Updated: 8th January 2021
When a company enters liquidation, all its assets are sold, and the proceeds go towards settling the outstanding debts. The very nature of a company being insolvent means that there is not enough money in the pot to ensure all creditors are paid what they are owed in full. Unfortunately this means that some inevitably miss out.
There is a defined hierarchy which determines the order in which creditors are paid. As part of this creditors are split into two distinct categories; secured creditors and unsecured creditors. The differences between the two are as follows:
Secured creditors rank highly when it comes to receiving payment. This is because secured creditors have a charge over assets held by the company. These assets can include property, as well as vehicles, machinery and fixtures and fittings. A secured creditor stands a higher chance than most of receiving payment following liquidation. Examples of secured creditors are banks, asset-based lenders, and finance and agreement providers.
Secured creditors are then divided into two sub-categories, those with a fixed charge, and those with a floating charge.
Unsecured creditors rank below secured creditors when it comes to receiving payment following the liquidation of a company. Unsecured creditors do not have the benefit of having a claim over a particular asset, and can include suppliers, contractors, landlords and customers. Perhaps surprisingly HMRC is also an unsecured creditor. As they do not have a hold over any particular asset it is much harder for unsecured creditors to recover the cash they are owed. Instead they have to hold tight and hope there is enough money left to go around after the secured creditors have been paid. Unfortunately the reality is that unsecured creditors typically receive very little, if anything, following the liquidation of a company.
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