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You may be expecting it or it may come out of the blue but what should you do if you find out a customer is about to enter liquidation? 

Paperwork 

As a creditor you will receive some paperwork from the insolvency firm instructed by the directors of the insolvent company. This should include a covering letter, a notice calling the forthcoming creditors’ meeting, a proxy form and a statement of claim form. Typically you may only have about 7 days until the meeting is held so it is important that these forms are dealt with quickly. 

1. Statement of claim form: This should be quite straightforward. Ensure all your invoicing is up to date and append copies of your invoices or statements to the form. This formally registers your claim in the forthcoming liquidation. 

2. Proxy form: This is your voting form. If you want to attend the meeting of creditors and you are a limited company, you will need to nominate yourself as a proxy holder. If you want to nominate a third party to be your proxy holder (such as a representative from Thomas Westcott Business Recovery & Insolvency (BRI)) to attend on your behalf, you will need to insert the name appropriately. Alternatively, you can give your vote to the Chairman who will be one of the directors of the insolvency company. 

Meeting of creditors 

You will often find the majority of creditors will not be in attendance at the meeting of creditors but rather will submit their proxy and wait to find out the outcome subsequently.

However, creditors’ meetings are an opportunity for creditors or their nominated representatives to question the directors about the reasons behind the insolvency. It is important that the right questions are asked. 

Creditors will also be asked to pass a number of resolutions. The first will be to either support the nomination of the proposed liquidator or, alternatively, appoint their own Insolvency Practitioner as liquidator. In larger cases you may find that one or more Insolvency Practitioners are putting themselves forward with the support of at least one creditor’s nomination. The Insolvency Practitioner who obtains over 50% of the total votes at the meeting will be appointed liquidator. 

Once the liquidator is appointed creditors may be asked to form a creditors’ committee. If a committee is appointed, it will decide how the liquidator is remunerated amongst other tasks. If no committee is appointed, a further resolution may be passed by the creditors to approve the basis of the liquidator’s remuneration. 

The appointed liquidator should report the outcome of the meeting to all creditors within 28 days of the meeting being held. 

Mitigating the loss 

There are a few key areas to look at: 

1. Insurance: You may have taken out insurance cover against bad debts. It will be important to let your insurers know of the impending insolvency at the earliest opportunity. 

2. Personal guarantees: You may have asked the directors to personally guarantee the company’s credit facility. Following the liquidation put the directors on notice that you intend to call against their guarantee. 

3. Retention of Title (ROT) claims: It is important to check the terms of any ROT clause you might have within your Terms of Trade and invoices. Act quickly! Contact the insolvency firm in the first instance to put them on notice of your potential ROT claim and try to establish what goods are still remaining and identifiable. You will be asked to supply the relevant paperwork so ensure that this is in good order. 

4. VAT bad debt relief: If you are registered for VAT, you may be able to claim VAT bad debt relief. If you receive any dividends from the liquidation, you should account for the VAT on a subsequent VAT return. 

5. Continuing to trade: You may find that the directors or a third party have set up a new company and bought the assets from the old company. Depending on your relationship with the ‘new’ company you may wish to continue to supply your goods/services albeit on slightly tighter credit terms.

By Jon Mitchell, Licenced Insolvency Practitioner at Thomas Westcott Business Recovery LLP and highly experienced in business rescue, restructuring and insolvency solutions.

If you would like any further information, please contact one of our Business Recovery & Insolvency team on 01392 288555 or by e-mail: insolvency@thomaswestcottbri.co.uk