The Insolvency Service, the government agency responsible for administering bankruptcies and liquidations in the UK, has published updated guidance that reframes its previously held view that a creditor is set at the point of entry into an insolvency procedure and remains a creditor even if payment in full is subsequently made.
The guidance, which was published in its most recent ‘Dear IP’ issue at the end of June, confirmed that the term “creditor” will be context specific and the office holder will be permitted to exercise their professional judgment in relation to whether paid creditors remain creditors. The update reframes the agency’s view on what defines a creditor and follows two court cases last year that found that the consent of paid secured creditors was not required in the context of an administration extension.
In 2024, the court in cases Boughey & Anor v Toogood International Transport and Agricultural Services Ltd and Re Pindar Scarborough Ltd (in administration) – commonly referred to as ‘Re Pindar’ and ‘Re Toogood’ – was asked to consider the issue of paid secured creditors in the context of administration extensions.
An administration automatically ends after one year, however, few administrations are concluded so quickly, so the administration can be extended by the court or for a period of up to one year by creditor consent.
Approaching secured and preferential creditors who have been repaid in full for their approval or consent has been a thorn in the side of administrators for a number of years. Many secured creditors, understandably, consider that once they had been repaid, they no longer have an interest in decisions in the insolvency process – so neither approve nor object to the request.
Consent refers to the actual consent of both secured and unsecured creditors unless the administrator has made a statement under paragraph 52(1)(b) of schedule b1 to the Insolvency Act 1986, in which case the consent of each secured creditor is required, or, if a distribution to preferential creditors is to be made, then the consent of each secured creditor and the preferential creditors of the company is required. The rationale is those creditors with an economic interest in the company are the decision makers.
In the Re Pindar and Re Toogood cases the court said that the definition of “secured creditor” in the Insolvency Act 1986 should be read in the present tense so that a secured creditor for decision-making purposes would only be a creditor who holds security in relation to a debt that is still owed.
In Re Toogood, the judge commented: “There is no reason why a commercial organisation such as a bank that has been repaid in full should have to be bothered thereafter with making administration decisions that do not affect it. Why should it spend its time, unremunerated, in doing so?”
The court’s view in these cases conflicted with the Insolvency Service’s interpretation at the time. In April 2022, the agency said: “It has been the government’s position for some time that the classification of a creditor is set at the point of entry to the procedure and that this remains, even if payment in full is subsequently made” – so underlining the need to obtain paid creditors’ consent, notwithstanding the practical difficulty obtaining it.
The judge in the Re Toogood case, His Honour Judge Matthew, challenged this view, stating: “If the government wishes there to be a different result, then it must legislate more clearly than it has done and moreover explain why those with no economic interest in the outcome of an administration should nevertheless determine what happens.”
In its latest guidance, the Insolvency Service stated it will no longer contend that the meaning of the word ‘creditor’ is fixed and crystallised at the date of entry into an insolvency procedure. The agency said it will be a matter for the officeholder’s professional judgement, with reference to the specific circumstances of the insolvency case in question, to determine whether an interpretation of the word “creditor” in an insolvency law provision will exclude a creditor whose debt has been repaid.
The update also highlighted that the officeholder should give “particular consideration” to whether the creditor in question may be prejudiced or disadvantaged by losing their status upon full repayment, in which case their creditor status should not be detached from them.
Commenting on the development, James Hillman, restructuring and insolvency expert at Pinsent Masons said: “The Insolvency Service’s reframed view will be welcome news for officeholders and brings its view closer to the view of the courts in relation to an issue that has been problematic for a number of years.”
The updated guidance provides welcome clarity on the definition of a ‘creditor’ in insolvency legislation, but Hillman said there are likely to be further court decisions on other procedural matters where uncertainty remains. “It does not deal with issues around obtaining consent where all secured creditors and preferential creditors have been paid or there weren’t any secured creditors to begin with, so we may see more court applications in this area,” he said. “However, the latest guidance is a positive step forward.”