Reviewed: 9th November 2016
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
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.
- Fixed charge – With a fixed charge, the creditor has a claim over a specific asset. This could be property, vehicles, machinery or equipment. This charge will have been formally registered with Companies House. The creditor will be paid the money they are owed as a direct result of selling the asset they are holding a charge over. So for example, a mortgage company would be paid back the money they are owed from the sale of the mortgaged property. This type of charge gives the lender added security, and significantly increases their chances of receiving payment in the event of liquidation.
- Floating charge – Floating charges are slightly more complicated as creditors with this type of charge do not have a claim over a particular asset. Floating charges cover things that the business would use to generate business and that which a company could (and may be expected to) dispose of in the course of business proceedings, such as stock. It would not be practical to have a fixed charge over each individual item of stock; therefore a floating charge is more appropriate. Having a floating charge provides the lender with some security, however as they do not have a claim over a specific asset, recovering money is more difficult. Creditors with a floating charge are placed further down in the order of priority than those with a fixed charge; however they are ahead of unsecured creditors in the queue for payment.
Unsecured creditors
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.
Further Reading on Articles about Advice for Directors
Free Guide for Limited Company Directors
Business Rescue Advice for Directors
- How to manage company cash flow problems
- Advice on dealing with HMRC
- Understanding rescue and closure options
- And much more...
Business Rescue Guide for Accountants
Dealing with your Insolvent Clients
- Helping you advise insolvent clients
- Spotting signs of client distress
- Exploring business rescue options
- And much more...
