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Who gets paid first during a liquidation procedure?


Insolvency Practitioner Approved

Understanding the hierarchy of creditors when a company is liquidated

An insolvent liquidation procedure involves the sale of assets, and distribution of the proceeds amongst company creditors. A licensed insolvency practitioner (IP) is appointed to administer the process, and ensures that all creditors are paid according to the hierarchy laid down in the Insolvency Act, 1986.

So what factors are relevant when considering repayment under these circumstances?

  • The class of creditor to be repaid
  • The liquidator’s fees
  • Value of the company’s assets

Each class of creditor must be paid in full before the liquidator can move on to repay the next. After the costs of liquidation and the office-holder’s fees have been paid, the first class of creditor to receive payment are secured creditors with a fixed charge.

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1. Secured creditors holding a fixed charge

This creditor group includes banks and other large financial institutions that have provided borrowing to the company, taking security on one or more business assets. If the company has borrowed money to purchase land or property, for example, the bank will take fixed charge security that allows them to sell the asset on default or liquidation, and recoup their money.

2. Preferential creditors

Preferential creditors are members of staff entitled to certain statutory payments. These include arrears of wages, holiday pay, redundancy, and unpaid pension contributions. Employees receive payment from realised assets, after the fixed charge creditors.

3. Secured creditors with a floating charge, and the ‘prescribed part’

Secured creditors holding a floating charge have security over a particular asset class, such as stock or work-in-progress. When the debtor company enters liquidation, these floating charges ‘crystallise’ and become fixed charges. Floating charge creditors are paid after preferential creditors, and at this point a sum of money is set aside for unsecured creditors.

This sum is called the ‘prescribed part’ and applies to assets with a floating charge taken out after 15th September 2003. It is intended to help unsecured creditors to receive some form of dividend from the company’s liquidation, as it is often the case that unsecured creditors receive no repayment at all.

The prescribed part consists of 50% of the first £10,000 received from the sale of assets with a floating charge, and a further 20% between £10,000 and £600,000 of realisations.

4. Unsecured creditors

Unsecured creditors generally consist of the company’s customers, suppliers, contractors, certain employee claims, and HMRC. If all unsecured creditors have received an equal dividend and there are further funds available, interest is also paid on their debt.

5. Connected/associate unsecured creditors

Unsecured creditors who have an association with the company are eligible to be paid a dividend in liquidation. This creditor group might include a director’s family member, or an employee who has loaned money to the business. Employee expense claims also fall into this category.

It is paramount to place the interests of creditors ahead of the company and its directors/shareholders in any insolvency situation. Directors who fail to do this face serious allegations that can lead to disqualification for up to 15 years.

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