What different types of creditor are there and how are they paid off?

Once a company goes into liquidation or an individual is made bankrupt, it will be the responsibility of the insolvency practitioner to collect in all the assets and to distribute them amongst the creditors according to a statutory pecking order.

The first payment out of those assets will be the insolvency practitioner’s own costs and the costs of the insolvency process including legal costs.

Secured creditors with a ‘fixed charge’ over assets – for example, a mortgage secured on a property – will be paid first. Technically, assets covered by a secured charge do not form part of the estate of the bankrupt or the company in liquidation. Once those assets are given as security they, in effect, belong to the secured creditor who would be entitled to sell them if you failed to maintain your loan payments.

Then come preferential creditors. These include the employees (for holiday pay and up to four months’ arrears of wages to a set maximum).

Then come secured creditors with a ‘floating charge’, which normally covers assets such as stock and work in progress. This will usually be the company’s bank (an individual cannot grant a floating charge). Unless floating charge assets are less than £10,000, a ‘prescribed part’ must be set aside for the benefit of the unsecured creditors.

Last to be paid are the unsecured creditors. Trade creditors are usually unsecured. Trade creditors may receive a nil return if floating charge assets are less than £10,000.

It is highly exceptional that there will ever be anything left to pay to the shareholders. After all, if there were, the company would not usually have been insolvent in the first place.

Next Steps

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This article is for information and interest only. It is not a substitute for full professional advice, which will take in to account the specific and individual circumstances. Navigate Business Recovery Limited cannot accept any responsibility for any loss arising because of any person or organisation acting or refraining from acting on any information.