26. Money owed to the insolvent
Collection of monies owed to an insolvent, including the process for engaging contracted agents to undertake the recovery
26.1 General
This chapter provides details of how the official receiver should deal with money owed to a company in liquidation or to a bankrupt. Most likely this will be monies owed in the course of the insolvent’s business (also known as book debts or trade debts) but might include personal loans or money owed by a director in respect of an overdrawn directors’ loan account.
26.2 Right of set-off
Where, before a company goes into liquidation or a bankruptcy order is made, there have been mutual credits, mutual debts or other mutual dealings between the insolvent and any creditor of the insolvent proving or claiming to prove for a debt, an account must be taken by the official receiver, as liquidator or trustee, of what is due from each party to the other in respect of the mutual dealings and the sums due from one party to the other must be set-off.
The balance, if any, once the account has been taken, is either a provable as a debt or an asset in the liquidation / bankruptcy. claimable as an asset.
By way of summary example, if a creditor owes an insolvent £1,500 and the insolvent owes that same creditor £1,000, the two amounts will be set-off and the debt to be collected by the insolvent estate would be £500, being the difference between £1,500 and £1,000.
See chapter 43 for further advice on the right of set-off.
26.3 Contract for recovery of money owed to the insolvent
The Insolvency Service has a contract for the services of an agent to work on behalf of the official receiver to collect money due to companies or partnerships against which a winding-up order has been made, or due to individuals (including members of a partnership) subject to a bankruptcy order.
In general terms, simple book debts can be collected by the contractor. Where the book debt collection is likely to be complex (where, for example, the debt is disputed) the contractor will not be able to act and the official receiver should consider attempting to collect the debt themsleves, or by using a solicitor, if that is commercially viable.
26.4 Interest on book debts
In all cases where statutory interest or charges under the provisions of the provisions of the Late Payment of Commercial Debts (Interest) Act 1988 may be claimed from book debtors of the insolvent, this should be claimed on behalf of the estate in addition to the capital sum for the whole period during which such interest is due.
Discretion may be used in enforcing such interest where it is clear that late payment of the debt by the book debtor has arisen as a consequence of the circumstances surrounding the insolvency (e.g. the insolvent trader could not be traced, the book debtor was uncertain as to whom to pay the sum outstanding to, etc). When calculating the interest payable is simple not compound.
26.5 Directors’ loan accounts and similar transactions
Generally a company may only make a loan to one of its directors or to a director of its holding company where the loan has been approved by resolution of its members. [Companies Act 2006 sections 197; 204-207].
See also chapter 32 regarding recoveries from directors.
26.6 Public companies and directors’ loan accounts
A public company, and a private company which is part of a group of companies that includes a public company, may make a loan, quasi-loan, credit transaction or guarantee to provide security for the benefit of a director or a person connected to a director (except where it is approved by resolution of its members subject to certain exceptions [Companies Act 2006, sections 198-202]).
Where the director is also a director of a holding company a resolution of the members of the holding company endorsing the loan or transaction is also required. For these purposes a director includes a shadow director [Companies Act 2006, s. 223(1)].
26.7 Notice re directors’ loan accounts and similar transactions
Where a loan is made the company must give notice to its members setting out the nature of the transaction, the amount and purpose of the transaction and the extent of the company’s liability related to the transaction [Companies Act 2006, section 197(3)].
26.8 Outstanding approved director’s loan account or similar transactions
Where the loan or other transaction has been approved by the members of the company (and, where appropriate, the members of the holding company [Companies Act 2006, section 197], the official receiver should determine the amount outstanding by making enquiries of the company’s director(s) and/or by reference to the company’s records.
26.9 Voidable director’s loan account or similar transactions
Where the loan or other transaction has not been approved by the members of the company and, where appropriate, the members of the holding company, it is voidable unless:
- restitution of any money or other asset is no longer possible,
- the company has been indemnified for any loss for damage resulting from the loan or other arrangement, or
- a person, who is not a party to loan or transaction and has not been given notice of the contravention, acquired rights as a result of the loan or transaction which would be affected by the avoidance [Companies Act 2006, s. 213(2)].
26.10 Factoring agreements
Where a business has a factoring agreement its sales invoices are sent to the factoring company as soon as they are raised and the factoring company advances a percentage of the debt to the business immediately. This means that the business gets cash instantly rather than having to wait for the customer to pay. The factoring company collects the debt and remits the balance due, less a standard rate of commission charged, to the business. Many factoring companies deal with the whole of a business’s sales ledger and credit control functions.
26.11 Invoice discounting
Another similar type of agreement is invoice discounting where more limited action is taken by the factoring company usually only collecting selected debts on behalf of the business.
26.12 Effect of insolvency on factoring and invoice discounting agreements
The insolvency order will have no effect on factoring or invoice discounting agreements, which will remain valid notwithstanding the order. The official receiver should request a copy of any factoring agreement and should make no attempt to realise factored book debts or to instruct the contractors.
26.13 Reassignment of book debts by the factoring company
The factoring company may wish to reassign the debts to the original owner, i.e. the insolvent, but this is only likely to occur where the debt has proved uncollectable or the factoring company has been paid in full from other book debts. In these cases the official receiver should instruct the contractor to realise those debts.
26.14 Sale of book debts
The official receiver may sell book debts to the purchaser of a business sold as a going concern.
26.15 Assignments of book debts in liquidation
In the case of a limited company, an assignment by way of a charge over the book debts must be registered within 21 days of creation with the Registrar of Companies if it is to be valid.
Assignments of book debts made after the commencement of a winding up may also be void [section 127].
26.16 Assignments of book debts in bankruptcy
Where a bankrupt has made a general assignment to another person of their existing and future book debts the assignment is void against the trustee, as regards the book debts that were not paid before the presentation of the bankruptcy petition, unless the assignment has been registered under the Bill of Sale Act 1878.
A general assignment does not include-
- an assignment of book debts due at the date of the assignment from specified debtors or of debts becoming due under specified contracts [section 244(3)(b)(i)], or
- an assignment of book debts included in a transfer of a business made in good faith and for value or in an assignment of assets for the benefit of creditors generally [section 244(3)(b)(ii)]. A factoring agreement is generally an assignment of specific debts [Hills v Alex Lawrie Factors [2001] BPIR 1038].
Assignments of debts made after the presentation of the bankruptcy petition may also be void as a disposition of property under the provisions of the Act [section 284].
26.17 Background
Book debts are a current asset and whether or not there can be a valid fixed charge on book debts has been the subject of much legal discussion. [Re Spectrum Plus Ltd; National Westminster Bank plc v Spectrum Plus Ltd and others [2005] UKHL 41].
26.18 Establishing whether book debt subject to a fixed charge.
The Official Receiver needs to establish whether a charge over book debts should be counted as fixed or floating, they should do this looking at the terms of the debenture rather than simply whether the debenture describes it as a fixed or floating charge.
The level of control the company has over the collection and disposition of the book debts should indicate whether the charge is fixed or floating, if for example the company was able to recycle receipts from the trade debts purportedly subject to the fixed charge this would point to the charge being floating or whether they were in some way retained by the chargeholder (bank), with the company’s access to them being denied or severely restricted, perhaps by the use of a blocked account, this would point to it being fixed.
26.19 Book debts subject to a valid fixed charge
Where there is a fixed charge and no prospect of a surplus for the benefit of the estate once the chargeholder has been paid, the official receiver, as liquidator or trustee, has no obligation to seek to realise the debts for the benefit of the secured creditor as it is the chargeholder who will benefit from the realisation not the general body of creditors. The chargeholder may appoint a receiver to realise the book debts or take direct action to collect the debts. Where the official receiver is aware of the chargeholder’s interest, a copy of the list of book debts should be provided to the chargeholder so that they may approach the book debtors directly for payment.
If the chargeholder is not prepared to collect the debts, they are not entitled to assume that the official receiver will seek to realise the asset on their behalf. The official receiver should not normally commit their resources to such activity but the collection of book debts should not be neglected, with both the official receiver and the chargeholder expecting the other to take action to collect the book debts. The action to be taken should be agreed in writing between the official receiver and the chargeholder. The official receiver can charge remuneration for this work on a time and rate basis [Insolvency Regulations 1994, reg. 35(1)(b)].
26.20 Realisation of book debts where the holder of a valid fixed charge refuses to realise the book debts
If the official receiver has satisfied themselves that there is a valid fixed charge but the chargeholder does nothing to protect or collect an asset of the estate which could be at risk of collection by a former director or successor company, the official receiver should collect the book debts. Thus the book debts will at least be collected and once remitted to the official receiver they can be put through a secured creditor’s account. In this way appropriate action is taken to collect the assets, a creditor may receive some benefit (albeit only small) and the contractor and the official receiver will receive fees.
26.21 Official receiver agrees to collect book debts subject to a fixed charge
Where the official receiver does agree to collect book debts subject to a valid fixed charge, they should make it clear to the chargeholder that the official receiver will charge remuneration [Insolvency Regulations 1994, reg. 35(1)(b)], together with VAT on that remuneration, and that those charges will be deducted from the amounts realised before any payment is made to the chargeholder. The chargeholder should be asked for confirmation in writing that they still wish for the official receiver to proceed in such circumstances. In such a case, the official receiver should open a fixed charge account (by contacting EAS) to receive the proceeds and to charge fees etc. and to make payments.
26.22 Collection of book debts subject to a floating charge
Where a receiver has not been appointed under a floating charge it falls to the liquidator of the company (including the official receiver when they occupy that position) to realise any book debts covered by the floating charge.
In the case of a floating charge the preferential creditors take priority over the chargeholder, and any book debts realised under a floating charge, once the fees, etc. have been paid, will be used in the first instance to pay the preferential creditors rather than the chargeholder [section 175].
The usual realisation fees [Insolvency Proceedings (Fees) Order 2016] and VAT will also be charged once the book debts are recovered. All monies received from the realisation of book debts subject to a floating charge should be paid into the estate account (as usual).
Where a floating charge was created after 15 September 2003, and monies are collected in and any preferential creditors are paid in full a prescribed part calculation will need to have been undertaken by the examiner.
See chapter 49 for guidance on the prescribed part.