at least 10% in value of the creditors or the permission of the court, or the bankrupt may apply to the court to claim that a Trustee’s remuneration is excessive (r.6.142(1)).

Any person may apply to Court where there are dissatisfied by any act, omission or decision of a Trustee in bankruptcy (s303). The Court has a general discretion in respect of any such application, to confirm, reverse or modify the Trustee’s acts. In practice however, it will be necessary to show the Trustee has acted unreasonably before the Court will interfere.

Under s 298 and r6.129, a Trustee can be removed from office either by an order of the Court, or by a general meeting of creditors summoned for that purpose. A Trustee must convene a general meeting of creditors if requested to do so by a creditor with the concurrence of at least 10% in value of the creditors (s314(7) IA). The voting of the meeting of creditors is by majority in value (r6.88)

Company Voluntary Arrangements and Individual Voluntary Arrangements

Voluntary arrangements are available to both companies (CVAs) and individual debtors (IVAs).

The procedure is similar for both CVAs and IVAs and enables the company or individual to put a proposal to their creditors for a composition in satisfaction of their debts.

It is for the creditors’ meeting to decide whether to agree the terms relating to remuneration along with the other provisions of the proposal. The creditors’ meeting has the power to modify any of the terms of the proposal (with the consent of the debtor in the case of an IVA), including those relating to the fixing of remuneration.

Section 6 of the Act (CVAs) and section 263 (IVAs) provide that any creditor may apply to the Court to challenge the decision of the meeting of creditors on the grounds that:

1. the arrangement unfairly prejudices the interests of a creditor; and/or
2. there has been a material irregularity at or in relation to the creditors’ meeting.

Such application must usually be made within 28 days of the result of the creditors’ meeting being reported to the court.

Where a creditor is dissatisfied with the actions of the supervisor, the terms of the voluntary arrangement proposal may provide what action can be taken. There is however further provision under section 7 (CVAs) and section 263 (IVAs) whereby any a creditor who is dissatisfied by any act, omission or decision of the Supervisor may apply to the Court, which has a wide discretion to review the Supervisor’s actions.