What is the priority order of creditors in an administration process?

Who gets paid first when a company is in administration?

When a company becomes insolvent, entering administration offers the chance for rescue without creditor pressure. Although many businesses are turned around after entering company administration, in some cases rescue will not be possible. This means the eventual outcome would be the liquidation of company assets and permanent closure.

When it comes to repayment of creditors, much will depend on the journey the company goes through while in administration and what the eventual outcome is.

If the company is able to be restructured in a way that allows ongoing trade, creditors will continue to be paid as per the terms of the original borrowing.

Entry into a formal repayment plan such as a Company Voluntary Arrangement (CVA) following the administration, however, will mean creditors will need to agree to renegotiate the repayment terms and even write off some of the money owed in order to facilitate the company continuing to trade.

In some cases, however, a company will exit administration and promptly enter into formal liquidation proceedings. When this is the case, creditors will be repaid as far as possible using company assets in a designated order as laid out by the Insolvency Act 1986. 

How is repayment carried out in liquidation following administration?

The Insolvency Act, 1986, lays down the order of priority a licensed insolvency practitioner (IP) must follow to pay creditor claims. The company’s assets are sold for the benefit of creditors, and creditors are grouped into specific categories depending on the security and status they hold.

This typically means the creditor falling at the bottom of the priority list receive little or no return from an administration process when the end result is liquidation. So what are the creditor categories, and which is paid first?

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Hierarchy of creditors when a company exits administration into liquidation

Secured creditors with a fixed charge

Secured creditors with a fixed charge typically include the bank and other lenders, such as factoring companies. They’re paid using funds from the realisation of the asset(s).

Office-holder’s fees and expenses

The administrator’s/liquidator’s fees rank second in line for payment, and these include the expenses of carrying out the procedure.

Preferred creditors

Preferred creditors include employees of the company. Since 1st December 2020, HMRC are also ranked as secondary preferential creditors. This means they’re paid arrears of taxes that a company collects on their behalf, such as VAT and PAYE, but not those paid directly by a company – corporation tax, for example.

Creditors with a floating charge and the prescribed part

A floating charge covers a class of asset rather than a specific item, and can include stock and work-in-progress. These are assets that typically change during the course of day-to-day business.

The prescribed part is a sum of money set aside at this point from the proceeds of realisation of floating charge assets. It’s designed to provide unsecured creditors with a greater possibility of repayment in some form, and a maximum of £800,000 can be set aside in this way.

Unsecured creditors

Claims made by unsecured creditors lie at the bottom of the hierarchy for payment in an administration process, which means by this stage, their return is typically low. Payment is made from the sale of unsecured assets, and in many cases there is little, if any, money left to distribute. Unsecured creditors can include suppliers, customers, and HMRC for tax arrears owed directly by the company such as corporation tax.

Connected unsecured creditors

Unsecured creditors associated with the company in some way – perhaps family members who loaned money to the business, for example – rank below general unsecured creditors.

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When are creditors repaid?

The office-holder gathers in the company’s assets for realisation, obtains a professional valuation, and invites claims from the company’s creditors. When all monies are received following the sale of assets, the administrator or liquidator can begin to repay creditor claims in the prescribed order.

As creditors must be repaid in full as a group, the knock-on effect to other businesses can be severe. Suppliers and other unsecured creditors in this position typically receive no dividend from the process, and can experience a decline themselves as a result of unpaid debts and the loss of that customer.

If you would like more information on the priority order of creditors in an administration process, Real Business Rescue can provide reliable professional advice. Please contact one of our expert team to arrange a same-day consultation free-of-charge – we operate an extensive network of offices throughout the UK, so you’re never far away from professional assistance.