UK: Litigation and Insolvency

Last Updated: 6 December 2002
Article by Carolyn Swain

Insurers frequently find themselves caught up in legal proceedings, either suing on behalf of an insured, seeking recoveries from reinsurers and other third parties, or being sued themselves. This article is intended as a practical guide on the consequences of insolvency on these proceedings and the strategies you can adopt to maximise recoveries and to improve your negotiating position. This article does not deal specifically with insurance insolvency issues recognising that litigation can ensue against all types of corporate entities not just insurance companies.

Notice of the insolvency of your litigation opponent need not mean that any further action is a waste of time and money. Steering the right course through the technical consequences of a particular form of insolvency on your litigation is essential to assess the risk and cost effectiveness of continued litigation.



An automatic moratorium will apply on the presentation of an administration petition or the making of an administration or winding up order.

In addition, once a winding up petition is presented in a compulsory liquidation, the company or its creditors may apply to the Court for a stay of proceedings. In a voluntary liquidation, only a liquidator may apply to the Court for directions that a stay should apply.

The Court has slightly different criteria to bear in mind when giving leave to commence or continue proceedings depending on whether the insolvency process is an administration or a liquidation. In brief, if the case involves a monetary claim, no leave to pursue the claim will be given. The quantum of any claim can be adequately determined using the procedures set out in the Insolvency Act and Rules. Proprietary, trust or other security interest claims will probably be allowed to proceed. Claims already being handled by insurers or to which an insurance policy may respond may also be allowed to continue.


At the moment, there is no automatic moratorium in a voluntary arrangement, an administrative receivership or a scheme of arrangement. Certain provisions of the Insolvency Act 2000 (which are likely to come into force in December 2002) will provide that a small company (as defined in the Companies Act 1985) will have the right to an automatic moratorium pending the consideration of their voluntary arrangement proposals by the creditors.

However, at the moment, a creditor may pursue any remedies against the company prior to the approval of any voluntary arrangement or scheme proposals.

However, once the voluntary arrangement has been approved by creditors and is effective then all creditors who receive notice are bound by the proposal whether they voted or not. No creditor who is bound by a voluntary arrangement is entitled to pursue any claims against the company in respect of pre-arrangement liabilities.

In the case of a scheme of arrangement, while there is no automatic moratorium, it is common to precede a scheme proposal with the appointment of a provisional liquidator. That appointment will trigger a moratorium in respect of actions against the company without leave of the Court similar to that imposed on compulsory liquidation.

The scheme itself will propose a moratorium on proceedings and detail the mechanism in place for the determination of disputes regarding liability and quantum. As with voluntary arrangements, you should satisfy yourself that the terms being proposed are fair and satisfactorily protect your interests. Once the scheme has been approved by the creditors and sanctioned by the court, you will be bound by its terms.

In an administrative receivership, there is no automatic moratorium. The administrative receiver will argue that since as the bank’s floating charge has crystallised on his appointment, the company’s assets are not available for the enforcement of any judgments. The proceeds of those assets will be used to pay the indebtedness owed to the lender ahead of any unsecured creditor’s claim.


None of the procedures described above will prevent the office holder from continuing proceedings against another party in order to swell the company’s assets or to avoid their depletion by a successful claim. The liquidator must seek sanction either from the Official Receiver or the Creditors’ Committee if one has been appointed, to either commence or continue proceedings. There are no such restrictions on other office holders although a supervisor and a scheme administrator will only commence proceedings if they have the requisite powers to do so in the voluntary arrangement or scheme documentation.

So how will an insolvent company pay any adverse costs awards? In the case of a liquidation, any legal costs incurred by a company acting by the liquidator in defending or pursuing an action unsuccessfully are payable out of the company’s assets in priority to the general costs of winding up. However, the liquidator is still entitled to his costs of getting in and realising those assets. If there is any doubt as to whether there will be sufficient assets to pay for costs, then you should seek security of the costs for all pre and post-liquidation costs of the litigation. Security can be given in the form of cash, a bank guarantee or a personal undertaking from the liquidators. A similar approach should be taken if you are being sued by a company in administration, administrative receivership, voluntary arrangement or which is subject to a scheme of arrangement. The administrative receiver or the administrator may offer to pay the costs as an expense of the receivership or administration. If costs are paid as an expense, they will be payable ahead of the office holders’ own remuneration. Security for costs should be obtained unless the action is in the name of the office holder personally. In that case, security for costs will probably not be necessary since he will be personally liable to pay the costs in the event that he is unsuccessful in the claim.


Even if you are unable to continue the action due to the insolvency of the respondent, all may not be lost. Any funds paid into an escrow account or into court during the course of proceedings prior to the insolvency will be held on trust for the ultimate successful party. If the action is too expensive for the insolvency practitioner to continue with, it may well be expedient for him to agree to payment out of the fund to you, particularly if he is concerned as to his position on costs if proceedings continue.


When notice of the insolvency of the "other side" lands on your desk, consider the following:

1 At what stage are the proceedings? If they are ongoing, is there an automatic moratorium or can you continue regardless? Is there any point in continuing if the claim is a monetary one?

2 If there is an automatic moratorium, does your claim qualify as one which should be allowed to continue in any event?

3 If you are being pursued by the insolvent entity, contact the office holder immediately and request an indication of his intentions. Negotiations may well be easier with a party who is not interested in the political ramifications of the dispute, only in the net return to the plaintiff.

4 You should consider the effect of set-off to minimise any claims against you. Set off in a liquidation will apply to all mutual credits, debts and mutual dealings. The dealings simply have to be between the same parties in the same right and do not have to relate to the same or closely connected transactions. Further, any contractual agreements restricting the right of set off are void in an insolvency.

5 If the office holder or company confirms that proceedings will be continued, consider making an application for security for costs and include all costs to date, not just post insolvency costs.

6 Are there any funds in escrow or paid into court? Consider whether you can agree with the office holder to accept those funds in part or full settlement of your claim.

7 Scrutinise the terms of any voluntary arrangement or scheme of arrangement carefully. You will need to negotiate any changes to them prior to any final approval being given by the creditors or the court to the scheme or arrangement.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.