When a customer goes into administration or liquidation

• Administration
• Creditors' voluntary liquidation
• Compulsory liquidation
• Who is paid first
• How to claim

Administration

The company is now run by its administrators, licensed insolvency practitioners. Their first aim is to rescue the company as a going concern. If that is not possible, they must try to get a better result for the creditors as a whole than an immediate liquidation would, often by selling the business or its assets.

A moratorium protects the company while it is in administration. You cannot start or continue legal action against it, or take back goods supplied on retention of title or hire purchase, without the administrators' consent or the court's permission.

Unsecured creditors, which include most suppliers, are paid after the costs of the administration, secured lenders and preferential creditors (employees' pay up to set limits, and some taxes owed to HMRC). Any payment to unsecured creditors usually comes from the prescribed part, a share of floating charge assets set aside by law, or after the company moves into liquidation.

Creditors' voluntary liquidation

The company's shareholders resolved to wind it up because it cannot pay its debts, and a licensed insolvency practitioner was appointed as liquidator. The company stops trading. The liquidator sells what it owns, pays the costs of the liquidation and then pays creditors in the order the law sets.

The liquidator must look into why the company failed and report on the conduct of its directors to the Insolvency Service. If you have information about how the company was run in its last months, you can give it to the liquidator.

Unsecured creditors, which include most suppliers, are paid after the costs of the liquidation, secured lenders and preferential creditors (employees' pay up to set limits, and some taxes owed to HMRC). If there is money for unsecured creditors, the liquidator gives notice of an intended dividend and sets a last date for claims.

Compulsory liquidation

A court ordered the company to be wound up, usually on a creditor's petition. The Official Receiver, a civil servant in the Insolvency Service, becomes liquidator first and may later be replaced by a licensed insolvency practitioner.

Once the order is made, legal action against the company cannot start or continue without the court's permission. The Official Receiver investigates why the company failed and reports on the directors' conduct.

Unsecured creditors, which include most suppliers, are paid after the costs of the liquidation, secured lenders and preferential creditors. If there is money for unsecured creditors, the liquidator gives notice of an intended dividend and sets a last date for claims.

Who is paid first

Money from the company's assets is paid out in an order set by law. Most suppliers are unsecured creditors, near the bottom.

1. Lenders with a fixed chargeFrom the assets the charge covers.
2. The costs of the procedureIncluding the practitioners' fees.
3. Preferential creditorsEmployees' unpaid wages up to £800 each and holiday pay, then, since 1 December 2020, HMRC for VAT, PAYE income tax, employees' National Insurance and construction industry scheme deductions.
4. The prescribed partA share of floating charge assets set aside for unsecured creditors: 50% of the first £10,000 and 20% of the rest, up to £800,000 where the charge was created on or after 6 April 2020.
5. Lenders with a floating chargeFrom what is left of the floating charge assets.
6. Unsecured creditors, including most suppliersPaid the same proportion of their debts as each other.
7. ShareholdersWhich in an insolvency is rare.

Highlighted: where a supplier's money comes from.

How to make a claim

Send the administrator or liquidator a proof of debt, a form they can send you, with copies of your invoices and statements. In Scotland it is called a statement of claim. Claim the full amount owed at the date the procedure began, including VAT. Interest already owed before then, under your contract or the Late Payment of Commercial Debts (Interest) Act 1998, can be included; the late payment interest calculator works it out. Before any dividend is paid, a notice in The Gazette sets a last date for claims; each case page in the register shows the date where one has been set.

Goods supplied on retention of title

If your terms of sale say you own goods until they are paid for, and those goods are still with the company and can be identified, write to the administrator or liquidator straight away with your terms and a list of the goods. In administration you need their consent or the court's permission before collecting anything.

Carrying on supplying

Since June 2020 most suppliers cannot end a supply contract, or insist on payment of the old debt as a condition of supplying, just because the customer has entered an insolvency procedure (section 233B of the Insolvency Act 1986). There are exceptions, for example for some financial services. For any new order, agree terms and how you will be paid with the office holder in writing first.

VAT and insurance

You can usually claim VAT bad debt relief from HMRC once the debt is more than six months overdue and has been written off in your VAT records (VAT Notice 700/18). If you have credit insurance, tell your insurer as soon as you hear of the insolvency; most policies set a deadline.

What you will hear, and when

In an administration, the administrators' proposals reach creditors within eight weeks and include an estimate of what unsecured creditors will receive; progress reports follow every six months. In a liquidation, the liquidator reports each year and files a final account before the company is dissolved. Our money-back tracker records what these documents say.

Questions suppliers ask