Caroline Clark, insolvency practitioner, director of RMCSC and a fellow of the Insolvency Practitioners Association and R3, explains the meaning of ‘creditors’ in insolvency proceedings and the influence of The Insolvency Service.

Introduction

The 2024 judgements in re Pindar Scarborough Ltd (In Administration) (Pindar) and Boughey & Anor v Toogood International Transport and Agricultural Services Ltd (In Administration) (Toogood) are important for the insolvency profession because of the changes these judgements brought about to the interpretation of a single section of the Insolvency Act 1986 (IA 1986); Sch B1 para 78 IA 1986.

The role of the Insolvency Service in the interpretation of Sch B1 para 78 IA 1986 should also be considered. The Insolvency Service is understandably very influential in the insolvency profession, but could this be something that should be reconsidered?

What is a creditor in insolvency proceedings?

A creditor is a person or organisation that is owed a debt. In the context of insolvency the debt owed to the creditor can be present or future, certain or contingent, ascertained or subject to a damages claim and if the debtor is insolvent the creditor may well ultimately suffer a financial loss.

IA 1986 defines different categories of creditors. Secured creditors, such as banks and providers of finance, will have a fixed charge over assets, such as property owned by the insolvent person or organisation, and they will be paid first from the realisations from those assets. Banks and providers of finance may have floating charges over other types of assets, such as stock and motor vehicles, but the realisations from these assets will be initially used for payments to preferential creditors.

S175 IA 1986 gives two categories of preferential creditors, ordinary and secondary:

1. ordinary preferential creditors are debts owed to the employees for arrears of pay and holiday are
2. the secondary preferential creditor is HMRC for arrears of PAYE, NIC and VAT

All other creditors will be unsecured and will only be paid a dividend from an insolvent estate after the secured creditors and ordinary and secondary preferential creditors, together with the cost of the insolvency procedure, have been paid in full.

Why are creditors important in an insolvency?

When working as the office holder of an insolvency such as a bankruptcy, liquidation, voluntary arrangement or administration, an insolvency practitioner will work for the benefit of creditors. It is recognised in the relevant legislation that as the creditors are likely to suffer financial loss because of the insolvency, they are major stakeholders in the insolvency procedure and they should be able to influence the insolvency, should they wish to do so.

The office holding insolvency practitioner should provide regular reports to creditors about the progress of the insolvency, the outcome of statutory investigations and the likelihood of any dividend to the different categories of creditors.

In creditors’ voluntary liquidations (CVLs), creditors are given the opportunity of nominating an alternative liquidator to the one appointed by the company’s shareholders. In administrations, insolvent liquidations and bankruptcies, creditors are given the opportunity of putting themselves forward as members of a creditors’ committee that would approve the office holder’s remuneration. If there is not a creditors’ committee then all creditors will have the opportunity of questioning or approving the office holder’s remuneration.

The importance of creditors in insolvency legislation is also shown in Sch B1 Para 78 IA 1986. This deals with administrations, usually just a 12-month long procedure, that are to be extended beyond this period. The administrator’s term of office may be extended by a specific period not exceeding one year if the appropriate creditors have given their consent to this.

The definition of ‘appropriate creditors’ in Sch B1 para 87 IA 1986 can be complex. Appropriate creditors are each secured creditor of the company and the majority of preferential and unsecured creditors who have replied to the consent procedure - unless the administrator has already issued a statement to the effect there will not be a dividend to the unsecured creditors. If there will not be dividend to the unsecured creditors the appropriate creditors will be each secured creditor and the preferential creditors. A creditor’s ability to be involved in the consent procedure effectively depends on whether they are likely to receive a dividend from the company in administration.  

Pindar, Toogood and The Insolvency Service

It was the definition of a secured creditor for the purposes of giving consent to the extension of an administration that was considered in Pindar and Toogood in 2024. Some time before 2024 it had been realised that by the time the administrator sought consent from creditors for the extension of the administration it was very possible that a secured creditor might have been paid in full. If a secured creditor had been paid in full then should, or could the secured creditor give its consent to the extension of the administration?

The Insolvency Service, which over the years has given excellent guidance regarding insolvency compliance and procedure, advised that in its view ‘a creditor is set at the point of entry to the procedure and that this remains even if payment in full is subsequently made’. This was taken to mean that a secured creditor may still give consent regarding the extension of an administration even if the secured creditor had been paid in full and is accordingly no longer a creditor.

The judges in Pindar and Toogood had a different opinion and they stated that if a secured creditor had been paid in full then it was no longer a creditor and therefore it could not give its consent to the extension of an administration. This is surely a commonsense decision that has also been recognised in the past in Wight v Eckhardt Marine GMBh (2004).

In subsequent correspondence with the Recognised Professional Bodies (RPBs) and R3, The Insolvency Service advised that when giving its previous view about the definition of creditor it was referring to all usages of the term creditor in insolvency law and it did not wish to make a statement on secured creditors and extensions to administrations. Since the Pindar and Toogood decisions The Insolvency Service has taken legal advice and has reconsidered its opinion about the definition of creditors. The Insolvency Service issued Dear IP 168 in June 2025 giving more information about the use of the term ‘creditor’ in insolvency legislation.

The role of The Insolvency Service with the RPBs in the future

There is little point in debating exactly what was meant or understood by previous guidance or professional opinions, but it is important for everyone to learn from mistakes. It is for the courts to interpret legislation, not The Insolvency Service.

It is interesting that R3 issued a recent Technical Alert about the decision in NOAL SCSp v Novalpina Capital 2025. The judge decided in this case that S89 IA 1986 should be interpreted strictly, and members’ voluntary liquidations (MVLs) in which all debts had not been paid in full together with interest within 12 months of the start of the liquidation should be converted into CVLs.

R3 is well aware of the challenges that this decision could cause for many insolvency practitioners and is seeking to enter dialogue with The Insolvency Service about it. It will be interesting to see how The Insolvency Service responds regarding guidance or opinion, especially as it is understood that NOAL SCSp v Novalpina Capital 2025 is subject to appeal.

The ICAEW and IPA have issued identical guidance about NOAL SCSp v Novalpina Capital 2025. Broadly speaking, the guidance from the RPBs is for office holders to review open MVLs and if creditors have not been paid in full within 12 months of liquidation then the MVL should be converted into a CVL. The RPBs also advise that they will take a pragmatic approach while NOAL SCSp v Novalpina Capital 2025 is subject to appeal in the court. No mention is made of The Insolvency Service.

About the author

Caroline Clark is an insolvency practitioner, director of RMCSC, and a fellow of the Insolvency Practitioners Association and R3. She established RMCSC in 2013, providing consultancy advice for insolvency practitioners about compliance with insolvency and anti-money laundering legislation, including insolvency compliance reviews and Reg 21 audits.

See also

Place an insolvency notice

Are appetites for members' voluntary liquidations changing?

What insolvency practitioners need to know about suspicious activity reports (SARs)

Economic Crime and Corporate Transparency Act 2023 - a year later

Find out more

Insolvency Act 1986 (Legislation)

Dear IP Issue 168 June 2025 (The Insolvency Service)

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Publication date

23 September 2025

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.