If you’re the director of an insolvent business that’s going into a company liquidation, it’s only natural that you’ll want to understand more about who gets paid first amongst your creditors.
For example, where do HMRC and the bank rank? Will your employees rank ahead of company employees if the bank has security?
These questions will also be important if you’re in line to be paid and what to know where you stand as a creditor.
We go through the creditors order of priority below.
What is Insolvent Liquidation?
When a company is insolvent it may opt, or be forced into, a process known as liquidation. This means the company is wound up, its assets sold, employees laid off.
The process is managed by a licensed insolvency practitioner whose job it is to provide the best possibly return for corporate creditors, before paying them in order of priority.
Directors will either choose the process voluntarily, via what is termed a creditors voluntary liquidation. Or they may be forced to liquidate via a Court Order placing the company into immediate compulsory liquidation.
At the end of the process the company is struck off the register at Companies House and ceases to exist.
Who Get Paid First During Insolvent Liquidation?
Who get paid first in liquidation?
The best way to answer these questions is to think of creditor payment priority as a ladder.
At the top, you have the fixed charge holders, at the bottom of the pile are the shareholders.
This order is laid out in the Insolvency Act 1986, which is the key piece of legislation relating to insolvency events in the UK.
Ranking of Creditors
|(1) Fixed charge holders (i.e. banks with security)|
|(2) Expenses of the insolvent estate|
|(3) Liquidators’ fees and expenses.|
|(4) Preferential creditors (including HMRC)|
|(5) The ‘prescribed part’ set aside for unsecured creditors from funds owned to holders of floating charges.|
|(6) Floating charge holders|
|(7) Unsecured creditors|
|(8)Interest incurred on all unsecured debts post-liquidation|
What is the Order of Priority in an Insolvency?
Below, we go into more detail around the specified order and the reasons behind this.
Secured Creditors with a Fixed Charge
Secured creditors, who hold a fixed or floating charge over a business asset have a legal right or charge over company property, which can include anything from buildings and equipment to vehicles, machinery and intellectual property.
Examples of secured creditors include leasing companies, banks and other lenders.
Typically a bank will only offer finance if the borrower signs a document assigning a security to the debt. Secured debt minimises the bank’s risk considerably as it knows it can simply take possession of the asset in the case of an insolvency event.
Employees are classed as preferential creditors for unpaid wages and holiday pay claims, so they are next in line to receive their cut.
The Finance Act 2020 makes HMRC a secondary preferential creditor.
This group will include suppliers, trade creditors, business rates and claims other than pay arrears and holiday pay by employees.
It also includes ‘associate creditors’ which are directors or employee who’ve lent the company money on an unsecured basis, or salaries and wages for company owners and directors are unpaid.
Right at the very bottom of the pile are the shareholders of the insolvenct company. These are the people who have invested money in the business on a risk basis, and as such, they are not entitled to remuneration or repayments in a company liquidation or administration until the claims of all of the above groups are satisfied.