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What is the order of company creditors in liquidation?
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Who gets paid first when a company is liquidated?
- Secured creditors with a fixed charge
- Preferential creditors (including secondary preferential)
- Secured floating charge creditors and the ‘prescribed part’
- Unsecured creditors
- Connected unsecured creditors
Creditors’ hierarchy in liquidation
When a company becomes insolvent and has to be liquidated, the order in which creditors are paid from the realisation of company assets is set out in the Insolvency Act 1986.
Creditors will be grouped into 'classes', and each class or group must be paid in full before the liquidator moves on to the next. There are essentially three main classes - secured, unsecured, and preferential creditors – but these can be broken down further as we detail below.
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Once the costs of placing the company into liquidation have been covered, the first class of creditor to be paid are secured creditors holding a fixed charge over some or all of the company's property and other assets. At the bottom of the 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 level of assets held by the insolvent company, and the ease with which these assets can be realised.
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Secured creditors with a fixed charge
Secured creditors are generally banks and asset-based lenders with security in the form of a fixed charge mortgage on business premises, land, or a specific piece of machinery. Secured creditors could also include invoice factoring finance providers holding security over a company’s sales ledger. When a company goes into liquidation, the secured fixed charge creditor is able to recover their money through the sale of the asset over which they are holding the security charge.
Preferential creditors, including secondary preferential creditors
Preferential creditors include employees who are owed arrears of wages, holiday pay, and outstanding pension contributions.
HMRC hold secondary preferential creditor status for some tax debts including VAT, PAYE, employee NICS, and Construction Industry Scheme deductions. HMRC's secondary preferential claims are paid only after employees with preferential claims are paid.
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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 and therefore change as stock is sold and materials are bought. This differs from a fixed charge which is held on a particular item which does not change such as a piece of land or property.
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 £800,000.
This group consists of creditors who aren’t classed as secured or preferential, and include trade suppliers, contractors, some employment-related payments, HMRC, unsecured debt providers, 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.
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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 offices across the UK offering confidential director support across the UK.
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