Meeting Insolvency Practitioners’ Obligations to Creditors

insolvency practitioners' obligations

Licensed insolvency practitioners (IPs) act on behalf of companies that are facing financial distress. These professionals are crucial in the process of company liquidations and administrations, ensuring the orderly winding up of a business that cannot meet its financial obligations. When a company becomes insolvent, meaning it cannot pay its debts as they fall due or its liabilities exceed its assets, it might enter into various forms of insolvency procedures.

The fundamental duty of an IP is to ensure the best possible financial outcome for creditors. This means realising assets in a manner that maximises returns, ensuring fair distribution based on the statutory order of priority, and minimising costs wherever possible.

The insolvency of a law firm can be particularly complex due to the unique nature of the legal industry.

IPs must consider both their primary obligations to creditors and the specific intricacies associated with legal practices. This ensures the best possible outcome for creditors whilst also respecting the unique requirements of the legal profession, and their clients.


Insolvency resolution

There are multiple routes through which an insolvent company can seek resolution:

  • Company Voluntary Arrangements (CVA): A CVA involves negotiating with creditors to agree on a repayment plan. The aim is to enable the business to continue trading and gradually pay off its debts. This arrangement requires approval from a majority of the company’s creditors.
  • Creditors Voluntary Liquidations (CVL): In situations where a company director recognises that the company is insolvent and there is no viable route to rescue it, they might opt for a CVL. This is a voluntary liquidation initiated by the directors, but it is done in the interest of the creditors. The process involves realising company assets and distributing the proceeds to creditors.
  • Pre-pack administration: Pre-pack administration is a procedure where the sale of the assets of an insolvent company is negotiated prior to the company entering administration. This ensures a quick sale and can help preserve the value of the assets, thereby maximising returns to creditors.
  • Insolvency advice: It is essential for companies, especially when they start facing financial troubles, to seek early insolvency advice. This can lead to better outcomes, potentially saving the business or at least ensuring maximum returns for creditors.

The Insolvency Service is an executive agency of the UK government. It provides a framework within which IPs operate, ensuring the process is transparent, and stakeholders’ rights are upheld. The nature and specifics of each insolvency procedure can vary depending on several factors, including the company’s financial health, its industry, and the prospects for recovery or restructuring.


Insolvency practitioners’ obligations to creditors


IPs serve as intermediaries between the insolvent entity and its creditors. They ensure that insolvency processes run smoothly, ethically, and within the boundaries of the law. Their role is to balance the interests of various stakeholders, including directors, shareholders, and, most importantly, creditors.

The primary duty of insolvency practitioners is to maximise returns to creditors. When a company or individual is declared insolvent, the insolvency practitioner must ensure that the assets are secured, valued, and realised to pay off the debts to the creditors.

Other examples of insolvency practitioners’ obligations to creditors include:

  • Communication: IPs must keep creditors informed about the progress and decisions made regarding the insolvency procedure. This is typically done through regular reports.
  • Meetings: In certain circumstances, IPs are obliged to convene meetings of creditors to provide updates or seek decisions on specific matters.
  • Distribution: Once assets are realised, IPs distribute the funds in a specific order of priority as stipulated by law.
  • Transparency: IPs are required to provide details of their fees and expenses. They should also ensure their actions are transparent and free from any conflicts of interest.
  • Investigations: IPs have a duty to investigate the affairs of the insolvent company or individual. If any wrongdoing or misconduct is identified, they must report it to the appropriate authorities, such as the Insolvency Service.


How the Recovery First Process can help Insolvency Practitioners meet their obligations

Recovery First regularly assists insolvency practitioners who are involved in any form of insolvency process, or indeed restructuring of a law firm. It is important to note that pre-pack sales are not the only route when it comes to law firm insolvency.

When IPs handle law firm insolvencies, one of the major assets to consider is the Work in Progress (WIP). This is the unbilled work that, once completed and billed, can offer significant returns for creditors. Realising the value of WIP is often a complex task. It is not just about selling off assets; it involves understanding the value of ongoing legal work, its potential for completion, and the ability to bill and collect for that work.  It Is also essential to preserve the goodwill and support of ‘live’ clients to ensure that they do not move their matter elsewhere and diminish the WIP value.  Excellent client care and communication is therefore essential.

There are often matters where costs issues are not fully resolved and require negotiation and collections to maximise and realise full value.

Recovery First has tailored its services specifically for this scenario. It focuses on assisting law firms in their strategic withdrawal from specific legal market sectors.

The process involves helping law firms withdraw from specific sectors of the legal market, whilst ensuring 100% of the recoverable WIP value is retained by the law firm. This is of paramount importance, as hastily selling or undervaluing these assets could mean significant financial losses for creditors.

Recovery First ensures a structured, phased, and strategic process. This ensures continuity for the law firm’s clients, potentially preserving the firm’s reputation and offering better outcomes for stakeholders.

We work alongside insolvency professionals to ensure the most profitable outcome is achieved on any file transfer agreement. This collaborative approach ensures that all obligations to creditors and other stakeholders are met, and often exceeded.

We guarantee 100% confidentiality for all clients. If you would like to find out more about Recovery First’s process, feel free to get in touch today.

It's never too late to speak to Recovery First. Contact us now in the strictest confidence

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