Who Gets Paid First During Liquidation?
When a company is liquidated, banks with secured loans get paid first. They’re followed by the costs of winding up the company and then certain special debts like unpaid taxes.
Here is the creditors order of priority:
- Fixed charge holders (i.e. banks with security)
- Expenses of the insolvent estate
- Liquidators’ fees and expenses
- Preferential creditors (including HMRC)
- The ‘prescribed part’ set aside for unsecured creditors from funds owed to holders of floating charges
- Floating charge holders
- Unsecured creditors
- Interest incurred on all unsecured debts post-liquidation
Note that the “prescribed part” is a certain percentage of the proceeds from the sale of assets subject to a floating charge that is set aside for unsecured creditors. This percentage is currently 20% in the UK.
This creditor’s order of priority is vital if you’re in line to be paid and want to know where you stand as a creditor.
Which Creditors Are Paid First in a Liquidation?
Firstly, the costs associated with the liquidation procedure are settled. Subsequently, creditors are paid in the following order: Secured creditors, categorised into fixed and floating charge holders; preferential creditors; and lastly, unsecured creditors.
(1) 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.
(2) Preferential creditors
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
(3) 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.
(4) 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, 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.
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 be in touch.
Determining who gets paid in a company insolvency can be a very complex area, particularly in the case of floating charge and associate creditors.