Practical considerations in pursuing a claim against an uninsured company in liquidation

When a company enters liquidation but has the benefit of an insurance policy in place, the usual route would be to pursue a claim against the liquidated company’s insurer under the Third Parties (Rights against Insurers) Act 2010, provided the company has the benefit of coverage under its insurance policy.

But what should insurers do with a subrogated recovery claim if the liquidated company does not have the benefit of policy coverage?

In this article, we consider some practical considerations, having recently secured a very favourable recovery on behalf of our insurer client from a company which was in liquidation.

In doing so we received invaluable support and advice from Weightmans’ Insolvency team.

Members’ voluntary liquidation v creditors voluntary liquidation

The first point to consider is which formal process was used to wind up the affairs of an insolvent or solvent company, as this will determine the merits of a direct recovery claim against a company.

Creditors’ voluntary liquidation (“CVL”)

This formal and voluntary process enables the director(s) of an insolvent limited company to formally close it where the company cannot continue to trade and the company is unable to pay its creditors and liabilities.

The director(s) will appoint an insolvency practitioner as liquidator of the company. The liquidator’s principal role is to realise any company assets and to distribute proceeds to the company’s creditors, if any. In addition, the liquidator has vast and wide-ranging powers to investigate the former directors of the company and the circumstances leading up to the insolvency of the company.

Members’ voluntary liquidation (“MVL”)

A MVL is also a formal and voluntary process started by the company’s directors, who have decided to wind up the affairs of a solvent company, which is handled by a licenced insolvency practitioner.  

The key difference between a MVL and CVL is that for a MVL to occur, the company must be solvent. This could be due to the business owners selling the company or simply retiring, in which case they are left with a balance of cash to distribute to shareholders after all liabilities have been paid in full.

The director(s) of the company must produce a statutory declaration of solvency confirming, by signing a Statement of Truth, the assets of the company are sufficient to pay all creditors in full, with statutory interest, within 12 months from the date of the declaration of solvency and to make repayment of the surplus to the company’s shareholders.

For insurers pursuing a recovery claim, a proof of debt form will need be filed within the 12 month period. Usually, a creditor will get notice of a company’s liquidation through the London Gazette or the proposed liquidators writing directly to them. The proof of debt is a document that records a creditor’s claim. Without the proof of debt, a creditor will not be recognised. The creditor’s claim (such as an insurer’s subrogated recovery claim), should already be factored in when producing the statutory declaration of solvency, particularly in circumstances where the director(s) of a company are on notice of the debt.

However, once a liquidator is appointed, further creditors may come out of the woodwork, akin to a client’s recent case as set out in the case study below.

Therefore, insurers must submit a proof of debt to the insolvency practitioner appointed as liquidator of the company as soon as a company enters liquidation, placing the insolvency practitioner on notice of the claim with a view to settling the debt during the MVL process or they will risk losing out pursuing a claim against the company. It is the liquidator’s role to realise the company’s assets and to settle any outstanding creditor claims before distributing the remaining assets to shareholders.

Most importantly for insurers pursuing a recovery claim, if the company is not able to pay its liabilities or assets are not available to realise what the director(s) had originally anticipated within 12 months, then the liquidator will likely form the view that creditors will not be paid in full. In turn, the liquidator will be required to write to creditors and effectively convert the liquidation into a  CVL, discussed further below.

Case study

We recently dealt with a subrogated recovery claim on behalf of our insurer and its policyholder, who incurred substantial losses and significant damages following a fire at a property caused by the defendant company, which did not have the benefit of insurance. It transpired that the defendant company entered MVL after the fire occurred. Subsequently, the defendant company filed a declaration of insolvency, which stated that the company was solvent and that it could repay creditors within 12 months.

As solicitors acting for insurers and working together with our insolvency team, we filed a proof of debt on behalf of the insurer and policyholder shortly and promptly after the company entered MVL to effectively confirm that the insurer and policyholder have a claim for insured and uninsured losses, which the company must pay.

Following our investigations, including reviewing the declaration of solvency filed at Companies House, it revealed that the declaration of solvency did not include any creditor claims, and as such, had not factored in our client’s claim despite the directors of the company being on notice of the same before the defendant company entered MVL.

It is a criminal offence to falsely sign a declaration of solvency. This applies whether the directors know the company is insolvent or not. In addition, the directors could have been found guilty of misconduct and as a consequence be disqualified, which the liquidator would need to report after a company enters CVL. We therefore factored in these issues during mediation to place our client in the strongest position, which expedited the negotiation process, given the risks posed to the directors. In order to maximise a return to our client, it was imperative to negotiate and settle the recovery claim during the MVL and before the expiry of the 12 month process, which we did successfully.

If the company could not pay its liabilities and creditors within the 12 month timeframe, then it is likely that the following circumstances would likely occur:

• The company will convert into a CVL;
• An appointed liquidator (who may be a different insolvency practitioner/ liquidator appointed in the MVL) will then investigate the company’s financial affairs, obtain control of the company to handle the company’s affairs and investigate the conduct of the directors; and
• In a CVL, there is an order of priority in terms of distribution of any realisations, namely that the costs and expenses of the liquidation, including the appointed liquidator and the liquidator’s solicitors’ fees, will be paid first before any creditors.
• The surplus, if any, will be distributed to the company’s creditors. In this instance, the debt owed to secured creditors, (i.e. banks and other regulated lenders), would be prioritised and would be paid next. Unsecured creditors at this stage, such as insurers, will fall towards the bottom of the queue and are unlikely to make a recovery.

Importantly, as noted above, the secured creditors fall into the first class of creditors and are prioritised so it is unlikely that insurers, as an unsecured creditor (who are at the bottom of the ranking ahead of shareholders) could have made a recovery, if any, following the expiry of 12 month period.

Therefore, the prospects of a subrogated claim against a company liquidated via MVL are far more favourable for insurers, for the reasons set out above.

Practical considerations

When dealing with a liquidated company that does not have the benefit of insurance, insurers, companies, owner managed businesses as well as legal practitioners need to consider certain and important steps which we, together with our Insolvency team, can advise on in the first instance in order to ensure the most favourable outcome is achieved.