Claiming against an insolvent defendant

Legal proceedings may, subject to some statutory restrictions, be pursued against an insolvent company or individual. The office holder (that is, the liquidator, administrator, administrative receiver, trustee in bankruptcy or, subject to the contractual terms, the supervisor of a company voluntary arrangement (CVA)) will generally have the power to defend the claim. The costs of defending a claim will usually be paid from the assets of the company or individual, subject to the statutory order of priority.

Of key importance is to consider whether it is cost-effective to pursue a claim against an insolvent company or individual. Unless you have a proprietary right or security in respect of assets held by the office holder, your legal claim will rank equally with those of other unsecured creditors. Even if you obtain a court judgment, you will not be entitled to recover your debt ahead of other unsecured creditors. Ultimately, you may recover only a percentage of your claim (which may be a few pence in the pound) or nothing at all.

In these circumstances, incurring litigation costs in respect of a claim for solely financial relief could be pointless. Subject to limitation issues, the best option may be to wait and let the insolvency process take its course. Instead of pursuing litigation, you may submit details of your claim (known as your proof of debt) and allow the office holder to carry out his duties and evaluate your claim in due course. If you are unhappy with the office holder's decision on your claim, there are procedures under the Legal Insolvency Act 1986 (IA 1986) by which you may challenge it.

Alternatively, you may ask the office holder to consider settlement of the claim. As the office holder will assess the merits of a claim on a purely financial basis, he may be more inclined to reach settlement than the company or individual, who may wish to obtain a judgment on matters of principle. Entering into a legal settlement agreement would provide certainty as to the value of your claim pending such time as the office holder is in a position to make a distribution to creditors. It will not, however, give your claim any priority over other unsecured creditors. You can look up the status of the office holder of an insolvent company via the Companies House online WebCHeck service.