The hierarchy of creditors when a company enters liquidation

What is the order of creditors in liquidation?

When a company enters insolvency and has to be liquidated, the order in which creditors are paid is defined by the Insolvency Act, 1986. This ‘hierarchy’ is divided into classes of creditor, and each class or group must be paid in full before the liquidator moves on to the next.

There are essentially three main categories – secured, unsecured, and preferential creditors – but these can be broken down further as we detail below.

What are the factors that influence repayment in liquidation?

Once the costs of liquidation have been covered, the first class of creditor to be paid are secured creditors with a fixed charge. At the bottom of this ranking lie unsecured creditors, who unfortunately, rarely fare well in these situations in terms of repayment.

Other factors also influence how much is received by each creditor class, including the cost of the liquidation process, the number of assets available for sale, and the ease with which they can be realised.

Creditor ranking

Secured creditors with a fixed charge

Secured creditors are generally banks and asset-based lenders with security in the form of a mortgage on business premises, land, or a specific piece of machinery. Secured creditors could also include invoice factors holding security over a company’s sales ledger. When a company goes into liquidation, the secured fixed charge creditor is able to sell the asset in question to recover their money.

Preferential creditors

Preferential creditors include employees who are owed arrears of wages and holiday pay up to certain limits, and outstanding pension contributions. HMRC no longer fall into the category of preferential creditor, and since 2003 have been classed as an unsecured creditor.

Secured floating charge creditors and the ‘prescribed part’

Floating charges are those held over asset classes, such as fixtures and fittings, stock, and raw materials – essentially these assets can be traded as normal, unlike a fixed charge which is held on a particular item.

The prescribed part is an amount set aside from the sale of assets with a floating charge that has been taken out after 15th September 2003. This is for the benefit of unsecured creditors, to boost their chances of receiving a return from the liquidation. The prescribed part is calculated as 50% of the first £10,000 of floating charge asset realisations, and 20% of any between £10,000 and £600,000.

Unsecured creditors

This group consists of creditors who aren’t classed as secured or preferential, and include trade suppliers, contractors, some employment-related payments, HMRC, suppliers, and customers.

Connected unsecured creditors

Also known as ‘associate’ creditors, connected unsecured creditors can include spouses and other members of a director’s family, or perhaps a member of staff who has loaned money to the company on an unsecured basis.

Shareholders

If there are sufficient funds to pay shareholders from the process, it will be regarded as a solvent liquidation. It’s recognised that shareholders take a risk when investing in a company, and they don’t receive a dividend from insolvent liquidations unless they hold some form of security over the company.

For more information on the order of creditors in liquidation, call one of our expert team. Real Business Rescue can advise on your position within the hierarchy, and of the likelihood of receiving a dividend from the liquidation. We offer a free same-day meeting, We have an extensive network of 75 offices offering confidential director support across the UK.