In the second of this two-part post, we continue our overview of claiming in a debtor’s insolvency. In particular we look at contingent debts, interest on debts, and debts in foreign currencies.
- How are contingent debts valued?
For obvious reasons, the element of uncertainty in the value or even the existence of a contingent debt conflicts with the insolvency practitioner’s requirement for certainty in order to make distributions.
This conflict is resolved by the insolvency rules placing a duty on the insolvency office-holder to estimate the value of a contingent debt based on a genuine and fair assessment of the chances of the relevant contingency occurring.
This estimate will be the amount of the debt that is accepted for proof. However, if relevant facts come to light or circumstances change during the course of the insolvency process, the insolvency office-holder may revise their estimate (through the operation of the so-called “hindsight principle”). If the creditor does not agree with the amount in which its proof has been admitted, it can challenge it.
In practice, insolvency office-holders will often seek external advice to help with such valuations.
- Can I claim for interest on my debts?
Yes. If a provable debt accrues interest, such interest may be proved by the creditor where it is in respect of the period after the start of the insolvency proceedings.
If there is a surplus remaining after the payment of all proved debts in an administration (a highly unusual scenario), that surplus will be applied to pay interest on debts for the period after the start of the insolvency proceedings. Such interest ranks equally between creditors, whether or not the underlying debts rank equally. It is payable at the greater amount of the Judgments Act rate (8% p.a.) and the rate applicable to the debt under the contract.
- Can I claim in a foreign currency?
Yes, but the insolvency office-holder will convert any foreign currency claim into pounds sterling at the applicable rate prevailing on the date of the start of the insolvency proceedings.
Naturally, the fixed conversion date will result in winners and losers as the value of the claim’s original currency fluctuates against the value of sterling during the course of the insolvency process.
Interestingly, in one of the many issues determined in the litigation surrounding the collapse of Lehman Brothers, the Supreme Court found that creditors who had suffered “losses” following a significant weakening of sterling after the conversion date could not make so-called “currency conversion” claims. This meant that they were not entitled to a “second bite of the cherry” to claim the “losses” as non-provable debts (being the difference between the sterling value at the date of the administration when the currency claim was converted into sterling and the sterling value at the date the debt was actually paid). In practice, there are rarely surplus assets to allow a recovery of unprovable debts.
- Do any of these issues affect the ranking of a debt?
No, subject to a few technical exceptions, all provable debts rank equally or pari passu within that class of debt (for example, preferential or unsecured).
Therefore, to give specific examples, a USD unsecured bank debt claim (including accrued interest), a EUR contingent claim under an indemnity in an SPA, and a GBP claim from a commercial supplier, will most likely all rank equally in the debtor’s insolvency proceedings.