Who Gets Paid First During Liquidation?

Which Creditors Are Paid First in a Liquidation?

When a company is liquidated, creditors often want to know the order in which they will be paid, so they can ascertain the likelihood of getting their money back.

The ranking of creditors is as follows:

• Fixed charge holders
• Expenses of the insolvent estate
• Preferential creditors (including HMRC)
• The ‘prescribed part’ *
• Floating charge holders
• Unsecured creditors
• Interest incurred on all unsecured debts post-liquidation
• Shareholders

I’ll explain this order in more detail below, breaking down each category.

Payment Hierarchy During Liquidation

Here is the statutory hierarchy established by the Insolvency Act 1986. Each group of creditors must be paid in full before funds can be allocated to the next.

(1) Secured Creditors with a Fixed Charge

A secured creditor with a fixed charge has a specific asset, such as equipment or property as collateral (or ‘lien’). These are usually banks or other asset-based lenders.

The ‘fixed charge’ gives the creditor a higher priority in the event of the borrower’s insolvency, as they are entitled to be paid first from the proceeds of the sale of the collateral. 

Secured creditors whose security interests were created earlier in time take priority over those who protected their interests later.

(2) Expenses of the Insolvent Estate

This category includes all costs related to managing the liquidation process, including the insolvency practitioners’ fees themselves and various administrative expenses such as office costs and the expenses of selling assets.

(3) Preferential Creditors

In the UK, certain types of debt are considered preferential. These include:

1. Wages and salaries: Debts owed to employees for unpaid wages, salaries, and redundancy pay are preferential and must be paid before other creditors (up to a sum of £800 per employee)
2. Contributions to employee pension schemes: Contributions owed to employee pension schemes are also considered preferential debts.
3. HMRC: Money owed to HMRC, such as VAT, PAYE, NIC’s or Construction Industry Scheme deductions

(4) The Prescribed Part

In UK insolvency law, the ‘prescribed part’ is designed to ensure unsecured creditors get a better return and involves assigning a proportion of that due to secured creditors under a floating charge.

The ‘prescribed part’ takes 50% of the first £10,000 from the sale of assets covered by floating charges for unsecured creditors. Additionally, 20% of any proceeds between £10,000 and £600,000 are also set aside for this group.

(5) Secured Creditor with a Floating Charge

A floating charge is a type of security interest covering a class of assets rather than specific ones; this means that the assets can change over time as the debtor acquires new or disposes of existing assets. Some common examples include:

1. Inventory: This can include raw materials, finished goods, and work-in-progress.
2. Receivables: These are amounts owed to the debtor by its customers.
3. Machinery and equipment: This can include factory equipment, office equipment, and other machinery used in the debtor’s business.

(6) Unsecured Creditors

An unsecured creditor is a lender with no collateral for their loan; this means that the creditor does not have a specific asset as security for their debt. 

Some examples of unsecured creditors include:

1. Credit card companies
2. Suppliers
3. Professional service providers
4. Landlords

(7) Shareholders

If any funds remain after all debts have been paid, these may be distributed to the company’s shareholders. However, shareholders are typically the last to be paid in liquidation, as the primary purpose of the process is to pay off the company’s debts.

Other Factors That Can Influence Creditor Repayment in Liquidation?

In addition to the defined order of priority, two other principle factors bear an influence on how much creditors are likely to recoup. These are:

• The value of the company’s assets: If the assets are valuable and easy to sell, creditors can expect more back. This is something the liquidator will be able to tell after they’ve compiled the statement of affairs document.
• The cost of the liquidation itself: Before any creditors are paid, the costs of the liquidation process itself must be covered. This includes the insolvency practitioners’ fees and other administrative expenses. Higher costs mean less money left for creditors.

Get Advice about Creditor Priorities in Liquidation

Please call 0800 074 6757 for a no-obligation initial consultation or complete an enquiry form, and one of our company rescue advisers will contact you.

Determining who gets paid in a company insolvency can be a very complex area, particularly in the case of floating charges and associate creditors.

FAQs on Creditor Repayment During Liquidation