Who Gets Paid First During Liquidation?
If you’re involved in a company liquidation, it’s only natural that you’ll want to understand more about who gets paid first.
For example, where do HMRC and the bank rank? Will employees get paid 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.
Below, we explain the categories of creditor in a liquidation, and the correct order of priority when it comes to getting paid.
|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?
When a company is liquidated, its assets are sold off, and the proceeds are used to pay off its debts. But who gets paid first, and in what order?
Here is a comprehensive overview of the priority of payments in a company liquidation.
Secured Creditors with a Fixed Charge
A secured creditor with a fixed charge has a specific asset, such as equipment or real estate, as collateral for a loan. 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.
In the UK, certain types of debt are considered preferential. These include:
- 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)
- Contributions to employee pension schemes: Contributions owed to employee pension schemes are also considered preferential debts.
- HMRC: Money owed to HMRC, such as
- Value Added Tax (VAT)
- Pay As You Earn (PAYE)
- employee National Insurance contributions (NICs)
- Construction Industry Scheme deductions
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 covered by the floating charge can change over time as the debtor acquires new or disposes of existing assets. Some common examples of assets that may be subject to a floating charge include the following:
- Inventory: This can include raw materials, finished goods, and work-in-progress.
- Receivables: These are amounts owed to the debtor by its customers.
- Machinery and equipment: This can include factory equipment, office equipment, and other machinery used in the debtor’s business.
An unsecured creditor is a lender with no collateral for their loan; this means that the creditor does not have a specific asset, such as equipment or real estate, as security for their debt.
Some examples of unsecured creditors include:
- Credit card companies: Credit card companies are often unsecured creditors, as they do not have any collateral for their loans.
- Suppliers: Suppliers who sell goods or services to a company on credit may also be unsecured creditors if they do not have any collateral for their debt.
- Professional service providers: Professional service providers, such as lawyers or accountants, may also be unsecured creditors if they do not have any collateral for their fees.
- Landlords: Landlords who rent property to a company may be unsecured creditors if they do not have any collateral for their rental income.
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.
In summary, the priority of payments in a company liquidation is as follows: secured creditors, preferential creditors, unsecured creditors, and finally, shareholders. It is a complex process governed by UK law and can have significant consequences for the various stakeholders involved.
It is important to note that the order of payment in a company liquidation is determined by the law and cannot be changed by the directors or shareholders of the company. If a creditor believes they are entitled to a higher priority, they may need to seek legal advice and take action to assert their rights.
Get Advice about Creditor Priorities in Liquidation
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Determining who gets paid in a company insolvency can be a very complex area, particularly in the case of floating charge and associate creditors.