Litigation proceedings may, subject to certain statutory restrictions, be pursued against an insolvent company or bankrupt individual.
The liquidator, administrator, administrative receiver or trustee in bankruptcy (Practitioner) will generally have the power and right to defend a litigation 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.
Prior to issuing legal proceedings it is important is to evaluate whether it is commercially and financially prudent to pursue a claim against an insolvent company or bankrupt individual. If you do not have a proprietary right or security over the assets of the company or individual, then your claim will rank equally with those of other unsecured creditors.
Therefore, even if you are successful in bringing a litigation claim and obtain a court judgment, you will not be entitled to recover your debt ahead of other unsecured creditors, and only after any secured creditors have been paid. There may be a not insignificant risk that you may recover only a small fraction of your claim award, or nothing at all.
In such circumstances, incurring litigation costs and expending significant management time, in pursuing a claim for solely financial relief, could be a waste of money and resources, which could be put to better use elsewhere in your business. You should consult your litigation solicitor to determine whether pursuing a claim is a viable option.
Subject to limitation periods and the statutory timescales within which you can bring your claim, a better option could be to wait and let the insolvency process take its course. Instead of pursuing litigation, you could submit details of your claim and proof of debt and allow the Practitioner to evaluate your proof of debt. If their decision in relation to your claim and proof of debt is not favourable, then there are procedures under the Insolvency Act 1986 by which you can challenge the decision, without incurring significant costs or management time.
A further option would be to ask the Practitioner to consider settling your claim. The Practitioner will assess the merits of a claim on a purely financial basis, and therefore may be more inclined to reach settlement than the company or individual. Agreeing the terms of a settlement agreement would provide certainty as to the value of your claim pending such time as the Practitioner is in a position to make a distribution to creditors. It will not, however, give your claim any priority over other unsecured creditors.
Where a company has been dissolved, it is no longer a legal entity and proceedings cannot be started against it.
Summerfield Browne Solicitors have offices in London, Birmingham, Oxford, Cambridge, Northampton and Market Harborough, Leicester.
