What happens if the other side goes into an insolvency process during litigation?

Published on

It goes without saying, particularly if you are a claimant or act for one, that the first thing to do is to establish that your proposed defendant has the financial resource to pay the amounts you believe that they owe before you commence proceedings against them. Checking on the financial health of that party should also be an ongoing exercise during the course of those proceedings.

It goes without saying, particularly if you are a claimant or act for one, that the first thing to do is to establish that your proposed defendant has the financial resource to pay the amounts you believe that they owe before you commence proceedings against them. Checking on the financial health of that party should also be an ongoing exercise during the course of those proceedings. 

However, even if you do check before beginning proceedings, parties can get into financial difficulty, so what happens if they go into an insolvency process during the course of proceedings? 

We set out below a summary of the position in respect of the various corporate (administration, liquidation and company voluntary arrangement - CVA) and individual (bankruptcy and individual voluntary arrangement - IVA) insolvency proceedings. 

Administration

Administration creates a moratorium that prevents the commencement or continuation of proceedings without the consent of the administrators or a court order. If the party being pursued goes into administration then any proceedings will be automatically stayed. 

There is a mechanism under the insolvency legislation for the administrator to adjudicate on claims if they intend to make a distribution to unsecured creditors. If the administrator admits the claim then the claimant will receive an equal return as all other unsecured creditors. If the administrator rejects the claim then the claimant can appeal that decision through the insolvency courts. 

If the claimant goes into administration then the administrators have the statutory power to continue those proceedings, but this may give rise to security for costs issues depending on how the proceedings are continued. 

Liquidation

Insolvent liquidation can be commenced by a creditor through the courts (compulsory) or by the company itself (creditors voluntary liquidation - CVL). If a defendant goes into compulsory liquidation, the proceedings are stayed and liquidation has a similar claims adjudication process to administration, as set out above. If the company goes into CVL, there is no automatic stay of proceedings although the liquidator can apply for a stay. 

From the claimant’s point of view, it is worth considering whether to continue proceedings against a company in liquidation or to try and agree the claim with the liquidator. The liquidator has the statutory power to commence or continue proceedings on the company’s behalf.

A company can go into solvent liquidation so that should be checked as the proceedings will not be stayed in those circumstances and the defendant should still be good for any judgment awarded or claim agreed in those circumstances. 

CVAs and IVAs

Voluntary arrangements are effectively agreements between the debtor and creditors to settle claims on certain terms. That agreement will bind all creditors if approved by 75 per cent or more of voting creditors. 

Once in a voluntary arrangement, proceedings can still be commenced or continued against the debtor, but the claim may have been settled by the arrangement, so its terms need to be checked. A company or individual in a voluntary arrangement can still commence or continue proceedings. 

Bankruptcy

If an individual is made bankrupt, as with administration and liquidation, the proceedings against that individual are stayed, subject to agreement of the trustee in bankruptcy or a court order allowing the trustee to adjudicate on the claim. Again, if that claim is rejected in whole or part then the claimant can appeal that decision through the bankruptcy court. 

A trustee in bankruptcy has the statutory power to commence or continue proceedings on behalf of the bankrupt as those claims vest in the trustee under the insolvency legislation. 

Summary

As can be seen from the above, there are some common themes, but there are also different rules and approaches for different insolvency processes. It is therefore worth taking advice if the other party to your litigation goes into an insolvency process so as to formulate the best recovery strategy and tactics. 

It is also demonstrates the importance of having the best idea possible, at all times, of the financial position of other litigating parties. 

If you would like further information on the matters mentioned above then please let us know.

Mills & Reeve Sites navigation
A tabbed collection of Mills & Reeve sites.
Sites
My Mills & Reeve navigation
Subscribe to, or manage your My Mills & Reeve account.
My M&R
Register or login

Register or login Get all the benefits of MyM&R but registering or logging in ulla vehicula mauris mattis hendrerit fermentum. Etiam placerat hendrerit dapibus. Praesent ligula felis, eleifend sed odio quis, feugiat eros. Aliquam vitae felis fermentum, posuere nulla ut, maximus magna.

Staff intranet
Log in to the intranet
Client extranet
Log in to the extranet