When a company goes into liquidation, one of the major issues the liquidators and concerned parties face is who will get paid first when it is liquidated.
The Insolvency Act 1986 governs issues relating to bankruptcy in the UK, this act shows an official hierarchy that determines which group of creditors will receive payment first or a hierarchy that dictates the order within which creditors are paid during an insolvent liquidation.
Each group of creditors must receive full payment when a company enters liquidation before allocating funds to the next.
We have ranked the creditors by payment first.
The ranking of creditors is as follows:
- Secured creditors with a fixed charge
- Preferential creditors
- Secured creditors with a floating charge
- Unsecured creditors
- Shareholders
Who gets paid first when a company is liquidated?
1 – Secured creditors with a fixed charge
Secured creditors are those who have security interest over some or all of the company assets, they are usually the first to get paid.
Fixed charge holders include banks and other asset-based lenders holding title over a company asset. These charges usually covers assets like plant, machinery, vehicles, and property.
Your business loses the right to trade or sell an item when a fixed charge is delivered to the lender.
These assets are fundamental to a company, and are not likely to be sold in normal course of business.
However, following the original agreement, the asset can be sold when the company goes into liquidation by the liquidator or charge-holder to obtain funds.
2 – Preferential creditors
Preferential creditors are creditors who have priority of claim over unsecured creditors and receive preferential right to payment when a business is in insolvency.
These creditors consist of employees or staff who are entitled to arrears of wages reaching a max amount of £800 as well as holiday payments. It also includes HM Revenue and Customs.
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3 – Secured creditors with a floating charge
Stock, work-in-progress, raw materials, fittings and fixtures and other assets outside a fixed charge are assets subjected to a floating charge.
This type of assets can be offered for sale or traded in the normal course of events. Floating charge creditors are eligible to take distributions from the company’s net property (i.e., the amount left after application of costs) subject to the dilution of the prescribed part.
The term ‘prescribed part’ is used to describe funds set aside after selling floating charge assets, net cost of the liquidation and also the amount deducted after 12/09/2003.
The sum of this amount is then used to give unsecured creditors a better possibility of recovering some part of their debt.
50% of the first £10,000 received after selling floating charge assets is reserved this way, followed by 20% of any other realisations up to £600,000.
The debenture – a signed document by the company directors which is registered by the lender at the Companies House – contains the terms and conditions regarding fixed and floating charges.
4 – Unsecured creditors
Unsecured creditors are lenders institutions or individuals that lend funds without obtaining specified assets as collateral, they include suppliers, trade creditors, contractors, customers, and some employee claims.
5 – Shareholders
The last group to receive payment when a company goes into liquidation are the shareholders.
Since shareholders have taken a business risk in lending funds to the company, they have no entitlement to distribution till all other group of creditors have received payment.
Next steps
I hope this article has cleared up who gets paid first when a company is liquidated.
If you are thinking of liquidating your company give us a call on 0800 975 0380 (or email [emailprotected]) for a completely free, no-obligation chat.
We’ll help you work out if it is the right option for you – there may be other more suitable solutions!
