Any creditor involved with a company that has failed, wants to know their position when it comes to division of assets. Here we explain the rules governing the priority of payment to those owed money when a company enters liquidation.
When a company fails, the question on every creditor’s lips is usually “where do I stand and what am I likely to receive?” Essentially this depends on three things:
There are three main types of creditor. The first are known as secured creditors. These are creditors with security over the company assets for amounts owed to them. Security tends to fall into two areas: fixed charge security and floating charge security. Fixed charge security is defined as a lien or mortgage over a specific fixed asset, which is registered and remains in force until a fixed charge debt is paid. A characteristic of fixed charge security is that a borrower would need the lender’s permission to sell a fixed charge asset. Examples include land, property and specific items of equipment (i.e. financed vehicles). Floating charge security is a lien or mortgage over assets that change in quantity and/or value over time, such as stock or cash in the bank. The security only crystallizes (i.e. fixes to the assets) once a company enters into liquidation, administration or administrative receivership.
Next are preferential creditors. These include outstanding contributions to pension schemes, employee remuneration for amounts relating to the period four months prior to liquidation (capped at £800 per employee), and any outstanding holiday pay.
And, finally, unsecured creditors, which are all other creditor claims that are neither secured nor preferential, including debts due to HM Revenue & Customs.
In liquidation, there is a set order in which surplus assets are distributed, as illustrated in the graphic above.
In very broad terms, those with fixed charge security over assets get paid first from the net proceeds of fixed charge recoveries. Any surplus will fall into the category of floating charge or non-charged assets, from which preferential creditors are paid first.
Thereafter those with floating charge security will be paid from net floating charge recoveries (save for a portion which may have to be set aside for unsecured creditors if the security was registered after 15 September 2003), leaving any residual balance to be paid over to unsecured creditors who only stand ahead of shareholders in the pecking order.
If you are interested in knowing more about the procudeure in a solvent liquidation (MVL), please take a look at our steps in a members’ voluntary liquidation article here.
If you or your clients would like to know more about the priority of payment in insolvency procedures, please call us on 020 8662 6070.