What-is-the-order-of-company-creditors-in-liquidation

Who gets paid first when a company is liquidated?

  • Creditors with a fixed charge
  • Priority creditors (including secondary priority)
  • Secured floating charge creditors and the ‘specified portion
  • Unsecured creditors
  • Associated unsecured creditors
  • Shareholders 
  •  

Creditors’ ranking in liquidation

When a company becomes insolvent and needs to be liquidated, the sequence in which creditors receive payment from the sale of company assets is outlined in the Insolvency Act 1986.

Creditors will be categorised into ‘classes’, and each class or group must be fully paid before the liquidator proceeds to the next. There are primarily three main classes – secured, unsecured, and preferential creditors – but these can be subdivided further as explained below.

 

Understanding the factors affecting creditor repayment in liquidation?

After covering the expenses of placing the company into liquidation, the initial creditors to be compensated are secured creditors who possess a fixed charge over some or all of the company’s property and assets.

At the bottom of the hierarchy are unsecured creditors, who unfortunately seldom receive satisfactory repayment in these circumstances.

Other factors also impact the amount received by each creditor class, such as the expenses of the liquidation process, the extent of assets owned by the insolvent company, and the ease of realising these assets.

 

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Understanding creditor’s order in liquidation

1. Creditors with a fixed charge

Secured creditors typically comprise banks and asset-based lenders who hold security in the form of a fixed-charge mortgage on business premises, land, or specific machinery. Additionally, secured creditors may encompass invoice factoring finance providers with security over a company’s sales ledger.

When a company undergoes liquidation, the secured fixed charge creditor can reclaim their funds by selling the asset against which it holds the security charge.

2. Priority creditors (including secondary priority)

Preferential creditors comprise employees owed arrears of wages, holiday pay, and outstanding pension contributions.

HMRC holds secondary preferential creditor status for certain tax debts, including VAT, PAYE, employee NICS, and Construction Industry Scheme deductions. HMRC’s secondary preferential claims are settled only after employees with preferential claims are paid.

3. Secured floating charge creditors and the ‘specified portion

Floating charges are held over asset classes like fixtures and fittings, stock, and raw materials. 

Essentially, these assets can be traded as usual, so they change as stock is sold and materials are purchased. This differs from a fixed charge, which is held on a specific item that does not change, such as a piece of land or property.

 

The prescribed part is a sum reserved from the proceeds of assets sold with a floating charge that was established after 15th September 2003. 

This allocation is intended for the benefit of unsecured creditors, enhancing their prospects of receiving a return from the liquidation.

The prescribed part is determined as 50% of the initial £10,000 of floating charge asset realisations and 20% of any amount between £10,000 and £800,000.

4. Unsecured creditors

This group comprises creditors who are not classified as secured or preferential. It includes trade suppliers, contractors, certain employment-related payments, HMRC, unsecured debt providers, and customers.

5. Associated unsecured creditors

Termed as ‘associate’ creditors, connected unsecured creditors may involve spouses and other relatives of a director, or even a staff member who has provided an unsecured loan to the company.

6. Shareholders 

If there are adequate funds to compensate shareholders through the process, it will be deemed a solvent liquidation. It is acknowledged that shareholders undertake a risk when investing in a company, and they do not receive dividends from insolvent liquidations unless they possess some form of security over the company.

For further details on the creditor order in liquidation, contact one of our knowledgeable team members. Vanguard Insolvency can provide guidance on your position within the hierarchy and the probability of receiving a dividend from the liquidation.

We provide a complimentary same-day meeting. With an extensive network of offices throughout the UK, we offer confidential director support nationwide.

Senior Partner at Vanguard Insolvency Practitioners | Website | + posts

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.