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.
|Creditors Order of Payment Priority during Insolvency|
|(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|
Who Get Paid First When a Company is Liquidated?
(1) Secured Creditors with a Fixed Charge
Secured creditors, who hold a fixed or floating charge over a business asset are the first to be paid in insolvency. These creditors 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.
(2) Preferential Creditors
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.
(3) Secured Creditors With a Floating Charge
Floating charges are generally offered over non-constant assets such as work in progress or raw materials. Holders of floating charges are registered in Companies House by the lender and, at the point of any insolvency event, the floating charge ‘crystallises’ to become fixed.
A proportion of those assets set aside for floating charge holders are given to unsecured creditors in what is called ‘the prescribed part.’
(4) Unsecured Creditors
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.
HMRC as a Preferential Creditor
For debts commencing after 1 December 2020, HMRC ranks as a secondary preferential creditor in the order of priority. This means they are paid ahead of secured creditors holding a floating charge (i.e. banks) and before non-preferential creditors (i.e. suppliers).
The HMRC debts included in this are as follows:
- Value Added Tax (VAT)
- debts that relate to the following taxes:
- Pay As You Earn (PAYE) Income Tax
- employee National Insurance contributions (NICs)
- students loan repayments
- Construction Industry Scheme deductions