Comparing Winding Up Petitions from Secured and Unsecured Creditors
If the winding up petition has been successful, the Court grants a winding up order to force the indebted company into compulsory liquidation. At the hearing, an official receiver or liquidator is appointed by the Court to settle any legal disputes the company is embroiled in, collect money that is owed to the company and, most importantly, sells the company’s assets and distributes the proceeds to the creditors. At the end of the process, the company will be struck off the register at Companies House and will cease to exist.
As part of the process, the company’s assets are sold, and once the fees, charges and additional expenses of the liquidation are deducted, the proceeds or in insolvency terms the ‘realisations’ are allocated to the creditors, depending on the type of creditor they are.
Types of creditor and distributions
These individuals or entities have security over a company’s assets registered at Companies House. They are typically a bank or other lender, such as an asset-based lender that holds a fixed or floating charge over a business asset/s. When there is a fixed charge over an asset, the secured creditor is paid out of the realisations from these specific assets. A fixed charge is typically held over a specific asset that was financed by the lender, such as new business premises, machinery and equipment with the charge registered at Companies House. When there is a floating charge over an asset, the secured creditor is also paid out of the realisations from these assets. However, this only takes place when the costs of realisations and the preferential creditors have been paid.
These are employees seeking arrears of wages, accrued holiday pay, unpaid contributions to the company’s pension scheme and state scheme premiums. They rank higher than all other creditors when realisations are achieved from assets when there is no fixed charge registered.
These individuals or entities have no security over a company’s assets. They are all the other unsecured and non-preferential creditors and tend to be suppliers, customers, HMRC and contractors, ranking below secured and preferential creditors in an insolvency. It’s frequently the case that this group of individuals or entities receives a small amount of money, if any, from the realisations pot once all other creditors have been paid.
Shareholders or company members are the last groups of creditors in line for payment. They only receive money from the distribution of assets once everyone else has been paid in full.
Unsecured creditors, such as suppliers and contractors frequently receive little money from the distribution of assets, once everyone else has been paid. As a result, they can feel out of the loop during insolvency compared with secured creditors or preferential creditors. To remedy this and in line with insolvency rules, unsecured creditors can form a liquidation committee to assist the liquidator. This is also an opportunity for the committee’s members to inform the liquidator if the company has assets or income that the directors have yet to disclose.
A liquidation committee can be formed at a creditors meeting and must be made up of at least three and not more than five creditors. The liquidation committee receives reports from the liquidator and may meet on occasion. The role of the committee is to provide useful information to the liquidator, approve his or her remuneration and sanction the exercise of some of his or her powers.
If you have any questions about the order of priority in which creditors are paid when a company goes into compulsory liquidation, please call 08000 746 757 or email [email protected] for free and confidential advice from one of our professional advisors.