What is the Order of Creditors in Liquidation?

Secured creditors are those who hold a security interest in some or all of a company’s assets, typically giving them priority in repayment.

Creditors are ranked in the following order: Liquidator fees and expenses, Secured creditors with a fixed charge, Preferential creditors, Secured creditors with a floating charge, Unsecured creditors, Connected unsecured creditor and Shareholders

The fate of creditors is determined by a well-defined order, ensuring that the most critical debts are settled before those with a lesser priority.

Secured Creditors

Secured creditors hold a unique position within the hierarchy, as they possess a legal charge or debenture over some or all of the company’s assets, granting them priority over other creditors in liquidation.

Among secured creditors, those with fixed charges are granted the highest priority. Borrowing is typically undertaken from banks and other financial institutions.

They will provide the funds on the understanding that security will be taken on one or more business assets. This security on business asset can encompass a range of assets, including property, machinery, vehicles, and intellectual property.

The distinction between fixed and floating charges is crucial to understanding the priority of secured creditors.

A fixed charge is attached to a specific asset, granting the creditor precedence over that asset in liquidation.

In contrast, creditors with a floating charge hovers over assets that are continually changing, such as inventory or accounts receivable.

To have floating charge creditors take over fixed charge secured creditors and ensure their priority, secured creditors must deliver their floating charge creditors to Companies House within 21 days of its creation. Failing to do so renders the floating and fixed charge holders’ creditors’ assets subject to void against the liquidator.

Preferential Creditors

Next in line are preferential creditors, who are granted priority in receiving payment during an insolvent liquidation.

These creditors typically include those with claims related to alimony, tax obligations, child support, liabilities for injury or death, and construction industry scheme deductions.

Some HMRC debts may also be classified as preferential creditors. In such cases, the business is responsible for deducting taxes from payments made to another person and paying those deductions to HMRC, making the company owes HMRC a secured preferential creditor.

In the event of multiple liens on a single asset, the order of precedence is determined by the unsecured creditor, who first secures a lien, meaning that provide unsecured creditors’ debts are ranked lower in the order of priority.

As we continue our exploration of the creditor hierarchy, we will now examine the position and rights of unsecured creditors in liquidation proceedings.

Unsecured Creditors

Unsecured creditors occupy the lowest rung of the creditor ladder. This group consists of a variety of creditors.

They include; trade creditors, suppliers, customers, contractors, staff, rent and lease payments, unsecured loans from banks and other lenders, family and friend loans and directors loan accounts.

While unsecured or preferential creditors with a floating amount are not granted the same level of priority as secured or preferential creditors with a fixed floating amount, they still have certain rights within the liquidation process.

One such right is the prescribed part, which allows unsecured creditors to receive a distribution from the net property of the company, provided that it is not reduced by the prescribed part.

All unsecured creditors have been paid an equal dividend. If there is still money left, then interest will be paid on their debt.

Now that we have established the hierarchy of creditors, let’s delve into the factors influencing their repayment in liquidation.

Factors Influencing Creditor Repayment in Liquidation

The repayment of creditors in liquidation is influenced by various factors, including the priority of the creditor’s claim, the amount of assets available for distribution, the type of debt owed, liquidation costs, asset realisation, timing and status of secured liens, and legal priority.

Each of these factors plays a significant role factors influence creditor repayment and in determining how much a creditor will receive in the event of an insolvent company’s liquidation. Let’s examine these factors more closely to understand their impact on the overall creditor repayment process.

Liquidation Costs and Asset Realisation

Liquidation costs encompass the expenses incurred during the liquidation process, including legal fees, administrative costs, and other associated costs.

The liquidator is responsible for identifying and appraising the company’s assets, followed by their sale to settle the company’s liabilities.

Any remaining funds will be allocated to shareholders.

The liquidation costs and asset realisation process can have a significant impact on the company’s creditors, as they may not receive the full amount they are owed. Additionally, shareholders may not be reimbursed from the liquidation process.

Timing and Status of Secured Liens

The timing and status of secured liens are crucial factors in determining creditor repayment in liquidation.

A secured lien is a legal claim on a debtor’s property that serves to secure a debt or other obligation, granting the creditor the right to take possession of the property in the event of non-payment.

The order of the secured creditor status is established by the date of the hypothec or security interest agreement, which determines the priority of the secured creditor’s claim and the quantity of assets available for distribution.

The liquidation order does not interfere with a secured creditor’s right to enforce a lien. This ensures that secured creditors maintain their priority in the event of liquidation, regardless of the timing and status of their secured liens.

Legal Priority and Insolvency Act Regulations

Legal priority refers to the sequence in which creditors are paid out during a liquidation, according to the nature of the debt and the priority of the creditor’s claim.

The Insolvency Act 1986 outlines the regulations governing this order of priority, addressing the payment of expenses from the assets of companies in compulsory liquidation and bankrupts’ estates.

The order of priority is contingent upon the rights of secured creditors, who are entitled to receive payment before other creditors from the assets of companies in compulsory liquidation and bankrupts’ estates.

As we have explored the factors influencing creditor repayment in liquidation, let’s now turn our attention to the specific payment order of creditors during this process.

The Payment Order of Creditors in Liquidation

The payment order of creditors in liquidation follows a well-defined sequence, starting with liquidator fees and expenses, followed by secured creditors with fixed charges, preferential creditors, secured creditors with floating charges, unsecured creditors, connected parties, and finally shareholders.

This order is designed to ensure that the most critical debts are settled first, while also taking into account the various factors discussed in the previous section.

Let’s examine each of these creditor groups in more detail, starting with the fees and expenses of multiple creditors to the liquidator.

Liquidator Fees and Expenses

The fees and expenses associated with a liquidator are those incurred during the liquidation process, such as legal and administrative costs.

As per the relevant legislation, these fees and expenses are to be paid first, taking precedence over all other creditor and employee claims made.

This ensures that the professionals responsible for the liquidation process are compensated for their services, allowing them to efficiently and effectively manage the company’s assets and liabilities.

Secured Creditors with Fixed Charges

Following the payment of liquidator fees and expenses, secured creditors with fixed charges are next in line to receive payment during liquidation.

These creditors, who typically include banks credit card companies, leasing companies, and other lenders, possess security over some or all of the company’s assets, allowing them to reclaim the property they have secured or receive proceeds from the liquidation of that specific property.

This priority in payment reflects the heightened risk that secured creditors with fixed charges have taken on by providing financing to the company, ensuring that they are adequately protected in the event of liquidation.

Preferential Creditors and Prescribed Part Creditors

Preferential creditors are paid after secured creditors with fixed charges, as they hold priority over other creditors in liquidation.

This group includes employees, tax authorities company property,, other companies house and certain other creditors with claims related to alimony, child support, and tax obligations.

In addition to preferential creditors, prescribed part creditors are also entitled to a share of the proceeds from assets available for floating charge holders.

These unsecured creditors receive a proportion of the net property of the company that has been specifically allocated to them.

By giving preferential and prescribed part to the preferred creditor or creditors, or creditors with a fixed first priority in payment, the liquidation process ensures that the most critical debts are settled before those creditors with a fixed or lesser payment priority.

Secured Creditors with Floating Charges

Secured creditors with a fixed or floating charges are those creditors get paid after preferential creditors are in liquidation.

These fixed and floating charge holders or secured creditors possess a security interest in a selection of non-fixed assets, such as inventory or accounts receivable, and are classified as secured lenders in a liquidation, albeit ranking subordinate to preferential creditors with a fixed or floating amount.

By granting these creditors a lower priority in payment, the liquidation process reflects the fact that their security is less specific and potentially more volatile than that of secured creditors with fixed charges.

Unsecured Creditors and Connected Parties

Following the payment of secured creditors with floating charges, unsecured creditors and connected parties are next in line to receive payment during liquidation.

These creditors, who do not possess any security over the company’s assets, are the last to be paid before any remaining funds are distributed to shareholders.

Although unsecured creditors and connected parties hold the preferential creditor claims and the lowest priority in the payment order, their claims are still acknowledged and addressed within the liquidation process, ensuring that they receive at least some compensation for their losses.

Shareholders and Liquidation

In the unfortunate event of an insolvent liquidation, shareholders are the last to be paid, only after all other creditor groups have been satisfied.

This is because shareholders hold an ownership stake in the company, rather than a debt, and their claims are considered to be subordinate to those of creditors.

In the majority of cases, shareholders are unlikely to receive anything from the liquidation process, as the company’s financial position is usually insufficient to cover both creditor claims and shareholder interests.

Frequently Asked Questions

What is the correct order of payment on liquidation?

The correct order of payment in a liquidation is secured creditors first, followed by preferential unsecured creditors first, then unsecured creditors, and finally shareholders.

This prioritisation ensures that those with the most need are taken care of first.

What is the order of priority creditors?

When a company goes into insolvency, creditors are typically ranked in the following order of priority: Liquidator’s fees and expenses of the winding up, preferential claims on unsecured debts, such as unpaid rent, wages and salaries, income tax and social security contributions, and finally, unsecured creditors’ debts.

This order ensures that secured creditors are paid back first and the remaining assets are then distributed among other creditors.

What is the correct order of priority for a corporate liquidation?

When facing corporate liquidation, creditors should be that secured creditors paid get paid first in the order of secured creditors, preferential to connected unsecured creditors, then connected unsecured creditors get paid first, and finally, shareholders.

This ensures that the company’s financial obligations are met before any other parties receive payments from the liquidation process.

What are the steps in liquidation?

The steps in liquidating a company include deciding on the best liquidation option, complying with filing and other legal requirements, transferring assets, satisfying creditor claims, obtaining any necessary court approval, and completing all required paperwork.

These steps must be completed in order for your company assets to be successfully liquidated.

Information For Company Directors

Here are some other informative articles for company directors in the UK: