Are you an Unwitting Victim of Insolvency?

Publication Date01 Feb 1993
AuthorJustin Day
SubjectAccounting & finance
Are you an Unwitting Victim of Insolvency?
Justin Day
Justin Day
partner at the firm of
has a special interest
in insolvency law.
Victims of insolvency are not just those pro-
vided for in the legislation. This paper
explores just who are the victims of insol-
vency and what their statutory remedies
When asking the question 'who is a
victim of insolvency?', certain groups of
people immediately spring to mind,
creditors being the obvious one.
Although it is often assumed that credi-
tors lose everything when a business is
declared insolvent, this is in fact not
strictly true: there are legal protections
for certain categories of creditor. How-
ever, as this paper outlines, not only is
this protection incomplete for creditors,
but there is also a chain of insolvency
which may lead to some other groups of
people becoming victims with no redress
or protection. Where and how does this
chain begin? It is useful to start by con-
sidering the effects of the statutory pro-
tection available to acknowledged credi-
There are three categories of creditor
secured, preferential and unsecured. At
first glance, secured creditors are not
obvious victims. The onset of insolvency
does not affect their rights to deal with
the secured assets. However, in the cur-
rent property slump, it is common for
secured assets not to realise the amount
required to pay off the secured creditor,
leaving a substantial shortfall. If this
situation arises, the only remedy is for
the secured creditor to prove for the
shortfall as an unsecured creditor a
remedy which is considered by many
secured creditors as a waste of time in
this recession as the unsecured assets
often realise no more than a nominal
value when compared with the amount
of debts due by the insolvent company
or person.
Preferential creditors are in a reason-
ably strong position. They are the five1
categories of creditor whose claims are,
subject to what follows, 'preferred' as
against the unsecured creditors' claims
and, in administrative receiverships,
against claims by secured creditors
whose indebtedness is secured by a float-
ing charge. The floating charge is a

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