UK insolvency service reframes its view on meaning of 'creditor'

The government has taken steps to clarify its view on the interpretation of the word 'creditor' in insolvency procedures, providing welcome clarification for insolvency practitioners.  

Background

Two separate cases in 2024 (Re Pindar and Re Toogood) considered whether consent to the extension of an administration should have been obtained from secured creditors who had been paid in full. The judge in both cases found that consent was not required as the secured creditors ceased to be creditors for insolvency law purposes once their charges had been satisfied (see our Alert). 

These decisions conflicted with the Insolvency Service's view in the First Review of the Insolvency (England and Wales) Rules 2016 (April 2022) 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."

Given the uncertainty, industry body, R3 and the Regulatory Professional bodies wrote to the Insolvency Service (the IS) asking for clarification.

Response

The IS has confirmed that it will no longer contend that the meaning of the word 'creditor' is fixed and crystallised at the date of entry into a insolvency procedure. An issue of Dear IP has been published confirming this and providing guidance to office-holders.

The IS revised view is that the term is context specific. Whilst in the Pindar/Toogood cases, the secured creditors ceased to be creditors for insolvency law purposes "…. there will be other occasions where the term ‘creditor’ can only refer to a party that was owed a debt (including a contingent liability) at the entry to the insolvency process in question.

…Accordingly, it will be a matter for the professional judgment of the office-holder, 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."

Key takeaways

IPs should carefully consider the meaning of 'creditor' in all contexts and exercise professional judgement in each case. Particular consideration should be given to whether the creditor in question may be prejudiced or disadvantaged by losing their status upon full repayment.

Find out more 

To discuss the issues raised in this article in more detail, please contact a member of our Restructuring and Insolvency team.