What-is-the-priority-order-of-creditors-in-an-administration-process-in-Birmingham

In what order are creditors paid when a company goes into administration?

If a company can’t be saved after going into administration, it might enter liquidation. In this process, creditors will be paid following a specific order, as outlined by the Insolvency Act 1986. 

The hierarchy in administration begins with secured creditors and finishes with unsecured creditors.

 

Who receives payment first in the event of a company being in administration?

When a company becomes insolvent, going into administration provides an opportunity for rescue without facing creditor pressure. While many businesses successfully recover through company administration, there are instances where rescue may not be achievable.

This implies that the ultimate result would be the liquidation of company assets and a permanent closure. Insolvency’s nature indicates that not all creditors can be fully repaid. Therefore, there exists a priority order for creditors in the repayment process during administration.

 

How is repayment carried out in administration?

The Insolvency Act 1986 establishes the priority order that a licensed insolvency practitioner (IP) must adhere to when settling creditor claims. The company’s assets are sold for the creditors’ benefit, but creditors are categorised, and each group must be fully repaid before the IP proceeds to the next category.

This usually implies that creditors at the bottom of the priority list receive minimal or no return from an administration process. So, what are the categories of creditors, and which one gets paid first?

 

Hierarchy of creditors in administration

1.Secured creditors with a fixed charge

Secured creditors with a fixed charge usually involve the bank and other lenders, like factoring companies. They receive payment from the proceeds of selling the asset(s).

 

2.Creditors with a floating charge and the prescribed part

A floating charge encompasses a category of assets instead of a particular item and may involve stock and work-in-progress. These assets are usually subject to change in the normal course of daily business operations.

The prescribed part is an allocated sum of money derived from the realisation of floating charge assets. Its purpose is to enhance the chances of repayment for unsecured creditors, and up to £800,000 can be earmarked for this purpose.

 

3.Unsecured creditors

Unsecured creditors’ claims occupy the lowest position in the payment hierarchy during an administration process, resulting in generally modest returns at this stage. 

Funds for payment are derived from the sale of unsecured assets, often leaving little to no money available for distribution. Unsecured creditors may consist of suppliers, customers, and HMRC for company-held tax arrears.

 

4.Office-holder’s fees and expenses

The fees for the administrator or liquidator come second for payment, covering the costs of conducting the procedure.

 

5.Preferred creditors

Employees are among the preferred creditors, and starting from 1st December 2020, HMRC is also classified as secondary preferential creditors. This entails settling overdue taxes collected on their behalf, like VAT and PAYE, excluding those directly paid by the company, such as corporation tax.

 

6.Connected unsecured creditors

Unsecured creditors linked to the company, like family members who lent money to the business, are positioned lower than general unsecured creditors.

 

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When are creditors repaid?

The office-holder collects the company’s assets for realisation, seeks a professional valuation, and calls for claims from the company’s creditors. Once all funds are amassed from asset sales, the administrator or liquidator can commence repaying creditor claims in the prescribed sequence.

As creditors need to be reimbursed collectively, the ripple effect on other businesses can be significant. Suppliers and other unsecured creditors in such a situation often receive no payment from the process and may suffer setbacks due to unpaid debts and the loss of a customer.

For further details regarding the prioritisation of creditors in an administration process, Vanguard Insolvency offers dependable professional advice. Please reach out to one of our expert team members to schedule a complimentary same-day consultation. With an extensive network of offices across the UK, professional assistance is always within reach.

David Jackson MD
Senior Partner at Vanguard Insolvency Practitioners | Website

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.