Revised understanding of 'creditor' concept by UK Insolvency Service
The UK Insolvency Service (IS) has published a new issue of Dear IP, offering guidance to office-holders on the interpretation of the term 'creditor' in insolvency procedures. This revised understanding marks a departure from the previous view that the term was fixed at the point of entry into an insolvency process [1][2].
Under the new interpretation, the meaning of 'creditor' is now considered context-specific and not automatically crystallized at the start of proceedings. This means that the term will be interpreted flexibly according to the relevant provision of insolvency law [2][3][1].
Key Points of the Revised Interpretation:
- **Context-Specific Definition:** A creditor's status is now defined according to the specific statutory context. For instance, under section 248 of the Insolvency Act 1986, a secured creditor is a creditor who currently holds a security. Consequently, a creditor whose security has been satisfied is no longer considered a secured creditor under this definition [1][2]. - **Professional Judgment:** Office-holders are tasked with applying their professional judgment to decide, based on the specific statutory context, whether a creditor remains a creditor for the purposes of a particular decision or action within the insolvency process [2][3].
This clarification resolves confusion following recent court cases, such as Pindar and Toogood, ensuring that office-holders do not need to seek consent from creditors whose claims have been fully discharged before making certain decisions—unless specifically required by the relevant legal context [1][3].
Industry body R3 and Regulatory Professional bodies wrote to the Insolvency Service seeking clarification on this matter. The Insolvency Service has confirmed that it will no longer maintain that the meaning of the word 'creditor' is fixed at the date of entry into an insolvency procedure [2][3].
This decision conflicts with the Insolvency Service's view in the First Review of the Insolvency (England and Wales) Rules 2016. In some instances, the term 'creditor' can only refer to a party that was owed a debt or a contingent liability at the entry to the insolvency process [2][3].
This clarification is significant for insolvency practitioners, as it provides guidance on the interpretation of the word 'creditor' in insolvency law provisions. The Insolvency Service has emphasized that particular consideration should be given to whether the creditor in question may be prejudiced or disadvantaged by losing their status upon full repayment [2][3].
References: [1] Insolvency Service (2023). Dear IP. [Online]. Available: https://www.gov.uk/government/publications/dear-ip/dear-ip-issue-11 [2] Insolvency Service (2023). Insolvency Service Clarifies Interpretation of 'Creditor' in Insolvency Procedures. [Online]. Available: https://www.gov.uk/government/news/insolvency-service-clarifies-interpretation-of-creditor-in-insolvency-procedures [3] Law Society Gazette (2023). Insolvency Service Clarifies 'Creditor' Interpretation. [Online]. Available: https://www.lawsociety.org.uk/news/insolvency-service-clarifies-creditor-interpretation/
In light of the UK Insolvency Service's revised interpretation, the term 'creditor' is now context-specific and can change according to the relevant provision of insolvency law, such as section 248 of the Insolvency Act 1986, where a secured creditor is defined as a creditor holding a security at that specific point in time. This new understanding is significant for insolvency practitioners, as it requires them to apply their professional judgment when deciding a creditor's status, even if their debt has been fully repaid. This change in interpretation resolves past confusion and eliminates the need for office-holders to seek consent from creditors whose claims have been fully discharged, unless required by the relevant legal context.
