Clarity on interpretation of creditor in insolvency legislation

Since two legal court decisions were made in early 2024 there’s been widespread confusion over whether creditors who have been paid in full during an insolvency process remain a creditor for various purposes under insolvency legislation. But clarity has now been obtained following cross-profession action and recent response from the Insolvency Service (IS).

In the legal update section of the June 2024 Insolvency technical update we highlighted two court decisions (commonly referred to as the Pindar and Toogood cases) where the court considered whether an office holder in the administrations should have sought the consent of secured creditors who had been paid in full during the course of the administration to extend the period of administration under paragraph 76 of Schedule B1 of the Insolvency Act 1986 (IA 1986).  

The decisions turned on the interpretation of ‘secured creditor’ in IA 1986. In Pindar, the court considered the definition of secured creditor set out in s248(b) of IA 1986 noting the language of that section is in the present tense. S248(b) defines a secured creditor as “a creditor of the company who holds...a security” and the judge decided that a creditor who had once held security would not be within the definition. Therefore, at the time that paragraph 78 of Schedule B1 IA 1986 was engaged, the court found that the lender was no longer a secured creditor within the definition of s248 and as such the extension which had been obtained without seeking the lenders consent was valid.

The decision in Toogood followed shortly after and was broadly similar in background. In both cases the court determined that the administration period had been validly extended and the consent of the paid secured creditors was not required.

In the Toogood decision, HHJ Matthews was critical of a previous government view (expressed through the IS) that creditors at the commencement of an insolvency procedures remained creditors throughout the process. HHJ Matthews said:

‘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.’

While the court decisions were likely to be persuasive in any future cases, there remained some doubt as to whether they were citable as authorities. As a result, for many IPs and their firms they were left in a position where it remained unclear whether consent from paid secured creditors was still required or not when obtaining an extension in an administration. 

Given that the findings in the decisions conflicted with previous IS guidance and had resulted in arguably less clarity for IP and the impact on monitoring by the Recognised Professional Bodies, ICAS, ICAEW, IPA and R3, wrote a letter jointly to the IS in August 2024. We asked them to consider: 

• As a matter of priority amend its view that ‘a creditor is set at the point of entry to the procedure and that this remains, even if payment in full is subsequently made’ and issue a Dear IP to the profession to assist insolvency practitioners as soon as possible.

and/or

• Amend legislation to reflect the practical approach demonstrated by the courts in their decisions.

The IS has only recently provided a substantive response. In this response they have said:

‘As you will appreciate, while the judgments (and your letter) concerned extensions to administration and secured creditors, the Insolvency Service’s previously stated view on ‘creditor’ applied to all usages of the term in insolvency law. Accordingly, when analysing the impact of the judgments, we had to consider the wider impact beyond the specific subject matter of Pindar and Toogood. We did not wish to make a statement on secured creditors and extensions to administration, only for this to then be taken out of context for other usages of ‘creditor’ in legislation, as this could have caused subsequent problems for all insolvency office-holders, whether insolvency practitioner or official receiver.

‘We have analysed the judgment and taken legal advice. As a result of the judgments and the advice, we will be reframing our view of the term ‘creditor’ in the insolvency legislation. We will no longer contend that the meaning of the word ‘creditor’ is fixed and crystallised at the date of entry into an insolvency procedure.

‘Our revised view, following legal advice, is that the term is context-specific. For example, as the court noted in the Pindar/Toogood judgments, the construction of the definition of ‘secured creditor’ at section 248 Insolvency Act 1986 means that such a party is no longer a creditor for insolvency law purposes once the charge has been satisfied. On the other hand, where a bankruptcy is annulled on grounds of payment in full (s282(1)(b) Insolvency Act 1986), rule 10.139 Insolvency (England and Wales) Rules 2016 (notice to creditors) would make no sense if the use of the word ‘creditor’ in that rule excluded those who had received payment. In that instance, the term ‘creditor’ must apply to one whose debt had been paid. 

‘Accordingly, where a creditor has been paid, it will be for the professional judgment of the office-holder whether a particular insolvency law provision relating to creditors is engaged following that payment.

‘As our reframed view is that the term is context-specific, no legislative amendment is required. However, we will be placing an article in a forthcoming issue of Dear IP on the matter along these lines to provide guidance to office-holders going forwards.’

We understand that the Dear IP article is likely to be published around the end of this month (June 2025).

Implications

IPs and their firms can immediately act in accordance with the above clarification. There is no need to wait until Dear IP is published to change the approach adopted. Many firms have already adopted the position set out in the Pindar and Toogood decisions and where that is the case the IS’s position will give greater clarity and certainty of their actions.

Of course, the IS position statement has clarified that they consider that the implications of the interpretation set out in Pindar/Toogood extend beyond the specific circumstances of those cases. As a result, IPs should consider the wider implications in all case types. The view that the term ‘creditor’ is context specific and will require professional judgement to be exercised will of course potentially add complexity to the running of insolvency cases.

Similarly, while the Pindar/Toogood decisions and the examples given in the IS response relate to rules applying in England and Wales, as definitions are contained in and the primary legislation applies to insolvency procedures across the UK, the approach set out by the IS should be adopted in Scottish and Northern Ireland jurisdiction insolvency processes also.