Jane Henderson considers limitations on creditors bringing legal proceedings against insolvent companies.

When considering whether or not to bring a legal action against a company, it’s important to establish if it is competent and commercially worthwhile to do so.

The ability to bring or continue with legal proceedings against a company can be restricted if that company enters into a formal insolvency process. The position of creditors may be improved now that the Third Party (Rights Against Insurers) Act 2010 has at last been brought into force.

Whether or not it is competent to bring an action will depend on which insolvency regime applies. All insolvency practitioner appointments are advertised in The Gazette and with Companies House. English and Welsh insolvency appointments will appear in The London Gazette, Scottish appointments in The Edinburgh Gazette and Northern Irish in The Belfast Gazette.

Administration

When a company in the UK is in administration, a statutory moratorium will automatically apply, and no legal process may be commenced or continued against the company without the consent of the administrator, or the permission of the court.

The moratorium is designed to provide breathing space, allowing the insolvency practitioner (IP) to focus on achieving the purposes of the administration.

Winding up by the court

After a winding up order has been made, or a provisional liquidator appointed, no action or proceedings can be continued or raised without the leave of the court. If a winding up petition has been presented, but a winding up order has not yet been made, the company, any creditor or a contributory can apply to the court to stay, sist or restrain any proceedings.

The statutory moratorium in both administration and compulsory liquidation prevents any one creditor from gaining priority over others. Also, given that IPs will adjudicate on claims, and some issues will otherwise be dealt with in the course of the insolvency process, the moratorium can also prevent potentially expensive and unnecessary litigation.

If permission is sought to bring or continue with proceedings, a balancing exercise will be carried out, considering the interests of the person proposing to bring an action against the interests of the body of creditors as a whole. The onus is on the party seeking leave to bring or continue with proceedings to demonstrate that it is appropriate in all the circumstances that leave be granted.

Creditors’ voluntary liquidation (CVL) and members’ voluntary liquidation (MVL)

There is no automatic restriction preventing proceedings against a company in a CVL or MVL, but the court can, as part of its general discretionary power, stay (or in Scotland sist) proceedings, on the application of a liquidator or creditor.

In Scotland, the court explicitly has power, on the application of the liquidator, to direct that no action or proceedings shall be commenced or continued against a company in voluntary liquidation, except with leave of the court.

Company voluntary arrangements (CVA)

The position will depend on the terms of the CVA, which are binding on all creditors and other parties who were entitled to vote on the proposal. Small companies that have filed a CVA proposal at court may be protected by a moratorium, which will prevent the commencement or continuation of legal proceedings against the company.

Although it may be competent to bring an action, this does not necessarily mean that such an action is commercially worthwhile. Even if an action is successful and a court judgement or decree is obtained, payment is not guaranteed and will depend on the financial position of the company. However, if the company had insurance cover in place, it may be possible to take action against the insurer directly.

Third Party (Rights Against Insurers) Act 2010

This act, which came into force on 1 August 2016, allows a third party to proceed directly against the insolvent company’s insurer, without first having to 'establish' the liability of the insured (as was previously the case) by obtaining a court judgment or arbitration award.

Now it’s possible to establish the liability of an insured party as part of an action against its insurer, and it's no longer necessary to issue separate proceedings against the insured. In addition, if the insured company has been struck off the register, it is no longer necessary for that company to be restored to the register before commencing an action against the insurer.

About the author

Jane Henderson is a senior solicitor in the corporate restructuring and insolvency team at Brodies LLP, @brodiesLLP.