If you’re the owner of an insolvent company that’s entering an administration or 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?
Ranking of Creditors in Order of Priority
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.
UK (England and Wales)
- Fixed charge holders.
- Liquidators’ fees and expenses.
- Preferred creditors.
- Floating charge holders.
- Unsecured creditors.
- Interest incurred on all unsecured debts post-liquidation.
Order of Priority During Liquidation
Below, we go into more detail around the specified order and the reasons behind this.
At the top of the creditor priority list come the company’s secured creditors, who hold a fixed or floating charge over a business asset. They 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. Once the insolvency practitioner has received their fee, the secured creditors are next to receive the money they are owed.
- A fixed charge is held over a specific asset which was financed by the lender. That includes business premises, intangible assets, financed vehicles and financed machinery. The fixed charge will be registered at Companies House. Those with a fixed charge one of the first to be paid from the liquidation after the insolvency practitioner has received their fee.
- A floating charge relates to the other company’s assets including cash at bank, fixtures and fittings, unencumbered plant and machinery and book debts when there is no invoice factoring agreement. Floating charge holders are placed further down the hierarchy of payment after preferential creditors (i.e. the former employees) have been paid.
It is not uncommon for a bank or asset-based lender to have both fixed and floating charges registered at Companies House.
Fixed Charge Creditors
A fixed charge is a direct charge over a specific asset, or category of assets, which means the company is not free to sell or trade the asset without the permission of the charge holder i.e. a bank or other lender. Most commonly a fixed charge will apply to a piece of machinery.
This is the case because the machinery in question is often central to the output of the company, so it would be unusual for such a piece of machinery to be sold. If the company does wish to sell the machinery (because it’s no longer efficient etc.) the company would have to seek permission from the charge holder. This will typically be granted as the proceeds from the sale could be used to repay the company’s borrowings.
Floating Charge Creditors
The situation with floating charges is not quite so simple. Floating charges give a greater degree of flexibility to the company and the creditor. The creditor is free to administer its assets in the normal course of its business, with the charge only kicking in when a ‘crystallising event’ takes place, such as the company becoming insolvent.
Under any floating charge created after 15 September 2003, 50 percent of any money realised up to the value of £10,000 must be set aside for the company’s unsecured creditors. 20 percent of any amount between £10,000 and £600,000 must be paid to unsecured creditors, with the rest going to the holder of the floating charge.
Employees are classed as preferential creditors for unpaid wages and holiday pay claims, so they are next in line to receive their cut.
Following the Finance Act 2020 gaining Royal Assent on 22 July 2020 HMRC once again became a preferential creditor in insolvencies . The Finance Act 2020 makes HMRC a secondary preferential creditor.
This group will include VAT payments, suppliers, trade creditors, business rates and claims other than pay arrears and holiday pay by employees.
If a director or employee lends the company money on an unsecured basis, or salaries and wages for company owners and directors are unpaid, they will become a type of unsecured creditor known as an ‘associate creditor’ i.e. the creditor is in some way associated with the company.
This can also include money borrowed from family members. Generally speaking, associate creditors will not typically receive a repayment in a voluntary company arrangement (CVA) or liquidation.
Right at the very bottom of the pile are the company shareholders. 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.